Credit institutions asked to deal with bad debts

Recently, Governor of the State Bank of Vietnam (SBV) Nguyen Van Binh issued Document 8421/NHNN-TTGSNH on the implementation of the Prime Minister’s directives detailed the Decision 843/QD-TTg dated May 31, 2013 approving the two projects of "Dealing with bad debts of the credit institutions system" and "Establishing the Vietnam Asset Management Company".

Based on this document, the SBV has called for credit institutions (CIs) to develop and implement plans to settle bad debts and improve credit quality in the 2013-2015 period (part of the overall plan to restructure credit institutions), following the spirit of Decision 254/QD-TTg dated March 1, 2012 (Decision 254) and Decision 843/QD-TTg (Decision 843) dated May 31, 2013 of the Prime Minister.

The objective is by the end of 2015, the current bad debts will have been basically cleared, credit quality effectively controlled and enhanced, successfully complete the objectives from the project "Restructuring the credit system 2011-2015" issued under the Prime Minister’s Decision 254 and the project "Dealing with bad debts of credit institution system" issued under the Prime Minister’s Decision 843.

The Governor has called for banks to assess bad debts and credit quality in 2011, 2012 and the first six months of 2013, including bad debts of credit level, bad debts from buying corporate bonds, fiduciary bonds and credit; bad debts divided into groups, collateral value and provision for risk corresponding to each group; bad debts with collateral (real estate and future real estate, commodities and other collateral) and without collateral; bad debts classified by customers of the State level (State-owned enterprises, including bad debts of state corporations and other businesses), individuals or households; bad debts classified by industry; bad debt incurred by affiliates, transaction offices, branches and units of CIs.

In addition, Vietnamese banks have also been required to perform analysis and evaluation on bad debts’ data and structure at the time of June 30th 2013 based on following classifications: bad debts defines under Decision 493/2005/QD-NHNN dated April 22, 2005 and Decision 18/2007/QD-NHNN dated April 25th 2007, but not under Decision 780/QD-NHNN dated April 23, 2012 of the SBV Governor; bad debts defined under Circular 02/2013/TT-NHNN dated January 21, 2013 of the SBV Governor (Circular 02) on asset classification, provision and provisioning method, as well as using reserves to handle risks in banking activities of CIs and foreign banks’ branches.

CIs also need to review, produce statistics, assess the status of loans including interest due but not paid which is added to the loan, in which clearly report the total debts classified in Group One, Group Two and other groups; loans for interests. CIs must evaluate accurately the level of risk of those aforementioned loans, financial situation and business activities relating to them.

Especially, CIs should propose solutions to deal with estimated bad debts in accordance with Circular 02 and Decision 843, estimate removable bad debts for each solution and each year up to 2015, including loans sold to the Vietnam Asset Management Company; solutions and plans to deal with bad debts of affiliates, branches and units of credit institutions.

In terms of improving credit quality, CIs need to develop measures to enhance the quality of appraisal and lending decisions (including changes in credit conditions, record, process, procedure, process of credit appraisal and approval, responsibilities of individuals and units in the process); measures to strengthen monitoring to guarantee loans are used for the purposes stated in the credit agreements.

Finally, the Governor requires CIs to introduce measures to strengthen internal inspection and control as well as internal audit of credit quality (for example proposing changes in internal control rules, inspection content and procedures, inspection before, during and after the credit approval); methods to handle illegal loan or loan posing a risk to CIs: classify, accounting these kind of debts in accordance with the law; to closely supervise the restructuring and handling; to create mechanisms which help prevent the arising of these kind of debts; and to stop providing illegal loans.

Source: VNA