Updated draft regulation on cross-border lending into Vietnam—a more lenient approach

By Linh Bui, Linh Chi Dang, Anh Duong
Banking & Finance Vietnam

Attention foreign lenders and domestic borrowers 5 min read

The State Bank of Vietnam (SBV) has been working on regulations to replace the current circular No. 12/2014/TT-NHNN on conditions for non-government guaranteed cross-border foreign loans (the Current Circular). The first draft released in May 2022 (First Draft Circular) raised concerns for the business community with various stringent new requirements (see our earlier Insight).

After the public consultation process, the SBV has recently released the second draft circular (Second Draft Circular) in February 2023, which takes a more lenient approach and has removed most of the stringent restrictions proposed in the first draft.

This Insight sets out the key changes proposed by the Second Draft Circular and their impact for foreign lenders and domestic borrowers.1

Key takeaways

  • The Second Draft Circular has removed most of the stringent restrictions proposed in the First Draft Circular, including:
    • cap on borrowing costs;
    • restriction on using short-term loans for securities trading and acquisition of shares/capital contribution, project or real property in Vietnam;
    • the three-times equity cap on total debt in respect of foreign loans used to finance the borrower's business activities.
  • The Second Draft Circular still provides for the FX hedging requirement but with less stringent conditions.
  • The borrower can now only take out foreign loans for financing of its own investment projects, but not of other entities in which the borrower directly invests. It seems that foreign loans can still be used to finance non-project specific business activities of the borrower's affiliates.

Further limitation on foreign loan use purposes

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:

  • finance an investment project or business/production plan of the borrower, or of enterprises directly invested in by the borrower; and
  • refinance an existing foreign loan of the borrower.

The Second Draft Circular proposes to further limit the use of foreign loans by a non-credit institution borrower, as follows:

  • Short-term loans: a short-term foreign loan can only be used to pay short-term payables recorded in the borrower's latest financial statement prior to the first drawdown date (except for entities subject to financial prudential ratios, such as a securities company).
  • Medium-or long-term loans: A medium-or long-term foreign loan can only be used for the following three purposes, subject to certain restrictions for each purpose:
    • Financing for the borrower's investment projects: similar to the Current Circular, the borrower may only borrow money up to an amount that is the difference between the borrower’s contributed capital in the project (eg charter capital) and the total investment capital specified in its investment licence/in-principle investment approval. All the borrower's existing onshore and offshore medium-or long-term loans will be counted towards this borrowing limit.
    • Financing for borrower's capital increase for its business activities: the total domestic and foreign borrowings of the borrower for this purpose must not exceed total loan-capital need—as specified in the foreign borrowing use plan approved by the relevant body of the borrower—which shall be submitted to the SBV as part of the loan registration with the SBV. As a welcoming change, the Second Draft Circular has removed the First Draft Circular's proposal to cap the total borrowing for this purpose at three times the borrower's equity or charter capital, if its equity is lower than its charter capital.
    • Refinancing of the borrower's existing foreign loan: the Current Circular requires the borrowing costs of the refinancing loan (which comprise interest and relevant fees) not to exceed those of the refinanced loan. The Second Draft Circular provides that the principal of the refinancing loan must not exceed the outstanding principal, interest, fees of the refinanced loan, and fees of the refinancing loan determined on the refinancing date. This is an improvement from the First Draft Circular where coverage of the new refinancing loan's fees was not clear.

Use of foreign loans to finance activities of the borrower's affiliates

The Draft Circular provides that medium-or long-term foreign loans can only be used to finance an investment project of the borrower and no longer permits the use of such loans to finance investment projects of enterprises directly invested in by the borrower (eg the borrower's affiliates).

With respect to financing other business activities (ie non project specific), the wording of the Second Draft Circular does not specifically limit the permitted use to those of the borrower only. Therefore, it seems that foreign loans can be taken out to finance business/production plans of other entities (eg the subsidiaries of the borrower). However, it is unclear whether this is the intention of the SBV and this should be further clarified.

New FX hedging requirement

The Second Draft Circular retains the First Draft Circular's introduction of the new requirement on hedging to mitigate the borrower's potential exposure to the currency fluctuation risk. However, the requirements under the new draft are now less stringent.

In particular, any repayment instalment in foreign currency equivalent to VND 15 billion or more (c. US$650,000) must be hedged at the hedging value, being at least 20% of each instalment repayment, and the hedging transaction must be conducted at least 30 days before the repayment date. The term of the hedging transaction should be consistent with the principal repayment schedule and applicable laws.

This requirement does not extend to:

  • borrowers that are credit institutions or foreign bank branches;
  • borrowers who can prove they will have sufficient foreign currency amounting to at least 20% of the repayment instalment within 30 days before or on the repayment date. Borrowers can source the foreign currency from (i) legitimate incomes from their production and business operations; or (ii) drawdown of new foreign loans for the purpose of refinancing existing foreign loans; and
  • repayment instalment of a short-term foreign loan having the tenor of less than 30 days.

It is also worth noting that the Second Draft Circular sets out a transition period for borrowers to comply with this requirement by prescribing a separate and later effective date for this hedging requirement (not yet specified in the draft), and an exemption for loans having the repayment date falling within a certain period after the new circular comes into effect.

Borrowing costs

The proposed cap on borrowing costs in the First Draft Circular was of the most concern to foreign lenders and Vietnamese borrowers. In a welcoming move, the Second Draft Circular has removed this cap.

However, instead of the existing wording under Current Circular allowing the parties to agree on the borrowing costs, the Second Draft Circular generally requires the parties to comply with the relevant law on loan interest and fees. It is unclear whether the intention here is to apply the 20% cap on interest rate under Vietnamese Civil Code, which applies to lending activities by non-credit institutions. This issue should be clarified in the official circular to avoid any confusion.

What's next?

If you have any questions about the Second Draft Circular, or would like to get involved in the public consultation on it, please do not hesitate to contact us.


  1. In this Insight, we focus on borrowers being non-credit institutions in Vietnam. Cross border lending to credit institutions in Vietnam is subject to different rules.