Decision 1096/2004/QD-NHNN dated Semtember 06, 2004 of the State Bank of Vietnam on the issuance of the regulation on factoring activity of credit institutions

DECISION

ON THE ISSUANCE OF THE REGULATION ON FACTORING ACTIVITY OF CREDIT INSTITUTIONS

THE GOVERNOR OF THE STATE BANK

- Pursuant to the Law on the State Bank of Vietnam No. 01/1997/QH10 dated 12 December, 1997 and the Law on the amendment, supplement of several Articles of the Law on the State Bank of Vietnam No. 10/2003/QH11 dated 17 June, 2003;

- Pursuant to the Law on Credit Institutions No. 02/1997/QH10 dated 12 December, 1997; and the Law on the amendment, supplement of several Articles of the Law on Credit Institutions No. 20/2004/QH11 dated 15 June, 2004;

- Pursuant to the Decree No. 86/2002/ND-CP dated 05 November, 2002 of the Government providing for the function, assignment, authority and organizational structure of the ministries and ministerial level agencies;

- Upon the proposal of the Director of the Banks and Non-bank Credit Institution Department,

DECIDES:

Article 1. To issue in conjunction with this Decision “the Regulation on factoring activity of credit institutions”

Article 2. This Decision shall be effective from 01 October, 2004.

Article 3. The Director of Administrative Department, the Director of the Banks and Non-bank Credit Institutions Department, Heads of units of the State Bank, General Managers of the State Bank's branches in provinces, cities under the central Government’s management, Chairpersons of the Board of Directors and General Directors (Directors) of Credit Institutions shall be responsible for the implementation of this Decision.

REGULATION

ON FACTORING ACTIVITY OF CREDIT INSTITUTIONS
(Issued in conjunction with the Decision No. 1096/20004/QD-NHNN dated 6 September 2004 of the Governor of the State Bank)

Chapter I

GENERAL PROVISIONS

Article 1. Governing scope and subjects of application

1. Governing scope: This Regulation provides for the implementation of factoring operation of credit institutions for customers in order to diversify credit activity, provide additional working capital for customers, promote domestic and international trade activities.

2. Subjects of application:

2.1. Credit institutions entitled to carry out the factoring operation shall be credit institutions that are set up and operating in accordance with the Law on Credit Institutions, including:

- The State owned commercial banks;

- Joint-stock commercial banks;

- Joint-venture banks;

- Banks with 100% foreign owned capital;

- Branches of foreign banks;

- Finance companies;

2.2. Customers entitled to the factoring facility provided by credit institutions shall be Vietnamese and foreign economic organizations that supply goods and are entitled to enjoy receivables arising from the purchase, sale of goods under the agreement stated in the goods purchase and sale contract between the selling party and buying party (hereinafter referred to as the selling party).

Article 2. Definition

Factoring is a form of credit extension by a credit institution to the selling party through the purchase of receivables which have arisen from the purchase, sale of goods as agreed in the goods purchase and sale contract between the selling party and the buying party.

Article 3. Principle of factoring performance

The factoring activity shall ensure following principles:

1. Ensuring the safety in the activities of the credit institution entitled to carry out factoring activity and to be in conformity with applicable provisions of Vietnam’s laws;

2. Securing the legal rights, obligations and interests of parties to the factoring contract and the parties involved in the receivables.

3. The receivables, which are factored, must originate from goods purchase and sale contracts in accordance with provisions of applicable laws.

Article 4. Interpretation

In this Regulation following terms shall be construed as follows:

1. Factoring unit shall be credit institutions as stipulated in point 2.1, paragraph 2, Article 1 of this Regulation, which are approved by the State Bank to carry out the factoring activity.

2. Domestic factoring shall be the factoring performed on the basis of a goods purchase and sale contract where the selling party and the buying party are residents in accordance with provisions of applicable laws on foreign exchange control.

3. Export- import factoring shall be the factoring performed on the basis of an export -import contract.

4. Export factoring unit shall be a unit that performs the factoring to the selling party being an exporter in the export-import contract.

5. Import factoring unit shall be a unit that is permitted to engage in the factoring activity and participates in the process of export-import factoring.

