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INSIGHT
The Draft Circular replacing the current circular No. 12/2014/TT-NHNN on conditions for non-government guaranteed cross-border foreign loans (the Current Circular) was released on 11 May 2022 for public consultation. It proposes to tighten conditions for taking out these loans, in order to manage Vietnam’s overall borrowing exposure and ensure proper use of foreign loans.
This Insight explains the potential impacts of the Draft Circular on foreign lenders and domestic borrowers. The public has 60 days to comment.
Under the Current Circular, a short-term foreign loan can be taken out for working capital purposes and cannot be used for a medium-or long-term purpose; and a medium-or long-term foreign loan can be taken out to:
The Draft Circular proposes to further limit the use of foreign loans by a non-credit institution borrower, as follows:
Notably, the Draft Circular seems no longer to permit the use of medium-or long-term foreign loans to finance an investment project or business/production plan of enterprises directly invested in by the borrower (eg the borrower’s subsidiary).
The Draft Circular clearly defines the borrowing costs of a cross-border foreign loan to be aggregate amounts payable to the lender, securing party, agent and other relevant parties, comprising interest, internal return rate, and other related fees and expenses, which will be calculated in percentage per annum out of the total principal of the foreign loan.
The Draft Circular proposes to cap the borrowing costs of a foreign loan at:
The Draft Circular requires the Vietnamese borrower, for the first time, to hedge its borrowings to mitigate its potential exposure to the risk of currency fluctuation. In particular:
This requirement does not extend to:
It is also worth noting that all foreign loans executed before the effective date of this Draft Circular (if passed) are also required to be FX hedged if not fully drawn.
The Draft Circular introduces a new requirement for having a Vietnamese security agent. Accordingly, if the foreign loan is secured by assets in Vietnam, the foreign lender is required to appoint a Vietnamese security agent, being either a credit institution, foreign bank branch or an institutional entity established and operating under the laws of Vietnam, to assist with the security enforcement process. This rule does not apply in the case of the lender electing to take over the secured assets for enforcement.
According to the public consultation process, the public has 60 days to comment. If you have any questions about the Draft Circular, or would like to get involved in the public consultation on it, please do not hesitate to contact us.
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