THE STATE BANK OF VIETNAM
Circular No. 02/2013/TT-NHNN of January 21, 2013, providing the classification of assets, risk provisioning levels and methods and use of provisions for handling risks in operations of credit institutions and foreign bank branches
Pursuant to June 16, 2010 Law No. 46/2010/QH12 on the State Bank of Vietnam;
Pursuant to June 16, 2010 Law No. 47/2010/QH12 on Credit Institutions;
Pursuant to the Government’s Decree No. 96/2008/ND-CP of August 26, 2008, defining the functions, tasks, powers and organizational structure of the State Bank of Vietnam;
After reaching agreement with the Ministry of Finance;
At the proposal of the Chief Bank Inspector-Supervisor;
The State Bank Governor promulgates the Circular providing the classification of assets, risk provisioning levels and methods and use of provisions for handling risks in operations of credit institutions and foreign bank branches.
Chapter I
GENERAL PROVISIONS
Article 1. Scope of regulation
1. This Circular provides the classification of assets, risk provisioning levels and methods and use of provisions for handling credit risks in banking operations regarding the following assets (below referred to as loans):
a/ Loans;
b/ Financial leases;
c/ Discounts and rediscounts of negotiable instruments and other valuable papers;
d/ Factoring;
dd/ Credit facilities in the form of issuance of credit cards;
e/ Amounts payable on customer behalf according to off-balance sheet commitments;
g/ Amounts for purchase and entrusted purchase of corporate bonds unlisted on the securities market or unregistered for trading on the trading market of unlisted public companies (Upcom) (below referred to as unlisted bonds), excluding entrusted capital sources for purchase of unlisted bonds whereby the entrusting parties bear risks;
h/ Entrusted credit facilities;
i/ Deposits, other than those for payment, at domestic credit institutions and Vietnam-based foreign bank branches as provided by law, and at foreign credit institutions.
2. Guarantees, payment acceptance and irrevocable lending commitments (below collectively referred to as off-balance sheet commitments) must be classified in accordance with this Circular for management and supervision of the quality of credit extension activities of credit institutions and foreign bank branches.
3. The setting aside and use of provisions for devaluation of stocks, provisions for loss of financial investments and the provision for loss of bad receivable debts, except the amounts specified in Clause 1 of this Article, must comply with law.
Article 2. Subjects of application
1. This Circular applies to:
a/ Credit institutions, including commercial banks and non-bank credit institutions;
b/ Foreign bank branches.
2. Foreign bank branches that apply risk provisioning policies of their foreign banks in the classification of loans and off-balance sheet commitments, setting aside and use of provisions to handle risks must obtain approval of the State Bank of Vietnam (below referred to as the State Bank) on the condition that such risk provisioning policies are more advanced and better than those provided in Article 6 of this Circular. Dossiers, order and procedures for obtaining the State Bank’s approval of application of risk provisioning policies of foreign banks are specified in Clauses 3 and 4, Article 11 of this Circular.
3. Foreign bank branches that have obtained the State Bank’s approval of application of risk provisioning policies of their foreign banks before the effective date of this Circular and those obtain the State Bank’s approval of application of risk provisioning policies of their foreign banks under Clause 2 of this Article shall implement regulations of these foreign banks. In the course of inspection and supervision, if the State Bank assesses that risk provisioning policies of a foreign bank cannot fully reflect the level of credit risks in practical banking activities in Vietnam, the State Bank may request its branch to classify loans and off-balance sheet commitments, set aside and use provisions to handle risks under this Circular.
4. During the time of implementation of restructuring, consolidation or merger plans, credit institutions that face difficulties in classifying loans and off-balance sheet commitments, setting aside and using provisions to handle risks shall report such to the State Bank Governor for application of handling measures to assure the system safety.
Article 3. Interpretation of terms
In this Circular, the terms and expressions below are construed as follows:
1. Credit risk in banking activities (below referred to as risk) means a possible loss of loans of a credit institution or foreign bank branch due to the failure or inability of its customers to fulfill part or the whole of their committed obligations.
