In the preceding post, we discuss how foreign (i.e. – investor/parent company) loans are classified, how such classification would affect the funding plan and what are possible legal consequences of breaking the rules.

In this post, we take a closer look at specific conditions for and the State Bank of Vietnam (SBV)’s interpretation on each loan type in practice.

Again, it bears noting that foreign loans, or more precisely, foreign loans without Government’s guarantee is highly regulated and always under strict scrutiny of the SBV.

Under current Vietnamese banking law, the borrowers and offshore loans must satisfy 02 layers of conditions:

(i) “general” conditions applicable to loans of any terms; and

(ii) “supplemental (or specific)” conditions applicable to loans with specific terms. 

What are conditions for taking offshore loans?

  • General conditions:

An offshore loan, regardless of its term, must only be used for the purpose of:

  1. to implement investment projects/plans of the borrower itself or, in case of mid and long-term loans, a company it holds shares; or
  2. to restructure [or repay] current foreign debts of the borrower without increasing loan expenses.[1]
  • Specific conditions:

In addition to the general condition, short-term loans must be served for short-term purposes.  Unfortunately, the law is silent on what ‘short-term’ purposes are. This would mean how this phrase is interpreted could be at the discretionary judgement of the SBV.  To that extent, historically, we were aware that SBV interprets “short term” purposes as working capital of the borrower or funds for a 1-year business plan, etc.

We also have experienced some cases where SBV treats payment of rentals at office buildings or purchase price under relevant trading contract as short-term loan. On the contrary, if the funds are used to finance operations of other entities than the borrower itself (e.g. – granting loans), the short-term criteria would not be met. 

What happens if a short-term loan is concluded ‘improperly’ used?

Because short-term loans are not subject to any compulsory registration, some companies simply use them for whatever purposes they think fit regardless of whether such purposes are of short-term nature or not.

Nevertheless, if for some reasons the short-term loans are not paid (or converted into equity) within one year from the [signing] date, these companies must register a conversion into either mid or long-term ones with the SBV. Then, problems arise because the SBV would require the applying entities to prove that the short-term loans have been properly used for the last year. In this case, bank slips for every transaction can be the direct source of evidence.

If the SBV concludes that any of the above transactions are outside the short-term criteria, a heavy penalty can be imposed, roughly around US$15,000 per each violation.  In addition, the registration process will be held until the penalty has been fully paid. The whole licensing process from the application for offshore loan extension until SBV’s approval of the change of term could take months in practice.

Care therefore should be well taken to avoid the above unexpected consequences. This means that if a short-term loans for urgent purposes is inevitable, please check to ensure the reimbursement would fit the ‘short-term’ precedents. Then, if it is less likely that such loans can be repaid within 1 year (as in case of most startups), a registration for conversion into mid or long term loan with the SBV must be done as practical as possible.



[1] “Loan expenses” include interests and other expenses relating to the offshore loans


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