The State Bank of Vietnam (“SBV”) has recently issued (i) Circular 06/2023/TT-NHNN (“Circular 06”) amending and supplementing a number of articles of Circular 39/2016/TT-NHNN (“Circular 39”), which introduces significant amendments to lending activities of credit institutions (“CIs”) and foreign bank branches (“FBBs”) in Vietnam towards their clients, and (ii) Circular 08/2023/TT-NHNN (“Circular 08”) replacing Circular 12/2014/TT-NHNN, which introduces significant changes to conditions for borrowing foreign loans which are not guaranteed by Vietnamese Government. Then, the SBV further issued Circular No. 10/2023/TT-NHNN dated 23 August 2023 (“Circular 10”) suspending the validity of clauses 8, 9 and 10 of Article 8 of Circular 39 (as amended by Circular 06) for an indefinite period.
A. Circular 06 and Circular 10
Circular 06 aims to regulate lending practices, address specific lending purposes, and establish stricter conditions on lending certain types of loans. The amendments came into effect on the 1st of September 2023. Here are some key points to note regarding Circular 06:
- Prohibited Lending Purposes: Circular 06 introduces new scenarios where CIs and FBBs are prohibited from providing loans. These include making saving deposits, paying for capital contributions of limited liability companies or partnerships, acquiring shares in joint stock companies that are unlisted or unregistered for trading on Upcom, making capital contributions to implement investment projects that do not satisfy conditions for commercial operation at the time of the lending decision, and providing financial reimbursement.
However, pursuant to Circular 10, the following clauses on prohibited lending purposes have been suspended: paying for capital contributions of limited liability companies or partnerships, acquiring shares in joint stock companies that are unlisted or unregistered for trading on Upcom, making capital contributions to implement investment projects which do not satisfy conditions for commercial operation at the time of the lending decision. - Stricter Conditions for Financial Reimbursement: Circular 06 imposes stricter conditions on lending for financial reimbursement. Such lending can only apply to project implementation expenses incurred within 12 months prior to the lending decision.
- Refinancing of Existing Loans: Circular 06 relaxes restrictions on refinancing existing loans. It clearly carves out the refinancing of foreign loans borrowed in the form of deferred payment sale and purchase of goods from the list of prohibited lending purposes and eliminates the requirement that existing loans must be for business purposes. This allows CIs and FBBs 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 and applicable laws.
- Loan Use Monitoring: Prior to Circular 06, CIs and FBBs have the right (but not obligation) to monitor and oversee loan utilisation and repayment. Circular 06 mandates that CIs and FBBs also have an obligation to monitor and oversee.
- Lending via Electronic Means: Circular 06 permits CIs and FBBs to provide loans through electronic means, subject to conditions such as information system security, KYC processes, and limits on loan amounts for individual customers.
These amendments introduced by Circular 06 aim to strengthen control over lending activities and provide clarity on prohibited lending purposes, refinancing of existing loans, loan repayment currency, loan monitoring obligations, and electronic lending practices. It is essential for CIs, FBBs, their clients and other stakeholders to familiarise 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 not guaranteed by the Vietnamese Government. These conditions will come into effect on the 15th of August, 2023. Here are some key highlights of Circular 08 relating to non-banking domestic borrowers and its impact on foreign lenders and non-banking domestic borrowers:
1. Permitted use purpose of foreign loans: The SBV adopts a more restrictive approach to ensure that foreign loans are solely utilised 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 repay its monetary payable short-term debts (excluding onshore debt principals) arising from implementing its investment projects, business plans and other projects. Certain entities being subject to regulations on prudential ratios, such as a securities company, are also allowed to borrow short-term foreign loans for their 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 debts. It is noticeable that 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 permitted by Circular 12/2014/TT-NHNN.
2. Documents justifying the use purpose of foreign loans: The borrower must justify the use 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 plan and other projects. This foreign loan usage plan shall have certain statutory contents. 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 debts. This debt refinancing plan shall have certain statutory contents.
3. Borrowing limits: The borrower may borrow foreign loans subject to the following limitations
- In case of borrowing foreign loans to finance its investment project: The total outstanding principals of its medium and long-term domestic and foreign loans serving such investment project shall 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 plan or another project, The total outstanding principals of its medium and long-term domestic and foreign loans serving such business plan or other project shall 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 shall not exceed the total amount of (i) the outstanding principals, interests, 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 five 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. It is also noticeable that Circular 08 does not incorporate the provisions on the ceiling of borrowing costs, which the SBV previously introduced in its draft circular on conditions for borrowing foreign loans.
Circular 08 aims to tighten the conditions on borrowing foreign loans in general and short-term foreign loans in particular. Non-banking domestic entities and other stakeholders need to familiarise 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.
