CIRCULAR

PROVIDING GUIDANCE ON TREATMENT OF RISKS ARISING FROM DIRECT LENDING OPERATIONS OF SMALL AND MEDIUM ENTERPRISE DEVELOPMENT FUND

Pursuant to the Law on State Budget dated June 25, 2015;

Pursuant to the Law on Credit Institutions dated June 16, 2010 and the Law on amendments to the Law on Credit Institutions dated November 20, 2017;

Pursuant to the Law on Enterprises dated November 26, 2014;

Pursuant to the Law on assistance for small- and medium-sized enterprises dated June 12, 2017;

Pursuant to the Government’s Decree No. 86/2017/ND-CP dated July 25, 2017 defining the functions, tasks, powers and organizational structure of the Ministry of Planning and Investment;

Pursuant to the Government’s Decree No. 39/2019/ND-CP dated May 10, 2019 on organization and operation of the Small and Medium Enterprise Development Fund (SMEDF);

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The Minister of Planning and Investment promulgates a Circular providing guidance on treatment of risks arising from direct lending operations of the Small and Medium Enterprise Development Fund (SMEDF).

Chapter I

GENERAL PROVISIONS

Article 1. Scope

This Circular provides guidance on treatment of risks arising the Small and Medium Enterprise Development Fund (SMEDF) as prescribed in Section I Chapter III and Section II Chapter V of the Government’s Decree No. 39/2019/ND-CP dated May 10, 2019 on organization and operation of the Small and Medium Enterprise Development Fund (SMEDF) (hereinafter referred to as “Decree No. 39/2019/ND-CP”).

Article 2. Regulated entities

1. The Small and Medium Enterprise Development Fund - SMEDF (hereinafter referred to as “Fund”);

2. Small- and medium-sized enterprises (hereinafter referred to as “SMEs”) getting loans from the Fund as prescribed in Section I Chapter III of Decree No. 39/2019/ND-CP;

3. Any organizations and individuals involved in the implementation of this Circular.

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For the purpose of this Circular, in addition to the terms defined in Decree No. 39/2019/ND-CP, the terms below shall be construed as follows:

1. “direct lending contract” (hereinafter referred to as “contract”) means the direct lending agreement defined in Article 20 of Decree No. 39/2019/ND-CP.

2. “risk” means the possibility of a loss, associated with loans given by the Fund, resulting from a SME's failure or inability to meet part or all of repayment obligations on its loan (principal and/or interest) under the signed contract.

3. “risk treatment” means the adoption of the measures specified in Article 40 of Decree No. 39/2019/ND-CP for dealing with an SME’s loan debts (principal and/or interests) which cannot be recovered by the Fund under the signed contract.

4. “revision of payment periods/amounts” means the Fund’s making changes in periods for making payment of debts (principal and/or interest) or payment amounts (principal and/or interest) agreed upon in the signed contract.

5. “extension of repayment period” means the agreement made between the Fund and an SME on extension of the repayment period of debts (principal and/or interest) specified in the signed contract.

6. “debt charge-off” means the Fund’s declaration that a portion or all of an SME’s debt (principal and/or interest) will not be collected within a given period under the signed contract.

7. “outstanding interest” means interest which is calculated on the principal amount and according to the interest rate specified in the signed contract but has not yet been paid by the SME.

8. “outstanding interest write-off” means the Fund’s partial or total forgiveness of the outstanding interest owned by an SME under the signed contract.

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10. “outstanding principal write-off” means the Fund’s partial or total forgiveness of the outstanding principal owned by an SME under the signed contract.

11. “debt sale” means the Fund's transfer of a part or all of the rights to collect debt and other rights associated with an SME’s debt to a debt buyer and receipt of payment from the debt buyer.

12. “book value of debt" means total amount of outstanding principal and interest and any other financial liabilities associated with an SME’s debt, which is recorded in the accounting books of the Fund in accordance with regulations of law.

13. “debt buyer” means an entity that is licensed to buy/sell debts in accordance with regulations of law.

14. “broker” means an entity that is licensed to provide brokerage on buying or selling of debts in accordance with regulations of law.

15. “disposition of collateral” means the Fund’s adoption of measures for disposing of the collateral provided by the SME to recover debt (principal and/or interest).

