Tighter conditions for foreign loans apply to Vietnamese businesses that are non-credit institutions
1. Introduction
In June 2023, the State Bank of Vietnam (SBV) issued Circular 8/2023 to replace Circular 12/2014, which sets forth the conditions under which Vietnamese borrowers may borrow foreign capital (i.e., loans provided by foreign lenders) without requiring a government guarantee. Similar to Circular 12/2014, Circular 8/2023 sets out separate borrowing conditions for borrowers that are credit institutions and borrowers that are companies established in Vietnam that are not credit institutions (Vietnamese Companies). In this post, we discuss the borrowing conditions for a Vietnamese Company. This article was written by Nguyen Hoang Duy and Nguyen Quang Vu.
Key highlights of Circular 8/2023 include:
- Obtaining short-term foreign loans may become more difficult, as short-term loans are currently permitted only for limited purposes (see 3.6) and (1) a Short-Term Loan List must be prepared (see 5.1.2);
- It is important to specify the purpose of the foreign loan—whether it is for an investment project, a business operation plan, another project, or to refinance an existing foreign loan; and
- Significantly more documentation is required for medium- and long-term loans (see 5.1.1). The primary purpose of these documentation procedures is to verify the purpose of the foreign loans.
2) General
In general, the State Bank of Vietnam (SBV) regulates foreign borrowing by Vietnamese companies through the following mechanism:
First, Vietnamese companies must comply with the borrowing conditions stipulated by the SBV. These conditions are specified in Circular 8/2023;
Second, Vietnamese companies must obtain foreign borrowing registration from the SBV for medium- and long-term foreign loans. The registration procedure is stipulated in Circular 12/2022;
Third, all domestic money transfer banks are required to verify whether the Vietnamese company complies with the first two requirements; and
Fourth, the Government issues an annual aggregate foreign borrowing limit for all medium- and long-term loans. The State Bank of Vietnam (SBV) will monitor this annual limit through a registration system.
3) Conditions for Vietnamese companies to borrow short-term funds abroad
Short-term foreign loans have a repayment term of up to one year. To qualify for short-term foreign loans, borrowers must meet the following conditions.
Foreign Loan Agreement:
- The borrower must enter into a foreign loan agreement (foreign loan contract) with the foreign lender to extend or commit to extending the loan to the borrower for the borrower’s use for specific purposes (see further discussion below) over a specified period. The loan agreement must be in writing and may be executed electronically. Circular 12/2014 does not address foreign loan agreements. A foreign loan agreement must be executed prior to the date of capital withdrawal, except in certain limited cases.
- Unlike Circular 12/2014, Circular 8/2023 does not require foreign loan agreements to comply with Vietnamese law. Although this change does not necessarily mean that a foreign loan agreement can violate Vietnamese law, it at least reduces the verification burden on the remitting bank.
Currency of the Loan
- Foreign loans must be denominated and/or settled in foreign currency, except in certain limited cases, including when a foreign-invested enterprise borrows dividends distributed by foreign shareholders/members.
- Unlike Circular 12/2024, Circular 8/2013 explicitly stipulates that foreign loans may be denominated in VND but must be repaid in foreign currency.
- Use of proceeds (purpose of the loan)
Circular 8/2023 significantly restricts the permitted use of funds for short-term foreign loans. According to Circular 8/2023, funds raised from foreign short-term loans may only be used to (1) repay other foreign loans and (2) finance the borrower’s short-term liabilities (excluding the principal of domestic loans) arising from “investment projects,” “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 use short-term foreign loans for medium- or long-term purposes.
Other Conditions
Circular 8/2023 also sets out conditions related to collateral and borrowing costs. However, the wording of these conditions only refers to Vietnamese law in general. This means that currently, there are no specific conditions that must be complied with. However, in the future, the SBV may impose specific conditions (if necessary).
4) Conditions for Medium- and Long-Term Overseas Borrowing by Vietnamese Companies
Conditions for Short-Term Borrowing
Medium- or long-term foreign loans have a repayment term exceeding one year. To borrow medium- or long-term foreign loans, the borrower must meet the same conditions regarding the foreign loan agreement (see 3.2), the currency of the loan (see 3.4), and other conditions (see 3.8) as for short-term loans.
