Circular No. 02/2017/TT-NHNN on the factoring activities of credit institutions and foreign bank branches

CIRCULAR

Provisions on Factoring Activities

The Governor of the State Bank of Vietnam issues this Circular to amend and supplement certain provisions of Circulars on the issuance of Licenses, network operations, and foreign exchange activities of credit institutions and foreign bank branches

Pursuant to the Law on the State Bank of Vietnam dated June 16, 2010;

Pursuant to the Law on Credit Institutions dated June 16, 2010;

Pursuant to Government Decree No. 16/2017/NĐ-CP dated February 17, 2017 on the functions, tasks, powers, and organizational structure of the State Bank of Vietnam;

At the proposal of the Chief Inspector, Bank Supervision;

The Governor of the State Bank of Vietnam issues this Circular to regulate factoring activities of credit institutions and foreign bank branches.

Article 1. Scope of Regulation

This Circular regulates factoring activities of credit institutions and foreign bank branches for customers.

Article 2. Applicability

1. The factoring entity is a commercial bank, a comprehensive financial company, a factoring company, and a foreign bank branch permitted to conduct factoring activities.

2. The factoring customer (hereinafter referred to as the customer) is a resident or non-resident as prescribed by laws on foreign exchange management, including:

a) The seller in seller factoring;

b) The buyer in buyer factoring.

3. Other organizations and individuals related to the factoring activities of the factoring entity.

Article 3. Explanation of Terms

In this Circular, the following terms are understood as follows:

1. Seller (including exporter) is the party selling goods, providing services, and having legitimate rights to receivables under the purchase and sale contract of goods and service provision.

2. Buyer (including importer) is the party purchasing goods, using services, and having payable amounts under the purchase and sale contract of goods and service provision.

3. Purchase and Sale Contract of Goods and Service Provision is the document agreeing between the seller and the buyer regarding the purchase and sale of goods and service provision according to the law.

4. Factoring Contract is the document agreeing between the factoring entity and the customer to establish, change, or terminate the rights and obligations of the parties concerning factoring.

5. Right of Recourse is the factoring entity's right to reclaim the advance amount and factoring interest and fees from the customer if the buyer fails to fulfill payment obligations. In seller factoring, the factoring entity recovers from the seller. In buyer factoring, the factoring entity recovers from the buyer.

6. Purchase and Sale Documents of Goods and Service Provision are documents related to delivery of goods, service provision, and the request for payment by the seller from the buyer based on the purchase and sale contract of goods and service provision.

7. Receivable Amount is the amount that the seller has the right to receive from the buyer according to the purchase and sale contract of goods and service provision.

8. Payable Amount is the amount that the buyer is obligated to pay to the seller according to the purchase and sale contract of goods and service provision.

9. Seller Factoring is the factoring entity's purchase of the customer's receivables with retention of recourse rights through advance payments to obtain rights and lawful benefits related to the receivables as agreed.

10. Buyer Factoring is the factoring entity's purchase of the customer's payable amounts with retention of recourse rights through advance payments to the seller and receiving repayment of the advance, interest, and fees as agreed.

11. Domestic Factoring is factoring based on the purchase and sale contract of goods and service provision where both the seller and the buyer are residents.

12. International Factoring is factoring based on the purchase and sale contract of goods and service provision between the exporter and the importer, where one party is a resident and the other is a non-resident.

13. Factoring Debt is the amount advanced by the factoring entity to the customer but not yet repaid.

14. Factoring Term is the period calculated from the day following the first advance payment date until the due date for repayment of the factoring debt and interest as agreed in the factoring contract. If the last day of the factoring term falls on a weekly holiday or public holiday, the term ends on the next working day. For a factoring term less than one day, the term is determined according to the Civil Code's provisions on the start of the term.

15. Repayment Period are intervals within the agreed factoring term during which the customer must repay part or all of the debt and interest to the factoring entity at the end of each interval. If the last day of the repayment period falls on a weekly holiday or public holiday, the period ends on the next working day.

16. Overdue Factoring Debt including:

a) Factoring debt transferred to overdue status as stipulated in Clause 2, Article 15 of this Circular;

b) Factoring debt that the customer cannot repay before maturity when the factoring entity terminates the factoring and recovers the debt early as stipulated in Clause 1, Article 16 of this Circular.

