In 2017, following the announcement that individual business owners would no longer be eligible for bank loans under Circular 39, many people expressed concern because they would either have to go through complicated and cumbersome procedures to establish a business, or they would have to borrow capital as individuals at higher interest rates.
Startup plans halted due to concerns about not being able to secure funding.
According to the 2015 Civil Code (effective from January 1, 2017), only legal entities and individuals are eligible to participate in civil relations. To ensure consistency, the State Bank of Vietnam added a regulation in Circular 39 (effective from March 15, 2017) stating that only legal entities and individuals are eligible to borrow capital from credit institutions. Therefore, business households and other households wishing to borrow capital for business purposes are required to establish a company or borrow as individuals.
Ms. Nguyen Thi Hoa, a household business owner selling groceries and consumer goods (as a general agency) on Xuan La Street (Xuan La Ward, Tay Ho District, Hanoi), said: “Last year, to open this agency, I borrowed 300 million VND, and then went through the procedures to borrow another 400 million VND from the bank. Now, hearing that to continue borrowing, I have to establish a business, I feel very discouraged. Borrowing as a household business owner, besides the preferential interest rate, management and tax payment are quite simple. Now, establishing a business requires complicated procedures such as registration, seal engraving, and quarterly and annual financial reporting.”
Like Ms. Hoa, Ms. Le Van Anh, a small business owner at Canh Market (Xuan Phuong Ward, Nam Tu Liem District, Hanoi), said that she and many of her friends at the market have only ever done small-scale business. However, each store requires capital of up to hundreds of millions of dong, so besides their savings, they have to borrow from relatives or banks. “Out of 10 individual business owners here, at least 4-5 have to borrow from banks. The business demand isn't large, so we lack the experience to manage bookkeeping, seals, and documents when we try to establish a company. If we're forced to, would we have to hire staff to manage this tiny store? Besides, the profit isn't much, and if we borrow as individuals (in the form of purchases), the interest rate is high, how can we afford it?” Ms. Van Anh worried.
Nguyen Hoang Vinh (from Vinh City, Nghe An province), a recent graduate of the National Economics University and currently working at a restaurant on To Hieu Street (Cau Giay district), shared: “After graduating from university, I worked part-time at a few restaurants to gain experience, then pooled capital with friends in Hanoi to open a food business. We had almost finalized our business plan and were in the process of applying for a bank loan when this news broke. The bank announced a temporary suspension of lending, so we have to start everything from scratch. If we consider establishing a company, with a small-scale business, hiring staff would be costly. On the other hand, if individuals borrow money through consumer loans or shopping loans with current interest rates, it will be very difficult to make a profit in the initial stages of starting a business.”
How should we understand this correctly?
According to incomplete statistics from the Vietnam Chamber of Commerce and Industry (VCCI), there are currently about 5,6 million individual business households nationwide. Individual business activities are highly autonomous, independently seeking resources, capital, and labor. Many economic experts believe that this is a highly adaptable economic sector, easily changing business sectors to suit market and economic demands. In reality, individual business households have created a wide variety of products and services everywhere and at all times, meeting societal needs and acting as satellites for enterprises in the economy. There are some industries where large-scale collective or state-run production would be inefficient or less efficient than small-scale production within households.
Following the announcement that Circular 39/2016/TT-NHNN came into effect on March 15, 2017, entities that are not legal entities (household businesses, family businesses, cooperatives, and other organizations without legal personality) are no longer eligible to borrow from banks. The Legal Department of the State Bank of Vietnam stated: Regulations on entities participating in civil relations (including loan agreements) only include individuals and legal entities as stipulated in the 2015 Civil Code. The regulations on loan customers in Circular 39 are implemented (and must be consistent with the 2015 Civil Code) based on provisions already in effect. Regarding the concerns that business households will be unable to access preferential interest rate credit if they do not convert into enterprises, the State Bank of Vietnam stated: Loan interest rates are determined by credit institutions depending on the purpose of the loan (business or consumption), loan term, risk level, feasibility of the loan plan, and input costs of each credit institution.
According to Mr. Truong Thanh Duc, Chairman of the Banking Law Club, the regulations in Circular 39 simply adjust to clarify terminology and concepts. The removal of household and business households as borrowers is merely a change in form, a change in name. “Therefore, from now on, households and business households will transact in the capacity of individuals, and the head of the household will no longer automatically represent the household as before. And in a recent announcement, the State Bank of Vietnam also clarified that in the case of borrowing for business activities, individuals can borrow to meet their own capital needs and the capital needs of the business household or private enterprise that they own.”
Therefore, to borrow from banks in 2017, household businesses must convert into enterprises or the head of the household must borrow in their own name. In other words, borrowing will be done in the name of each individual, and the individual will be responsible for repaying the debt, not in the name of the household or business," Mr. Truong Thanh Duc explained.www.expertis.vn
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