Currently, the Government of Vietnam is still in the process of drafting and soliciting feedback on several draft legal documents related to the banking sector. Notably, this includes the Draft Circular regulating factoring activities of credit institutions and foreign bank branches. (Hereinafter referred to as the Draft Circular).
Article table of contents
The proposals outlined in the Draft Circular are adjusted based on the current regulations still having inadequacies in Decision 1096/2004/QD-NHNN, Decision 30/2008/QD-NHNN, Circular 24/2011/TT-NHNN, Circular 14/2016/TT-NHNN, and Official Dispatch 676/NHNN-CSTT.
According to Clause 17, Article 4 of the Law on Credit Institutions, factoring is a form of credit extension to the seller or buyer through the purchase of receivables or payables arising from the sale and purchase of goods and provision of services per the sales contract or service provision contract, with the reservation of the right to recourse.
This concept is maintained and reiterated in the Draft Circular. However, in cases where the Vietnamese factoring unit participates in factoring originating from foreign sources through providing one or several services (management, bookkeeping of receivables, debt recovery, credit risk assurance), the provision of these services is not subject to the Circular on factoring activities but to the relevant regulations for these activities. Therefore, Clause 2, Article 1 of the Draft Circular clearly stipulates: “The participation of credit institutions, branches of foreign banks in factoring with foreign factoring units and non-financial provision is to be performed based on the agreement of the involved parties in accordance with the law and international commercial practices issued by the International Chamber of Commerce and other commercial practices not contrary to the laws of Vietnam.”
For cases not allowed for factoring, the Draft Circular lists in Clause 2, Article 4 as follows:
2. The factoring unit is not permitted to factor the following accounts receivable or payable:
a) Arising from sales contracts, provision of service contracts prohibited by law or under dispute;
b) Arising from sales contracts, provision of service contracts with the remaining payment term longer than 180 days;
c) Arising from sales contracts, provision of service contracts with an agreement not to transfer rights and obligations in the contract;
d) Arising from the provision of financial services, banking services according to the regulations of the Prime Minister of the Government of Vietnam on the Economic Sector System of Vietnam;
dd) Already factored or used as collateral for other debt obligations;
e) Overdue payments according to the sales or service provision contract.
Compared to Decision 1096, the Draft Circular removes the provision: "Receivables not allowed for factoring: Arising from consignment sales contracts;…” because consignment contracts are not buy-sell or service provision contracts. Simultaneously, clauses 1, 2, 3 of Article 19 of Decision 1096 are merged into Point a, Clause 2, Article 4 of the Draft Circular.
For sales contracts, service provision contracts in the construction sector, Decision 1096 does not permit factoring for this sector as receivables in this field generally have lengthy durations and do not conform to the nature of factoring which aids in a company’s working capital. The Draft Circular removes the content that credit institutions, branches of foreign banks are not allowed to factor receivables from construction service provision contracts and stipulates that receivables and payables arising from sales contracts or service provision contracts with a remaining payment term longer than 180 days are not permitted for factoring. Thus, it can be understood that receivables arising from construction service provision contracts with a term exceeding 180 days will not be factored.
For receivables arising from financial services, banking services contracts according to the annex attached to Decision 1096 (amended and supplemented by Decision 30), the Draft Circular refers to the regulation of the Prime Minister of the Government of Vietnam on the Economic Sector System of Vietnam (Decision 10/2007/QD-TTg dated January 23, 2007, on the Economic Sector System of Vietnam) to specifically identify financial and banking services not allowed for factoring.