6. The buying party shall be an organization which is entitled to receive goods from the selling party and obliged to make payment of receivables as stipulated in the goods purchase and sale contract

7. The goods purchase and sale contract shall be a written agreement between the selling party and the buying party on the purchase, sale of goods in accordance with provisions of applicable laws where the term to carry out the payment obligation of the buying party does not expire.

8. Sale documents shall be documents relating to the goods delivery and payment claim of the selling party to the buying party on the basis of the goods purchase and sale contract.

9. Factoring balance shall be an amount advanced by the factoring unit to the selling party in accordance with agreements stated in the factoring contract.

10. Receivable shall be the amount the selling party must collect from the buying party under the goods purchase and sale contract.

11. Factoring limit shall be the maximum outstanding receivables, which have been factored for a certain period of time in accordance with the agreement between the factoring unit and the selling party in the factoring contract.

Article 5. Agency that permits the factoring activity

Credit institutions provided for in Article 1 of this Regulation, which desire to engage in the factoring activity, must obtain the written approval from the State Bank.

Article 6. Application of international treaties and customs

1. If international treaties on the factoring activity to which the Socialist Republic of Vietnam is signatory or has acceded, contain provisions other than those stated in this Regulation, they shall be applicable.

2. Parties may agree on the application of regulations, customs and rules on the factoring, provided that they are not in contrary to Vietnam’s laws.

Chapter II.

FACTORING ACTIVITY

Section 1. APPROVAL OF THE FACTORING ACTIVITY

Article 7. Conditions for engaging in the factoring activity:

1. The State Bank shall permit the domestic factoring activity when credit institutions fully satisfy following conditions:

a. There is a demand for factoring activity;

b. Their overdue debt at the end of the month in the latest 3 months is less than 5% of the total loans outstanding; they do not violate any prudential provision in the banking activity.

c. They are not subjects being considered for administrative punishment in the financial, banking area or have already been subject to the administrative punishment in the financial, banking area but have overcome their violation act.

2. In respect of the export-import factoring activity:

Credit institutions applying for export-import factoring activity must, in addition to conditions provided for in paragraph 1 of this Article, be credit institutions, which are permitted to engage in foreign exchange activity.

Article 8. File for the approval of the factoring activity

1. The application file for the approval of the factoring activity from the State Bank shall include:

a. A written application letter of the Chairman of the Board of Directors of the credit institution or of authorized person requesting the State Bank to approve the engagement of the credit institution in the factoring activity. In case of authorization, the application letter must be supported by the letter of authorization of the Chairman of the Board of Directors;

For branches of foreign banks in Vietnam, there must be a written application letter of their General Manager (Manager);

b. A factoring business plan, which clearly states the requirement for the performance of the factoring operation, expected customers and operational plan;

c. A copy of the establishment and operation Licence; a copy of the Business Registration Certificate;

d. Credit institution’s financial Statements of the most recent year that has been audited by an independent auditing organization; a report on the compliance with prudential ratios in the operation of the credit institution at the most recent time in accordance with applicable provisions.

2. In respect of the export-import factoring activity

In addition to documents provided for in paragraph 1of this Article, the application file for the export-import factoring activity shall include a copy of the foreign exchange activity permit issued by the State Bank.

Article 9. Sequence and procedure for the approval of the factoring activity

The application sequences and procedure for the approval of the State Bank for the factoring activity of the credit institution:

1. Joint stock credit institutions shall submit 2 sets of application file for the approval of the factoring activity to the State Bank’s branches in provinces, cities where their head offices are located.

The State Bank’s branches in provinces, cities shall, within a maximum period of 15 working days from the full receipt of files, consider and give their opinion in writing on the conditions, application file for the factoring activity in accordance with provisions in Articles 7 and 8 of this Regulation then send to the State Bank (the Banks and Non-Bank Credit institution Department) enclosed with 01 set of file of the joint-stock credit institution.

2. Credit institutions (except for joint-stock credit institutions) shall submit 01 set of application file to the State Bank (the Banks and Non-Bank Credit institution Department) for its approval of the factoring activity.