16. “provision for risks” means an amount of money which is set aside by the Fund as prescribed in Decree No. 39/2019/ND-CP as the provision for covering losses which may arise from SMEs’ failure to repay debts under signed contracts.

Article 4. Risk treatment principles   

The Fund’s treatment of risks must comply the principles laid down in Article 39 of the Decree No. 39/2019/ND-CP.

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1. SMEs suffer financial and/or property damage due to disasters, calamities, crop failure, epidemics, fire, war events or national state of emergency.

2. SMEs incur risks due to objective factors which directly affect their business operations resulting in their inability or failure to repay debts (principal and/or interest) under signed contracts. 

3. SMEs have bad debts according to results of debt classification as prescribed in Clause 1 Article 37 of Decree No. 39/2019/ND-CP and fall into neither the case in Clause 1 nor the case in Clause 2 of this Article.

4. SMEs are declared bankrupt in accordance with current regulations of law.

Article 6. Determination of capital and asset damage

1. When an SME borrowing funds from the Fund incurs risk, the Fund shall play the leading role and cooperate with relevant parties, including the SME and competent authorities (if any), to examine and assess the risk and make a record of capital and asset damage incurred by that SME.

2. The record of capital and asset damage incurred by the SME must bear certifications of related parties and contain all the necessary information such as events, risks incurred, causes of risks, and the capital and asset damage level.

3. The level of capital and asset damage incurred by the SME is the cash value of assets and capital actually damaged or lost at the date of record.

4. The Fund is allowed to hire entities that are licensed to provide valuation services to determine the level of capital and asset damage incurred by the SME.

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MEASURES AND FUNDING SOURCES FOR RISK TREATMENT

Section I. RISK TREATMENT MEASURES

Article 7. Revision of payment periods/amounts

1. Eligible borrowers:

SMEs facing risks as prescribed in Clause 1 or Clause 2 Article 5 of this Circular.

2. Eligibility requirements:

An SME may be eligible for revision of payment periods/amounts when meeting all of the following requirements:

a) It is an entity mentioned in Clause 1 of this Article.

b) It has used the borrowed funds for the purposes specified in the contract.

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d) It has submitted an adequate application as prescribed in Clause 3 of this Article.

3. Application for revision of payment periods/amounts:

The SME shall prepare and send an application for risk treatment to the Fund. The application consists of:

a) The application form which is signed by the SME's legal representative and includes the following contents: Causes of risk resulting in its failure to repay debts under the signed contract; capital and asset damage level; outstanding principal and interest payable; adopted risk treatment measures (if any) and proposed risk treatment measures; commitments on the feasibility of the business plan and debt repayment plan after risk treatment;

b) Authenticated duplicates of the financial statements audited by independent audit organizations or sent to tax authorities of the latest 02 years before the date of application for risk treatment or of the year preceding the year in which the SME applies for risk treatment if the SME has operated for a period less than 2 years;

c) Certified true copy of the debt reconciliation statement by the time of application for risk treatment;

d) Other relevant documents (if any).

4. Dossier on revision of payment periods/amounts:

The Fund shall prepare a risk treatment dossier, consisting of:

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b) The record of capital and asset damage incurred by the SME.

c) The Fund’s report on risk treatment, including the following contents: The SME’s business situation, repayment of debt (principal and/or interest) under the signed contract, description and causes of the risk, capital and asset damage level, adopted risk treatment measures and results thereof (if any), proposed risk treatment measures, the necessity of such proposed risk treatment measures, SME’s ability to repay debt (principal and/or interest) after implementing such proposed risk treatment measures.

d) Other relevant documents (if any).

5. Authority to decide revision of payment periods/amounts:

The revision of payment periods/amounts shall be considered and decided by the Fund.

6. Rules for revision of payment periods/amounts:

a) Revision to payment periods/ amounts of a debt may be made several times.

b) The revision of payment periods/amounts shall change neither of the repayment period, the last payment deadline, and total amount of debts payable as specified in the signed contract.

7. Revision of payment periods/amounts:

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Article 8. Extension of repayment period

1. Eligible borrowers:

SMEs facing risks as prescribed in Clause 1, Clause 2 or Clause 3 Article 5 of this Circular.