17. Capital usage plan is a set of information about the use of the advance amount by the customer, which must include the following information:

a) Value of receivables, payables; advance amount; purpose of using the advance amount; duration of using the advance amount;

b) Source of repayment of the customer in buyer factoring.

18. Financial Capacity is the ability of capital, assets, and other lawful sources of finance of the customer.

Article 4. Language Usage

1. A factoring contract shall be established in Vietnamese or simultaneously in Vietnamese and a foreign language.

2. For other documents used in factoring activities in a foreign language, the factoring entity must translate them into Vietnamese (with confirmation from an authorized person of the factoring entity or must be notarized or certified) upon request of the competent authority.

1. Based on the provisions of the Law on Credit Institutions, this Circular, and relevant laws, credit institutions and foreign bank branches shall establish internal regulations on purchasing and selling negotiable instruments suitable to their management model, characteristics, business conditions, and ensuring safe operations for credit institutions and foreign bank branches.

1. Based on the provisions of the Law on Credit Institutions, this Circular, and relevant laws and regulations, the factoring entity shall issue internal regulations on factoring operations, management of receivables and payables that are consistent with the business characteristics of the factoring entity (hereinafter referred to as internal regulations on factoring).

2. The internal regulations on factoring of the factoring entity shall be uniformly implemented throughout the system and must include at least the following specific contents:

a) Conditions for factoring; cases not eligible for factoring; methods of factoring; interest rates, factoring fees, and calculation methods for interest and fees; factoring documentation and customer documents submitted to the factoring entity; debt collection and recovery; overdue debt transfer;

b) Procedures for assessing, approving, and deciding on factoring, including specific maximum deadlines for assessment and decision-making on factoring; classification, delegation of authority, and responsibilities of individuals and departments in assessing, approving, and deciding on factoring and other tasks within the factoring operation process;

c) Procedures for monitoring and supervising the factoring process and customer repayment; classification, delegation of authority, and responsibilities of individuals and departments in monitoring and supervising the factoring process and customer repayment;

d) Application of security measures for factoring activities, asset evaluation, management, supervision, and tracking of assets in accordance with security measures, asset characteristics, and customers;

đ) Termination of factoring, handling of debts; waiver or reduction of interest and fees;

e) Identification of potential risks that may arise during the factoring process; procedures for monitoring, evaluating, and controlling risks; risk resolution plans;

g) Risk management measures when the buyer does not have a written commitment to make payment to the factoring entity (for seller factoring). Inspection, supervision, and management measures when original contracts and purchase, sale documents, service provision documents are not used;

h) List or criteria for organizations providing payment guarantees and insurance for payable amounts as stipulated in point c(ii) Clause 2 Article 11 of this Circular.

3. Within ten working days from the date of issuance or amendment of the internal regulations on factoring, the factoring entity must submit the internal regulations to the State Bank of Vietnam (Bank Supervision Authority).

Article 6. Cases Not Eligible for Factoring

The factoring entity shall not factor the following receivables or payables:

1. Arising from contracts for the purchase, sale of goods, or service provision prohibited by law.

2. Arising from contracts for the purchase, sale of goods, or service provision with remaining payment terms exceeding 180 days from the date of receipt of the factoring request.

3. Arising from contracts for the purchase, sale of goods, or service provision with agreements prohibiting the transfer of rights and obligations under the contract.

4. Arising from contracts for service provision in the financial, banking, and insurance sectors as prescribed by the Prime Minister's regulations on the economic sectors of Vietnam.

5. Already factored or already used to secure another debt obligation.

6. Already overdue according to the purchase, sale of goods, or service provision contract.

7. Currently in dispute.

Article 7. Methods of Factoring

1. Single factoring: Each time factoring occurs, the factoring entity and the customer shall complete the factoring procedures and sign a factoring contract.

2. Limit factoring: The factoring entity determines and agrees with the customer a maximum factoring limit to be maintained over a certain period and the use of this limit. At least once a year, the factoring entity reviews and re-determines the limit and the duration of maintaining this limit.

