New Circular on conditions for foreign loans not guaranteed by the government.

This article explains the key points of Circular 08/2023/TT-NHNN on conditions for foreign loans not guaranteed by the Government ("Circular 08"). The Governor of the State Bank of Vietnam ("SBV") issued Circular 08, which took effect on 15 August 2023. The points below concern enterprises that are not credit institutions or foreign bank branches in Vietnam.

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1. The purposes of short-term foreign loans are now clearer

Previously, enterprises could not use short-term foreign loans for long-term purposes under Circular 12/2014/TT-NHNN on conditions for foreign loans of enterprises not guaranteed by the Government. However, the other provisions of that circular did not say which purposes count as short-term and which count as long-term.

Under the new Article 17.1 of Circular 08, an enterprise may use a short-term foreign loan only to (i) meet short-term payment obligations and (ii) restructure its foreign debts.

As a result, an enterprise must base a short-term foreign loan on one of the following:

• unpaid invoices;
• contracts with payment obligations falling due within one year; or
• other documents proving that the enterprise has amounts payable within one year.

In addition, enterprises that must meet prudential financial ratios may take short-term loans for their professional activities.

With these rules, Circular 08 puts short-term foreign borrowing on a clear legal footing. Commercial banks can provide account services for these loans with more confidence, and enterprises can obtain such loans more easily.

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2. Unused loan proceeds may be placed in deposits of up to one month

Circular 08 allows an enterprise to place loan amounts that it has drawn down but not yet used for the registered purpose in term deposit accounts with a term of up to one month. However, this provision raises the following problems:

• Under current regulations, term deposits can be made only in VND. An enterprise therefore converts the loan amount from the loan account into VND in its current account and then places it in a term deposit. Except where the difference in balances is obvious, nobody can tell the enterprise's own funds apart from the borrowed funds, so in practice the enterprise can place this money in any term deposit;
• Circular 08 does not say whether a term deposit funded by borrowed money may be rolled over. If the deposit rolls over automatically, the enterprise can use it as collateral for domestic loans for other purposes.

For these reasons, the SBV needs to issue further guidance on placing unused loan proceeds in term deposits.

3. A loan use plan is a mandatory part of a medium or long-term loan file

Circular 08 adds new rules on the plan for using foreign loans. Under Circular 08, "the plan for using foreign loans is a production and business plan that uses the foreign loan and demonstrates the borrower's lawful and reasonable purpose and need for the foreign loan."

The enterprise's owner, Members' Council or General Meeting of Shareholders approves this plan to demonstrate the borrower's need for the foreign loan.

Circular 08 specifically makes the plan part of the application to register a medium- or long-term foreign loan. In addition, the enterprise must prepare and keep the plan as required, so that it can present the plan when the authorities inspect how the foreign loan is used.

4. Registration of foreign loans in Vietnamese dong is simplified

Circular 08 amends Circular No. 12/2022/TT-NHNN guiding foreign exchange management for foreign borrowing and repayment by enterprises. The amendment removes or changes several provisions on the SBV Governor's power to approve foreign loans in VND.

As a result, once a foreign loan in Vietnamese dong meets the borrowing conditions in Article 10 of Circular 08, the enterprise follows the normal procedure for foreign loans. Unlike under the old rules, the loan can be registered without the approval of the SBV Governor.

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