Lending limits: implications to foreign bank branches

One of the major Law on Credit Institutions’ biggest changes is to limit a foreign bank branch's

Mr Tony Nguyen

loan to a single borrower at 15 per cent of its legal paid-in capital. The provision has generated heated debate, not only between the foreign banks and the State Bank, but also between the ministries of Justice and Finance and within the National Assembly. EPLegal’s managing director Tony Nguyen provides an in depth analysis of the issue.

Under the old regulations the limit has been applied to the parent bank, which is rooted in Decision 457/2005/QD-NHNN. Until May, 2010 the same principle was still applied by Circular 13/2010/TT-NHNN. Ironically any provisions of this circular, effective on October 1, 2010, which are in contradiction to the new Law (including the 15 per cent limit) will cease to be applied as of January 1, 2011.

Many commentators suggested keeping the current structure of Decision 457/2005. However, as witnessed by the National Assembly Steering Committee, such a notion goes against the Vietnam’s World Trade Organisation (WTO) commitments as foreign bank branches from January 1, 2011 will be entitled to national treatment and will receive Vietnamese dong deposits in the same way as Vietnamese commercial banks do. Therefore, the limits applied to them must be the same to ensure credit institutions’ and banking system security. 

Secondly, the change in the National Assembly’s view will not have much impact on foreign banks’ operations in Vietnam because parent banks have the option to provide more finance to their branches or to provide direct offshore loans to Vietnamese enterprises. A compromising option was suggested whereby the limit was proposed to be based on “the provided capital, reserved funds, long-term loans of the foreign banks’ branches” in accordance with State Bank regulations. However, at the last minute this option was dropped and those branches are now treated in the same way as Vietnamese commercial banks.

Burdens on borrowers and lenders

From the borrower’s perspective it can be easily seen that big projects will no longer be able to seek onshore loans from the foreign bank branches. For example, in the recent case of Formosa Corporation’s steel complex project in central Ha Tinh province, the Taiwanese investor applied for a 15 per cent limitation exception under the new law because the loan required $2 billion per year and with such new limitation even a syndicate of all foreign banks’ branches in Vietnam together could not  provide enough finance for the project.

For the time being the investors may overcome this barrier by either applying for exception as Formosa did or converting all loans into offshore loans.

Regarding the lenders there are currently over 45 foreign bank branches in Vietnam and many believe that those branches will be heavily affected when the new law becomes effective. This impact is in fact dependent on the strategies of the foreign banks toward Vietnamese market. Foreign banks are complaining that under Decree 141/2006/ND-CP the legal capital of a foreign bank branch is $15 million, which means a branch having such paid-in capital can only finance a maximum $2.25 million to a single borrower. However, there is no limitation on, or prohibition of, a branch increasing its capital in Vietnam up to the amount sufficient to maintain their current loans.

While the limitations are quite straight forward, it is also notable that the new law provides some transitional provisions whereby the loan agreements signed before January 1, 2011 will continue to be effective until they expires (Article 161.4) and the credit institutions are given two years from the effective date of the new law to restructure their organisation to adapt with the new law (Article 161.2). These provisions seem very useful to foreign bank branches.

As clarified by the State Bank the limitations provided in the new law are of great significance to avoid the centralisation of capital in a single client or a group of clients having connections, as such to limit the risks associated with credit and banking activities of each credit institution as well as the whole system. It is difficult to tell if this is the best way to manage the credit institutions, but they are not new to international law. Similar general limitation rules can be found in the laws of the United States or China. Some commentators said the [unfair] limitation is a kind of protection for the local banks but in the light of Vietnamese commitments to the WTO the State Bank seems very prudent in proposing such limitation regulations in the new law.

Emergency exit

The new law (Article 128.6) has paved the way for the banks to exercise syndicates in case the loan amount required exceeds the limitation. As discussed above the syndicates between the foreign banks branches will not be sufficient for those large financing projects and in these cases the involvement of the parent banks will take a very important role. There are at least three obstacles associated with these syndicated loans. Firstly, where the syndicates include both local and foreign banks the practices, customs and standards applied by local banks and foreign banks are fairly different and it will take much time to harmonise them. Secondly, there are different and overlapping laws and regulations applicable to different documents of the facility which may increase the legal risk exposures of the foreign parties and thirdly local banks may not be wealthy enough to finance a number of extra-large projects in Vietnam especially with regard to infrastructure, ports and energy sectors. On the part of the foreign banks, the change to direct offshore loans will result in the imposition of foreign withholding contractor tax (WHCT) which will place another burden onto the borrowers.

A general suggestion to borrowers who are seeking direct offshore loans is that Vietnam has got double tax avoidance agreement (DTAs) with several countries such as China and France which allows the exemption of WHCT on banking services. The borrowers should look into banks from these countries as the first priority or to take those tax advantages into account when choosing the financiers. On the other hand, it is suggested for syndicate structures that all the members concerned in the financing project, including the lawyers and consultants should always work closely together and keep themselves involved from time to time. Syndicates always take long time and involve many people. The miscommunication and/or missing out some members during the process will cost more time and money for the whole project, which can be fatal for which under pressure of deadlines.

What lies ahead?

While the impact of the new law will not be witnessed until next year and there should be some time to see how the banks will adapt with the new limitations, the State Bank is working hard on a number of decrees to be passed shortly to provide guidance to the new law. It is submitted that those decrees should be carefully drafted and take into account reasonable comments and feedback of the banking sectors before adoption.

In short, there are several options the lender and borrower may consider:

(1) To provide syndicated loans as provided for by Article 128.6 of the new law, which may include branches, local banks and foreign banks

(2) To request for an exception to the government or State Bank but such a request will have a minimum chance of being satisfied, as the only provision they can base on is Article 128.7 which is only applicable in “special cases to carry out eco-social missions of Vietnam”

(3) To increase the capital of foreign bank branches to the amount sufficient for the single loans or syndicates.

While making a choice is not an easy task, the lenders and borrowers should carefully consider their finance capacity, their credit service strategies, taxation environment, the eco-social role of their project(s) as well as the potential risks and procedural burden in each case to make a wise and feasible move.