Vietnam Tightens Regulations on Foreign Sourced Loans
HANOI – On May 15, 2014, new legislation went into effect that tightened the Vietnamese government’s control of foreign sourced loans. This legislation is of particular importance since many Vietnamese businesses tend to opt for loans from overseas financial institutions and business partners.
Circular 12/2014/TT-NHNN, originally formulated on March 31, 2014, applies to entities that are not sponsored by the government, these include:
- Credit institutions (except for the state-owned commercial banks); and
- Branches of foreign banks established and operated in Vietnam.
According to the Circular, lenders and borrowers are authorized to negotiate and determine different fees, including the lending interest rate. However, in certain circumstances, the State Bank of Vietnam will set a lending interest rate ceiling.
In order to be approved, foreign loans must fall into one of the two following categories:
- Foreign loans used to implement the business plans or projects of borrowers or companies receiving borrowers’ direct capital (this only applies to mid-term and long-term loans);
- Foreign loans that serve to restructure the foreign debts incurred by the borrower (this is a change from the previous law which gave permission to borrow foreign money only for the purpose of implementing business plans and projects).
In general, only foreign currencies are allowed, however, Vietnamese currency can be used in the following circumstances:
- The borrower is a microfinance institution;
- The borrower is a foreign-invested company borrowing from the Vietnamese-currency profit of a lender who has made capital contributions to the borrower;
- Other cases must be approved by the State Bank of Vietnam.
Additionally, the new Circular stipulates that finance or subsidiary institutions can only take a short-term loan in order to replenish their loan capital. Also,any short-term loans which are not renewed and are not fully paid within one year must be registered at the State Bank of Vietnam.
Lenders and borrowers must report in a timely manner on any changes in the terms and conditions of their loans. In order to ensure that it can effectively oversee this area, the State Bank of Vietnam has reserved the right to revoke the license of approved foreign loans.
A search for clarity
In recent years, the foreign loan situation in Vietnam has suffered from a lack of transparency. The government has struggled to keep track of the inflow of foreign loans – this is because the majority of these loans was short-term (less than a year) and was not required to be registered with the State Bank of Vietnam.
In order to avoid a lengthy processing time and complex red-tape, Vietnamese businesses agreed to short-term loans with overseas partners. When the loans expired, they were easily renewed for another term without having a finance contract or having to report to the governmental authorities.
Additionally, many entrepreneurs chose foreign loans due to their profit maximizing potential: the lending interest rate in Vietnam for short-term loans is 4-7 percent a year, the rate for mid-term and long-term loans is 5.5-7 percent. In comparison, the USD foreign lending interest rate is only around 2.5 percent a year.
The new Circular is intended to bring these loans into the light and clearly define the process for both lenders and borrowers.
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