2. Loan means a sum of money deposited and disbursed in installments by a credit institution or foreign bank branch under agreements on loans specified in Clause 1, Article 1 of this Circular.
3. Risk provision means a sum of money set aside and accounted as operation expense to offset the possible loss of loans of a credit institution or foreign bank branch. Risk provisions include specific provision and general provision.
4. Specific provision means a sum of money set aside to offset the possible loss of a specific loan.
5. General provision means a sum of money set aside to offset losses that are possible but cannot be identified yet when setting aside specific provisions.
6. Overdue loan means a loan of which part or the whole of the principal and/or interest has become overdue.
7. Rescheduled loan means a loan which has its due date rescheduled and/or its repayment period extended by a credit institution or foreign bank branch because the customer is unable to pay the loan principal and/or interest on time as stated in the contract and the credit institution or foreign bank branch assesses that such customer is able to fully pay the loan principal and/or interest on the rescheduled due date.
8. Non-performing loan (NPL) means a loan in group 3, 4 or 5.
9. Non-performing loan ratio means the ratio of non-performing loans to total loans in groups 1 thru 5.
10. Bad credit facility ratio means the ratio of total loans and off-balance sheet commitments in groups 3 thru 5 to total loans and off-balance sheet commitments in groups 1 thru 5.
11. Customer means an institution (credit institution or foreign bank branch), an individual or another entity as defined by civil law that has a credit facility or deposit relation or has issued bonds or valuable papers purchased by a credit institution or foreign bank branch.
12. Use of provisions to handle risks means the accounting and transfer by a credit institution or foreign bank branch of a loan for which risks have been handled to the balance sheet account for further monitoring and application of measures to fully recover the loan under a contract signed or commitment made with the customer.
Article 4. Collection of customer data and information and information technology
1. A credit institution or foreign bank branch shall take measures and regularly collect and use information and data on its customers, including information from the Credit Information Center (CIC) in order to:
a/ Amend and supplement the internal credit-rating system and internal regulations on credit extension, loan management and risk provisioning policy;
b/ Monitor and evaluate the ability of its customers to repay loans after rating them according to the internal credit-rating system, and take appropriate measures to manage risks and credit quality;
c/ Classify loans and off-balance sheet commitments, set aside and use risk provisions under this Circular;
2. A credit institution or foreign bank branch shall build an information technology system in its entire system to meet requirements of management of customer data and information, operation and management of the internal credit-rating system, management of risks, classification of loans and off-balance sheet commitments, and setting up and use of provisions to handle risks.
Article 5. Internal credit-rating system
1. An internal credit-rating system is a system consisting of sets of financial and non-financial indicators and processes for qualitatively and quantitatively assessing customers in terms of finance, business operation, governance and prestige. An internal credit-rating system must be built for different customers, including those subject to credit extension limits and their affiliated persons.
2. An internal credit-rating system must be built on the following principles:
a/ It must be based on data and information of all customers collected within at least 1 (one) year before it is built;
b/ At least once a year, it must be reviewed, modified and supplemented on the basis of customer data and information collected in the year;
c/ It sets different ratings corresponding to risk levels from low to high;
d/ It is approved by the Board of Directors (for joint-stock credit institutions), Members’ Council (for limited liability credit institutions) or General Director or Director (for foreign bank branches).
3. A credit institution or foreign bank branch shall build an internal credit-rating system to rate its customers on a periodical basis or when necessary. Customer ratings serve as a basis for consideration and approval of credit facilities, management of credit quality and formulation of risk provisioning policies suitable to its scope of operation and actual situation.
Non-bank credit institutions are not required to have an internal credit-rating system.
