Introduction
On 30 June 2023, the State Bank of Vietnam (SBV) issued Circular 08/2023/TT-NHNN (Circular 08), prescribing the eligibility requirements for foreign loans without the government's guarantee.

Circular 08 replaces Circular 12/2014/TT-NHNN (Circular 12) and came into force on 15 August 2023, with the exception of the provisions on limits on short-term foreign loans, which come into force on 1 January 2024. Circular 08 seeks to strengthen regulatory monitoring of foreign loans with no government guarantees while also leveraging offshore loans to effectively contribute to economic development. In addition, under Circular 08, borrowers are restricted from sourcing funds through foreign loans for projects within enterprises in which they possess direct investment interests.

Structure

Circular 08 is organised into five chapters housing a total of 23 articles. In comparison with Circular 12, Circular 08 added a new chapter specifying the responsibilities of relevant stakeholders. There are also new regulations being supplemented relating to:

• the limits on offshore loan amounts (as prescribed in articles 15 and 18);
• a plan for the use of foreign loan capital (as described in article 7);
• a plan for the restructuring of foreign debts (as detailed in article 8);
• a borrower and account service banks' responsibilities (as prescribed in articles 19 and 20).

Subjects of application

Circular 08 applies to:

• enterprises, cooperatives, cooperative unions, credit institutions, and foreign bank branches established, resident and operating in Vietnam (borrowers); and
• credit institutions or foreign bank branches in Vietnam where borrowers' accounts serve their foreign borrowing and repayment of foreign loan debts (account service banks).

Foreign borrowers that import products with deferred payment are not required to comply with the foreign loan requirements mentioned in Circular 08.

General requirements

Circular 08 allows foreign loan agreements to be made in writing. If sent through electronic messages, the agreement must comply with the provisions of the law on electronic transactions.

Regarding the loan currency, like Circular 12, Circular 08 requires that foreign borrowing currency should be foreign currency. However, in the past, Circular 12 allowed exceptions approved by the governor of the SBV on a case-by-case basis. Currently, exceptions (in which foreign loans can be issued in Vietnamese dong) are possible under Circular 08 only in the following three cases:

• the borrower is a microfinance institution;
• the borrower is a foreign-invested enterprise getting a loan from the lender's profits from direct investments in Vietnam; or
• the borrower withdraws loan capital and pays debts in foreign currency, but debt obligations are denominated in Vietnamese dong.

Requirements regarding secured transactions, foreign borrowing costs and foreign borrowing by state-owned enterprises are not specified in detail in Circular 08 but are instead referred to in the relevant regulations.

Regarding offshore loan expenses, while the draft version introduced the ceiling level for offshore loan expenses and referred to the secured overnight financing rate (SOFR) as the benchmark interest rate, Circular 08 stipulates that offshore loan expenses will be negotiated among relevant parties. This is subject to compliance with regulations governing foreign borrowing interest rates. Where necessary, the SBV's governor will decide and announce the ceiling level of offshore loan expenses in each period.

Circular 08 so removes the interest rate ceiling in foreign loans, a departure from its draft circular. This shift is a positive indicator for enterprises seeking capital mobilisation through foreign loans. This adjustment is also congruent with the national treatment principle, as current credit institution law permits domestic entities to negotiate loan interest rates freely, barring specific sectors requiring preferential support, such as high technology and agriculture.

Additionally, this regulation harmonises international norms, as most foreign loan agreements abide by the laws of the lender's country. Thus, it appears unwarranted for Vietnamese law to enforce a borrowing cost ceiling if the host country's regulations for non-resident lenders lack such constraints.

Requirements for loan purposes

Borrowers being credit institutions and branches of foreign banks can only borrow from abroad for the purpose of:

• increasing the borrower's funding for credit extension activities to meet its credit growth target; or
• restructure foreign debts.

In the meantime, requirements for loan purposes for debtors who are not credit institutions or foreign bank branches vary depending on whether the loans are short-term, medium-term or long-term.

