Attention, foreign lenders and domestic borrowers8 min read

After various rounds of drafts and consultations, on 30 June 2023 the State Bank of Vietnam (the SBV) finally issued the long-anticipated regulations on non-government guaranteed cross-border foreign loans under Circular No. 08/2023/TT-NHNN (the New Circular). This replaces the current Circular No. 12/2014/TT-NHNN (the Current Circular) from 15 August 2023.

The SBV has cut back on most of the controversial changes proposed in the previous drafts. It has mainly focused on regulating the use purpose of foreign loans and the relevant process for the borrower to justify, and the SBV to review, the use purpose, to ensure that Vietnamese borrowers will use foreign loans for a valid purpose and in the most efficient manner. This Insight explains the key changes under the New Circular and their impact on foreign lenders and domestic borrowers.1

Key takeaways

• In a welcome move, the SBV has decided not to adopt most of the controversial restrictions/requirements proposed in the previous drafts, including:
  • a cap on borrowing costs (subject to uncertainty as to whether the 20% cap on the interest rate under Vietnamese law applies);
  • a cap on total foreign debt for the borrower's general business activities;
  • foreign exchange hedging requirements; and
  • a restriction on using short-term foreign loans for securities/shares trading, real estate acquisition and project transfer in Vietnam.
• The key changes focus on the permitted use purpose of foreign loans (which include international bonds issued by Vietnamese companies). Generally, the SBV has taken a more restrictive approach on this issue, in order to ensure that Vietnamese borrowers will only borrow foreign loans for proper purposes, and for valid investment projects and business activities. In particular:
  • short-term foreign loans can be taken out to restructure the borrower's foreign debt (which seems to include foreign loans with all types of tenor) and for payment of its short-term payables (excluding onshore loan principal); and
  • medium- or long-term foreign loans can be taken out to finance investment projects, business plans or other of the borrower's projects only (not those of other entities in which the borrower directly invests, as permitted under the current law), and for refinancing of the borrower's existing foreign debt.
• Under the New Circular, the borrower must, before borrowing, prepare a detailed foreign loan usage plan/debt restructuring plan to justify the permitted purpose of a foreign loan. This plan must be submitted to the SBV for review as part of the loan registration process to ensure that the borrower's need for foreign debt is valid and reasonable.

Limitation on foreign loan use purposes

Under the current law:

• a short-term foreign loan can be taken out for the implementation of business plans and investment projects, and for refinancing of the borrower's foreign debt, and cannot be used for a medium- or long-term purpose; and
• a medium- or long-term foreign loan can be taken out to finance an investment project or business/production plan of the borrower, or of enterprises directly invested in by the borrower; and to refinance an existing foreign loan of the borrower.

The New Circular now only allows the borrower to take out foreign loans to:

• pay its short-term payables and restructure its own foreign debt; and
• implement its own licensed investment projects (ie those granted with investment licences/in-principle investment approvals), and its own specific business plan and other projects (which are not required to be licensed under Vietnamese law).

Together, these are Permitted Activity.

The borrower is no longer permitted to use its foreign loans to finance an investment project or business/production plan of an entity it has directly invested in. It is not clear whether a borrower may downstream proceeds from a foreign loan to such entities via an investment project (eg equity contribution to such entities) – this will need to be considered on a case-by-case basis. 

The New Circular goes into more detail on the borrower's foreign loan usage plan/debt restructuring plan to justify the relevant Permitted Activity that it will use the foreign loan for. This plan must be approved by the borrower before the foreign loan borrowing, and must be submitted to the SBV for review as part of the loan registration process to ensure that the borrower's need for foreign debt is valid and reasonable. This plan must also be adjusted by the borrower if there is any change in the relevant circumstances (eg to the amount or payment date of a short-term payable).

The New Circular further limits the use of foreign loans by a non-credit institution borrower, depending on its tenor, as discussed below.