3. The State Bank shall, within a maximum period of 30 working days from the full receipt of files from credit institutions (except for the joint-stock credit institutions) and 15 working days from the full receipt of files of joint-stock credit institutions, which are delivered by the State Bank’s branches in provinces, cities, consider and give its written opinion on the approval or non-approval of the factoring activity of credit institutions which desire to perform the factoring activity. In case of non-approval, the State Bank shall give out clear reason thereof.

Article 10. Conditions for the performance of the factoring activity

1. Prior to the performance of the factoring activity, credit institutions shall register with the business registration agency and publish in the central, local paper in Vietnamese in 3 consecutive issues in accordance with provisions of current laws.

2. Credit institutions shall submit their registration with the business registration agency and other related documents to the  State Bank.

Section 2. PROVISIONS ON THE FACTORING ACTIVITY

Article 11. Types of factoring

1. Factoring units shall be entitled to carry out following types of factoring:

a. Factoring with recourse right: the factoring units shall have the right to recourse to the selling party for the advance, when the buying party is not capable to perform its payment obligation for the receivable.

b. Factoring without recourse right: factoring units shall take the entire risks when the buying party is not capable to perform its payment obligation for the receivable. The factoring units shall only have the right to recourse to the selling party in case where the buying party refuses to make payment of the receivable due to the selling party failing to deliver goods in accordance with agreements stated in the goods purchase and sale contract or because of another reason, which is not related to the payment capacity of the buying party.

2. A factoring unit shall be entitled to carry out domestic and export-import factoring activity.

Article 12. Modes of factoring

1. Factoring for each receivable item: The factoring unit and the selling party shall complete required procedures and sign the factoring contract for receivables of the selling party.

2. Factoring on limit basis: The factoring unit and the selling party shall agree and determine a factoring limit to maintain for a certain period of time.

3. Co-factoring: two or several factoring units shall together carry out the factoring activity for a goods purchase and sale contract where a factoring unit shall act a coordinator in the organization of the co-factoring activity.

Article 13. Process of factoring activity

1. The factoring activity shall be carried out under following main steps:

a. The selling party shall request the factoring unit to factor receivables;

b. The factoring unit shall analyze receivables, the operation and financial capacity of the selling party and the buying party;

c. The factoring unit and the selling party shall agree and enter into a factoring contract;

d. Both the factoring unit and the selling party shall sign a written notice of the factoring contract, which clearly states the fact that the selling party has transferred its right to claim the payment to the factoring unit and provides the buying party with the guidance on the direct payment to the factoring party, then send it to the buying party and related parties;

dd. The buying party shall send the selling party and the factoring unit a written confirmation of its receipt of the notice and its commitment on the performance of its payment obligation to the factoring unit;

e. The selling party shall hand over the original copy of the goods purchase, sale contract, sale vouchers and other documents concerning the receivables to the factoring unit;

g. The factoring unit shall make an advance to the selling party in accordance with the agreement stated in the factoring contract;

h. The factoring unit shall follow up and collect debts from the buying party;

i. The factoring unit shall settle payment with the selling party in accordance with provisions stated in the factoring contract;

k. To deal with other outstanding issues, which may arise.

2. For the export-import factoring activity: The process of factoring operation may be performed in accordance with provisions in paragraph 1 of this Article or carried out through the import factoring unit. The import factoring unit shall be responsible for analysis of receivables, the operation and financial capacity of the buying party that is the importer in the export-import contract; perform the debt collection under the authorization of the export factoring unit and undertake, on behalf of the importer, to make payment in case where the importer is not capable of making payment of the receivables.

In case where the factoring activity is performed through an import factoring unit, the export factoring unit and the import factoring unit shall agree and enter into a separate contract, which specifically stipulates the rights and obligations of each party, in line with provisions of applicable laws.

Article 14. Provisions on the currency used in the factoring activity

Factoring transactions shall be performed in VND. For factoring transactions made in foreign currency, the factoring unit, the selling party and the buying party shall comply with current provisions on foreign exchange control.

