The State Bank of Vietnam (SBV) is currently preparing a draft to replace Circular 12/2014/TT-NHNN, which will then set conditions for foreign loans to companies that are not guaranteed by the government. This move by SBV has raised major concerns among investors as it will hurt cash flow into the stock market and even cause the market to decline.
capital from abroad
The VN Index recently posted a sharp drop of more than 24% in April, showing Vietnam as the largest stock market decline in the world. The reason for this decline is not only the negative influence of the world financial market, but also the drastic action taken by state administrative authorities in regulating the bond market and dealing with stock market manipulation.
However, the main reason that many securities professionals believe is the phenomenon of securities firm “call margin” taking place on a large scale. This comes as the total balance of margin loans hit a record level of VND201,176 billion in the first quarter of the year.
Previously, the boom in the stock market during the Covid-19 pandemic helped securities firms boost margin lending support services. At the same time, in addition to equity, investment firms also raised capital from credit institutions (CIs) to meet the capital needs of the market. Many investment firms have taken advantage of unsecured loans from foreign lending institutions and mobilized huge capital to supplement capital for operations.
Recently, on May 12, Viet Capital Securities Joint Stock Company (VCSC) issued a press release on the successful signing of a loan agreement with Megabank with a limit of USD 100 million, equivalent to VND 2,300 billion. Previously, VCSC had also successfully arranged two additional unsecured syndicated loans for $100 million in November 2021 and $40 million in May 2020.
In late March, Saigon Securities Corporation (SSI) also announced that it had completed the disbursement of a $148 million unsecured loan agreement. This is the largest foreign unsecured loan agreement entered into by a Vietnamese securities firm.
In 2021, SSI also had access to the largest source of unsecured foreign loans among securities firms at $267.5 million. Similar to VCSC and SSI, Ho Chi Minh City Securities Corporation (HSC) also signed an unsecured loan syndication agreement in December 2021 worth US$104 million, equivalent to VND2,374 billion. Previously, HSC had already signed two loans worth $50 million and $44 million.
Cheap flow of capital
Unsecured foreign loans have been made by the aforementioned Vietnamese investment firms over the past two years, and according to a survey, most of these loans came from Taiwanese banks. Although most foreign debt activity is regulated, too much cheap capital flow can easily create bubbles in stock markets and real estate companies within a country.
The risk of exchange rate fluctuations can also put pressure on the State Bank of Vietnam. It is therefore necessary for the SBV to change and supplement the conditions for foreign loans so that borrowers can control risks themselves and also take responsibility for any risks that arise. At the same time, it helps the State Bank of Vietnam to improve efficiency in market management and management.
For securities owned by a group of borrowers that are not credit institutions, the SBV added several conditions to guide the flow of credit, in addition to the general criteria for taking out foreign debt. Article 15 of the draft revised circular does not allow borrowers to take out short-term foreign loans, e.g. with maturities of less than one year, to be used to pay off loans with residents or to pay debts arising from the trading of securities or the purchase of contributed capital, and stocks of other companies.
According to this regulation, securities firms are not allowed to use short-term foreign loans to structure short-term domestic debt or engage in securities trading and investments, thereby restricting short-term speculation in the securities sector.
Article 15 of the revised Circular allows the borrower to use medium- and long-term foreign loans with a maturity of more than one year to restructure foreign loans and increase the size of the capital for legal production and business in accordance with the size of the licensed enterprises. Therefore, when a securities company uses medium and long-term foreign loans, it is not restricted in using capital for business purposes. This means they have full authority to use their capital to lend to clients through margin trading services, advance money for sale, or purchase their own securities in accordance with the law.
The aim of the State Bank of Vietnam is to use this additional regulation to adjust the term of the flow of foreign credit from short to medium-term and, in particular, not to allow short-term foreign credit to flow into highly speculative channels such as securities and real estate. Investment firms can continue to actively seek cheap foreign loans with a maturity of more than one year to service their operations, which is not restricted by the amended Circular 12. In addition, the regulation limits foreign borrowing to no more than three times the equity or charter capital is also a positive way to control the flow of debt of companies.