Short-term foreign loans

Under the New Circular, a short-term foreign loan can only be used to:

• pay the borrower's short-term payables: determined according to its accounting standards arising as part of its implementation of the Permitted Activity. However, such short-term payables must not include principal amounts of the borrower's existing onshore loans (ie a foreign short-term loan must not be used to repay principal amounts of onshore loans). The New Circular sets out the standard form of the list of these short-term payables (including the specific amount, intended payment date and legal basis for their payment) that is included in the foreign loan usage plan to be approved by the borrower before disbursement of the loan, and by the SBV (if the loan needs to be registered with it upon extension into a medium- or long-term loan).
• restructure the borrower's foreign debt: the New Circular generally refers to 'foreign debt' of the borrower, which seems to imply that a short-term foreign loan can be taken out to repay all types of the borrower's foreign loans (including short-term, medium- or long-term foreign loans) and their related fees and expenses. This interpretation is supported by the removal of the restriction under the Current Circular that short-term foreign loans cannot be used for medium- or long-term capital purposes. However, this should be further clarified with the SBV.

(Note that the restriction on refinancing discussed in the below section about medium- or long-term foreign loans would also apply in this case.)   

Medium- or long-term foreign loans

Under the New Circular, a medium- or long-term foreign loan can only be used for the following three purposes, subject to certain restrictions for each:

• financing for the borrower's licensed investment projects: similarly to under the Current Circular, the borrower may only borrow money up to the loan capital of the licensed investment project – being the difference between the borrower’s contributed capital in the project and the total investment capital specified in the project's relevant regulatory approval. However, under the New Circular, only the outstanding principal amounts (and excluding interests and fees, as under the Current Circular) under the borrower's existing onshore and offshore medium- or long-term loans (including extended or overdue short-term loans) used for the licensed investment project will be counted towards this borrowing limit.
• financing for the borrower's business plans or other projects: the total outstanding amount (which seems to include principal, interest and fees in this case) under the borrower's existing onshore and offshore medium- or long-term loans (including extended and overdue short-term loans) used for the relevant business plan or other project must not exceed the plan/project's total loan capital as specified in the borrower's foreign loan capital use plan for the plan/project. This plan must be submitted to the SBV as part of the loan registration application.
• refinancing of the borrower's existing foreign loans: the Current Circular requires the refinancing loan's borrowing costs not to exceed those of the refinanced loan. The New Circular is more restrictive, and requires that the refinancing loan's principal not exceed the outstanding principal, interest and fees of the refinanced loan, and the fees of the refinancing loan determined on the refinancing date. The borrower must submit a detailed debt restructuring plan to the SBV as part of the registration process.

To deal with the double-counting issue borrowers have often faced so far, the New Circular now provides that if the refinancing loan is a medium- or long-term loan, the borrower must repay the refinanced loan within five business days from the drawdown date of the refinancing loan, so that after such repayment it will comply with the borrowing limits discussed above.

Borrowing costs

The proposed cap on borrowing costs in the original draft circular was of particular concern to foreign lenders and Vietnamese borrowers. In a welcome move, the New Circular has removed this cap.

However, instead of the existing wording under the Current Circular, allowing the parties to agree on the borrowing costs, the New Circular generally requires them to comply with the relevant law on foreign loan interest and fees. As such, it is unclear whether the SBV's intention is to apply the 20% cap on the interest rate under the Vietnamese Civil Code, which applies to lending activities by non-credit institutions. This issue should be further clarified with the SBV.

VND-denominated foreign loan

Consistently with the Current Circular, foreign lenders are still permitted to lend in VND in limited circumstances (eg if the borrower is a micro-finance company). In practice, these loans are not common.

However, the New Circular allows, for the first time, foreign loans to be disbursed and repaid in a foreign currency but for the debt to be recorded in VND, as per the parties' agreement. Such a loan will be treated as a VND loan by a foreign lender. No further guidance is provided under the New Circular but this change seems to allow parties more flexibility to structure their cross-border loans. 

Application to existing foreign loans

The borrower may continue to perform foreign loan agreements executed before the effective date of the New Circular (ie 15 August 2023) until their termination, in accordance with the old regulations and the relevant SBV registrations. However, any amendment to such agreements after 15 August 2023 must comply with the New Circular.