2. Eligibility requirements:

An SME may be eligible for extension of repayment period when meeting all of the following requirements:

a) It is an entity mentioned in Clause 1 of this Article.

b) It has used borrowed funds for the purposes specified in the contract.

c) It has difficulties in business operations resulting in its failure to repay debts (principal and/or interest) in full and on schedule under the signed contract.

d) It has submitted an adequate application as prescribed in Clause 3 of this Article.

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The SME shall prepare an application as prescribed in Clause 3 Article 7 hereof.

4. Dossier on extension of repayment period

The Fund shall prepare a dossier as prescribed in Clause 4 Article 7 hereof.

5. Authority to decide extension of repayment period

The extension of repayment period shall be considered and decided by the Fund.

6. Rules for extension of repayment period

a) Repayment period of a debt may be extended multiple times.

b) The extended repayment period must fall within the loan term and not exceed the maximum loan term according to regulations on the Fund’s direct lending.

7. Extension of repayment period

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Article 9. Debt charge-off

1. Eligible borrowers:

SMEs facing risks as prescribed in Clause 1, Clause 2 or Clause 3 Article 5 of this Circular.

2. Eligibility requirements:

An SME may be eligible for debt charge-off when meeting all of the following requirements:

a) It is an entity mentioned in Clause 1 of this Article.

b) It has used borrowed funds for the purposes specified in the contract.

c) It faces difficulties during business resulting in its loss or accumulated losses incurred within at least 01 year preceding the year of risk treatment and its failure to repay debt (principal and/or interest) in full and on schedule as agreed upon in the signed contract.

d) It has submitted an adequate application as prescribed in Clause 3 of this Article.

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The SME shall prepare an application as prescribed in Clause 3 Article 7 hereof.

4. Debt charge-off dossier

The Fund shall prepare a debt charge-off dossier as prescribed in Clause 4 Article 7 hereof.

5. Authority to decide debt charge-off

The Fund shall request the Minister of Planning and Investment to consider and decide the debt charge-off.

6. Debt charge-off rules

a) A debt may be charged off multiple times.

b) The period over which a debt will be charged off shall not exceed 03 years and not included in the loan term.

c) During the period over which a debt is charged off, the SME shall not incur interest and is not required to pay outstanding principal and interest.

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a) After receiving an adequate application as prescribed in Clause 3 of this Article, the Fund shall appraise the received application, carry out risk assessment and determination of capital and asset damage incurred by the SME, and prepare and submit a report on risk treatment to competent authorities for decision.

b) After a decision on risk treatment is issued, the Fund shall charge off the debt.

Article 10. Debt sale

1. Eligible borrowers:

SMEs facing risks as prescribed in Clause 1, Clause 2 or Clause 3 Article 5 of this Circular.

2. Eligibility requirements:

An SME may be eligible for debt sale when meeting all of the following requirements:

a) It is an entity mentioned in Clause 1 of this Article.

b) It has used borrowed funds for the purposes specified in the Contract.

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d) It has submitted an adequate application as prescribed in Clause 3 of this Article.

3. Application for debt sale

a) In case of debt sale requested by the SME

The SME shall prepare an application as prescribed in Clause 3 Article 7 hereof. If an SME has a request for selling of total book value of debt, commitments, and information about feasibility of the business plan and the debt repayment plan must not be specified in the application for risk treatment.

b) In case of debt sale requested by the Fund

The Fund shall prepare an application for debt sale, consisting of:

- The written proposal for risk treatment made by the Fund, indicating the followings: causes of the risk resulting in the SME’s failure to repay debt under the signed contract, the outstanding principal and interest payable. Any adopted risk treatment measures and proposed ones must be specified in the written proposal for risk treatment.

- The record of capital and asset damage incurred by the SME (the SME’s certification thereon is not required).

4. Debt sale dossier

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b) In case of risk treatment requested by the Fund: The debt sale dossier includes the documents specified in Point b Clause 3 of this Article.

c) The Fund's report on risk treatment:  In addition to the contents specified in Point c Clause 4 Article 7 hereof, the report on risk treatment shall include the proposal for sale of partial or entire book value of debt.

d) The original of the debt buyer’s written request for or letter of acceptance of debt purchase.

dd) Other documents and instruments as prescribed by law or requested by the debt buyer (if any).

