How Circular 03 on debt rescheduling and rates exemption affect to Vietnamese banks

On April 2, the State Bank of Vietnam (SBV) officially 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 debts incurring repayment obligations from January 23, 2021 to the end of this year.

Nguyen Thi Phuong Thanh, financial analyst at VNDIRECT

Previously, in last March, the SBV issued Circular No.01/2020/TT-NHNN directing credit institutions and foreign bank branches to restructure their repayment periods, waive and reduce interest rates and fees, and maintain debt classifications in order to support customers affected by the COVID-19 pandemic.

Circular 01 only allows restructuring for debts which have payment obligations from January 23, 2020 to three months after the date that the prime minister announces pandemic termination. Those conditions imposed difficulties for credit institutions on identifying eligible debts for restructuring and tracking for accounting purposes since the base date may not overlap the banks’ accounting period.

Besides that, the SBV also maintains the regulation that the period to restructure the repayment term does not exceed 12 months from the date the credit institution implements the restructuring process. The debt payment rescheduling will be executed until December 31, which means the deadline for all the restructured debts to expire will be at the end of 2022.

Regarding debt classification, Circular 03 stipulates that those restructured debts will maintain their debt categories instead of applying the general rules for overdue debts. However, to avoid a “profit shock” at the end of the restructuring period, banks are required to start making provisions in accordance with the nature of those outstanding loans.

Specifically, according to the revision, the amount of provision charged is the difference between the provision of the loan balance when there is no restructuring and of the loan balance when being restructured. The provision rate is at least 30 per cent of the total additional provision due at December 31, 2021 and then increases to at least 60 and 100 per cent by 2022 and 2023, respectively.

We believe that the issuance of Circular 03 will support companies in recovering business lines as well as reducing the pressure on provision for commercial banks. On the side of companies, the implementation of additional conditions regarding debt restructuring will allow companies to make loans for production purposes, especially when the loan’s repayment terms are extended, reducing financial cost pressure during the recovery period post-pandemic. On the side of commercial banks, we believe that Circular 03 will release the pressure regarding provisions for commercial banks over the period of 2021-2023.

In our opinion, banks’ debt restructuring portfolios will slightly increase in 2021 as restructuring conditions are expanded. However, the impact on asset yields is minimal. In fact, since the end of 2020, several commercial banks have ceased debt restructuring portfolio expansion in fear of conditions regarding repayment time from Circular 01.

As of November 2020, all credit institutions have rescheduled the repayment period for over $1.5 billion of outstanding loan books, recording a modest increase from $1.4 billion in mid-September.

We think that further regulation regarding allocating bad debt provisioning over the period of three years will reduce provision pressure for banks, especially in 2021. Circular 01 stipulates that credit institutions will perform debt reclassification and set up provision according to the restructuring timeline, which means credit institutions will have to make provision as usual when the restructured debts expire.

Such regulation creates pressure on provision expenses for commercial banks with a huge amount of restructured debt balances such as BIDV, VPBank, and HDBank by the time their debts’ interest repayment extension expires (in 2021 according to the guide).

However, by loosening the schedule for provision, we expect that the provision cost will not increase too substantially in 2021, thereby creating room for commercial banks’ retained earnings growth, supporting capital safety and promoting lending activities for business.

Assessing the impact of Circular 03 on commercial banks’ activities in Vietnam, we project commercial banks which have high debt restructuring values or high credit cost will be the most beneficiaries from the revision, such as VPBank and BIDV.