Legal provisions on on-lending of foreign loans

I. Current landscape of on-lending of foreign loans

On-lending of foreign loans refers to the reallocation of funds borrowed by the Government from international sources to domestic organizations and enterprises. Currently, this mechanism plays a pivotal role in financing socio-economic development projects, particularly in infrastructure and industrial sectors. However, in practice, such an activity faces several challenges, such as protracted approval procedures, limited financial capacity of on-lending borrowers, and ineffective risk management.

Moreover, certain on-lending entities fail to strictly comply with applicable legal regulations, resulting in public debt risks and inefficient use of capital. Therefore, improving the regulatory framework and enhancing legal support is essential to boost the efficiency of on-lending activities.

II. Legal regulations on for on-lending of foreign loans

1. Definition of on-lending of foreign loans

On-lending of foreign loans refers to a form whereby the Government or its authorized agency utilizes foreign-sourced loans to provide re-lending to domestic organizations and enterprises. This serves as a connection between international capital and domestic development projects, typically applied to strategically significant initiatives aimed at promoting socio-economic growth.

Such an activity is conducted on the basis of a loan agreement between the re-lender (commonly the Ministry of Finance or an authorized agency) and the re-borrower. The agreement stipulates terms including the purpose of the loan, loan term, interest rate, and repayment obligations. Beyond financial support, on-lending ensures that projects financed by foreign loans are subject to oversight and implemented effectively.

2. Main features of on-lending of foreign loans

- Foreign-sourced capital: On-lending capital originates from loans received by the Government or authorized agencies from international financial institutions, foreign banks, or foreign partners.

- Intermediary role: The Government acts as an intermediary, transferring international loan capital to domestic organizations and enterprises through on-lending agreements.

- Borrower restrictions: Eligible re-borrowers are typically large-scale enterprises, public entities, or private organizations that meet the financial capacity and intended use criteria.

- Strategic objectives: This form is usually reserved for projects that contribute to national development, such as infrastructure, energy, or healthcare.

- Strict legal compliance: On-lending must adhere to domestic legal regulations and conditions imposed by the foreign lenders, ensuring transparency and debt repayment capability.

3. Important notes on on-lending of foreign loans

Pursuant to Clause 3, Article 36 of the Law on Public Debt Management 2017, enterprises seeking to receive on-lending of ODA or concessional foreign loans must satisfy all of the following conditions:

- Being a legal entity, lawfully established in Vietnam, and have operated for at least three (03) years;

- Having an investment project approved by competent authorities to utilize loan capital and have completed investment procedures in accordance with applicable laws;

- Possessing a viable financial plan appraised by competent authorities in accordance with Article 38 of the Law on Public Debt Management 2017;

- Having a debt to equity ratio not exceeding 03 times according to the financial report of the most recent year compared to the year of appraisal;

- Not having incurred losses for the three (03) consecutive most recent years, except for losses resulting from the implementation of State policies approved by competent authorities;

- Not having overdue debts at the time of the re-lending request;

- Providing adequate loan security as required by law.

III. Questions on on-lending of foreign loans

1. Who is eligible to receive on-lending of foreign loans?

According to Clause 1, Article 33 of the Law on Public Debt Management 2017:

- Eligible re-borrowers of ODA loans and concessional foreign loans include:

+ Provincial People’s Committees;

+ Public service units;

+ Enterprises.

- Re-lending agencies include the Ministry of Finance; State policy banks, credit institutions authorized by the Ministry of Finance to conduct re-lending activities. 

Accordingly, the current eligible entities for on-lending include:

+ Provincial People’s Committees;

+ Public service units;

+ Enterprises.

2. Factors affecting the on-lending term 

Several factors influence the duration of on-lending arrangements, including:

+ Loan agreements among parties: The on-lending term is typically defined in loan agreements between the relevant parties, based on the terms and repayment schedules of the original loan.

+ National policies: Domestic legal frameworks (e.g., public debt regulations and borrowing limits) may affect the on-lending duration and the Government’s or entities’ repayment capacity.

+ International financial market conditions: Global interest rates, financial market volatility, and macroeconomic trends can directly impact debt servicing capability and loan duration.

+ Repayment and renegotiation mechanisms: If the borrowing country has difficulty repaying its debt, there may be renegotiations of repayment schedules, extensions of loan terms, or adjustments to interest rates.

+ Domestic economic and political conditions: Factors such as economic growth, political stability, and public finance status also influence on-lending eligibility and repayment terms.

+ International commitments and obligations: Participation in international loan agreements or financial institutions may impose specific requirements concerning on-lending duration and repayment responsibilities.

3. Can foreign enterprises receive on-lending of foreign loans?

Pursuant to Article 33 of the Law on Public Debt Management 2017, eligible re-borrowers include: Provincial People’s Committees, public service units, and enterprises. Foreign enterprises are not included in this list.

Furthermore, Article 36 provides detailed conditions for enterprises to qualify as re-borrowers. Accordingly, enterprises must:

- Being a legal entity, lawfully established in Vietnam, and have operated for at least three (03) years;

- Having an investment project approved by competent authorities to utilize loan capital and have completed investment procedures in accordance with applicable laws;

- Possessing a viable financial plan appraised by competent authorities in accordance with Article 38 of the Law on Public Debt Management 2017;

- Having a debt to equity ratio not exceeding 03 times according to the financial report of the most recent year compared to the year of appraisal;

- Not having incurred losses for the three (03) consecutive most recent years, except for losses resulting from the implementation of State policies approved by competent authorities;

- Not having overdue debts at the time of the re-lending request;

- Providing adequate loan security as required by law.

Accordingly, foreign enterprises established abroad do not qualify for re-lending under the above criteria, as they fail to meet the legal entity establishment condition in Vietnam.

Thus, foreign enterprises are not eligible to receive on-lending of foreign loans under current legal regulations.

IV. Legal advisory services on on-lending of foreign loans

The above is a comprehensive overview provided by Ngoc Phu Law Firm (NPLaw) to support clients regarding the on-lending of foreign loans. Should you have any further questions on the above matter or other legal concerns, please do not hesitate to contact NPLaw for direct consultation and assistance.