Offshore loan rules sharpened with draft

June 04, 2022 | 15:48
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While the State Bank of Vietnam’s forthcoming tight restriction on offshore loans which are not guaranteed by the government underscores local authorities’ commitment to maintain safe external debt and minimise risks, it could also leave cash-squeezed businesses high and dry.
Offshore loan rules sharpened with draft
Photo: Le Toan

The State Bank of Vietnam (SBV) last week solicited feedback from relevant parties about a draft circular stipulating criteria on limiting foreign loans for risky sectors, especially loans which are non-guaranteed by the government. Accordingly, Vietnam’s credit institutions and businesses have been taking advantage of the global low lending rate environment for the past two years, which has led to significant offshore loans.

“This in turn has led to the risk of surpassing the annual government-imposed limit of medium and long-term offshore balances held (with a ceiling limit of $7.3 billion for 2022), as well as exceeding the target growth of short-term foreign loans (25 per cent on-year in 2022),” said Trinh Thai, an analyst at SSI. “The draft circular addresses this in order to maintain safe external debt thresholds by controlling forex outflows, and also limiting systematic risks for high-risk sectors such as real estate trading and investment, mergers and acquisitions, and more.”

The SBV noted that businesses “should be regulated not to borrow short-term loans for high-risk objectives from overseas lenders”. The forthcoming circular aims to enhance businesses’ risk management efficiency, while putting a priority on focusing foreign loans on production sectors and businesses that are critical to the economy, it added.

Besides overall improvement on the general rules such as definitions and required content in borrowing plans in order to access offshore loans, the draft does not exclude state-owned commercial banks (SOCB) including Vietcombank, VietinBank, BIDV, and Agribank, as is the case in the SBV’s Circular No.12/2021/TT-NHNN issued last July specifying the trading of promissory notes, treasury bills, deposit certificates and bonds between credit institutions and foreign bank branches in Vietnam. It implies those four SOCBs must meet statutory financial prudence benchmarks as a condition for obtaining offshore loans for credit institutions.

A lending rate ceiling has been set in the draft, which is either composed of the reference rate plus 8 per cent, or secured overnight finance rate plus 8 per cent for foreign currency-denominated loans, or the 10-year government bond yield plus 8 per cent for VND-denominated loans. It implies the maximum lending rate that borrowers will bear, broadly ranging around 10 per cent at current market rates. The draft also adds a clause requiring borrowers to hedge exchange rate risk via derivative tools, excluding credit institutions and borrowers who can demonstrate adequate forex inflows. Borrowers must hedge risk by covering at least 30 per cent of the credit balance (of over $500,000). Those requirements might burden the funding cost for borrowers, but on the other hand, banks might benefit from additional forex derivative income streams.

Market watchdogs believed that the new circular would leave a huge impact on both banks and non-bank enterprises as well.

Thai of SSI noted that for banks, offshore borrowings must be used to fund operating needs or to restructure the borrower’s existing offshore loans. In terms of borrowing limits, particularly short-term offshore borrowing, starting in 2023, the balance of offshore loan obligations must not exceed 25 per cent of total capital (Tier 1 and Tier 2 capital) for credit institutions, and not exceed 100 per cent for branches of foreign banks.

“Starting in 2024, this ceiling is lowered, and such a balance must not exceed 20 per cent of total capital (Tier 1 and Tier 2 capital) for credit institutions and 80 per cent for branches of foreign banks. In actuality though, such proposed requirements would have limited impact on banks overall,” Thai said. “For existing short-term borrowing, the bulk of these obligations will expire soon and therefore banks which currently have this ratio over the cap might choose not to roll over before the effective date of the draft if approved.”

In terms of long-term offshore borrowing, new borrowing and repayments during the year must not exceed 10 per cent of total capital for commercial banks and 50 per cent for non-bank credit institutions.

Such borrowing is not applicable for issuing Tier 2 bonds. Yet within 2021, Techcombank, VietinBank, VPBank, and small and medium-sized banks such as HDBank, OCB, MSB, and VIB borrowed from offshore institutions to save on funding costs (with a total lending rate of around 4 per cent) thanks to the low-rate environment at the time.

A fortnight ago, HDBank inked an MoU with the International Finance Corporation to build its supply chain finance portfolio of $1 billion in the next three years.

For other non-bank enterprises, the draft circular tightens the permitted purposes of the use of short-term loan proceeds. Short-term offshore loans could be used to finance short-term debt, but are not permitted to be applied for onshore debt and/or debt arising from securities or real estate trading, capital contribution to other companies, and financing for project transfer.

Securities brokerages (which stand out as one of the most active short-term borrowers in the market) might be partly impacted, as these firms might encounter difficulties when they want to fund their prop trading activities.

In terms of borrowing limits, an additional clause is added to medium and long term borrowings, in which medium and long-term debt (including planned offshore loans and onshore debt) must not be in excess of three times owners’ equity (or charter capital, depending on which one is higher). Companies operating in the electricity or aviation sector therefore might need to reconsider their debt structure in order to execute offshore borrowings in the future.

Overall, the current situation is quite fluid and rapidly changing. Divergence in monetary policy between Vietnam and other countries has led to a divergence in lending rate trends. The global rate environment might have bottomed out if the Fed maintains a rate hike resolution in the US, whereas the lending rate in Vietnam remains rather stable. This has rendered offshore borrowings currently less attractive than previously.

Further, rising global USD strength has also put pressure on the VND, which has already depreciated 1.5 per cent year-to-date, which brings an added degree of exchange rate risk to the equation.Source: SSI

By Luu Huong

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