What are the new features of Circular 08/2023/TT-NHNN regarding foreign loans

Recently, borrowing from foreign sources by credit institutions (“credit institutions”) and non-credit institution enterprises (“enterprises”) has been on the rise due to their desire to take advantage of low interest rates in the international market. In order to control the level of conventional loans to maintain a safe debt threshold, the State Bank of Vietnam has recently issued Circular 08/2023/TT-NHNN (“Circular 08/2023/TT-NHNN”). This Circular prescribes the eligibility requirements for foreign loans without a government’s guarantee and replaces Circular 12/2014/TT-NHNN dated March 31, 2014 (“Circular 12/2014/TT-NHNN”), which governed the foreign loan eligibility requirements for enterprises without a government guarantee. In addition, it amends Circular 12/2022/TT-NHNN[1], which provides guidelines for foreign exchange administration with respect to enterprises’ foreign borrowing and enterprises’ foreign debt repayment (“Circular 12/2022/TT-NHNN”).

The Circular 08/2023/TT-NHNN is scheduled to take effect on August 15, 2023 and brings about several notable changes from previous legal documents. In this article, we will highlight some new and notable aspects of the Circular 08/2023/TT-NHNN that enterprises should take note of.

1. Allow the borrowers to temporarily use unused loan funds to make deposits.

One of the new outstanding features of the Circular 08/2023/TT-NHNN is to allow the borrowers to make deposits with credit institutions or foreign bank branches operating in Vietnam in case they have withdrawn funds but temporarily not used them for legal purposes.

In the case of large foreign loans, this regulation provides real benefits to borrowers, allowing them to earn interest on their deposits to offset the cost of the loan during the period when they have not yet used these funds.

For example, if an enterprise has short-term loans to pay off its own debts in cash, it can borrow short-term funds to settle the debts arising during the implementation of investment projects, production plans, or other projects, excluding the principal amount of domestic loans. However, if the aforementioned payment obligation has been extended after enterprises have withdrawn capital from foreign loans, instead of leaving these funds unused, the enterprises may deposit them with credit institutions or foreign bank branches operating in Vietnam to earn deposit interest and optimize the use of capital sources.

However, enterprises must be aware that they can only deposit these funds for a maximum period of one month for each amount, regardless of the loan term.

2. Amendments to the cases eligible for borrowing in Vietnamese dong from foreign loans.

According to the provisions of the Circular 12/2014/TT-NHNN, “the Vietnamese dong will be used only in the following cases”:

• The borrower is a microfinance institution;
• The borrower is a foreign-invested enterprise that takes the loan from the distributed profit in Vietnamese dong from the direct investment of the creditor, which is a foreign investor that contributes capital to the borrower;
• Other cases approved by the Governor of the State Bank of Vietnam considering the actual situation and necessity of the loans.

However, in the Circular 08/2023/TT-NHNN, removed the provision on “other cases approved by the Governor of the State Bank of Vietnam considering the actual situation and necessity of the loans” and replaced it with the case where “the borrower withdraws capital, repay loans in foreign currency, and the liability of the loan is determined in Vietnamese dong”.

This is a new regulation that provides flexibility for parties involved in loan transactions. In principle, the liability of the loan records the value of the loan, while drawdowns or repayments by the borrowers are still made in foreign currency, based on the exchange rate of banks agreed upon by the parties. In practice, however, it is not certain that parties will choose to borrow in Vietnamese dong using this method, as the priority for most parties in commercial transactions in general, and loan transactions in particular, is still the stability of the loan value. Therefore, it is unlikely that foreign creditors will accept the recognition of the loan value in Vietnamese dong.

In addition, with the removal of the provision in Circular 08/2023/TT-NHNN regarding “other cases approved by the Governor of the State Bank of Vietnam considering the actual situation and necessity of the loans” for foreign loans in Vietnamese dong, the corresponding regulation for enterprises registering such loans will also be removed. Accordingly, in the past, for foreign loans in Vietnamese dong that must be registered and whose borrowers are not microfinance institutions or foreign-invested enterprises taking out loans from distributed profits in Vietnamese dong resulting from direct investment by a foreign investor contributing capital to the borrower, the borrowers must obtain a written confirmation or rejection of loan registration from the State Bank of Vietnam within a period of forty-five working days starting from the date of receipt of a complete and valid application. This period is longer compared to the registration of ordinary foreign loans because for these loans, the loan registration process is also the process of the consideration and approval of the Governor of the State Bank of Vietnam. Therefore, at present, when conducting the registration procedure for foreign loans, the deadline for the State Bank to confirm or reject the loan registration is only twelve or fifteen working days from the date of receiving a complete and valid application from the borrower, depending on whether the borrower has declared the loan information on the electronic portal or not.

