Land use rights proposed to be mortgaged for foreign loans

Vietnam should have a mechanism allowing its enterprises to mortgage land use rights and assets attached to land to raise foreign capital, said Darryl Dong, principal financial specialist at the International Finance Corporation (IFC).

Giving comments on the draft revised Land Law, he said businesses should be able mortgage their real estate directly or indirectly.

According to Dong, Vietnam has been in deep and wide international integration in terms of trade and investment through a series of free trade agreements (FTAs). But integration related to land and finance has remained limited, reducing international funding for Vietnamese enterprises and increasing their costs for loans, thus making them less competitive than their foreign peers.

The problem will be solved if businesses can mortgage land use rights to raise capital from foreign lenders through an appropriate mechanism, in order to minimize the risks arising from debt payment failure, he said.

Dong proposed two options. The first is to allow domestic enterprises to mortgage real estate directly to foreign lenders with certain restrictions, and the handling of collateral must comply with Vietnamese law.

In the second option, domestic enterprises can mortgage land use rights through a Vietnamese credit institution. When the borrower fails to repay the debt, the domestic credit institution will sell the collateral in accordance with the law and use the proceeds to repay the debt to the foreign lender.

Notably, real estate near national security-defense, nature and cultural conservation areas, border and island land, and other types of land in special-use and protection forests will not allowed to be mortgaged to foreign lenders, he added.

Sharing the same view, lawyer Nguyen Van Hau, vice chairman of the Ho Chi Minh City Bar Association, said with this method, Vietnamese enterprises will be able to expand their ability to attract investment capital and have more choices in capital mobilization.

As foreign organizations show high demand for investing in Vietnamese real estate, Vietnamese enterprises can access more capital amounts than those raised domestically, contributing to creating conditions for the economy and real estate market to develop, he argued.

Hau noted the draft only stipulates that Vietnamese enterprises are entitled to mortgage land use rights to "credit institutions licensed to operate in Vietnam, other economic organizations or individuals". It means that they cannot mortgage their real estate at foreign bank branches established and operating in Vietnam or at other foreign financial institutions.

“Therefore, this proposal needs to be further studied to add to the draft law,” he said.

Lawyer Tran Minh Cuong, a member of the Ho Chi Minh City Bar Association and director of law firm TMC Lawyers, said that the mortgage of land use rights to raise capital from foreign financial institutions is a matter of concern, especially when the current Land Law does not allow foreign organisations or individuals to acquire land use rights.

"The draft law must clarify the handling of assets mortgaged by businesses to foreign financial institutions. Special attention should be paid to developing suitable mechanisms and policies," he said.

"If we do not have strict regulations, in many different ways like offering low interest rates and high disbursements, domestic enterprises will mortgage land use rights to foreign financial institutions. If they fail to repay the debt, these foreign financial institutions will dispose of the collateral," Cuong said, adding that the handling of collateral must comply with the Vietnamese law because it affects national security-defense and national secrets.

"We should still include the proposal in the draft law for consideration, but we must be cautious, especially regarding the handling of collateral and avoiding overlaps with current laws," he said.

However, Cuong agreed with the option that allows domestic enterprises to mortgage their real estate through a credit institution in Vietnam who will use the proceeds from selling collateral to pay debt to foreign lenders.