Noteworthy issues regarding foreign loans

During the course of their operations, foreign-invested enterprises may seek foreign loans from the foreign project owners or investors (or their own holding companies) or obtain loans from foreign banks in order to leverage more favorable interest rates. 

Such foreign loans are governed by the State Bank of Vietnam, and they adhere to specific legal regulations outlined in the Decrees guiding foreign borrowing without government guarantee (“self-borrowed and self-paid loan”). 

Noteworthy issues regarding foreign loans
Noteworthy issues regarding foreign loans

Therefore, when seeking “self-borrowed and self-paid loans”, foreign-invested companies should pay attention to the following issues: 

1. Determining the type of loan  

Under Clause 1, Article 2 of Circular No. 12/2014/TT-NHNN (“Circular No. 12”) providing conditions on enterprises’ foreign borrowing without government guarantee, self-borrowed and self-paid loans are classified into 02 (two) types: 

  • Self-borrowed and self-paid short-term foreign loan (“short-term loan”) means a foreign loan with a term of up to one (01) year, which is not guaranteed by the Government 
  • Self-borrowed and self-paid medium- or long-term foreign loan (“medium- or long-term loan”) means a foreign loan with a term of over one (01) year, which is not guaranteed by the Government. 

Determining whether to borrow a medium-, long-term loan or a short-term loan will affect the Borrower’s loan registration obligation. Accordingly, the Borrower will be obliged to register the loan with the State Bank if he/she/it seeks any medium- or long-term loan (Clause 1, Article 11 of Circular No. 12/2022/TT-NHHH guiding foreign exchange management for foreign loan borrowing and repayment by enterprises). 

The Borrower may not register any short-term loan, unless otherwise specified in Clause 2 and Clause 3, Article 11 of Circular No. 12/2022/TT-NHHH, specifically as follows: 

  • Short-term loans eligible for extension of the principal repayment period, with the total term of the loans longer than 01 year. 
  • Short-term loans not accompanied by extension agreements but having outstanding loan principals (also including loan interests aggregated in loan principals) on the date which is full 01 year from the first drawdown date, unless the Borrower completes the payment of the above outstanding loan principals within 30 working days from the date which is full 01 year from the first drawdown date. 

The above regulation can be construed that, if an enterprise seeks a short-term loan, the loan term specified in the Loan Agreement/Contract is 01 (year). However, if the term of 01 (one) year from the first drawdown date expires and the Borrower still has outstanding loan principals, regardless of whether it is extended or not, such short-term loan must be subject to registration with the State Bank, unless the Borrower completes the payment of the above outstanding loan principals within 30 working days from the date which is full 01 year from the first drawdown date.  

2. Maximum loan limits 

Every year, the Prime Minister will approve the maximum limits for self-borrowed and self-paid foreign loans within the country’s foreign commercial loan framework. Based on such approved limits, the State Bank and commercial banks under the management of the State Bank shall monitor, review and manage registered loans so as not to exceed such limits. Accordingly, the self-borrowed and self-paid foreign loan limits apply only to medium- and long-term loans as well as short-term loans subject to registration.  

In particular, for medium- and long-term loans, the Borrower should pay attention to some regulations on loan limits as follows:  

  • In case of borrowing a medium- or long-term foreign loan to perform a production and business plan or fund an investment project from an enterprise to which the Borrower directly contributes capital, the ratio of the foreign loan to the total value of loans for such production and business plan or investment project must not exceed the rate of capital contributed to such enterprise by the Borrower. 

(Article 5.1(b) of Circular No. 12/2014/TT-NHNN) 

  • For a Borrower with an investment project using a foreign loan which has been granted an investment certificate, the Borrower’s outstanding medium- and long-term loans (including domestic loans) for such project must not exceed the difference between the total investment capital and the contributed capital stated in the investment certificate; 

(Point (i), Article 11.2 (b) of Circular No. 12/2014/TT-NHNN) 

  • For a Borrower that borrows a foreign loan to implement a production and business plan or an investment project without an investment certificate, the Borrower’s outstanding medium- and long-term loans (including domestic loans) for that project must not exceed the total loan demand for that plan or investment project approved by competent authorities in accordance with the law. 

