Trends to stricter control for short-term foreign loan purpose

1. Effective circular stipulating conditions for foreign loans of enterprises not guaranteed by the government

Currently, Circular 12/2014/TT-NHNN (“Circular 12”) is the effective circular stipulating conditions for foreign loans of enterprises not guaranteed by the government, which presents the conditions for the borrower who is not a credit institution or foreign bank branch. In the current situation when foreign loans of private enterprises account for most of the outstanding loans, in order to ensure the restriction of short-term foreign loans for high-risk potential sectors, from mid-2022, the State Bank of Vietnam has begun soliciting comments on the draft Circular amending Circular 12 (“Draft Circular”), which tightens the conditions on the purpose for short-term foreign loans that the private enterprises which are not credit institutions, foreign bank branches should be noted. 

According to current regulations, Article 5 of Circular 12 does not separate but generalizes the borrowing purposes of both short-term loans and medium, long-term loans. For short-term foreign loans, enterprises are allowed to borrow to serve production and business plans (of the borrower or its subsidiaries) or to restructure debts. This regulation seems to be quite general, in addition, short-term loans do not have to be registered, which has created favorable conditions for enterprises in recent years to mobilize short-term capital from abroad to increase the potential of enterprises in operations. However, the use of short-term loans for many purposes without registration and is difficult to manage still contains many potential risks for the economy itself. 

2. Draft Circular is being discussed to adjust relevant regulations to the purpose of short-term foreign loan

Realizing that many risks in short-term foreign loans, the Draft Circular is being discussed to adjust relevant regulations to the purpose of this loan. Specifically, in Article 15 of the Draft Circular, the purpose of a short-term foreign loan is only allowed to pay short-term debts that are obligated to be paid within 12 months from the time of signing the foreign loan agreement. However, the State Bank also offers debts that cannot be paid by short-term foreign loans, which include the debts arising from loan contracts with residents and debts incurred, arising from transactions of buying and selling trading securities; purchasing contributed capital or shares of another entity; buying investment real estate and getting transferred project. With this adjustment, it can be seen that the State Bank is offering solutions to more closely control short-term foreign loans of the enterprises right from the stage of forming the loan purpose, ensuring the loan can promote actual and direct production and business activities: 

• For the debts arising from the transaction of buying business securities, buying investment real estate, these are business activities with high potential risks to the economy, easily causing the phenomenon of asset bubbles in case of not being tightly controlled of capital flows. Therefore, the State Bank is excluding this purpose in the Draft Circular; 

• For the purchase of contributed capital or shares of another entity; buying investment property and transferring projects, in fact, these are activities aimed at investing, buying, selling, merging or acquiring other businesses, requiring the implementer to have a vision and orientation of long-term development, focusing on business operation. The use of short-term loans, not only does not guarantee the right nature, also easily leads to the phenomenon of investors creating liquidity in a short time to buy and resell projects rather than make real investments. In fact, it also leads to businesses being pushed prices after being bought and sold time after time, resulting in price bubbles. 

To ensure the intention of adjustment to concentrate capital for actual production activities, Clause 3, Article 15 of the Draft Circular also further stipulates that the Borrower may only use foreign loans to carry out activities, production and business in accordance with the scope of business registration of the enterprise, the scope of the establishment license, the certificate of investment registration, the decision on approval of the investment policy, the certificate of registration of the cooperatives, unions of cooperatives or equivalent licenses as prescribed by law, or other legal scopes of activities specified in current legal documents regulating the organization’s charter and Borrower’s activities. 

Up to now, the Draft has not been officially issued by the State Bank of Vietnam and Circular 12 is still in effect, regulating short-term borrowing activities of enterprises. However, by assessing the Draft Circular and the opinions of the State Bank regarding the Draft Circular, it can be seen that, although the actual regulations at the time of issuance may still change, the adjustment trend of the State Bank is become stricter in controlling loans, especially short-term loans when these loans do not carry out registration procedures at the initial time. Therefore, businesses and enterprises need to gradually come up with plans related to working capital so that they can easily adapt to possible legal adjustments in the future. 

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