Principles for letter of credit (L/C) issuance trust in Vietnam

Principles for letter of credit (L/C) issuance trust in Vietnam (Internet image)

1. Principles for L/C issuance trust in Vietnam

Article 45 of Circular 21/2024/TT-NHNN stipulates the principles for L/C issuance trust in Vietnam as follows:

- The commission must be formed into a contract, in accordance with the provisions in Article 46 of Circular 21/2024/TT-NHNN and other relevant legal regulations.

- The entrusted party cannot re-delegate the commission to a third party.

- The transfer of commissioned capital must match the due date for the payment of the letter of credit.

- The entrusted party must not use the commissioned capital contrary to the purpose and content stipulated in the commission contract.

- The entrusting party must include the balance of commissioned letter of credit issuances into the total credit limit for the customer; likewise, the entrusted party must include the letter of credit issuance balance into the total credit limit for the entrusting party according to legal regulations on limits and safety ratios in bank operations, including branches of foreign banks.

- Foreign bank branches receiving commissions from the parent bank or its branches overseas to issue letters of credit; commercial banks receiving commissions from branches or subsidiaries of banks overseas to issue letters of credit and related entities must comply with the provisions of this Circular and legal regulations on foreign borrowing, debt repayment, foreign exchange management, and other relevant laws.

- Foreign currency commission transactions must adhere to regulations on foreign exchange management and other relevant legal regulations.

- The entrusting and entrusted parties must classify debts, make provisions for risk, and use such provisions to handle risks for the commissioned balance according to legal regulations on asset classification, provision levels, methodologies for risk provision, and the use of provisions for handling risks in banking operations, including branches of foreign banks.

- Banks cannot commission the issuance of letters of credit to parties that are not eligible for credit under the regulations specified in the Law on Credit Institutions 2024.

2. Conditions for offer and acceptance of the trusteeship to/from banks in Vietnam

Article 44 of Circular 21/2024/TT-NHNN specifies that a bank is eligible for the offer and acceptance of L/C issuance trusteeship if it fully meets the following conditions:

- The commission and reception of commissioned tasks must be recorded in the establishment and operation license.

- There must be internal regulations on the management of commissioned tasks, including identification, measurement, and management of risks related to such activities according to the nature and scale of the bank’s operations.

- The commission and reception of tasks must be managed by a risk management department.

- The entrusted party must have facilities, a network, and a skilled workforce to ensure the execution of the commission’s content.

- The entrusted party must assess the financial capability to ensure the transfer of capital from the entrusting party before considering and deciding to accept the commission for issuing the letter of credit.

3. Rights and obligations of the trustor in Vietnam

Article 50 of Circular 21/2024/TT-NHNN outlines the rights and obligations of the commissioning party for issuing letters of credit as follows:

* The commissioning party has the following rights:

- Request the entrusted party to provide files and documents proving its capability to perform letter of credit operations as per legal regulations;

- Request the entrusted party to provide materials, information, and data on the status and results of the commission contract's execution;

- Supervise and check the entrusted party’s performance of the tasks and scope specified in the commission contract;

- Other rights as stipulated in the commission contract in compliance with legal regulations.

* The commissioning party has the following obligations:

- Evaluate the entrusted party’s capability to perform letter of credit operations;

- Transfer commission capital to the entrusted party to ensure payment obligations according to the letter of credit’s due date as stipulated in the commission contract;

- Provide related documents, information, and data to the entrusted party as per the commission contract and ensure the honesty, accuracy, completeness, and promptness of such information, documents, and data;

- Pay the commission fee and penalty interest (if any) to the entrusted party as stipulated in the commission contract;

- Other obligations as stipulated in the commission contract in compliance with legal regulations.

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