- What are your observations regarding the borrowing trends within the Vietnamese market currently and for the next 12 months?
After a low-slung 2022, offshore borrowings turned around and there was an uptick in activity in 2023. Offshore borrowings by the private sector in 2023 reached around 26% of GDP, surpassing 2021’s figure of 23%. The FDI segment remains key, taking most of the big ticket borrowings. For example, there were several construction financings in 2023, like the financing for the construction of the largest water purifier production facility in Vietnam by Kangaroo International JV. The momentum is expected to continue through the end of the year, as many FDI companies make efforts to come back as the world recession improves.
- How does the regulation of offshore borrowing compare to that of onshore borrowing in Vietnam?
Offshore borrowing is regulated differently than onshore borrowing in a number of aspects. The government regulates offshore borrowings mainly from the perspective of managing the volume of foreign currency inflows and outflows.
One key difference is offshore loans must be used for a limited number of specific purposes, for example, as one of the permitted purposes, an offshore loan can only be used to refinance an existing offshore debt (not an onshore debt) of the borrower. Generally, medium or long-term offshore loans (having a tenor of more than 12 months) may only be used to finance investment projects and business plans of the borrowers.
The most important difference is that a medium or long-term offshore loan must be registered with the central bank (called the State Bank of Vietnam or SBVN). An offshore loan that has a short term of 12 months or less is not required to be registered, but if it is extended beyond the first 12 months, it will then have to be registered.
Of note, borrowing from any party offshore, whether from a foreign bank or a non-bank foreign entity, is regulated in the same way. On the other hand, regulations on onshore borrowings only target local banks.
- How significant is the registration process for an offshore loan?
It plays a very significant role, indeed. As mentioned above, a medium or long-term offshore loan must be registered with the State Bank of Vietnam. To elaborate, the registration needs to be made before the loan can start drawing down. Local banks are required to make sure that the registration is in place in order to release the first drawdown. Very importantly, registration is the utmost basis for the borrower to remit money to repay the loan. If an offshore loan is subject to registration, the borrower will be asked to present records of registration in order to remit money for loan repayment. Without registration, local banks are not allowed to process a remittance request.
The process of registration with the State Bank of Vietnam is not very cumbersome. But it is important to present clearly in the registration dossier crucial terms of the offshore loan that the regulator is typically attentive to.
It is important to emphasize here that if one misses registering the loan, and they later discover that they should have registered the loan, then making the registration late will not be straight forward. A sanctioning process would first be invoked by the SBVN to look into the non-compliance and to impose administrative penalties. In some cases, this process gets wider and deeper, not only touching the non-compliance at hand, but also comprehensively inspecting the company’s records of compliance with foreign exchange regulations. Only after the sanctions or penalties are settled, would the SBVN resume consideration of the company’s application for registration of its offshore loan. It will cost considerable time and effort of a non-compliant borrower.
- Is it feasible to secure an offshore loan with locally based assets?
Most assets located or based in Vietnam can be used to secure offshore loans. Offshore lenders can take moveable assets in Vietnam, such as shares, bank accounts, receivables, machinery and equipment, and the like as collateral. The law recognizes the right of an offshore lender to receive security enforcement proceeds from Vietnam, as long as the money is remitted through a designated local bank (which needs to be specified in the SBVN registration of the offshore loan).
Even though registration with the national security transaction registrar is not required as a prerequisite for a security interest to take legal effect, security interests are ranked based on the order of registration. A security interest that is registered first in time has the highest ranking over security interests on the same assets which are registered later.
Land, factories, buildings are all high valued collaterals that many offshore lenders are willing to take. This is possible, legally, but requires creative structuring. In principle, land and assets attached to land can only be encumbered to local banks. Strictly speaking, because an offshore lender is not entitled to take security over land and landed properties in Vietnam in the first place, it would not be able to appoint a local bank to act merely as a security agent to hold the security. A typical arrangement is to involve a local bank for a back-to-back (but separate) onshore loan such that the onshore loan is secured by land and/or assets built or to be built on the land. With that, the offshore lender can be the indirect, secondary beneficiary of the land security through certain arrangements with the local bank and the borrower. There are different pieces that need to be assembled.
- For companies doing business in Vietnam, what are the typical legal and practical challenges associated with offshore borrowing?
Utilizing offshore borrowings comes with various compliance requirements.
The first and foremost is the requirement to register an offshore loan with the State Bank of Vietnam if the circumstances require registration. In our experience, it is not rare that companies are not aware of the registration requirement, especially when they borrow from parties other than banks, such as their foreign investors, partners, etc. It has become common that an offshore loan is originally given with a written term of less than one year to skip the registration requirement (due to an urgent funding need), and the parties agree to extend the loan after one year say, without registering it with the State Bank (or without knowing that the extended loan needs to be registered then). As explained above, this can cause serious issues later when the loan needs to be paid back.
Then there will be periodic reporting requirements to be complied with. Borrowers need to file periodic reports to the SBVN, showing how their offshore loans are being implemented, among other things. Even if a company borrows a short-term loan from offshore and does not need to register the loan with the SBVN, it is still required to file a monthly report about this loan with the SBVN. This reporting obligation is more often than not left ignored, which could affect the company’s foreign exchange compliance record.
- What is Vietnam’s regulator’s attitude toward offshore borrowing?
The government has a much closer watch on offshore borrowing by the public sector than by the private sector. While managing to keep offshore borrowing by the public sector under control, the regulators do not try to overly restrict offshore borrowing in the private sector, even though it has increased its scrutiny over offshore borrowing practices and compliance. The SBVN has become more familiar with offshore lending terms, and does, in fact, check key commercial terms closely upon registration.
However, generally speaking, it can be said that the SBVN has become more facilitative. Registration applications are processed efficiently, most of the time. Several formalities that used to be required by the SBVN have been relaxed or simplified.
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