News and developments
SBV PUBLISHES NEW CIRCULAR ON OFFSHORE LOANS WITHOUT 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.
Author: Vu Thanh Minh, Partner, Nguyen Dieu Quynh, Associate, Le Anh Thu, Associate
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).
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- 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 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.
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- restructure foreign debt; and
- pay any payable short-term debt that originated from investment, production or business activities.
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- executing the borrower's investment projects;
- executing the borrower's business plans or other projects; or
- restructuring foreign debts.
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 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.
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