Some solutions to handling overdue short-term foreign loans of enterprises in Vietnam

In the course of investment activities in Vietnam, raising capital from foreign entities is an effective means for enterprises to quickly access financial resources. However, many enterprises overlook the risk of overdue short-term foreign loans if not properly managed. Therefore, this article proposes several solutions for handling overdue short-term foreign loans of foreign-invested enterprises in Vietnam.

1. Solutions for Handling Overdue Short-Term Foreign Loans

a. Registering Medium- and Long-Term Loans Due to Extension of Short-Term Loan Repayment Period

If, upon the maturity date of a loan, an enterprise wishes to continue utilizing the borrowed capital and extend the loan term, such an extension may give rise to an obligation to register the loan with the State Bank of Vietnam (SBV). Specifically, pursuant to Clause 2, Article 11 of Circular No. 12/2022/TT-NHNN, if a short-term loan is extended in a manner that results in the total loan term exceeding 12 months, the enterprise must proceed with loan registration with the SBV. 

Accordingly, in this case, the loan term shall be determined from the date of the first disbursement to the anticipated date of final principal repayment, based on the provisions of the foreign loan agreement and the extension agreement, as stipulated in Clause 2, Article 12 of Circular No. 12/2022/TT-NHNN. 

The deadline for submitting the loan registration application in this case is 60 working days from the date marking one full year from the first disbursement, provided that the loan extension agreement is signed after this one-year period. This requirement is prescribed under Point d, Clause 2, Article 15 of Circular No. 12/2022/TT-NHNN. If the enterprise fails to register the loan within this timeframe, the registration application may be subject to violation review before being approved by the SBV. 

Additionally, under Article 41 of Circular No. 12/2022/TT-NHNN, short-term foreign loans (with a term of less than 12 months) are not subject to mandatory registration with the SBV. However, enterprises are still required to submit periodic reports on loan utilization and repayment. Compliance with this reporting obligation is a crucial basis for the SBV’s consideration and approval should the enterprise later seek to register a medium- or long-term loan due to an extension of the short-term loan repayment period.

b. Loan Restructuring

Enterprises may restructure their loans using the following methods: 

i. Converting Loans into Capital Contributions

Enterprises may negotiate with foreign creditors to convert loans into capital contributions. This approach helps alleviate financial pressure by eliminating the obligation to repay debt while also improving financial stability and debt-to-equity ratio. However, while this strategy offers long-term benefits, it also results in significant changes in ownership structure. 

For Vietnamese enterprises, converting loans into capital contributions may increase the foreign ownership ratio, potentially leading to a reclassification as a foreign-invested enterprise (FIE). In such a case, the enterprise must comply with the regulatory requirements applicable to FIEs, including investment restrictions, ownership limitations, and additional legal procedures. 

The loan conversion process must adhere to Vietnam’s foreign investment regulations, including procedures for amending the Enterprise Registration Certificate and the Investment Registration Certificate (if applicable).

ii. Raising Funds from Other Sources to Restructure Existing Loans

Enterprises may seek alternative funding from individuals, organizations, or credit institutions to settle overdue foreign loans. However, careful consideration should be given to the interest rates and loan conditions to avoid increasing financial pressure. 

If the enterprise opts to borrow from foreign sources to restructure an existing loan, it must strictly comply with the legal requirements for foreign borrowing and repayment to ensure regulatory compliance.

2. Risks and Control Measures

a. Legal Risks

Failure to comply with legal procedures regarding foreign loans may result in administrative penalties ranging from VND 40,000,000 to VND 60,000,000, as stipulated in Article 23.3(g) of Decree No. 88/2019/ND-CP dated November 14, 2019, on administrative penalties in monetary and banking sectors. 

Additionally, non-compliance with loan registration, reporting, or extension procedures may hinder future fundraising efforts. Financial institutions and investors may perceive the enterprise as high-risk, thereby reducing its ability to access capital under favorable conditions. In severe cases, enterprises may face restrictions on transactions with banks or foreign partners due to financial regulatory violations. 

b. Financial Risks

The financial risks associated with overdue foreign loans extend beyond debt repayment obligations and can impact the long-term financial stability of the enterprise. Key risks include: 

• Exchange Rate Fluctuations: If the Vietnamese Dong (VND) depreciates, enterprises will have to repay a larger amount in local currency, significantly increasing financial costs, especially if they lack foreign currency revenue. 

• Interest Rate Risks: Global interest rate fluctuations may create financial strain on enterprises. 

• Liquidity Pressure: Without a proper debt repayment plan, enterprises may face financial or legal enforcement actions from creditors, affecting their reputation and operations. 

c. Risk Control Measures

To mitigate legal and financial risks associated with overdue foreign loans, enterprises should implement the following measures: 

• Developing Contingency Financial Plans: Effective cash flow management and risk forecasting for exchange rates, interest rates, and economic fluctuations to ensure timely debt repayment. 

• Negotiating Flexible Loan Terms: Enterprises should negotiate extension, restructuring, or interest rate adjustment clauses when entering into loan agreements to provide options in case of financial difficulties. 

• Consulting Financial and Legal Experts: Collaborating with banks, credit institutions, and legal advisors to ensure compliance with foreign loan regulations and avoid legal risks. 

Handling overdue short-term foreign loans requires strict adherence to Vietnam’s legal framework. Enterprises should develop appropriate financial strategies, fulfill reporting obligations, and implement risk control measures to optimize capital utilization. In cases of legal difficulties, enterprises are advised to seek expert consultation or legal advisory services for appropriate solutions. 

See more:

1/ Trends to stricter control for short-term foreign loan purpose

2/ Vietnamese enterprises obtain short-term foreign loans

Share: