Circular tightens offshore borrowings
Circular tightens offshore borrowings
A circular containing new regulations on offshore borrowing took effect on April 15, expanding the central bank’s control over offshore borrowings to short-term loans. Doan Tu Tich Phuoc, lawyer at Duy Long Legal LLC, provides some insight on the topic.
On April 15, the State Bank of Vietnam’s Circular 03/2016/TT-NHNN (Circular 03) regulating offshore borrowing took effect with some last-minute changes.
The new law was issued by the central bank on February 26, 2016 and supersedes the earlier circulars governing foreign borrowing without a government guarantee, namely Circular No.09/2004/TT-NHNN and Circular No.25/2014/TT-NHNN. Circular 03 was designed to strengthen the State Bank of Vietnam’s (SBV) control over the foreign exchange rate with a requirement for all offshore borrowings and repayments by corporate entities, including those for short-term loans, to be made through special accounts dedicated for such purposes (Offshore Loan Accounts (OLAs).
However, Circular 03 could have significantly increased transaction costs for offshore borrowing and create a heavier burden on credit institutions. Due to these shortfalls, the SBV has just made an unprecedented decision to amend Circular 03 on its first day of implementation by Circular No.05/2016/TT-NHNN (Circular 05).
Registration changes for medium- and long-term loans
Circular 03, as amended, retains the requirements for registration of medium- and long-term loans at the SBV as set out under its previous incarnations, albeit with certain changes:
- An electronic procedure has been introduced under which a borrower may opt to register for an online account at the SBV’s website for offshore loan registration and reporting purposes. Once the account registration is made, the borrower will no longer be able follow the traditional procedure before the SBV’s Department of Foreign Exchange Management.
- Importing goods on deferred payment terms does not need to be registered at the SBV. However, this is still subject to the requirement on the opening and use of the foreign loan account as discussed below. The importer must fulfill its reporting obligation to the SBV, similar to any ordinary offshore borrower, and evidence of such reports must be presented for the purpose of loan repayment.
- The SBV’s timeline in the processing of registration is shortened from 20 days to 15 for a paper-based application, and 12 days for an electronic one. In the case of an offshore loan made in VND that needs approval from the SBV governor, the procedure has been reduced to 45 days instead of the previous 60.
- The procedure for registration of changes in an offshore loan is relaxed in certain situations where the change is deemed to be insignificant. If there is a change of the borrower’s trade name or its address within the province/city where the borrower is headquartered, or a change in details of a non-agent lender in a syndicated loan – in these cases only a written notification is required instead of a formal registration.
Extended regulations to short-term borrowings and stricter regulations on use of OLAs
Previously, the SBV only targeted long and medium borrowings with a term of more than one year by its registration regime. Following stricter requirements on use and management of OLAs, short-term borrowings have been for the first time brought under regulation.
The term OLA was first introduced under Circular 25. However, no specific requirements for these accounts had been set out, except that foreign-invested companies must use their direct investment accounts for this purpose. Circular 03 now expressly requires that any disbursement and repayment of an offshore loan be made through an OLA. This requirement is applicable to all types of borrowings, including short-term ones.
Circular 03 further provides that an OLA will be dedicated for the purpose of both disbursement and repayment (including reimbursement to a guarantor) of an offshore loan, as well as payment of transaction fees in relation to such a loan.
This means that the borrower will need another account to transfer the disbursement fund for further use or for the repayment amount to be used as remittance to the lender. As a result, the borrower will see a significant increase in transaction costs, especially if it needs a large number of short-term loans during its daily operations.
While a local borrower is allowed to open OLAs in more than one credit institution (thus minimising inter-bank transfers), the disadvantage to a foreign-invested company is obvious, since it may only use a single direct investment account for this purpose.
Thanks to the last-minute amendment under Circular 05, a foreign-invested company may now use an OLA other than its Foreign Direct Investment (FDI) Account to conduct short-term borrowing activities. However, as long- or medium-term loans must still be disbursed and repaid through a single FDI Account, these companies will continue to suffer from the disadvantages of less flexibility and higher costs associated with the transactions.
Credit institutions that provide OLA services may also find the new circular challenging to comply with, since it imposes additional duties on overseeing the offshore borrowing status of their clients other than periodic reports.
For instance, Circular 03 provides that, for the purpose of repayment of a guaranteed offshore loan, the guarantor must submit written confirmation from the credit institution that hosts the relevant OLA of the borrower as evidence that the loan has not yet been repaid.
Another provision stipulates the general obligation of a credit institution in disclosing details of any OLAs upon request, but not identifying from whom such a request may be made. This type of disclosure of a client’s information may not only be questionable under existing laws, but could also potentially conflict with the current internal rules of the institution.
In conclusion, while a certain relaxation of procedures is notable under Circular 03, the general control of the SBV over offshore borrowing has been tightened, with an extension to short-term loans and an additional burden of compliance on credit institutions. This new circular may be necessary for the SBV given the current pressures on the country’s forex reserves. However, from a business standpoint, it may lead to a significant increase in transaction costs for borrowers.
The SBV’s unprecedented move to amend Circular 03 with Circular 05 on the first day of the new circular’s implementation suggests that the regulations may need more time to be tested in practice. The issuance of Circular 05 with immediate effect is also questionable under existing procedural laws, which require a public consultation period of 60 days before and a rolling period of another 45 days after issuance.
