The State Bank of Vietnam (“SBV”) recently issued (i) Circular No. 06/2023/TT-NHNN dated 28 June 2023 (“Circular 06”) amending and supplementing a number of articles of Circular No. 39/2016/TT-NHNN, introducing significant amendments to lending activities of credit institutions and foreign bank branches in Vietnam (“Banks”) impacting Banks’ clients; and (ii) Circular No. 08/2023/TT-NHNN dated 30 June 2023 (“Circular 08”) replacing Circular No. 12/2014/TT-NHNN, which introduces significant changes to conditions for borrowing foreign loans not guaranteed by the Vietnamese Government.
A. Circular 06
Circular 06, which comes into effect on 1 September 2023, aims to regulate lending practices, address specific lending purposes, and establish stricter conditions on lending certain types of loans. Some key points to note in Circular 06:
- Prohibited Lending Purposes: Circular 06 introduces new scenarios when Banks are prohibited from providing loans. These situations include: (i) making savings deposits, (ii) paying for capital contributions of limited liability companies or partnerships, (iii) acquiring shares in joint stock companies, which are unlisted or unregistered for trading on upcom, (iv) making capital contributions to implement investment projects which do not satisfy conditions for commercial operation at the time of the lending decision; and (v) repayment of offshore or onshore loan (except offshore loan in the form of deferred payment and some other specific cases).
- Refinancing of Existing Loans: Circular 06 relaxes restrictions on the refinancing of existing loans. It clearly carves out the refinancing of foreign loans borrowed in the form of deferred payment sale and purchase of goods’ contracts from the list of prohibited lending purposes and eliminates the requirement that existing loans must be for business purposes only. This allows Banks to provide loans for various lawful purposes, including living expenses.
- Loan Repayment Currency: Circular 06 permits borrowers to repay loans in a currency different from the loan currency, subject to agreement between the Banks and their borrowers, and applicable laws.
- Lending via Electronic Means: Circular 06 permits Banks to provide loans via electronic means, subject to conditions such as information system security, KYC processes, and limits on loan amounts to individual customers.
These amendments introduced by Circular 06 aim to strengthen control over lending activities, provide clarity on prohibited lending purposes, refinancing of existing loans, loan repayment currency, loan monitoring obligations, and electronic lending practices. It is essential for Banks, their clients and other stakeholders to familiarize themselves with these changes to ensure compliance and understanding of the updated lending regulations in Vietnam.
B. Circular 08
Circular 08 focuses on conditions for borrowing foreign loans, which the Vietnamese Government does not guarantee. Circular 8 will come into effect on 15 August 2023. Some key highlights of Circular 08 relating to non-banking domestic borrowers and the resulting impact on foreign lenders and non-banking domestic borrowers are as follows:
1. Permitted use of foreign loans: The SBV adopts a more restrictive approach to ensure that foreign loans are solely utilized for valid investment projects and business activities. Notably, Circular 08 allows a non-banking domestic borrower to borrow:
- Short-term foreign loans to refinance its foreign debts and to repay its short-term debts in cash (excluding onshore debt principal) arising from the implementation of its investment project(s), business plans and other projects. Certain entities being subject to regulations on prudential ratios, such as securities companies, are also allowed to borrow short-term foreign loans for short-term professional operations; and
- Medium or long-term foreign loans to finance its investment projects, business plans and other projects; and to refinance its foreign debt. Notably, Circular 08 no longer allows the use of medium or long-term foreign loans to finance projects of other entities in which the borrower directly invests, which is currently allowed under Circular No. 12/2014/TT-NHNN.
2. Documents justifying the purpose of foreign loans: The borrower must justify the purpose of the proposed foreign loans via:
- Its investment certificates, investment registration certificates, and/or investment policy approvals, in case of borrowing foreign loans to finance its investment projects.
- Its foreign loan usage plan duly approved by its corporate body, in case of borrowing foreign loans to finance its business plans and other projects. This foreign loan usage plan must contain certain statutory requirements. Regarding a short-term foreign loan, the foreign loan usage plan must include a list of short-term demands to be financed by the proposed short-term loan, which must be prepared pursuant to a template attached to Circular 08.
- Its debt refinancing plan, duly approved by its corporate body, in case of borrowing foreign loans to refinance its foreign debt. This debt refinancing plan must contain certain statutory contents (such as information about the lender, borrower, and loan).
3. Borrowing limits: The borrower may borrow foreign loans subject to the following limits:
- In case of borrowing foreign loans to finance its investment project: The total outstanding principal of its medium and long-term domestic and foreign loans serving such investment project must not exceed the difference between the total investment capital and the contributed capital recorded under the relevant investment project, investment registration certificate or the investment policy approval.
- In case of borrowing foreign loans to finance its business plans or other projects: The total outstanding principal of its medium and long-term domestic and foreign loans serving such business plans or other projects must not exceed the total borrowing demand recorded under its duly approved foreign loan usage plan.
- In case of borrowing foreign loans to refinance its foreign loans: The new foreign loans to be borrowed must not exceed the total amount of (i) the outstanding principal, interest and fees of the current foreign loans and (ii) the fees of the new foreign loans. In case the new foreign loans to be borrowed are medium or long-term foreign loans, the current foreign loans must be repaid within 5 business days after the date of drawdown of the new foreign loans to ensure compliance with the borrowing limits mentioned in items (a) and (b) above.
- Short-term foreign loans are not subject to the borrowing limits mentioned in items (a) and (b) above.
4. We further note that Circular 08 does not incorporate the provisions on the ceiling of borrowing costs, which the SBV previously introduced in its draft circular as a condition for borrowing foreign loans.
Circular 08 aims to tighten the conditions for borrowing foreign loans in general, particularly short-term foreign loans. It is essential for non-banking domestic entities and other stakeholders to familiarize themselves with these changes to ensure compliance and understanding of the updated lending regulations in Vietnam.
The information provided is for information purposes only and is not intended to constitute legal advice. Legal advice should be obtained from qualified legal counsel for all specific situations.