5. Authority to decide to implement risk treatment measure

a) In case of debt sale which does not cause a decrease in the Fund’s charter capital:

The Fund shall consider deciding the debt sale in accordance with Point c Clause 1 Article 41 of the Decree No. 39/2019/ND-CP and SBV’s regulations on debt trading.  

b) In case of debt sale resulting in a decrease in the Fund’s charter capital:

The Fund shall prepare and submit a risk treatment dossier to the Ministry of Planning and Investment that shall play the leading role and cooperate with the Ministry of Finance in submitting it to the Prime Minister for considering and deciding the debt sale in accordance with Point a Clause 1 Article 41 of the Decree No. 39/2019/ND-CP.

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a) The debt trading between the Fund and the debt buyer shall comply with SBV’s regulations on trading of debts of credit institutions and foreign bank branches (FBBs) and other relevant laws.

b) Either partial or entire book value of the debt may be sold.

c) The sale of debts by auction shall be prioritized. In case of unsuccessful auction, the Fund may consider deciding to sell debts by negotiation.

7. Debt sale methods

a) Selling debts by auction

- The Fund shall employ an auction organization that is established and operating in accordance with regulations of law to organize or itself organize the auction of debts in accordance with regulations of law on property auction.

- The starting price for the auction shall be determined in accordance with SBV’s regulations on determination of value of debts traded by credit institutions.

b) Selling debts by negotiation

- The Fund and the debt buyer shall enter into negotiation on selling debt directly or through a broker according to the market principle.

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8. Debt sale and purchase contract

The Fund’s debt sale shall be made by entering into a debt sale and purchase contract in which the selling price and transfer of the creditor’s rights from the Fund to the debt buyer and other relevant agreements are specified.

9. Settlement of difference between the selling price and book value of the debt (after deducting all expenses as prescribed by law):

a) In case the selling price of a debt is greater than its book value, the positive difference shall be settled according to Point c Clause 3 Article 51 of Decree No. 39/2019/ND-CP.

b) In case the selling price of a debt is smaller than its book value, the negative difference shall be settled according to Point a Clause 1 Article 41 and Point b Clause 3 Article 51 of Decree No. 39/2019/ND-CP.

10. Accounting for debt sale

The Fund shall carry out accounting for its debt sale according to current regulations on accounting applied to the Fund.

11. Selling debts

a) In case of debt sale requested by the SME

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The debt sale which is decided by the Prime Minister shall be carried out according to Clause 7 Article 9 hereof.

b) In case of debt sale requested by the Fund

The Fund shall carry out risk assessment and determination of capital and asset damage incurred by the SME, prepare and submit a report on risk treatment to competent authorities for decision; carry out the debt sale after obtaining a decision on debt sale issued by a competent authority.

Article 11. Disposition of collateral

1. Eligible borrowers:

SMEs facing risks as prescribed in Clause 1, Clause 2 or Clause 3 Article 5 of this Circular.

2. Eligibility requirements:

An SME may be eligible for disposition of collateral when meeting all of the following requirements:

a) It is an entity mentioned in Clause 1 of this Article.

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c) It faces difficulties during business resulting in its loss or accumulated losses incurred within at least 01 year preceding the year of risk treatment and its failure to repay debt (principal and/or interest) in full and on schedule as agreed upon in the signed contract.

d) It has submitted an adequate application as prescribed in Clause 3 of this Article.

3. Application for disposition of collateral

a) In case of risk treatment requested by the SME:

The SME shall prepare an application as prescribed in Clause 3 Article 7 hereof.

If an SME has a request for disposition of collateral for settling total book value of its debt, commitments and information about feasibility of the business plan and the debt repayment plan must not be specified in the application for risk treatment.

b) In case of risk treatment requested by the Fund: The Fund shall prepare an application as prescribed in Point b Clause 3 Article 10 hereof.

4. Collateral disposition dossier

a) In case of risk treatment requested by the SME: The collateral disposition dossier shall comply with Point a Clause 3 of this Article.

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c) The Fund's report on risk treatment:  In addition to the contents specified in Point c Clause 4 Article 7 hereof, the report on risk treatment shall include the proposal for disposition of collateral for settling partial or entire book value of debt.

d) Other documents and instruments as prescribed by law regulations on disposition of collateral.

