Allow land mortgages for international loans, experts propose

Darryl Dong, principal country officer of the International Finance Corporation (IFC), said at a forum Wednesday that Vietnam currently does not allow enterprises to mortgage land use rights to borrow from international lenders. He added that this hampers local businesses from accessing the much-needed large-scale international capital that domestic credit institutions cannot provide.

Dong proposed that the law be changed to allow either direct or indirect mortgages for international loans.

In the direct mortgage mechanism, the law may allow foreign lenders to take security over immovable assets in Vietnam with certain conditions and restrictions in order to manage potential associated risks, as well as to ensure the principle that land is owned by the State and foreign entities are not allowed to own land and other real estate in Vietnam, he said.

For example, land use rights and assets attached to land considered critical from a security and defense perspective must not be mortgaged, he added.

In the indirect mortgage mechanism, domestic credit institutions will represent foreign lenders to receive, manage, and enforce immovable asset security such as land use rights and property attached to land, Dong said.

When a loan is in default, the domestic credit organization will, on behalf of foreign lenders, sell the collateral to pay the foreign lender, he added.

The direct mortgage mechanism has been implemented in China, South Korea, Singapore and Thailand, while the indirect mechanism is imposed in Myanmar and the United Arab Emirates.

The lack of such mechanisms in Vietnam increases borrowing costs and reduces the opportunities for local businesses to access foreign finance.

If the mechanisms are allowed they would decrease lending interest rates by 0.3%-0.5% points, equivalent to millions of dollars.

Tran Tuan Phong, a co-chair of the infrastructure committee under the Vietnam Business Forum, said that international loans are key to domestic development.

“Businesses cannot borrow internationally without land use rights mortgages,” he said. “All we need to ensure is that no foreign organization can have a legal authority over Vietnamese land.”

Phong cited an example in which power projects can have a price tag of up to $1.8 billion and that this amount cannot be provided by domestic lenders.

A mortgage mechanism, in fact, has been imposed in the past. In order to lessen the difficulty in raising international funding for build-operate-transfer energy projects, since 2011 the prime minister has allowed those projects to mortgage immovable assets through a domestic bank for loans from international finance organizations.

Phong said that the Vung Ang 2 Thermal Power Project received international funds using this mechanism but this was treated as an exception and had to go through many complicated procedures.

Nguyen Van Hau, Vice Chairman of the HCMC Bar Association, said that the proposed changes to the law have not specified whether financial organizations funded by foreign investment or foreign economic organizations will be able to receive mortgages.

He therefore said that the indirect mechanism, in which a domestic credit institution be selected as an agent, is more feasible.

Deputy Minister of Natural Resources and Environment Le Minh Ngan said that the proposals are “very new” and will be reviewed.