Tight control on foreign borrowing, businesses face more difficulties

DNHN - Since 2022, borrowing foreign capital without government guarantees has become more difficult, and according to feedback from many businesses, part of the reason is the tight control policies on foreign borrowing from the State Bank of Vietnam.

This opinion was shared by Lawyer Nguyễn Sơn Tùng, Director of Legal United Law Firm, who is also the Chairman of the Inter Capital Debt Trading & Asset Management Company, in an interview with doanhnghiephoinhap.vn. According to Lawyer Nguyễn Sơn Tùng, in the past, many businesses often "proactively sourced capital" by borrowing foreign funds under a self-responsibility mechanism, "self-borrowing, self-repaying" as per Decree No. 219/2013/NĐ-CP dated December 26, 2013, on the management of foreign borrowing and debt repayment. However, currently, this "self-borrowing, self-repaying" practice is gradually being tightened by a number of regulations regarding the purpose of using borrowed funds, loan limits, and safety ratios in the debt structure. This has led to difficulties for many businesses that previously had a strong ability to use foreign loans, making it challenging to meet the conditions for borrowing and disbursement of foreign loans.

Reporter: Who are the current participants in foreign borrowing relations without government guarantees, sir?

Lawyer Nguyễn Sơn Tùng: According to Decree No. 219/2013/NĐ-CP, effective from February 15, 2014, the entities involved in foreign borrowing include both organizations and individuals related to foreign borrowing and debt repayment activities. However, Decree 219/2013/NĐ-CP has not clearly defined the borrowers in legal terms and has not provided more explicit definitions of the borrowing entities.

With the issuance of Circular No. 08/2023/TT-NHNN, the State Bank of Vietnam (SBV) has more clearly defined the entities participating as borrowers by using the concept of "residents." Specifically, the current borrowers are identified as credit institutions (CIs), foreign bank branches (FBBs) in Vietnam, and enterprises, cooperatives, and cooperative unions. As for CIs or FBBs, they can participate both as borrowers or as banks providing account services. According to Circular No. 08/2023/TT-NHNN, borrowers can be categorized into groups: the banking group, CIs, state-owned enterprises, those borrowing in the form of international bond issuance, and other enterprises with borrowing needs. For each group, the law currently sets out specific conditions that need to be met for foreign borrowing without government guarantees.

Therefore, when comparing Decree No. 219/2013/NĐ-CP and Circular No. 08/2023/TT-NHNN, the SBV currently does not allow individuals or cooperative groups to participate in foreign borrowing relations as borrowers.

Reporter: Many businesses have complained about the restrictions on the purposes of using borrowed funds. Is this accurate in practice?

Lawyer Nguyễn Sơn Tùng: All foreign loans require the borrower to clarify the purpose of borrowing and to prove the purpose of the foreign loan through the documents and materials outlined in the loan plan or debt restructuring plan.

Previously, under Circular No. 12/2014/TT-NHNN (now expired), foreign borrowing followed the principle of "self-responsibility, self-borrowing, self-repaying," so the requirements for short-term and medium to long-term borrowing were not strictly imposed.

With Circular No. 08/2023/TT-NHNN, there is clearer classification regarding the purpose of using short-term and medium to long-term borrowed funds. Accordingly, short-term loans are only allowed to be used for restructuring foreign debts and paying short-term liabilities in cash, excluding the principal of domestic loans, provided that financial safety indicators are met. Medium to long-term loans are only allowed for purposes related to investment projects, other projects, or business plans, or for restructuring foreign debts of the borrower.

Currently, according to Clause 4, Article 1 of Circular No. 19/2024/TT-NHNN dated June 28, 2024, foreign loans, whether short-term or medium to long-term, are only allowed to be used for the following purposes: (i) Restructuring foreign debts of the borrower; (ii) Supplementing capital for credit activities according to credit growth for CIs; or (iii) Paying beneficiaries through banks with deferred payment letters of credit with immediate or prepayment terms, and other business activities related to letters of credit.

Reporter: So, the complaints about the SBV tightening the purpose of using foreign loans are accurate?

Lawyer Nguyễn Sơn Tùng: Comparing the regulations in Circular No. 12/2014/TT-NHNN, Circular No. 08/2023/TT-NHNN, and the most recent Circular No. 19/2024/TT-NHNN effective from July 1, 2024, regarding the purpose of using borrowed funds, as I have analyzed above, it is clear that borrowers are no longer allowed to borrow foreign funds for the purposes of implementing production, business plans, investment projects using foreign loans, or for enterprises in which the borrower participates in direct investment for medium to long-term foreign loans, as previously allowed.