3. Joint factoring: Two or more factoring entities jointly perform factoring on one or several receivables or payables of the customer, with one factoring entity acting as the lead organizer for joint factoring.

- Prime Minister;8. Currency for Factoring and Repayment

1. The currency for factoring is the Vietnamese Dong, except as provided in Clause 2 of this Article. The factoring entity can only factor in Vietnamese Dong for non-resident customers when they use the factoring funds within Vietnam.

2. The factoring entity may consider and decide to factor in foreign currency for foreign currency receivables or payables in compliance with foreign exchange management laws and meet the following conditions:

a) The customer is a non-resident; or

b) The customer is a resident who meets the following requirements:

(i) The customer is the seller using the factoring funds to settle foreign currency transactions as prescribed by law; or

(ii) The customer is the buyer having sufficient foreign currency from production and business revenue to repay the factoring; or

(iii) The customer is a key enterprise importing oil assigned annual import quotas by the Ministry of Industry and Trade to pay for oil imports abroad.

3. The currency for repayment and interest on factoring is the currency used for factoring.

- Prime Minister;9. Interest Rate and Factoring Fees 1. The interest rate and factoring fees shall be agreed between the factoring entity and the customer in compliance with the law.

2. When the due date arrives and the factoring debt or interest is not paid or not fully paid as agreed, the customer must pay interest as follows:

2. When the due date arrives and the debt or interest payable is not paid or is not fully paid as agreed, the customer shall pay interest as follows:

a) Interest on the factored debt shall be calculated at the agreed factoring interest rate corresponding to the factoring period until the due date has not been paid;

b) In case the customer fails to pay the interest as stipulated in point a of this clause on time, they must pay overdue interest at the rate agreed between the factoring unit and the customer but not exceeding 10% per year based on the outstanding overdue interest balance corresponding to the overdue period;

c) In case the factored debt is transferred to overdue status, the customer must pay interest on the overdue factored debt corresponding to the overdue period, with the applicable interest rate not exceeding 150% of the in-limit factoring interest rate at the time of transferring the debt to overdue status;

3. In case of applying adjusted factoring interest rates, the factoring unit and the customer must agree on the principles and factors for determining the adjusted interest rate and the timing for adjusting the factoring interest rate. If the factors for determining the adjusted interest rate lead to multiple factoring interest rates, the factoring unit shall apply the lowest factoring interest rate;

Article 10. Requirements for Factoring Execution

1. The factoring unit agrees with the customer on the advance amount but it must not exceed the value of the receivable or payable amount, and can only provide advances after receiving the following complete documents:

a) Original contract, purchase and sale documents, service provision certificates; or

b) Copies of the purchase and sale contracts, service provision certificates and copies or lists of purchase and sale documents, service provision certificates in cases where the factoring unit and the customer have agreed in the factoring contract on measures to ensure the accuracy, truthfulness, and completeness of the copies or lists compared to the originals;

2. The factoring unit may only factor in foreign currency within the scope of its business operations and foreign exchange service provision activities in the domestic market and international market as specified in the License issued by the State Bank of Vietnam;

3. For seller factoring, the factoring unit shall implement the following requirements:

a) Agree with the seller on sending a notification letter regarding factoring to the buyer and other related parties with obligations (if any), except when the seller, buyer, and other related parties with obligations (if any) have agreed not to require such notification. The notification letter must minimally include the transfer of rights and obligations concerning the receivable between the seller and the factoring unit, and request the buyer and other related parties with obligations (if any) to consider and commit in writing to the payment to the factoring unit;

b) In case the buyer and other related parties with obligations (if any) do not provide a written commitment to make payments to the factoring unit as stipulated in point a of this clause, the factoring unit can only proceed with factoring for the customer if the factoring unit and the customer have agreed in writing on measures for the factoring unit to control the payments made by the buyer or other related parties with obligations (if any) to the seller;

4. For buyer factoring, the factoring unit can only proceed if the seller agrees in writing that the buyer will transfer the obligation to pay the payable to the factoring unit;

5. The execution of joint factoring shall be carried out in accordance with the provisions of this Circular, the regulations of the State Bank of Vietnam on joint credit facilities for customers, and relevant laws.

