Foreign loan conditions are stricter for Vietnamese enterprises that are non-credit organizations
1. Introduction
In June 2023, the State Bank of Vietnam (SBV) issued Circular 8/2023 to replace Circular 12/2014 regulating the conditions for Vietnamese borrowers to borrow foreign capital (i.e. loans provided by foreign lenders) without a Government guarantee. Similar to Circular 12/2014, Circular 8/2023 has separate loan conditions for borrowers who are credit institutions and borrowers who are companies established in Vietnam that are not credit institutions (Vietnamese Companies). In this post, we discuss loan conditions for a Vietnamese Company. This article was written by Nguyen Hoang Duy and Nguyen Quang Vu.
Key highlights of Circular 8/2023 include:
Short-term borrowing abroad may be more difficult because currently short-term loans are only allowed for limited purposes (see 3.6) and (1) a Short-term Loan List needs to be prepared (see 5.1.2);
It is important to determine the purpose of foreign loans for investment projects, production and business plans, other projects or to refinance existing foreign loans; And
Considerably more paperwork is required for medium and long-term loans (see 5.1.1). The paperwork is mainly to prove the purpose of the foreign loans.
2) Chung:
In general, the State Bank controls foreign borrowing by Vietnamese companies through the following mechanism:
First, Vietnamese companies must comply with loan conditions prescribed by the State Bank of Vietnam. These conditions have been stipulated in Circular 8/2023;
Second, Vietnamese companies must have foreign loan registration from the State Bank for medium and long-term foreign loans. Registration procedures are specified in Circular 12/2022;
Third, all domestic remittance banks are obliged to verify whether the Vietnamese Company complies with the first two requirements; And
Fourth, the Government issues a total annual foreign loan limit for all medium and long-term loans every year. The State Bank will monitor this total annual limit through the registration system.
3) Conditions for short-term loans abroad for Vietnamese companies
Short-term loans abroad have a repayment term of up to one year. To get a short-term loan abroad, the borrower must meet the following conditions.
Foreign loan contract
- The borrower must enter into a foreign loan contract (foreign loan agreement) with the foreign lender extending or committing to extend the loan to the borrower for the borrower to use for a specific purpose (see further discussion below) for a certain period of time. The loan contract must be in writing and may be executed electronically. Circular 12/2014 does not regulate foreign loan contracts. Foreign loan contracts must be signed before the capital withdrawal date except in certain limited cases.
- Unlike Circular 12/2014, Circular 8/2023 does not require foreign loan contracts to not violate Vietnamese law. Although this change does not automatically mean that a foreign loan contract may contravene Vietnamese law, this change can at least reduce the verification burden of the remitting bank.
Loan currency
- Foreign loans must be registered and/or paid in foreign currency, except in limited cases including cases where foreign-invested enterprises borrow dividends from foreign shareholders/members.
- Unlike Circular 12/2024, Circular 8/2013 clearly stipulates that foreign loans can be in VND but are paid in foreign currency.
Use of proceeds (loan purpose)
- Circular 8/2023 significantly limits the use of authorized amounts for short-term foreign loans. According to Circular 8/2023, the proceeds from short-term foreign loans can only be used to (1) repay other foreign loans and (2) finance short-term payables (excluding principal of domestic loans) of the Borrower arising from “investment projects”, “production and business plans” or “other projects”. Short-term payables will be determined based on Vietnamese accounting standards. Circular 12/2014 does not impose similar restrictions. It only requires borrowers not to borrow short-term foreign loans for medium/long-term purposes.
Other conditions: Circular 8/2023 also sets out conditions related to security measures and borrowing costs. However, the expression of these conditions only refers to Vietnamese law in general. This means that there are currently no specific conditions that must be complied with. However, in the near future the State Bank may impose specific conditions (if necessary).
4) Conditions for medium and long-term loans abroad for Vietnamese companies
Short-term loan conditions
Medium or long-term foreign loans have a repayment term of more than one year. To borrow medium or long-term foreign loans, the borrower must meet the same conditions regarding the foreign loan contract (see 3.2), loan currency (see 3.4) and other conditions (see 3.8) as for short-term loans. loans.
Use of income
Regarding the use of the loan amount, the medium or long-term borrower can use the loan amount for the following purposes:
– Implement investment projects;
– Implement production and business plans;
– Implement other projects; And
– To pay other foreign loans.