(Point (i), Article 11.2 (b) of Circular No. 12/2014/TT-NHNN) 

3. Purposes of foreign borrowing and use of loans  

The purpose of foreign borrowing is one of the important conditions always considered when the Borrower takes out a foreign loan. The purpose of foreign borrowing will also be appraised and checked by State agencies when the Borrower applies for a loan/a loan change, converts a loan, or repays a foreign loan, etc. The loan must be used for the purpose as committed in the loan agreement/contract and in accordance with the law. 

In accordance with this, the Borrower may only take out a foreign loan for 02 (two) purposes:  

  • To implement a production and business plan or an investment project using a foreign loan of: (i) The Borrower; (ii) An enterprise to which the Borrower directly contributes capital (applicable only to medium-or long-term foreign loans).  In particular, the production and business plan or investment project using such a medium- or long-term foreign loan must be approved by a competent authority in accordance with relevant laws of Vietnam and conform with the scope of the enterprise establishment license, enterprise registration certificate, business registration certificate, investment certificate, or cooperative or cooperative union registration certificate of the Borrower or of the enterprise to which the Borrower directly contributes capital.  

At the same time, Clause 1, Article 11 of Circular No. 12/2014/TT-NHNN also provides additional conditions for the purpose of short-term foreign loans: “a) The Borrower may not borrow a short-term loan for medium- or long-term use”. 

This means that the Borrower can only borrow a short-term loan to implement the production and business plan or investment project for the Borrower’s short-term and immediate activities, but cannot borrow such loan for the purpose of capital contribution or long-term investment in the investment project.  

  • To restructure foreign debts of the Borrower without increasing the loan cost. 

Please be noted that: The Borrower and Lender may agree on the loan cost in the loan contract; however, the loan cost shall be subject to conditions on foreign loan cost, the decision and the cap of foreign loan cost announced by the Governor of the State Bank from time to time. 

If the Borrower commits in the loan agreement/contract to using the loan for the right purpose as specified by the law but the Borrower’s accounting and financial records or the Borrower’s payment receipts show the use of the loan for any purpose other than the committed one, the Borrower may be refused by the State Bank when carrying out the procedures for loan registration, loan change registration or necessary procedures related to the loan with the competent State Bank.  

4. Currency of foreign loans 

Under the laws of Vietnam, Borrowers can borrow loans in any foreign currency or Vietnam dong. However, a foreign loan may be borrowed in Vietnam dong only in the following cases: 

  • The borrower is a micro-finance institution; 
  • The borrower is a foreign-invested enterprise which takes out the loan in Vietnam dong from the shared profits from direct investment activities of the lender being a foreign investor contributing capital to the borrower; 
  • Other cases considered and approved by the State Bank Governor based on the practical situation and necessity of each case. 

Considering the practice of foreign borrowing, we find that very few Borrowers make foreign loans in Vietnam dong. However, in the case where the foreign loan borrowed in Vietnam dong does not fall into the cases as mentioned in Cases (a) and (b) above, the Borrower shall seek approval from the Governor of the State Bank. This case may lead to a lengthy borrowing process depending on the review and approval of the competent person. 

5. Reporting obligations when obtaining foreign loans 

Under Article 41 of Circular No. 12/2022/TT-NHNN, Borrowers shall make monthly reports to the competent State Bank on the execution of short-, medium- and long-term loans no later than the 5th day of the month succeeding the reporting month. 

Under this regulation, Borrowers shall make such reports online on the State Bank’s website (www.sbv.gov.vn   or  www.qlnh-sbv.cic.org.vn). In case the Website encounters a technical incident, making Borrowers unable to send reports, they shall send paper reports made according to the form provided in Appendix 05 to Circular No. 12/2022/TT-NHNN. 

The report is recorded when the competent State Bank approves the report on the Website or sends a confirmation email to the Borrower. If the report requires any adjustment or supplement, the State Bank shall request the Borrower to adjust the data and re-send the report on the Website.  


Disclaimers:

This article is for general information purposes only and is not intended to provide any legal advice for any particular case. The legal provisions referenced in the content are in effect at the time of publication but may have expired at the time you read the content. We therefore advise that you always consult a professional consultant before applying any content.

For issues related to the content or intellectual property rights of the article, please email cs@apolatlegal.vn.

Apolat Legal is a law firm in Vietnam with experience and capacity to provide consulting services related to Contract Drafting and Reviewing and contact our team of lawyers in Vietnam via email info@apolatlegal.com.

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