5. Authority to decide to dispose of collateral

a) In case of disposition of collateral which does not cause a decrease in the Fund’s charter capital:

The Fund shall consider deciding the disposition of collateral according to Point c Clause 1 Article 41 of Decree No. 39/2019/ND-CP, the 2015 Civil Code and relevant laws on disposition of collateral.

b) In case of disposition of collateral resulting in a decrease in the Fund’s charter capital:

The Fund shall prepare and submit a collateral disposition dossier to the Ministry of Planning and Investment that shall play the leading role and cooperate with the Ministry of Finance in submitting it to the Prime Minister for considering and deciding the disposition of collateral in accordance with Point a Clause 1 Article 41 of the Decree No. 39/2019/ND-CP.

6. Methods for disposition of collateral

a) Auction of collateral;

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c) The secured party’s acceptance of collateral instead of fulfillment of obligations by the securing party;

d) Other methods as prescribed by law regulations on disposition of collateral.

7. Collateral disposition rules

a) The collateral may be disposed of for settling either partial or entire book value of a debt.

b) The disposition of collateral shall be carried out in accordance with the Civil Code and relevant laws on disposition of collateral.

c) The method for disposition of collateral must be specified in the pledge or mortgage agreement.  If agreements on collateral disposition are not available, the collateral shall be disposed of by auction.

8. Settlement of difference between the proceeds from collateral disposition and book value of the debt (after deducting all expenses as prescribed by law):

a) In case the proceeds from the collateral disposition are greater than the book value of debt, the positive difference shall be settled according to the signed Agreement (if any) or returned to the SME.

b) In case the proceeds from the collateral disposition are smaller than the book value of debt, the negative difference shall be settled according to Decree No. 39/2019/ND-CP.

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9. Accounting for disposition of collateral

The Fund shall carry out accounting for collateral disposition according to current regulations on accounting applied to the Fund.

10. Disposing of collateral

The collateral shall be disposed of according to Clause 11 Article 10 hereof.

Article 12. Outstanding interest write-off

1. Eligible borrowers:

SMEs facing risks as prescribed in Clause 1 or Clause 4 Article 5 of this Circular.

2. Eligibility requirements:

An SME may be eligible for outstanding interest write-off when meeting all of the following requirements:

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b) It has used borrowed funds for the purposes specified in the Contract.

c) It faces difficulties during business resulting in its loss within at least two (02) years preceding the year of risk treatment, or accumulated losses incurred within 01 year preceding the year of risk treatment (if the SME has operated for a period less than 2 years), and its failure to repay debt (principal and/or interest) in full and on schedule as agreed upon in the signed contract (except the case specified in Clause 4 Article 5 hereof).

d) It has submitted an adequate application for risk treatment as prescribed in Clause 3 of this Article.

dd) With regard to the case prescribed in Clause 1 Article 5 hereof: The risk treatment measure prescribed in Article 10 or Article 11 hereof has been adopted to collect debt (principal and interest) of a SME but there is still an amount of outstanding interest yet to be collected.

e) With regard to the case prescribed in Clause 4 Article 5 hereof: The risk treatment measure prescribed in Article 10 or Article 11 hereof has been adopted to collect outstanding interest but there is still an amount of outstanding interest yet to be collected.

3. Application for outstanding interest write-off

a) In case of outstanding interest write-off requested by the SME

If an SME faces risks as prescribed in Clause 1 Article 5 hereof, it may prepare an application for outstanding interest write-off as prescribed in Clause 3 Article 7 hereof.

b) In case of outstanding interest write-off requested by the Fund

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- The documents specified in Point b Clause 3 Article 10 hereof.

- The original of the decision to declare bankruptcy issued by the civil judgment enforcement agency.

4. Dossier on outstanding interest write-off

a) In case of outstanding interest write-off requested by the SME: The dossier on outstanding interest write-off shall comply with Point a Clause 3 of this Article.

b) In case of outstanding interest write-off requested by the Fund: The dossier on outstanding interest write-off shall comply with Point b Clause 3 of this Article.

c) The Fund's report on risk treatment:  In addition to the contents specified in Point c Clause 4 Article 7 hereof, the report on risk treatment shall include the proposed amount of outstanding interest to be written off.