In reality, most of the demand for foreign loans by businesses is for implementing production, business plans, and investment projects, so when the SBV restricts these main purposes, the demand and ability to access foreign capital is significantly reduced. Enterprises, if they are not CIs and not import-export companies using loans related to letter of credit transactions, will only have the need to borrow to repay existing foreign debt with new foreign loan capital (foreign debt restructuring). This, in fact, according to my observation, poses certain disadvantages for businesses that previously borrowed large amounts of foreign capital, especially in industries related to real estate investment and business.

Reporter: That is regarding the purpose of the loan, but regarding the limit on foreign borrowing, are there any new regulations that hinder businesses, especially those in the real estate sector?

Lawyer Nguyễn Sơn Tùng: Before August 15, 2023, the effective date of Circular No. 08/2023/TT-NHNN, the SBV did not impose any regulations on loan limits. Currently, for medium to long-term loans with a maturity of over one year or loans arising from letter of credit transactions, there are no regulations on loan limits.

However, for short-term loans of less than 12 months, the SBV has imposed regulations based on the principle of calculating the maximum ratio of total outstanding short-term foreign debt to the standalone equity capital, and the borrower is only allowed to borrow short-term if it meets the limit as of December 31 of the year immediately preceding the time of loan occurrence. Additionally, this ratio is limited to 30% for commercial banks or 150% for other CIs and FBBs.

For real estate businesses, according to Article 5 of Decree 96/2024/NĐ-CP, the total outstanding loans at CIs, corporate bonds, and equity capital must comply with the regulations for each project not exceeding 100% of the total project investment capital, and the total outstanding loans must not exceed four (04) times or 5.67 times the equity capital for projects with a land use area of less than 20 hectares or 20 hectares or more, respectively.

Current real estate business laws do not explicitly state whether total real estate loans include foreign loans if those loans are not borrowed from foreign CIs. As for total bond debt, I believe it should be understood as including bond debt issued on the international market.

By introducing these limits, it is clear that the SBV aims to better control the debt structure but also poses some challenges in meeting and satisfying these new criteria, which many businesses may find difficult to achieve.

Reporter: Regarding the safety ratios in the foreign debt structure for borrowers, does current law provide any more flexible regulations?

Lawyer Nguyễn Sơn Tùng: In my opinion, there are no more flexible regulations, but there are stricter ones. The safety ratio currently applies to both short-term and medium to long-term loans. According to Article 16 of Circular No. 08/2023/TT-NHNN, for short-term loans, the borrower must comply with the safety ratio regulations in the Law on Credit Institutions at the end of the three (03) months preceding the date of signing the loan agreement or agreement to increase the value of the foreign loan. This means that if applied according to Article 138 of the Law on Credit Institutions 2024, the borrower must maintain safety ratios such as the ability to repay the loan principal and interest, a minimum capital safety ratio of 08% or higher, foreign currency and gold positions relative to equity capital, and other safety ratios. With these requirements, many enterprises or CIs with borrowing needs may find it difficult to comply.

Moreover, if borrowing in the form of bond issuance on the international market, the issuing enterprise must also comply with the safety ratios specified in Article 138 of the Law on Credit Institutions at the end of the three (03) months preceding the date of submission of the registration dossier for the bond issuance.

Reporter: In your assessment, is accessing and using foreign loans without government guarantees currently more difficult and restricted for businesses compared to the period before mid-2023?

Lawyer Nguyễn Sơn Tùng: Personally, I believe that the current legal regulations have become stricter and are not limited to the four groups of regulations that have been established. I see that other regulations, such as those on loan agreements, debt restructuring, loan currencies, borrowing costs, interest rates, collateral for loans, and exchange rates and foreign currencies, are also regulated in a stricter and clearer manner to further enhance the responsibility of the borrower. This means that borrowers must bear heavier responsibilities and comply with more regulations in their foreign borrowing and repayment transactions.

In practice, as I observe, apart from the strictness in legal regulations which makes it difficult for many businesses to comply in a short period of time, there are also objective changes, both internal to the economy and external, such as the increase in interest rates, high risk regarding collateral in loan transactions, low ability to repay foreign debts on time, and incomplete regulations on collateral and debt sales related to loans. These factors contribute to the perception that foreign lending and borrowing in Vietnam are less attractive.

Reporter: Thank you, Lawyer, for the insights shared!

P.V