A credit contract is one of the most common types of transactions, regularly entered into between a credit institution and its customer for the purpose of granting credit in accordance with the law. The interest rates stipulated in a credit contract usually include three types: ordinary interest, default interest, and penalty interest. However, in practice, the application of “penalty interest” remains controversial.
To ensure consistency in application, the Judicial Council of the Supreme People’s Court issued Resolution No. 01/2019/NQ-HDTP guiding the application on the calculation of interest under credit contracts, distinguishing between contracts concluded before and after January 1, 2017, while also setting clear limits on the scope of interest calculation recognized by law. Specifically:
| Timeline | Type of Interest Determined |
| Credit contracts concluded before January 1, 2017 | (1) Ordinary interest calculated on the principal within the due term; (2) Default interest calculated on the overdue principal
“Penalty interest” or interest calculated on interest is not mentioned. |
| Credit contracts concluded after January 1, 2017 | 1) Ordinary interest calculated on the principal within the due term (2) Default interest calculated on the overdue principal and (3) Interest on late payment of interest: this rate is subject to the parties’ agreement but may not exceed the limit on interest rate. |
Pursuant to Resolution No. 01/2019/NQ-HDTP, with credit contracts concluded before January 1, 2017, the interest payable by the customer to the credit institution only includes interest on the principal within the due term and interest on the overdue principal. Credit contracts concluded after January 1, 2017 shall include late payment interest calculated on the principal within the due term. Article 12 of the Resolution expressly provides that: “If a property loan agreement includes provisions on the borrower’s failure to make scheduled debt payments, the Court shall consider and make decision on the borrower’s failure to make debt payments on the due date by adopting the double jeopardy principle.”
Some banks consider “penalty interest” to be a legitimate form of interest that may be agreed upon in the contract. However, many court judgments have rejected this type of interest on the grounds that it lacks a clear legal basis, particularly with respect to contracts entered into before 2017. Specifically, in Cassation Decision No. 01/2017/KDTM-GĐT dated March 1, 2017 of the Supreme People’s Court (later developed into Precedent No. 11/2021/AL), the Court held as follow:
“In addition, the trial court relied on the parties’ agreement under Clause 5.4, Article 5 of the credit contract concerning penalty interest on unpaid interest – stipulating that ‘penalty interest for late payment shall apply if more than 10 days past the due date, at a rate of 2% of the unpaid interest; and if more than 30 days past the due date, at a rate of 5% of the unpaid interest’ – to accept the Bank’s claim and require Company B to pay VND 123,254,156 as penalty interest for late payment. This is contrary to the law and cannot be upheld because it constitutes compound interest. The appellate court failed to detect this error and still upheld the decision of the first-instance judgment, which was also incorrect.”
Guidance No. 25/HD-VKSTC dated April 18, 2022, on certain issues in the supervision of the settlement of commercial cases concerning “Disputes over credit contracts” also makes clear:
“At present, there is no legal provision allowing multiple penalties for the same breach under a credit contract. Article 12 of Resolution No. 01/2019/NQ-HDTP dated January 11, 2019 of the Judicial Council of the Supreme People’s Court, guiding on the application of certain legal provisions on interest, interest rates, and penalty (Resolution No. 01/2019/NQ-HDTP), stipulates the principle that ‘each act of late repayment shall be subject to handling only once’. Accordingly, if the parties have already agreed on default interest (usually 150% of the in-term loan interest rate), any additional agreement on penalty for late payment or interest on overdue interest is impermissible.”
Thus, for credit contracts concluded before January 1, 2017, a bank’s demand that the borrower pay penalty interest is not in accordance with the law. In such cases, the borrower has a valid legal basis to negotiate with the bank for a waiver of such penalty interest or to refuse payment thereof.
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Disclaimers:
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