Article 11. Conditions for Factoring

The factoring unit shall consider and decide to provide factoring services when the customer meets the following conditions:

1. For resident customers

a) The customer is a legal entity with civil legal capacity as prescribed by law;

b) The customer is an individual aged eighteen years or older with full capacity for civil acts as prescribed by law, or an individual aged fifteen to under eighteen years old who has not lost or been restricted in their capacity for civil acts as prescribed by law;

c) The need for factoring to use advance funds for legitimate purposes and to serve production and business activities;

d) Having financial capability to repay debts;

đ) Having a feasible capital utilization plan.

2. For non-resident customers

a) The customer is an organization;

b) The conditions stipulated at points c, d, and đ of Clause 1 of this Article;

c) In the case where the customer is the importer, they must meet the conditions stipulated at points a and b of this clause and one of the following conditions:

(i) The customer is a business established and operating abroad with direct investment from a Vietnamese business;

(ii) One hundred percent of the value of the payable amount is guaranteed for payment and insurance by a third party, secured by a deposit made by the customer, or guaranteed by the customer's deposit at the factoring unit.

Article 12. Documents for Requesting Factoring

1. When there is a need for factoring, the customer must submit to the factoring unit a request for factoring, including documents proving compliance with the factoring conditions as prescribed in Article 11 of this Circular and other documents as guided by the factoring unit.

2. The customer bears legal responsibility for the accuracy, truthfulness, and completeness of the documents submitted to the factoring unit.

Article 13. Evaluation and Decision on Factoring

1. The factoring unit evaluates the customer's ability to meet the factoring conditions as prescribed in Article 11 of this Circular to consider and decide on providing factoring services. During the evaluation process, the factoring unit may use its internal credit rating system, combined with information from the National Credit Information Center and other sources of information.

2. The factoring unit must organize the review of factoring applications according to the principle of defining responsibilities between the evaluation stage and the decision-making stage for factoring.

- Prime Minister;14. Loan contracts factoring

1. The factoring contract must be documented in writing in accordance with the provisions of this Circular and relevant laws, including at least the following contents:

a) Name, address, business registration number of the factoring unit; name, address, valid identification number or business registration number of the customer;

b) Value of receivables or payables; advance amount; factoring limit for limit-based factoring; content and time of transfer of rights and lawful interests related to receivables or payables under the purchase and sale contract or service provision contract;

c) Purpose of using the advance amount;

d) Currency of factoring; currency for repayment and interest payment;

đ) Method of factoring;

e) Term of factoring; term of maintaining the factoring limit;

g) Factoring interest rate level and calculation method; principles and factors determining the interest rate, determination date for adjustable interest rates; converted interest rate level expressed as a percentage per annum (one year being 365 days) based on actual factoring debt and the actual period of holding such debt; interest rate level applicable to overdue factoring debt; interest rate level applicable to late interest payments; types of fees and applicable levels;

h) Repayment of factoring debt and interest; order of recovery of debt and interest; early repayment of debt;

i) Transfer of overdue debt for factoring debt that the customer cannot repay on time as agreed; form and content of notice of transferring overdue debt as stipulated in Clause 2, Article 15 of this Circular;

k) Provisions regarding debt collection and interest, factoring fees; content and time of transfer of rights and interests related to receivables or payables during the collection process;

l) Circumstances for terminating factoring; early debt recovery and overdue debt transfer for factoring debt after termination of factoring; form and content of notice of terminating factoring and early debt recovery as stipulated in Clause 1, Article 16 of this Circular;

m) Debt handling; penalty for breach and compensation for damages;

n) Obligation to notify the buyer (if any);

o) Rights and obligations of the parties, including the customer's commitment not to use receivables or payables to secure other debt obligations or for other credit purposes without the factoring unit's consent;

p) Method of transferring the purchase and sale contract, purchase and sale documents, rights, interests, and other documents related to receivables or payables subject to factoring;

q) Dispute resolution;

r) Effectiveness of the factoring contract.

2. In addition to the contents stipulated in Clause 1 of this Article, the factoring unit and the customer may agree on other contents in accordance with the provisions of this Circular and relevant laws.

