Restrict foreign currency loans: Why has it not been implemented yet?

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The remaining policy on foreign currency loans will conflict with the policy on USD deposit interest rate of 0% per year

Continue to extend

This regulation in draft has amended and added some articles of Circular No.24/2015/TT-NHNN dated 8-12-2015 of the Bank Governor regulating loans by foreign currencies of credits organizations, foreign banks’ branches for borrowers who are residents.

Accordingly, short-term loans are to meet the needs of short-term capital for performance of production and business projects of goods exported through Vietnam borders of borrowers who have foreign currency revenue from exports enough to pay the loans. When the credit organizations and foreign bank branches disburse the loans, borrowers have to sell those foreign currency loans for these credits organizations and foreign bank branches under foreign exchange arrangements, unless the demand on capital borrowing of customers is to perform the payment transaction in foreign currency prescribed by law. This regulation will be applied until 31 December 2017.

This Circular is intended to replace Circular 07/2016/TT-NHNN, amends and adds some articles of Circular 24/2015/TT-NHNN regulating loans by foreign currencies. In which there have been regulations on allowing an exporting business group to borrow loans in foreign currencies until 31 December 2016, replaces the regulations on suspension of foreign currency loans at Circular 24/2015/TT-NHNN of 31 March 2016.

After these restrictions, the Commercial Banks will stop the loans by foreign currencies to move to the pure trade of USD except for some typical groups. According to the explanation of the SBV, this group that borrows foreign currencies to meet the demand on domestic capital for performance of production and business projects of exporting goods, only wants to borrow the foreign currencies and then buy them to get the difference of the high interest rates because in fact they only have demand on VND rather than foreign currencies.

In March 2016, at a Seminar, the Director of the Monetary Policy Department (SBV), Mr. Bui Quoc Dung said that, because the former economy grew slowly, the demand on the market was low; the SBV supported this group to borrow capitals to enjoy the low interest rates, and then sell VND to meet the domestic capital need. However, when the economy is rehabilitated, the demand on foreign currencies increases, so in the roadmap of “dollarization” prevention, it is necessary to gradually change from borrowing relation into trading relation, moreover, the adjustment of exchange rate decreases the benefits from interest rate difference.

However, the explanation of the management authorities is not approved by businesses for example the Vietnam Association of Seafood Exporters and Producers (VASEP) said that many exporting countries have competed with Vietnam by devaluation of the local currency to promote the discount on the price of exporting goods. Moreover, the significant difference on interest rates between foreign currency with VND and exchange rate fluctuations will push product’s prices of Vietnam’s Enterprises higher, which reduces competitiveness.

Therefore, Circular 07/2016/TT-NHNN stated that this regulation will be implemented by the end of 2016 and this draft will continue to be extended one more year to carry out the next targets of the Government on removing difficulties for enterprises in production and business

Regulation becomes law?

Many experts disagree that the SBV has extended the restriction on foreign currency loans so many times because previously the SBV also issued many circulars like this. According to Lawyer, Mr. Truong Thanh Duc, Chairman of Bank Legislation (Vietnam Banks Association), Chairman of the Board of BASICO Law Firm, the SBV should consider to come to uniform regulations, extension for one or two times is acceptable but extension for nearly ten times will make the enterprises disregard the observance of law. Thus, the SBV should either absolutely forbid or make a roadmap of foreign currency loans for 3-5 years even 10 years and then come to full restriction

Besides, Lawyer Truong Thanh Duc also said that the restriction on foreign currency loans should be prescribed in law or decree to be in accordance with the market economic law as well as regulations in the new Investment Law and Civil Procedure Code, etc. These codes shows that all that restricts the rights of citizens and enterprises must be prescribed clearly in law. So the restriction on foreign currency loans is also considered as a prohibition in business, it should be defined clearly, if the content is not specified clearly, there must be a certain expression in the law. The SBV has issued vague circulars for many years so it does not make a definitive element of law.

On the other hand, together with prescribing as law, many experts noted that, the SBV has been eligible for absolute prohibition of foreign currency loans. Because at present, the economy has many difficulties but with directions of the Government, the financial–monetary market is still quite stable and the fluctuation of foreign currencies is trivial. The SBV has bought more than 40 billion USD as foreign currency speculation. Especially, the remaining policy on foreign currency loans will conflict with the policy on USD deposit interest rate of 0% per year.

According to Dr. Nguyen Duc Do, the Deputy Director of the Institute of Economics and Finance, applying ceiling interest of 0% is a positive mechanism to limit the hoarding and speculation of foreign currencies. Yet, together with this mechanism is refusal for loans by USD. This makes the enterprises lose the capital source with low interest, theoretically, USD deposit interest of 0% will decrease the demand on USD and Banks will no longer have USD to lend. Additionally, the above conflict makes advantages for banks to dodge the law for profits.

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In conclusion, although all the State’s policies are to facilitate the Company’s production and business, the issuance of policies must be in compliance with real situations and other related regulations. The extension of the regulation so many times would be a “double-edged sword”, so the definitive and uniform of competent authorities are very necessary.