On 30 June 2023, the Governor of the State Bank of Vietnam issued Circular No. 08/2023/TT-NHNN on conditions for borrowing foreign loans not guaranteed by the Government (“Circular 08/2023”) replacing Circular No. 12/2014/TT-NHNN dated 31 March 2014 (“Circular 12/2014”). Circular 08/2023 took effect from 15 August 2023 and has introduced some significant changes compared to Circular 12/2014 on foreign loan conditions for borrowers who are enterprises, cooperatives, unions, credit institutions and foreign bank branches established and operating in Vietnam (the “Borrower“).
This article will discuss some notable new points about the conditions of borrowing foreign loans that are not guaranteed by the Government for Borrowers who are neither credit institutions or foreign bank branches.
A more specific definition of foreign loan agreement
Compared to Circular 12/2014, foreign loan agreements have been defined more specifically in Circular 08/2023. Specifically, according to Circular 08/2023:
“A foreign loan agreement is one or a set of documents recording an agreement between the parties, whereby the lender delivers or commits to deliver to the borrower a sum of money or property (in the case of a foreign loan in the form of a financial leasing contract) to use for a specified purpose for a certain period of time with the principle of repaying both principal and interest (if there is an agreement on interest)”.
By including this definition, Circular 08/2023 assists the Borrower and the lender in preparing a foreign loan agreement that covers the essential terms of a foreign loan transaction, while also securing the possibility of obtaining approval from competent authorities in Vietnam such as the State Bank of Vietnam (SBV), Department of Planning and Investment (DPI), local Tax Authority and Commercial Banks where the Borrower opens a bank account to receive the loan.
Introduction of a new form of foreign loan agreement
Circular 12/2014 previously stipulated that foreign loan agreements must be executed in writing. Now, Circular 08/2023 has introduce the form of electronic data messages for the signing of foreign loan agreements. Foreign loan agreements executed via this form must comply with the law on electronic transactions. This regulation aims to simplify and create flexibility in foreign loan transactions in the current era of digital technology development, thereby creating opportunities to expand the market coverage while saving time and money for businesses.
Foreign loan agreements can be signed on the loan disbursement date
Before, Circular 12/2014 required the foreign loan agreement to be signed prior to loan disbursement. Now, Circular 08/2023 allows this signing to happen before or on the disbursement date.
However, signing a foreign loan agreement on the foreign loan disbursement date only applies in the following cases: (i) short-term foreign loan with the condition that loan disbursement occurs after the parties sign the loan agreement; or (ii) foreign loans arising from converting the amount of money for investment preparation of projects that have been granted Investment Registration Certificates into foreign loans.
Adjustment in cases where foreign loans are denominated in Vietnamese Dong
According to regulations in Circular 12/2014, foreign loans in Vietnamese Dong (VND) are only permitted in the following cases:
- The Borrower is a microfinance institution;
- The Borrower is an FDI enterprise that borrows from distributed profits denominated in VND from direct investment activities of the creditor being a foreign investor contributing capital to the Borrower;
- Other cases that are considered and approved by the Governor of the State Bank based on the actual situation and the necessary nature of each case.
However, Circular 08/2023 has removed the case of “Other cases that are considered and approved by the Governor of the State Bank based on the actual situation and the necessary nature of each case” and replaced with the case “The borrower withdraws loan capital and pays the debt in foreign currency but the debt obligation of the loan is denominated in VND“.
This new regulation is intended to make loan transactions more adaptive for the parties, in which, “debt obligations of the loan are denominated in VND” means that the loan is withdrawn in foreign currency, but the debt value under the foreign loan agreement is denominated in VND according to the foreign currency buying and selling exchange rate listed by the credit institution as agreed upon by the parties.
More detailed provisions and re-adjustment to the loan purpose for each type of foreign loan
Instead of regulating the general purpose of borrowing for all types of foreign loans like Circular 12/2014, Circular 08/2023 now clearly and more specifically stipulates the purpose of foreign borrowing for short, medium and long term loan for Borrowers who are neither credit institutions or foreign bank branches, specifically as follows:
|Type of loan
|Mid- and long-term loan
Thus, Circular 08/2023 has somewhat limited the scope of foreign loan purposes of businesses in Vietnam. Specifically, the Borrowers were used to be permitted to procure medium/long-term foreign loans to implement manufacturing plan, business plans and investment projects of enterprises in which the Borrower directly contributed capital (subsidiaries). Currently, Circular 08/2023 only allows medium/long-term loans to implement investment projects, manufacturing plans, business plans, and other projects of the Borrower itself.
In addition, for loans with loan purpose of refinancing the Borrower’s foreign debt, Circular 08/2023 has removed the restrictions “without increasing borrowing costs” but instead provides a more specific regulation on borrowing cap of foreign loan.
Stricter regulations on the borrowing cap for foreign loan
Similar to Circular 12/2014, the borrowing cap for medium and long-term loans to implement investment projects, manufacturing plans, business plans, and other projects of the Borrower is also stipulated in Circular 08/2023. However, Circular 08/2023 has added new regulations on borrowing cap for the purpose of refinancing the Borrower’s foreign debt. Specifically, the current foreign loan borrowing cap for businesses in Vietnam under Circular 08/2023 is as follows:
|Refinancing foreign debt
|The maximum loan amount does not exceed the sum of (i) the outstanding principal of the existing foreign loans, (ii) the outstanding interests and fees of the existing foreign loans, and (iii) the fees of the new loan determined at the time of the refinancing.
|Medium and long-term loans to implement investment projects
Outstanding principal amount of medium and long-term onshore and cross-border loans of the Borrower (including extended short-term loans and overdue short-term loans which are converted to medium and long-term loans) serving the investment project does not exceed the loan limit of the investment project, which is recorded on its Investment Certificate, Investment Registration Certificate, investment in-principle approval.
|Medium and long-term loans to implement manufacturing plan, business plan and other projects of the Borrower
|Outstanding principal amount of medium and long-term onshore and cross-border loans of the Borrower (including extended short-term loans and overdue short-term loans which are converted to medium and long-term loans) for this purpose shall not exceed the total demand for loan capital in the approved Plan on using cross-border loans.