LEGAL UPDATE: Did you know that the temporary lift of the ban on borrowing in foreign currency for use domestically has been extended to the end of 2017 but only if you are an exporter and provided that you meet certain conditions?

Up until May of this year, the State Bank of Vietnam imposed a ban on the borrowing of foreign currency by companies in Vietnam for use domestically.

The reason for the ban was that this practice was abused by borrowers that, in fact, did not need foreign currency for their businesses and had no foreign currency revenues. They were borrowing in foreign currency to sell to banks in VND to benefit from the interest rate gap as VND loans have much higher interest rates than USD loans. When foreign currency rates fluctuate they would rush to buy to repay the foreign currency loans. This put pressure on the exchange rate. In addition, the ban was also part of the policy to de-dollarise the economy.

However, in May of this year, the State Bank of Vietnam (SBV) lifted the ban and allowed banks to lend short-term (less than 1 year) foreign currency loans to exporters that need foreign currency for use in Vietnam for their production and trade through Vietnam’s border gates.

The lifting of the ban was to help exporters cut costs and enhance competitiveness since USD loans (currently 3%) have a much lower interest rate than VND loans (currently 5-6%).

The ban, however, was lifted only temporarily until the end of this year. This would mean that exporters would have to repay their loans by 31 December of this year. It appears that many would not be able to do so.

To that extent, on 15 November, the SBV decided to extend this to 31 December 2017, provided that exporters meet the following conditions:

1. They must have sufficient foreign currency from their export activities to repay such loans;
2. On disbursement, the foreign currency has to be converted to VND on a spot basis if payments are to be made in Vietnam, unless such payments are within the exceptions where payments in foreign currency are allowed to be made domestically.

The reason for the extension was to support local enterprises given this year's adverse weather conditions and impacts on businesses caused by the environmental pollution in the central provinces.

Circular 31/2016/TT-NHNN (valid as of 1 January 2017)

DN Legal (21 November 2016)