3. The factoring contract stipulated in Clauses 1 and 2 of this Article can be established in the form of a specific factoring contract or a framework agreement and a specific factoring contract.

4. Amendments, supplements, and termination of the factoring contract shall be agreed upon by the parties in accordance with the provisions of this Circular and relevant laws.

5. In cases where standard contracts or general terms and conditions are used in concluding factoring contracts, the factoring unit must perform the following:

a) Publicly display at its headquarters and publish on its website the standard contract or general terms and conditions for factoring.

b) Provide complete information about the contract template and general transaction conditions to the customer before signing the factoring contract and obtain the customer's confirmation that they have been provided with complete information by the factoring entity.

Article 15. Determine the factoring period, repayment term, and shall transfer overdue debt

1. The factoring period and repayment term shall be determined based on the remaining payment terms of receivables and payables under the purchase and sale contracts or service provision contracts, and the recovery period. The recovery period starts from the day following the end of the payment terms of receivables and payables under the purchase and sale contracts or service provision contracts until the end of the factoring period and repayment term. The recovery period agreed upon between the factoring entity and the customer in the factoring contract shall not exceed 60 days for domestic factoring or 120 days for international factoring.

2. The factoring entity shall transfer overdue debt for the portion of the factored debt that the customer fails to repay on time according to the agreement. The factoring entity must notify the customer of the overdue debt transfer, which includes at least the amount of overdue factored debt, the date of the overdue debt transfer, and the interest rate applicable to the overdue factored debt.

3. For overdue factored debt, the factoring entity shall collect the factored debt first and then collect the interest.

Article 16. Termination of Factoring, Handling of Debt, Waiver, and Reduction of Interest and Fees

1. The factoring entity has the right to terminate factoring and recover the debt ahead of schedule according to the agreed content when discovering that the customer provides false information or violates the provisions of the factoring contract or guarantee contract. When terminating factoring and recovering the debt ahead of schedule according to the factoring contract, the factoring entity must notify the customer about the termination of factoring and the early recovery of the debt. The notification must include at least the date of termination of factoring, the amount of the debt recovered ahead of schedule, the deadline for repaying the debt recovered ahead of schedule, the date of transferring the overdue debt, the interest rate applicable to the debt recovered ahead of schedule, and the return of receivables and payables to the customer.

2. In case the customer cannot repay the due debt, the factoring entity has the right to apply measures to recover the debt according to the factoring contract, guarantee contract, and relevant laws. If, after applying the debt recovery measures, the customer still fails to fully fulfill their obligation to repay the debt to the factoring entity, the customer is responsible for continuing to fully repay the factored debt and interest to the factoring entity.

3. In case the customer or guarantor is decided by the court to enter bankruptcy proceedings or declared bankrupt, the factoring entity's debt recovery against the customer or guarantor shall be carried out in accordance with the law on bankruptcy.

4. The factoring entity has the right to decide to waive or reduce interest and fees for the customer according to internal regulations of the factoring entity.

Article 17. Guarantee for Factoring Activities

1. The application of guarantee measures or non-application of guarantee measures is agreed upon by the factoring entity and the customer. The agreement on guarantee measures between the factoring entity and the customer must comply with the provisions of the law on guarantee measures and related laws.

2. The factoring entity decides and bears responsibility for not applying guarantee measures for factoring activities.

3. The customer and guarantor must cooperate with the factoring entity to handle the collateral assets when there is a basis for handling according to the factoring contract, guarantee contract, and relevant laws.

Article 18. Electronic Factoring Activities

1. The factoring entity conducts electronic factoring activities in accordance with this Circular and the law on electronic transactions in banking operations.

2. At least 10 working days before conducting electronic factoring activities, the factoring entity must submit the documentation regarding the information technology system serving electronic factoring activities (including the design model of the application program, infrastructure, and solutions to ensure the security of the information technology system) to the State Bank of Vietnam (Department of Information Technology).

3. Customers conducting electronic factoring activities must comply with the conditions and guidelines of the factoring entity in electronic transactions and relevant laws.