However, Circular 8/2023 provides confusing definitions or descriptions of the intended use of medium or long-term loans. Special,
“Investment project” (investment project) is understood as “project” (project) that has been granted an Investment Registration Certificate or other equivalent document according to investment regulations. However, the Investment Law 2020 has its own definition of “investment project” and no definition of “project”. The Investment Law 2020 defines an investment project as a collection of medium or long-term capital expenditure proposals to carry out business investment activities in a specific geographical area and within a specified period of time. Therefore, when introducing a new definition of “investment project”, the State Bank violated the Investment Law 2020 issued by the National Assembly or created unnecessary confusion about the meaning of investment projects;
“Other projects” (other projects) are defined as “projects” that are not investment projects. Since there is no definition of “project”, the definition of “other projects” is not at all clear; And
“Production and business plan” (production and business plan) is not defined at all in Circular 8/2023.
Circular 12/2014 provides a definition of investment projects similar to investment projects under the Investment Law 2014 and a definition of production and business plans (Production and business plans).
Circular 8/2023 requires that the purpose of using foreign loans must be consistent with:
scope of business registration certificate, establishment decision, investment registration certificate or other equivalent documents; or
Other legal activities are prescribed in legal documents governing the charter of the Borrower.
It is unclear how the “other legal activities” mentioned in the second bullet point will be interpreted. For example, the Enterprise Law 2020 and the Investment Law 2020 allow a Vietnamese Company to invest in another company. Accordingly, it is unclear whether this means that a Vietnamese Company can borrow from foreign lending institutions to invest in another company even though Circular 8/2023 no longer allows borrowers to borrow from foreign countries to implement business plans and projects of their subsidiaries.
Medium and long-term loan limit
According to Circular 8/2023, the total outstanding balance of medium and long-term loans (both domestic and foreign) of a Vietnamese Company must not exceed:
If the purpose of the foreign loan is to implement an investment project, the difference between the total investment and contributed capital is recorded in the Investment Registration Certificate or equivalent document. This condition is consistent with Circular 12/2014;
If the purpose of the foreign loan is to implement a production and business plan or another project, then synthesize the loan needs for the related production and business plan or other project according to the approved capital use plan (see section 5.1.1). This condition is similar to the provisions in Circular 12/2014; And
If the purpose of the foreign loan is to repay existing foreign loans, the total amount of (i) outstanding principal of existing foreign loans, (ii) outstanding interest and fees of existing foreign loans and (iii) fees of existing foreign loans. New loans are determined at the time of restructuring. This is a new condition. Circular 12/2014 only requires in general that refinancing an existing foreign loan must not increase the borrower’s borrowing costs. In addition, if the new loan is a medium and long-term loan, the borrower must repay existing foreign loans within 5 working days after disbursement of the new loan to ensure compliance with restrictions related to the total outstanding medium/long-term debt. -term loans. This is a new regulation to solve the problem of double counting of foreign loan amounts in case of refinancing existing foreign loans.
5) New mechanism to verify loan purpose
Circular 8/2023 introduces a completely new mechanism to monitor and ensure that borrowers will comply with the stated borrowing purposes for foreign loans. In particular, Circular 8/2023 requires borrowers that are Vietnamese Companies to prepare and retain:
- Plan for using the proceeds (Loan capital use plan) (Usage plan) if the foreign loan is a medium or long-term loan serving production and business plans or for other projects;
- List of short-term loans (Statistical table of capital needs) (List of short-term loans) if the foreign loan is a short-term loan; or
- Debt restructuring plan (Debt restructuring plan) (Refinancing plan), if the foreign loan amount is used to repay other foreign loans. A refinancing plan is mandatory for all foreign loans including short-term foreign loans.
The usage plan must have certain mandatory contents such as (i) information about the borrower, (ii) loan purpose, (iii) scale of foreign loan, (iii) information about production and business activities/other projects carried out by the foreign party. Loans will be used and (iv) authority to approve the Utilization Plan. The list of short-term loans must follow the prescribed form. These contents are much more detailed than required in the business plan according to Circular 12/2014. In short, the SBV appears to require each Vietnamese Company to demonstrate its overall financial needs and how to use or repay the proposed foreign loan.
6) What is not included?
Perhaps equally interesting are the things proposed in the draft Circular 8/2023 that were not ultimately included in Circular 8/2023. In particular, Circular 8/2023 does not include a number of new conditions related to maximum foreign loan costs, foreign exchange risk prevention requirements and organization of collateral handling (discussed here).