Article 15. Interests and fees in the factoring activity

Interests and fees in the factoring activity agreed by the parties in the factoring contract shall consist of:

1. Interests on the capital amount advanced by the factoring unit to the selling party in line with market interest rate.

2. Fees on the value of the receivables to make up for credit risks, management cost of sale books and other costs.

Article 16. Security for the factoring activity

The factoring unit and the selling party shall agree on the application or non-application of security measures to the factoring activity. Security forms shall include: deposit, mortgage and pledge of assets, guarantees secured by assets of a third party and other security measures in compliance with provisions of applicable laws.

Article 17. Provisions on payment rescheduling, and overdue debt classification in the factoring activity

Provisions on payment rescheduling, and overdue debt classification in the factoring activity shall comply with the guidance of the State Bank.

Article 18. Provisions on tax

Provisions on tax applicable to the factoring activity shall comply with provisions of applicable laws.

Article 19. Receivables not qualified for factoring

Following receivables shall not be qualified for factoring:

1. Receivable arising from the purchase and sale contract of goods forbidden by applicable laws;

2. Receivable arising from illegal transactions and agreements;

3. Receivable arising from transactions and agreements being in dispute

4. Receivable arising from contracts of goods sale in form of consignment

5. Receivable arising from the goods purchase and sale contract, the remaining payment period of which is more than 180 days.

6. Receivables set off or mortgaged, pledged;

7. Receivables, which are overdue according to the goods purchase and sale contract.

Article 20. Prudential provisions

1. The factoring activity must ensure prudential provisions stated in the Law on Credit institutions and guiding documents of the State Bank;

2. Total factoring balance for a single customer shall not be in excess of 15% of the own capital of the factoring unit. For a branch of foreign bank, it shall not be in excess of 15% of the own capital of the foreign bank.

3. The balance of receivables, the payment of which is guaranteed by an import-factoring unit for an importer, shall be within the limit of the total guarantees outstanding a credit institution has made to a customer in accordance with the Regulation on banking guarantee.

4. In case where the factoring requirement of a customer exceeds 15% of the own capital of a factoring unit, factoring units shall be entitled to carry out co-factoring for that customer in accordance with applicable provisions of the State Bank.

5. The total factoring value outstanding shall not be in excess of the own capital of a factoring unit.

Chapter III.

FACTORING CONTRACT

Article 21. Factoring contract

1. Factoring contract shall be a written agreement between a factoring unit and a selling party on the purchase of receivables in compliance with provisions of applicable laws.

2. Factoring contract may be amended, supplemented or cancelled if related parties agree to do so.

Article 22. Contents of a factoring contract

A factoring contract shall consist of following main contents:

1. Name, address, tel, fax, etc… of parties signing the factoring contract

2. Value of receivables to be factored, the right and interest in relation to receivables in accordance with the goods purchase and sale contract;

3. Factoring interests and fees;

4. The selling, buying price of the receivable shall be determined on the basis of the value of the receivable after the factoring interests and fees are deducted;

5. Advanced amount and payment mode;

6. Notice of the factoring to the buying party and related parties;

7. Forms of security to secure the factoring unit of its recourse on the advanced amount, value of security assets;

8. Effective term of the factoring contract;

9. Rights and obligations of parties;

10. The mode to hand over the goods purchase and sale contract, sale vouchers, the rights, interest and documents relating to the receivable, which is factored;

11. Provisions on the recourse of the factoring unit;

12. Dealing with arising disputes;

13. Other agreements.

Chapter IV.

RIGHTS AND OBLIGATIONS OF PARTIES

Article 23. Rights and obligations of the factoring unit

1. The factoring unit shall have the right:

a. To request the selling party to provide information and documents relating to the receivable, its financial capacity and its business performance;

b. To request the selling party to hand over the original copy of the goods purchase and sale contract, sale vouchers, rights, interests and documents in relation to the receivable, which is factored;

c. To claim a debt from the buying party in line with the value of the receivable being factored and enjoy other rights and interests the selling party does have according to provisions in the goods purchase and sale contract;

d. To transfer the right to claim a debt, except for the case where the parties in the factoring contract have agreed otherwise.

