A series of loan insolvencies totaling hundreds of billion Vietnamese dong have been detected in Hanoi. This is partly due to the impacts of the economic slowdown, which has savers shying away from legal investment channels because of low profits.
They instead use their savings to offer loans at extremely high interest rates. Although borrowing and lending among local people is legal, capital mobilization with interest rates more than 10 times higher than the maximum rate allowed, often known among locals as "black credit," is banned by the law, lawyer Pham Thanh Binh, deputy head of Hong Ha Law Firm in Hanoi, tells Thanh Nien Weekly in an interview.
Thanh Nien Weekly: In the insolvencies, the debts are recorded only in simple handwriting or even oral contracts without any witnesses. How is lending conducted so easily?
Pham Thanh Binh: Many large loans are offered quite easily because of two main reasons.
First, the lending is usually conducted via acquaintances and the mutual trust between lenders and borrowers, formed either directly or via a third person.
The second reason is very high interest rates. In most of the recent insolvent cases, daily interests were VND7,000-10,000 per VND1 million, equivalent to monthly interest rates of up to 30-40 percent.
Of the two factors that I have just mentioned, the greed for high interest rates is the main reason that has encouraged some people to offer easy loans.
What kind of trickery do borrowers often use, and what are the forms their loans take?
As for trickery, borrowers often try to create the appearance of being extremely rich, saying that they are successful businesspersons, so that others feel safe lending to them.
All of the recent insolvent cases happened under this scenario.
As for the form of lending, it is conducted based on the acquaintance between lenders and borrowers, and recorded by handwritten contracts or verbal agreements. The lending is easy due to the attractiveness of high interest rates agreed to by the borrowers.
Are handwritten contracts without witnesses legal?
According to Vietnam's Civil Law, property sale-purchase contracts are legal only when they are notarized. However, the law does not require contracts on lending assets or money to be notarized. Handwritten contracts recognizing a person borrowing a sum of money from another are considered civil contracts, and could be used as evidence if the cases are dealt with by the courts.
Thus, loans between the two sides could be recognized by law agencies, and cases would be dealt with if lenders can present their lending contracts, even under the handwritten form.
What is the probability of reclaiming the loans in the recent cases?
Most of the recent insolvencies are defrauded capital collection cases. Borrowers have not poured their loans into any business activities. They use the loans to pay interest rates on previous loans.
The loans are used for their individual expenditures only.
Thus, they often hide their assets before running away. Besides some assets they use to create the appearance of wealth such as cars, houses, or some plots of land they seem to have nothing. The assets' value is tiny compared to their loans. Thus, the risk of loan loss is very high.
Which of the cases will be solved by civil law, and which under criminal law?
The Penal Code stipulates the offense of defrauding and making use of trust to appropriate assets.
Defrauding is deceitful behavior, formed since the beginning of a transaction. If I don't have any investment or business activities, but I tell everybody that I have many projects, and encourage them to lend to me... That is defrauding.
In other cases, borrowers use loans for their real business purposes, but they, for some reason, fail in business, and cannot earn profits to pay back the loans to capital contributors. These cases will be dealt with by civil law.
Thus, it is necessary to consider whether there are any deceitful signs in the mobilization of capital or not, whether borrowers use their loans for any business and investment or not, and the behavior of borrowers after losing their ability to pay should also be considered. For example, a case in which they run away with a large amount of money to avoid debt payment is different from a case in which they temporarily dodge investigators, and then come forward later to deal with the aftermath.
In Hanoi, especially in its rural areas, lending is rather easy, and many insolvencies have occurred. Are there gaps in our laws?
In legal terms, transactions between borrowers and lenders are normally civil ones and recognized by the law. The existing civil code also regulates the issue of hui or ho a revolving fund where pooled money is lent to one of the contributors after drawing lots, or to the person offering the highest dividend.
This is a form of asset transaction under local customs on the basis of agreements of contributors, who decide the time, the amount of money for the contribution, and the rights and duties of each contributor. This method of capital mobilization is allowed by the law.
But "black credit" is via illegal channels. In the context of a frozen property market, increasing gold prices, and a bearish stock market, it is difficult for people with savings to consider other investment channels. Lusting for high returns off interest rates offered by borrowers, they easily become the victims in insolvent cases. Capital mobilization with very high interest rates is banned by the law.
Have we relaxed management of the issue?
It is not because we have relaxed management, but it is due to societal trends that occur when the savings of local residents are large and the economy is slow. This limits the savings from being invested in official channels. The current socioeconomic situation is a factor affecting local people's investment in "black credit" channels.
What is your advice to local people who are looking for a way to invest their money?
They should be vigilant against attractive interest rates that borrowers offer to pay because no business could bring profit of 30-40 percent each year during an economic slump like the one we are experiencing now. Thus, they should pour their investment into legal and safe channels. Despite unattractive interest rates, making deposits at banks is one of the safest ways to invest their money.