Circular offers strict level for bank risks

Circular offers strict level for bank risks

The State Bank of Vietnam (SBV) officially issued Circular No.11/2021/TT-NHNN on July 30, replacing a previous circular from 2013 on asset classifications, risk provisioning, and utilisation of provisioning by credit institutions and foreign bank branches – a move reflecting the central bank’s concerted efforts on handling soured loans.

At the same time, the SBV is also working with relevant parties to develop a comprehensive set of legal instruments to handle bad debts of credit institutions and foreign bank branches. Besides this, amendments to the previous legal framework on debt structure are also being seriously considered.

In the fresh Circular 11, the SBV added a new scope of regulations to require banks to classify and provision and risk of assets arising from activities such as buying and selling debt, government bonds, and selling valuable papers, as well as promissory notes, bills, and certificates of deposit and bonds issued by other credit institutions in Vietnam.

At the same time, the new circular also stipulates that all credit institutions are applicable, including commercial banks and non-banking credit institutions, except those under special control, such as Dong A Bank or GPBank.

“The frequency of debt classification and provisioning is increased, from a quarterly to a monthly basis, which allows the bank to deal with credit deterioration more aggressively and swiftly,” said Nguyen Quoc Hung, general secretary of the Vietnam Banking Association (VBA).

Hoang Viet Phuong, head of Research at SSI, however believed the fresh move would not bring about a significant change in bank risk management.

“Publicly-listed banks under our coverage, such as Techcombank and Vietcombank, have already classified outstanding loans and provisioning on a monthly basis,” Phuong told VIR. “However, from a general perspective, Circular 11 now acts as a document to ensure that the whole industry applies the same standards, with a stricter foundation for debt classification.”

In April, the SBV promulgated Circular No.03/2021/TT-NHNN, announcing additional conditions for debt restructuring and extending the roadmap for restructuring debts provisions until 2023. Specifically, the SBV enables credit institutions to reschedule debt repayment terms for incurring repayment obligations from January 23 to the end of this year.

After a few months of application, Hung of the VBA admitted that Circular 03 has not yet provided permission for credit institutions to freeze debts without interests for restructuring, and the debt freezing mechanism without charging additional interests is only applicable for agricultural and rural development loans.

Elsewhere, the SBV has lifted credit growth limits in 2021 for some banks with an increase of 2-6 per cent.

Phuong of SSI expected the SBV to extend the credit limits at the end of this quarter or the beginning of the next. The increased credit growth limit will create favourable conditions for commercial banks to reduce lending interest rates.

“Given the complicated developments of the pandemic in this country, we do not exclude the scenario that the SBV will loosen monetary policy more by reducing interest rates or the required reserve ratio, in the case that inflation is still under control. This is also a trend that global central banks are picking up, particularly under the adverse impact of the Delta variant,” she noted.

Besides new legal conditions, the upcoming bad debt exchange platform from Vietnam Asset Management Company (VAMC) is being viewed as a promising legal intermediary which can effectively deal with bad debts.

Doan Van Thang, general director of VAMC, acknowledged this platform will connect buyers and sellers professionally, with the joint efforts from 23 credit institutions in the country. In 2017, the National Assembly passed Resolution No.42/2017/QH14 on the pilot settlement of bad debts of credit institutions, applicable to debt arisen and considered as soured before August 15, 2017.

It is only a pilot with short validity period of five years, thus the legal corridor does not apply to handling all bad debts in the long term. With the end of the pilot set for next year, VAMC’s debt exchange is part of its plan to restructure and improve capacity towards 2022.

“However, during the implementation process, VAMC found that there were still obstacles in law enforcement related to debt settlement activities such as seizing collateral, applying simplified procedures to resolving disputes related to collateral at courts, and tax policies that have not actively supported the process of handling collateral for bad debt recovery,” Thang said.

Vietcombank Securities explained, “If the coronavirus pandemic is not controlled soon, the entire banking industry will face the risk of bad debt in the next period, which will affect profits in the years afterwards.”