2. The factoring unit shall be obliged:

a. To give notice to the buying party and related parties in accordance with provisions in point d, paragraph 1, Article 13 of this Regulation;

b. To make payment of the receivable to the selling party at the purchase price agreed in the factoring contract;

c. To bear all the risk when the buying party is not capable to perform its payment obligation for the receivable in case of factoring without recourse.

d. To correctly and fully comply with clauses agreed in the factoring contract.

Article 24. Rights and obligations of the selling party

1. The selling party shall have the right

To receive the payment made by the factoring unit at the buying, selling price of the receivable as agreed in the factoring contract.

2. The selling party shall be obliged

a. To fully, accurately and honestly provide the factoring unit with information, documents and reports upon its request;

b. To give notice to the buying party and related parties in accordance with provisions in point d, paragraph 1, Article 13 of this Regulation;

c. To bear risks when the buying party is not capable of completing its payment obligation for the receivable in case of factoring with recourse.

d. To fully and timely hand over the goods purchase and sale contract, sale vouchers, rights, interests and other documents relating to the receivable factored to the factoring unit in accordance with agreements stated in the factoring contract;

e. To correctly and fully comply with clauses agreed in the factoring contract and goods purchase, sale contract.

Article 25. Rights and obligations of the buying party

1. The buying party shall have the right

a. To be informed of the factoring;

b. Not to change its rights and obligations stipulated in the goods purchase and sale contract, but the party, which is entitled to receive the payment of the receivable. The adjustment of clauses stipulated in the goods purchase and sale contract must be accepted in writing by the buying party.

2. The buying party shall be obliged

a. to confirm in writing on its receipt of the notice and commitment on making payment in accordance with provisions in point d, paragraph 1, Article 13; in case of payment refusal, the buying party must clearly state the true reason thereof and immediately give a written notice to the selling party and the factoring unit.

b. To make payment to the factoring unit in accordance with clauses stipulated in the goods purchase and sale contract;

c. Not to request the repayment of the amount, which it has already paid to the factoring unit, in case where the selling party fails to, do not correctly, sufficiently comply with clauses stipulated in the goods purchase and sale contract, except for the case where the factoring unit deliberately makes payment of that amount to the selling party after it has been notified of violation committed by the selling party to the goods purchase and sale contract

Chapter V.

DEALING WITH VIOLATION

Article 26. Dealing with violation

Organizations, individuals violating any provision in this Regulation shall, depending on the nature and seriousness of the violation, be subject to discipline, administrative punishment or prosecuted for criminal liability in accordance with provisions of applicable laws.

Chapter VI.

IMPLEMENTING PROVISIONS

Article 27. Organization of implementation

1. Responsibility of the factoring unit: based on this Regulation and provisions of related legal documents, the factoring unit shall issue specific documents to guide the factoring operation in line with its conditions, characteristics and Charter.

2. Responsibility of units of the State Bank:

a. The Banks Department and the State Bank’s branches in provinces, cities:

- To receive application files for the factoring activity from credit institutions in compliance with the sequence, procedure stipulated in Chapter II, Section 1 of this Regulation.

- To coordinate with related Departments of the State Bank to consider and submit the Governor for his decision on the approval of credit institutions to perform factoring operation.

b. The State Bank Inspectorate:

- To coordinate with and provide the Banks Department with the operation situation of credit institutions to submit to the Governor of the State Bank for his consideration, decision on the permission to credit institutions to perform factoring operation.

- To organize inspection, supervision for the implementation of the factoring operation; To deal with under its competence and make recommendation to the Governor of the State Bank to deal with violations of this Regulation.

c. The Monetary Policy Department:

- To guide provisions on the payment rescheduling and overdue debt classification in the factoring activity of credit institutions

- To provide for the periodical reporting regime on the factoring activity to competent units of the State Bank.

d. The Finance Accounting Department:

- to provide guidance on the accounting of the factoring operation of credit institutions.

e. The Credit Department:

- To provide guidance to the factoring units on the implementation of co-factoring operation.

Article 28. Amendment of, supplement to this Regulation

The amendment of, supplement to this Regulation shall be decided upon by the Governor of the State Bank