3. Limitation of the amount of foreign loan by the borrowers

If the borrower is a credit institution.

Compared to the Circular 12/2014/TT-NHNN, Circular 08/2023/TT-NHNN introduces completely new provisions in comparison to on the limitation of the amount of short-term foreign loans of borrowers that are credit institutions. Accordingly, borrowers are only permitted to take out a short-term foreign loan if they comply with the limit on short-term foreign loans by the end of December 31 of the year preceding the occurrence of the loan. The short-term foreign borrowing limit refers to the maximum ratio of the total outstanding principal amount of short-term foreign borrowings to owner's equity, and may not exceed[2]:

• 30% if the borrower is a commercial bank;
• 150% if the borrower is a branch of a foreign bank or other credit institution.

This regulation aims to reduce the increase of foreign debts of credit institutions, avoid pressure on the limit of conventional foreign loans, and ensure the safety of Vietnam's foreign debts. On the other hand, the requirement that the borrower must meet the limit for short-term foreign loans as of December 31 of the year preceding the time of the loan occurrence also gives the borrower flexibility in implementing the loans at different times of the year. In other words, the borrower can generate multiple loans and exceed the limit as long as it still meets the limit at the end of the year to qualify for loans in the following year.  

One point that enterprises need to be aware of is that due to the new regulation on the limit of short-term foreign loans at the end of December 31 of the year preceding the occurrence of the loan. Therefore, this regulation will only come into effect only from January 1, 2024[3], which means it will apply to loans starting from 2024.

If the borrower is an enterprise

While the limitation of foreign loans for implementation of investment projects or the implementation of carry out production and business plans and other projects of the borrower, is regulated similarly to the Circular 12/2014/TT-NHNN, the Circular 08/2023/TT-NHNN has additionally provided regulations for cases where enterprises borrow from abroad to restructure their foreign debts.

Specifically, according to Clause 2 Article 5 of the Circular 12/2014/TT-NHNN, the borrower is allowed to borrow from abroad to restructure incurred the foreign debts without increasing the borrowing cost. However, other than this provision, the Circular 12/2014/TT-NHNN does not contain any other regulations relating foreign loans for the purpose of restructuring the borrower’s foreign debts, including the loan limit.

However, the Circular 08/2023/TT-NHNN contains detailed regulations regarding this type of loan. Specifically, for loans used to restructure their foreign debts, enterprises are allowed to borrow on a short-term or medium to long-term[4] basis. At the same time, the maximum amount of foreign loan used to restructure the borrower’s foreign debts may not exceed the sum of the outstanding principal, unpaid interest and relevant expenses of the existing foreign loan, and the expenses related to the new loan determined when restructuring its foreign debts[5].

In addition, for medium and long-term foreign loans of enterprises to restructure their foreign debts, the enterprises must note that they must repay the existing foreign loan within 05 working days from the date of withdrawal of the new foreign loan capital is withdrawn. After the aforementioned period, the enterprises must ensure compliance with the loan limits in cases of foreign loans for investment projects or other production, business plans, or projects of the enterprise[6].

4. There are clear provisions regarding the case where enterprises take short-term loans to repay short-term debts in cash.

The Circular 12/2014/TT-NHNN does not provide clear provisions regarding whether enterprises can use an amount of short-term foreign loans to repay debts incurred during the implementation of investment projects, production and business plans, or other projects of the enterprise. It only provides a general regulation on the use of foreign loans for the implementation of production, business plans, and investment projects. However, the Circular 08/2023/TT-NHNN provides comprehensive guidelines. It not only permits enterprises to obtain short-term foreign loans for the purpose of restructuring their foreign debts, but also allows them to use such loans to settle short-term debts in cash (excluding the principal amount of domestic loans) owed to the borrowers[7]. The short-term debts to be settled here refer to the debts incurred during the implementation of investment projects, production and business plans, and other projects of the enterprise. Therefore, these new regulations will help enterprises more clearly determine whether or not they can borrow short-term foreign loans to repay the debts incurred during their business operations or not.

It can be seen that the Circular 08/2023/TT-NHNN has brought about specific modifications and revisions compared to the Circular 12/2014/TT-NHNN. In addition, these adjustments have an impact on the implementation of other legal documents, particularly the Circular 12/2022/TT-NHNN regarding the procedures for the registration of foreign loans. Due to its specific nature, the process of foreign borrowing is closely monitored and regulated by the state authorities. As a result, it is crucial for enterprises and credit institutions to be aware of the new regulations set forth in Circular 08/2023/TT-NHNN and to familiarize themselves with them promptly in order to ensure full compliance with the law.