7 new points in the draft circular on factoring service

On 18 January 2024, the National Assembly passed the Law on Credit Institutions 2024 which will take effect from 01 July 2024. In the context of Vietnam’s increasingly deep economic integration, the activities of credit institutions and foreign bank branches in Vietnam are increasingly diverse in many forms. On that basis, the issuance of a new circular to replace Circular No. 02/2017/TT-NHNN regulating factoring service (“Circular No. 02”) is deemed essential. Therefore, the State Bank of Vietnam (“SBV”) has drafted a new circular on factoring and other services related to factoring (the “Draft”), to replace Circular No. 02.

In this article, BLawyers Vietnam shares new points stipulated in the Draft based on the Law on Credit Institutions 2024.

1. What are the ‘other services related to factoring’?

Circular No. 02 of the SBV only regulates the factoring service of credit institutions and foreign bank branches. However, the Law on Credit Institutions 2024 stipulates that commercial banks, general finance companies and factoring finance companies are allowed to conduct other business activities according to the regulations of the SBV, including other services related to factoring.

Accordingly, the Draft defines other services related to factoring, including the following services that the factoring service provider performs on behalf of the factors that provide factoring requested by the seller:

1. Managing, monitoring ledgers, invoices and related documents concerning accounts receivables of the seller;
2. Debt collection for accounts receivables other than the factoring service; and
3. Other services in accordance with international practices on factoring according to the Law on Credit Institutions 2024.

2. Recourse factoring regarding factoring service

1. Unlike the current regulations of Vietnamese law on factoring, the Law on Credit Institutions 2024 defines factoring as a form of extension of credit by purchasing accounts receivable from a seller or giving an advance on behalf of a buyer under a sale contract or service contract between the seller and the buyer. The Draft is based on the omission of the recourse rights in the factoring service that is regulated in Law on Credit Institutions 2024 to appropriately regulate the form of factoring request by seller (or factoring) and factoring request by buyer (or reverse factoring), specifically:Factoring request by seller means that a factor purchases an accounts receivable arising from a sale contract or service contract of the seller to receive rights and legitimate interests relating to the accounts receivable as agreed. The buyer or seller is responsible for paying the factoring amount and related fees according to the agreement;
2. Factoring request by buyer means that a factor gives an advance to receive the obligation to pay the payables arising from a sale contract or service contract, and the client is responsible for paying the factoring amount and related fees according to the agreement.

The removal of recourse factoring from the services of credit institutions and foreign bank branches is a move towards changing factoring services in accordance with international practices and improving the competitiveness of Vietnam’s financial services industry. Recourse factoring, in which the seller retains the risk of bad debt, is being replaced by non-recourse factoring, which transfers the risk to the factor, providing the seller with better protection and potentially improving their balance sheets. This change may also encourage financial institutions providing factoring services to assess and manage risk more carefully. Furthermore, broader reforms aim to strengthen the financial system by imposing tighter controls and expanding the scope of those involved, which could lead to more transparent and responsible credit extension activities.

3. Principles of factoring implementation

Circular No. 02/2017/TT-NHNN (“Circular No. 02”) does not specify the principles of conducting factoring service. On this basis, the Draft has added provisions that specifically regulate the principles of carrying out the factoring service for applicable subjects. Specifically, these principles include:

1. The factor agrees with the client on the factoring amount, but it must not exceed the value of the accounts receivables and payables;
2. The factor performs factoring in foreign currency within the scope of its business operations, and the provision of foreign exchange services in the domestic market and international markets as authorized by the license granted by the SBV;
3. In compliance with regulations on cases where credit extension is not permitted; cases where credit extension is restricted; and cases where credit extension is limited set forth in the Law on Credit Institutions and the regulations of the SBV regarding limits and safety ratios in the operations of credit institutions and foreign bank branches; and
4. Syndicated factoring shall be conducted in accordance with regulations in this Draft, the regulations of the SBV in terms of syndicated loans, and relevant law provisions.

4. Cases ineligible for factoring

Circular No. 02 has specifically stipulated the cases that are not eligible for factoring, to protect credit institutions that carry out factoring service in the market. In the Draft, the cases ineligible for factoring are defined and supplemented by additional regulation, to limit the risks for these credit institutions when conducting such service. Specifically, the following accounts receivable and payables shall not be factored by the factor:

1. Accounts receivable arising from a goods or service contract forbidden by applicable laws;
2. Accounts receivable arising from a goods or service contract of which the remaining payment period is longer than 180 days from the date of receiving an application for factoring services;
3. Accounts receivable arising from a goods or service contract with a term indicating that rights and obligations in the contract may not be assigned or with a debt offset term;
4. Accounts receivable arising from a contract for service supply in sectors of finance, banking and insurance as prescribed by the Prime Minister in terms of Vietnam Standard Industrial Classification;
5. Accounts receivable that have been factored or used to guarantee other debt obligations;
6. Overdue accounts receivable according to the goods or service contract; and
7. Accounts receivable under dispute.

5. Rights and obligations of the factoring service provider

The Draft of the SBV has specifically stipulated the entities that are permitted to carry out other services related to factoring (hereinafter referred to as payment guarantee service provider), which include:

1. Commercial banks;
2. General finance companies;
3. Factoring finance companies;
4. Foreign bank branches; and
5. Foreign credit institutions.

Accordingly, the Draft also adds specific rights and obligations of the factoring service provider. With the function of providing other services related to factoring, the factoring service provider has the following rights and obligations:

1. The factoring service provider has the following rights:
   1. Accepting or rejecting the offer to provide a part or all of the other services related to factoring of the factor;
   2. Collecting fees for providing other services related to factoring and adjusting factoring fees; and
   3. Other rights as agreed to by the parties in accordance with the provisions of law.
2. The factoring service provider has the following obligations:
   1. Fulfilling accurately all the commitments made to the factor and related parties (if any); and
   2. Other obligations as agreed to by the parties in accordance with the provisions of law.

6. Rights and obligations of the factor

Vietnamese laws on credit institutions and documents guiding the implementation of regulations stipulate that factoring is a financial operation, provided by credit institutions to clients in need of financing through purchasing accounts receivable, giving an advance under a sale contract or service contract. However, current legal documents have not clearly regulated the rights and obligations of the factor. Consequently, the Draft of the SBV stipulates specific regulations concerning the rights and obligations of the factor, as follows:

1. The factor has the following rights:
   1. Accept or reject the factoring request;
   2. Request the factoring service provider to provide a part or all of the other services related to factoring;
   3. Request the guarantor to confirm the guarantee for the client;
   4. Request the client and related parties to provide information and documents related to factoring appraisal and collateral (if any);
   5. Require the client and related parties to have security measures for factored obligations (if necessary);
   6. Collect factoring fees, adjust factoring fees; apply and adjust interest rates, penalty interest rates;
   7. Refuse to perform factoring when the contract for purchase and sale of goods or provision of services is invalid or there is evidence that the presented documents are fake;
   8. Request the client to refund accounts receivables, payables as agreed;
   9. Check and monitor the debt repayment of the client;
   10. Liquidate the collateral according to the agreement and provisions of law;
   11. Initiate a lawsuit according to the provisions of law when the client violates the committed obligations; and
   12. Other rights as agreed to by the parties in accordance with the provisions of law.
2. The factor has the following obligations:
   1. Responsible for providing information and documents related to factoring rights to relevant parties;
   2. Correctly execute the content based on commitments to the client;
   3. Preserve factoring records according to the provisions of law; and
   4. Other obligations as agreed to by the parties in accordance with the provisions of law.

7. Rights and obligations of the client

In addition to specifying the rights and obligations of the factor, the Draft also issues regulations on the rights and obligations of the client using the factoring service. The rights and obligations of the client when using the factoring service include the following content:

1. The client has the following rights:
   1. Reject requests from the factor that are not in accordance with the agreements in the factoring contract;
   2. Request the factor to purchase accounts receivables or give an advance to the client as agreed;
   3. Initiate a lawsuit according to the provisions of law when the factor and other relevant parties violate the committed obligations; and
   4. Other rights as agreed to by the parties in accordance with the provisions of law.
2. The client has the following obligations:
   1. Provide full, accurate, and truthful information and documents related to accounts receivables, payables; ensure these accounts receivables, payables are not used to secure other debt obligations and are not subject to dispute; take legal responsibility for the accuracy, truthfulness, and completeness of the information and documents provided;
   2. Fully and timely fulfill the obligations and responsibilities committed in the factoring contract;
   3. Coordinate with the factor and related parties in the process of liquidating collateral (if any); and
   4. Other obligations as agreed to by the parties in accordance with laws.

The above is not official advice from BLawyers Vietnam. If you have any questions or suggestions about the above, please contact us at info@blawyersvn.com. BLawyers Vietnam would love to hear from you.

Date: 28 May 2024

Writer: Thai Bui