Article 19. Penalty for Breach and Compensation for Damage

1. The factoring entity and the customer may agree on penalties for breach of contract and compensation for damages according to the law in cases where the factoring entity or the customer does not perform the contents of the factoring contract correctly, except for the cases stipulated in Clause 2, Article 9 of this Circular.

2. The factoring entity and the customer may agree that the party breaching the obligation only bears the penalty for breach without having to compensate for damages, or both bear the penalty for breach and compensate for damages. In cases where the factoring entity and the customer agree on penalties for breach but do not agree on bearing both penalties for breach and compensating for damages, the party breaching the obligation only bears the penalty for breach.

Article 20. Retention of Factoring Files

1. The factoring entity must retain factoring files including the following documents:

a) Application for factoring;

b) Factoring contract;

c) Financial status report of the customer;

d) Documents related to collateral (if any);

đ) Decision on factoring with signatures of authorized persons; in case of collective decision, there must be a record clearly stating the decision that has been approved;

e) Documents arising during the use of advance payment funds related to the factoring contract as guided by the factoring entity.

2. The retention period for factoring files shall be implemented in accordance with the provisions of the law.

Article 21. Other Provisions

When implementing factoring, the factoring entity shall have the responsibility to:

1. Adhere to the provisions regarding situations where factoring is not allowed, restricted factoring, and factoring limits as stipulated in Articles 126, 127, and 128 of the Law on Credit Institutions and the regulations of the State Bank of Vietnam on limits and risk coverage ratios for credit institutions and foreign bank branches.

2. Implement classification, provision setting, and utilization of provisions to address risks associated with factoring activities according to the State Bank of Vietnam's regulations on asset classification, provision levels, provision setting methods, and the use of provisions to manage risks in the operations of credit institutions and foreign bank branches.

3. Conduct accounting entries and statistical reporting for factoring activities in accordance with current laws and regulations on accounting systems and statistical reports applicable to credit institutions and foreign bank branches.

Article 22. Transitional provisions

1. For factoring contracts signed before this Circular takes effect and comply with the legal provisions at the time of signing, the factoring entity and the customer may continue to implement the signed contracts until their expiration.

2. Any amendments, supplements, or extensions of factoring contracts as stipulated in Clause 1 of this Article can only be carried out if the amended, supplemented, or extended contents comply with the provisions of this Circular and relevant legal provisions.

Article 23. Effective Date

1. This Circular shall take effect from September 30, 2017.

2. From the date this Circular takes effect, the following documents and regulations cease to be effective:

a) Decision No. 1096/2004/QD-NHNN dated September 6, 2004, of the Governor of the State Bank of Vietnam promulgating the operational rules for factoring of credit institutions;

b) Decision No. 30/2008/QD-NHNN dated October 16, 2008, of the Governor of the State Bank of Vietnam amending and supplementing certain articles of the operational rules for factoring of credit institutions issued pursuant to Decision No. 1096/2004/QD-NHNN dated September 6, 2004, of the Governor of the State Bank of Vietnam;

c) Article 8 of Circular No. 24/2011/TT-NHNN dated August 31, 2011, of the Governor of the State Bank of Vietnam on the implementation of plans to simplify administrative procedures in the establishment and operation of banks in accordance with Government Resolutions on simplifying administrative procedures within the scope of management functions of the State Bank of Vietnam;

d) Article 2 and Clause 2 of Article 3 of Circular No. 14/2016/TT-NHNN dated June 30, 2016, of the Governor of the State Bank of Vietnam on amending and supplementing certain articles of Circular No. 30/2014/TT-NHNN dated November 6, 2014, of the Governor of the State Bank of Vietnam on entrusting and accepting entrustment of credit institutions and foreign bank branches, and abolishing certain articles of the operational rules for factoring of credit institutions issued together with Decision No. 1096/2004/QD-NHNN dated September 6, 2004, of the Governor of the State Bank of Vietnam.

Article 24Implementation Organization

The Director of the Office, the Director of Banking Inspection and Supervision, Heads of units under the State Bank of Vietnam, Governors of the State Bank of Vietnam branches in provinces and centrally-administered cities, Chairmen of the Board of Directors, Chairmen of the Board of Members, and General Directors (Directors) of credit institutions and foreign bank branches are responsible for organizing the implementation of this Circular./.