by Steven Jacob, Foreign Associate

Last week I attended a year-end party and was asked about business-to-business, or B2B, lending in Vietnam. While I was familiar with the legal issues surrounding peer-to-peer, or P2P, lending (see my post on that topic here) I hadn’t had the chance to investigate the somewhat different issues surrounding the higher level B2B lending business model.

The B2B Lending Business Model

B2B lending is similar to P2P lending in that the proprietor operates a platform on which businesses seeking loans can meet and interact with businesses who are willing to lend. This allows for faster, less invasive checks on borrowers and potentially higher returns for lenders. But there are also unique issues that arise from this model, especially in Vietnam.

First, a review of sorts. The exact business model used by a B2B lending platform will determine what business activities it conducts and therefore what business lines it must register and what licenses it must obtain. From simply providing a network where businesses can meet to conducting due diligence on borrowers to actively arranging loans the B2B lending platform will be subject to different sectoral regulations.

Business Lines of a B2B Lender

There are four business lines relevant to B2B lending in Vietnam: e-commerce (or the act of conducting transactions through electronic means), credit rating and appraisal (or the analysis, assessment, and rating of borrowers’ ability to repay their debt), lending (or the extension of credit whereby the lender delivers or undertakes to deliver to the borrower a sum of money to use for a definite purpose for a definite term as agreed, on the principle that principal and interest are fully repayable), and intermediary payment services (services of provision of electronic payment infrastructure, assistant support payment services, and other intermediary payment services pursuant to state bank regulations). I’ll take these one at a time.

E-commerce

This one’s straightforward. Companies seeking to provide e-commerce services in Vietnam must be registered to provide the proper services with their local business registration office and must notify the Ministry of Industy and Trade prior to publishing an e-commerce website. They are subject to data privacy (see article on data protection obligations here) and cybersecurity regulations. It is also possible that, due to the fact that a B2B lending platform may be seen to act similarly to a high level social network, they may want to pursue compliance for providing a social network on telecommunications.

Credit Rating

In order to provide credit rating services, the platform will need to obtain a credit rating license from the Ministry of Finance, something that also entails consultation with the state bank and the Ministry of Planning and Investment. They must have a registered and paid-up capital of at least 15 billion VND and maintain at least five qualified credit raters on staff. They are also subject to additional requirements of prudential and fiscal responsibility. It would seem, too, that obtaining this license is difficult as it took four years from the promulgation of the law on credit rating services until the granting of the first license.

Lending

Lending activities are regulated by the state bank of Vietnam. Though a B2B lending platform may argue that they are not technically lending, if they are conducting activities that could be classified as lending on a regular basis then they must register as a relevant credit institution.  Lending means:
a form of extension of credit whereby the lender delivers or undertakes to deliver to a client a sum of money to use for a definite purpose for a definite term as agreed, on the principle that principal and interest are fully repayable.
It is likely, however, that a B2B lending platform will not be viewed as being in the business of lending and will not have to register as a credit institution, particularly as there are provisions for non-credit institutions to issue loans so long as such activity does not become regular enough to be deemed as a business activity.

Intermediary Payment Services

If the B2B lending platform acts as an intermediary for the payment itself then the platform will likely be considered to be performing intermediary payment services. Although not a credit institution, the B2B lending platform will be required to register the business line with the local business registration office and obtain an intermediary payment services license from the state bank. To obtain the latter it must meet minimum technical requirements, have management and staff with sufficient qualifications, and maintain a 50 billion VND charter capital. They will also be subject to periodic reporting requirements concerning the nature, number, and size of payments as well as special reporting obligations upon request of the state bank.

Loan Process Compliance

Depending on how involved the B2B lending platform becomes in the loans themselves, they will have to develop solutions to assist the businesses that are parties to the loan in complying with regulations.

Domestic loans

For B2B loans where both companies are Vietnamese citizens, the restrictions are few. Each company will have to obtain the necessary corporate approvals, depending on their individual charter documents, before giving and receiving the loan. They will also have to ensure that the proper accounting and reporting of the loan, fees, and interest occurs. There is no VAT applicable to interest paid on loans between businesses in Vietnam and the borrower may deduct the interest from its corporate income tax for up to 150% of the official rate then announced by the state bank so long as it has fully paid up charter capital. Loans cannot be made in cash money though they may be made by check, bank transfer, or other means that are deemed acceptable forms of payment under the law.

Foreign Loans

For B2B lending in Vietnam where the lender is not a Vietnamese citizen, the process is considerably more complicated. Enterprises in Vietnam may only obtain foreign loans for the purposes of manufacturing projects, business, and for use as capital in investment projects of either the enterprise itself or of an investment project in which it is investing. To apply for a foreign loan, Vietnamese enterprises must register with the state bank for all loans of medium to long term and certain short term loans with a term of more than one year. In addition to registration they will also be subject to annual reporting requirements in which they must provide updates to the state bank on the status of the loan. Disbursement and settlement of the loan from overseas will normally be made in foreign currency. If the enterprise borrowing money is already a foreign invested enterprise they may use their existing direct investment account for the purposes of the disbursement deposit and payment and obtaining the foreign currency exchange necessary to conduct the loan. If the enterprise is not a foreign invested enterprise they must open a foreign loan account at a bank in Vietnam through which they can exchange foreign currency to correspond with their lender.

Whether the B2B lending platform will specialize in loans between domestic businesses or allow foreign businesses to use the platform, they will have to ensure that they take the relevant lending regulations into account when considering whether to process payments and in obtaining information from both parties prior to consummating a loan.

Convertible Bonds

When a borrowing business decides it wants more from the lender than simply a loan, or the lender wants to be involved in the management and development of the borrower, the two companies may agree to exchange a convertible bond. This is a loan which may be repaid using shares of the borrower rather than payment in currency. I won’t go into all of the issues that surround convertible bonds, but normally there are numerous legal documents including a shareholders agreement and revisions to the borrower’s charter that must be prepared. I only raise the point as something that the B2B lending platform needs to consider prior to launch. Will they allow for convertible bonds and, if so, what level of involvement will the platform expect? It is a common enough financing model that anyone involved with loans between businesses needs to be aware of it and plan accordingly.

Conclusion

B2B lending in Vietnam is yet a fledgling idea and there are few companies involved with the model. It is one with great potential, however, as there are several large companies–some of which are state owned, at least in part–with cash to burn. To use that capital by investing in loans to other companies would allow them not only to grow their revenue, but assist small and medium enterprises to take the next step in their development.

B2B lending in Vietnam is more complicated than the similar model of P2P lending and it is important that prior to launching a platform a company considers all of the elements in play. They must determine how involved they will be in the interactions between businesses and the reach of their services. They must also ensure that they consider all the reporting and prudential requirements imposed on B2B lending in Vietnam, something that may not be straightforward. And they must determine whether they want to complicate their lives by allowing for more complex loan structures.

Assuming the B2B lending platform accomplishes all this, they can expect to see a brisk business in B2B lending in Vietnam as most Vietnamese tend to embrace business models that promise relatively secure profits. How they accomplish this, however, will be influenced by their compliance with law and their planning for legal risks in deciding their business model and the exact service levels they will provide to users.