Specifically, in the past, Circular 12 only stipulated that creditors must not take short-term loans to serve mid-term and long-term purposes. However, currently, the Circular 08 specifies two purposes of short-term foreign loans. These are to:

• restructure foreign debt; and
• pay any payable short-term debt that originated from investment, production or business activities.

A significant difference between Circular 08 compared to its original draft is that, under the draft, short-term foreign loans were not allowed for the purpose of financing debt resulting from securities or real estate trading, capital contribution to other enterprises, or project transfer financing. Circular 08 does not set out such restrictions but only requires the borrower to achieve minimum levels of prudential indicators (as prescribed by specialised laws) when using the short-term foreign loan capital for business operations within a maximum duration of 12 months from the day on which the foreign loan capital is withdrawn. This provision has the government's backing of Vietnam's capital market via foreign loans. Eliminating the limitations on foreign borrowing for securities and real estate enterprises serves as a positive indicator for Vietnam's capital mobilisation endeavors in these domains.

Medium and long-term foreign loans are allowed for:

• executing the borrower's investment projects;
• executing the borrower's business plans or other projects; or
• restructuring foreign debts.

The recent amendment in Circular 08 has done away with a provision from Circular 12 that permitted borrowers to source funds through foreign loans for the purpose of executing production, business and investment projects within enterprises in which they possess direct investment. Additionally, this updated regulation in Circular 08 has eliminated a potential avenue for borrowers, acting as intermediary borrowers for projects within subsidiaries or member companies where they have made capital investments.

Offshore loan limit

Compared to Circular 12, Circular 08 provides new clauses to govern the offshore loan limit under Circular 08.

For credit institutions and foreign bank branches being the borrowers, the limit on short-term foreign loans (ie, the maximum ratio of the total outstanding principal of short-term foreign loans to standalone equity), as of 31 December of the year preceding the year in which the loan application is submitted, must not exceed:

• 30% if the borrower is a commercial bank; or
• 150% if the borrower is a foreign bank branch or another credit institution.

For borrowers who are not a credit institution or foreign bank branch, the loan limits are subject to the loan purposes. In particular, the following points should be noted:

• For the purpose of investment project implementation, the principal balance of the borrower's medium or long-term domestic and foreign loans used for implementing its investment project must not exceed the loan limit of that investment project (the loan limit of that investment project is the difference between the total investment capital of the investment project and the contributed capital recorded in the investment registration certificate or the theoretical approval of an investment project).
• To implement the borrower's production, business and other projects, the balance of medium and long-term domestic and foreign loans of the borrower for this purpose must not exceed the total loan demand in the plan on using foreign loans approved by competent authorities.
• To restructure the borrower's foreign debt, the maximum amount of foreign loans for this purpose must not exceed:
  • the total value of the principal balance;
  • the amount of interest;
  • unpaid fees of the existing foreign debt; and
  • the fees of new loans determined at the time of structure.

If the new foreign loan is a medium or long-term loan, the borrower must repay the existing foreign loan within five working days of the date of withdrawal of the new loan so that after such five working days, the borrower guarantees the loan limit as mentioned in the first two points above (ie, investment project implementation and borrower's production).

Borrower responsibilities

Circular 08 imposes other responsibilities on borrowers, requiring them to:

• be self-responsible for the authenticity and accuracy of all documentation related to the purpose of the loan;
• maintain comprehensive records that validate the proper utilization of foreign loans; and
• keep the record of each idle amount of money in case the borrower makes term deposits at credit institutions and foreign bank branch according to the rules for using foreign loan capital.

Comment

Circular 08 has opened up avenues for local enterprises to source foreign capital in the real estate and securities sectors. This move holds significant promise for Vietnam's capital market, particularly the struggling real estate sector since the latter half of 2022. The noteworthy change of removing the previously proposed ceiling on lending costs aligns harmoniously with the principles of both national treatment and international norms. This shift enhances the appeal of foreign loan-based capital mobilisation for local enterprises. However, it is important to note that Circular 08 also includes a stipulation that curbs borrowers from utilising foreign loans to finance projects within companies where they have direct investment stakes.

Author: Vu Thanh Minh, Partner,  Nguyen Dieu Quynh, Associate, Le Anh Thu, Associate