Civil laws generally respect the freedom of contract between parties, although the parties must comply with the general regulations. Accordingly, although the loans are non-regular activities of the enterprises, they may bring about more legal and commercial risks for the enterprises. This articles will list 4 potential risks associated with loan agreements under the Civil Code 2015.
1. No mandatory interest
It is misconceived by some enterprises that Loan Agreements require an interest rate, resulting in some aversion about getting loans from partners or customers. Interest rate is absolutely dependent solely on the agreement of the parties when getting a loan. Under Vietnamese laws, parties can agree on a fixed or floating interest rate. Should the parties agree that interest will be payable but fail to specify an interest rate, or if there is a dispute regarding the interest rate, there will be an implied 10% default annual interest rate until the dispute is resolved or the loan is repaid. This interest rate may change from time to time in accordance with the laws and policies of the banks. However, it is still absolutely legal for enterprises to enter interest-free loans.
2. Limitation on interest rate
In case where there is an interest rate in the Loan Agreement, such rate is limited by the Law. The legal interest rate limitations are as follows:
- Pursuant to the 2005 Civil Code, the interest rate is agreed upon by the parties, but it must not exceed 150% of the base rate announced by the State Bank with respect to the corresponding type of loans. The determination of the interest rate ceiling is quite complicated for enterprises, which leads to the fact that the agreed interest rates of parties are often too high or too low. In March 2023, the State Bank of Vietnam issued decisions that can help resolve some uncertainties which may help with setting a correct ceiling.
- Decision No. 313/QD-NHNN states the refinancing rate is to be maintained at 6% p.a.; and the rediscounting rate got reduced from 4.5% to 3.5% p.a.; the overnight rate for the inter-bank electronic payments and the rate applied to loans to finance short-term balances in the clearing transactions between the SBV and the credit institutions has been lowered from 7.0% to 6.0% p.a.
- Decision No. 314/QD-NHNN on the interest rate cap applied to the VND short-term loans provided by the credit institutions and the foreign bank branches to borrowers to meet the capital demand in a number of priority sectors and areas in line with Circular No. 39/2016/TT-NHNN marks the reduction of interest rate cap from 5.5% p.a. to 5.0% p.a.. The interest rate cap applied to the VND short-term loans in the priority sectors and areas provided by the People’s Credit Funds and the Micro Finance Institutions was also reduced from 6.5% p.a. to 6.0% p.a.
- Pursuant to the 2015 Civil Code, interest rates of the loan under the agreement of the parties must not exceed 20%/year. Overall, such rate is higher than the rate stipulated in the previous regulations. Therefore, according to the financial capacity and the level of trust between the parties, the enterprises may carefully consider the interest rate in the Loan Agreement.
The new regulation also nullifies the validity of any such loans that exceed 20%/year, applying the rate stipulated by the Law.
3. Interest on late payment is obligatory
When the enterprises provide interest-free loans, they mainly want to support and assist the borrower, hence it is rare for the parties to agree on the payment of interest on late payment when the loan is due. However, the parties should be noted that even if there is no agreement, the laws still regulate the late payment amount in case the loans are without interest:
- Pursuant to the 2005 Civil Code, if there is no agreement, the borrower will not have to pay interest on the late payment.
- Pursuant to the 2015 Civil Code, if the borrower does not repay or pay insufficiently when the loan is due, the lender has the right to request payment of the interest at the rate of 10% (determined by 50% of the interest rate limit). It has to be stressed that this is only a right rather than an obligation, and the lender does not have to enforce it.
4. Applying late payment interest rate according to the agreement
In cases when enterprises provide loans with interests, the regulations change into the direction, which is more favorable for the lenders in the following ways:
- Pursuant to the 2005 Civil Code, although the parties agreed on the late payment interest rate, it is obligatory to apply the base rate announced by the State Bank corresponding to the loan terms at the time of repayment. Following the 2015 Civil Code, when the loan is due and the borrower does not pay or pay insufficiently, the borrower has to pay the interest in compliance with the interest rate stated in the agreement rather than the base rate prescribed in the 2005 Civil Code:
- Unpaid due principal debts are to be paid as agreed in the contract corresponding to the loan terms; in the late payment cases, they must pay interest at the rate of 10% (determined by 50% of the interest rate limit).
- If there is no agreement, interest on the remaining overdue principal debt is 150% of the contractual interest rate in line with the term of late payment.
It is noted that the interest that the borrower must pay in accordance with the 2015 Civil Code is more than the interest stipulated in the old provisions because the agreed interest between the parties is usually higher than the base rate of the State Bank. Therefore, to supplement capital for business activities through borrowing capital, businesses need to pay attention to some of the things we mentioned to avoid risks during this transaction.