5. Authority to decide to implement risk treatment measure

The Fund shall request the Minister of Planning and Investment to consider deciding the outstanding interest write-off as prescribed in Point b Clause 1 Article 41 of Decree No. 39/2019/ND-CP.

6. Rules for outstanding interest write-off

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b) An amount of outstanding interest shall be written off once only.

7. Writing off outstanding interest

a) In case of outstanding interest write-off requested by the SME

The outstanding interest shall be written off according to Clause 7 Article 9 hereof.

b) In case of outstanding interest write-off requested by the Fund

The outstanding interest shall be written off according to Point b Clause 11 Article 10 hereof.

Article 13. Outstanding principal write-off

1. Eligible borrowers:

SMEs facing risks as prescribed in Clause 4 Article 5 of this Circular.

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An SME may be eligible for outstanding principal write-off when meeting all of the following requirements:

a) It is an entity mentioned in Clause 1 of this Article.

b) It has used borrowed funds for the purposes specified in the Contract.

c) It has submitted an adequate application as prescribed in Clause 3 of this Article.

d) The risk treatment measure prescribed in Article 11 hereof has been adopted to collect the outstanding principal from the SME but there is still an amount of outstanding principal yet to be collected.

3. Application for outstanding principal write-off

The Fund shall prepare an application as prescribed in Point b Clause 3 Article 12 hereof.

4. Dossier on outstanding principal write-off

a) The dossier on outstanding principal write-off shall comply with Point b Clause 3 of this Article.

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5. Authority to decide the outstanding principal write-off

a) In case of outstanding principal write-off which does not cause a decrease in the Fund’s charter capital:

The Fund shall request the Minister of Planning and Investment to consider deciding the outstanding principal write-off as prescribed in Point b Clause 1 Article 41 of Decree No. 39/2019/ND-CP.

b) In case of outstanding principal write-off resulting in a decrease in the Fund’s charter capital:

The Fund shall request the Ministry of Planning and Investment to play the leading role and cooperate with the Ministry of Finance in requesting the Prime Minister to consider deciding to write off the outstanding principal in accordance with Point a Clause 1 Article 41 of the Decree No. 39/2019/ND-CP.

6. Rules for outstanding principal write-off

a) The amount of outstanding principal to be written off shall be decided by the competent person prescribed in Clause 5 of this Article.

b) An amount of outstanding principal shall be written off once only.

7. Writing off outstanding principal

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Section II. FUNDING FOR RISK TREATMENT

Article 14. Funding for risk treatment

1. Proceeds from debt sale and disposition of collateral.

2. Funding from the loan loss provision and financial reserve fund

a) The loan loss provision and financial reserve fund shall be used according to Clause 1 Article 42 and Clause 3 Article 51 of Decree No. 39/2019/ND-CP for implementing the following risk treatment measures, including: debt sale (in case the selling price is smaller than the book value of debt), disposition of collateral (in case the proceeds from the disposition are smaller than the book value of debt), and outstanding principal write-off.

b) In the event risks are not fully settled after the amounts of the loan loss provision and financial reserve fund have been used up, the Fund shall request the Ministry of Planning and Investment to play the leading role and cooperate with the Ministry of Finance in submitting the case to the Prime Minister for consideration.

3. Funding for implementing other risk treatment measures shall comply with regulations of law.

Chapter III

IMPLEMENTATION

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1. Relevant organizations, units and individuals are responsible for the implementation of this Circular.

2. Ministries, ministerial agencies, Governmental agencies and People's Committees at all levels shall, within the ambit of their assigned functions, tasks and powers, direct their affiliated agencies and enterprises to cooperate with the Fund in collecting and settling debts.

3. The Small and Medium Enterprise Development Fund (SMEDF) shall promulgate regulations on authority to decide to adopt the risk treatment measures specified in Clause 5 Article 7, Clause 5 Article 8, Point a Clause 5 Article 10, and Point a Clause 5 Article 11 of this Circular.

Article 16. Implementation clause

1. This Circular comes into force from February 25, 2021.

2. Difficulties that arise during the implementation of this Circular should be promptly reported to the Ministry of Planning and Investment for consideration./.

MINISTER




Nguyen Chi Dung

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