Use of Loan Proceeds
Regarding the use of loan proceeds, the borrower of a medium- or long-term loan may use the loan proceeds for the following purposes:
- Implementing investment projects;
- Implementing business production plans;
- Implementing other projects; and
- To repay other foreign loans.
However, Circular 8/2023 provides unclear definitions or descriptions regarding the intended use of medium- or long-term loans. In particular,
“Investment project” (investment project) is understood to mean a “project” (project) that has been issued an Investment Registration Certificate or other equivalent document in accordance with investment regulations. However, the 2020 Investment Law has its own definition of “investment project” and does not define “project.” The 2020 Investment Law defines an investment project as a set of proposals for medium- or long-term capital expenditures to carry out business investment activities in a specific geographic area and within a defined timeframe. Therefore, by introducing a new definition of “investment project,” the SBV has violated the 2020 Investment Law enacted by the National Assembly or created unnecessary confusion regarding the meaning of an investment project;
“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 also entirely unclear; And
“Business Operation Plan” (business operation plan) is not defined at all in Circular 8/2023.
Circular 12/2014 provides a definition of an investment project similar to that under the 2014 Investment Law and a definition of a business production plan (Business Production Plan).
Circular 8/2023 requires that the purpose of using foreign loans must be consistent with:
the scope of the business registration certificate, establishment decision, investment registration certificate, or other equivalent documents; or
other legal activities specified in the legal documents governing the Borrower’s articles of association.
It is unclear how the “other legal activities” mentioned in the second bullet point will be interpreted. For example, the 2020 Enterprise Law and the 2020 Investment Law allow a Vietnamese company to invest in another company. Accordingly, it is unclear whether this means a Vietnamese company may borrow from foreign lenders to invest in another company, even though Circular 8/2023 no longer permits the borrower to borrow from foreign sources to implement the business plans or projects of a subsidiary.
Limits on Medium- and Long-Term Loans
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 amount and the contributed capital stated 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 business plan or other project, the total borrowing requirement for the relevant business plan or other project shall be determined in accordance with the approved capital utilization 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 comprising (i) the principal balance of the existing foreign loans, (ii) the interest and fee balances of the existing foreign loans, and (iii) the fees of the existing foreign loans shall be determined at the time of restructuring. This is a new condition. Circular 12/2014 only generally required that the refinancing of existing foreign loans must not increase the borrower’s borrowing costs. Additionally, if the new loan is a medium- or long-term loan, the borrower must repay the existing foreign loans within 5 working days after the disbursement of the new loan to ensure compliance with restrictions on total medium- and long-term outstanding debt. -term loans. This is a new regulation aimed at addressing the issue of double-counting foreign loan amounts in cases of refinancing existing foreign loans.
5) New mechanism for verifying loan purposes
Circular 8/2023 introduces a completely new mechanism to monitor and ensure that the borrower complies with the stated loan purposes for foreign loans. In particular, Circular 8/2023 requires Vietnamese companies acting as borrowers to prepare and retain:
+ A plan for the use of the proceeds (Loan Utilization Plan) if the foreign loan is a medium- or long-term loan intended for a business operation plan or other projects;
+ A list of short-term loans (Capital Needs Summary) (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 proceeds are used to repay other foreign loans. A refinancing plan is mandatory for all foreign loans, including short-term foreign loans.
The usage plan must include certain mandatory contents such as (i) information on the borrower, (ii) the purpose of the loan, (iii) the scale of the foreign loan, (iii) information on the production, business operations, or other projects for which the foreign loans will be used, and (iv) the authority responsible for approving the Utilization Plan. The list of short-term loans must follow the prescribed format. These requirements are significantly more detailed than those in the business plan under Circular 12/2014. In summary, the SBV appears to require each Vietnamese company to demonstrate its overall financial needs and how the proposed foreign loan will be used or repaid.
6) What is not included?
Perhaps equally interesting are the provisions proposed in the draft Circular 8/2023 but ultimately not included in Circular 8/2023. In particular, Circular 8/2023 does not include certain new provisions related to the maximum limit on foreign borrowing costs, foreign exchange risk mitigation requirements, and the organization of collateral asset management (as discussed here).