4. Within 10 (ten) days after issuing, modifying or supplementing its internal credit-rating system, a credit institution or foreign bank branch shall send directly or by post to the State Bank (the Bank Inspection and Supervision Agency) the following documents:
a/ For the issuance of a new system:
(i) A written report on the issuance and application of an internal credit-rating system;
(ii) The internal credit-rating system, documents describing the internal credit-rating system, process of collecting customer data and information, and the rating of customers;
(iii) Instructions for use of the internal credit-rating system, including the decentralization and authorization of the collection of customer data and information and rating of customers.
b/ For the modification or supplementation of an existing system:
(i) A written report on the modification or supplementation of the internal credit-rating system, clearly stating the reason for modification or supplementation;
(ii) Documents modifying or supplementing the internal credit-rating system and its use instructions.
Article 6. Internal regulations on credit extension, loan management and risk provisioning policy
1. A credit institution or foreign bank branch shall issue internal regulations on credit extension, loan management and risk provisioning policy.
2. Internal regulations on credit extension and loan management must at least satisfy the following requirements:
a/ They are based on collected customer information and data and results of customer rating according to the internal credit-rating system;
b/ They are used uniformly in the entire system and serve as a basis for consideration and approval of credit extension and management of loans for specific customers;
c/ They establish credit policies toward customers, including conditions for credit extension, credit extension limits, interest rates, and dossier, order, procedures and process of appraisal, consideration and approval of credit extension and management of loans;
d/ They have provisions on management to assure compliance with the State Bank’s regulations on prudential ratios in operations of credit institutions and foreign bank branches;
dd/ They define responsibilities and powers of units and individuals in the appraisal and grant of credit, management of credit quality, appraisal and management of security assets;
e/ They establish the process and contents of inspection and control before, during and after the grant of credit;
g/ They specify security measures, appraisal and management of security assets;
h/ They specify the self-valuation of security assets, covering the principle, method, process of self-valuation and responsibility of each unit or individual involved in the valuation of security assets in accordance with the law on security assets and for the determination of the deductible value of security assets upon the calculation of a specific provision specified in Clause 5, Article 2 of this Circular;
i/ They specify measures to recover loans.
3. The risk provisioning policy must at least satisfy the following requirements:
a/ It is compliant with the laws on accounting, finance, statement and statistics;
b/ It provides a process of collecting customer information and data, assuring proper classification of loans and off-balance sheet commitments, management of non-performing loans and bad credit extension balance and setting aside of sufficient provisions under regulations;
c/ It specifies the classification of loans and off-balance sheet commitments, levels and methods of setting aside risk provisions and the use of provisioning to handle operational risks for each customer on a periodical or irregular basis;
d/ It defines powers and responsibilities of units and individuals in the classification of loans and off-balance sheet commitments, setting aside and use of provisions to handle operational risks;
dd/ It establishes mechanisms for inspection and supervision of and reporting on the contents specified at Points a thru d of this Clause.
Article 7. Reports on internal regulations on credit extension, loan management and risk provisioning policy
Within 10 (ten) days after the issuance, amendment or supplementation of its internal regulations on credit extension, loan management and risk provisioning policy, a credit institution or foreign bank branch shall send directly or by post to the State Bank (the Bank Inspection and Supervision Agency) one set of dossier comprising:
a/ For newly issued regulations:
(i) A written report on the issuance of internal regulations on credit extension, loan management and risk provisioning policy.
(ii) Internal regulations on credit extension, loan management and risk provisioning policy.
b/ For amended or supplemented regulations:
(i) A written report on the amendment or supplementation of internal regulations on credit extension, loan management and risk provisioning policy, clearly stating the reason for amendment or supplementation.
(ii) Documents amending or supplementing internal regulations on credit extension, loan management and risk provisioning policy.
Article 8. Time of classification of loans and off-balance sheet commitments and setting aside and use of provisions to handle risks
1. At least once a quarter, within the first 15 (fifteen) days of the first month of the quarter, a credit institution or foreign bank branch shall classify by itself loans and off-balance sheet commitments by the end of the last working day of the last quarter based on the ability of its customers to pay loans under Articles 10 and 11 of this Circular, and send results of the classification of loans and off-balance sheet commitments to the CIC.
Particularly for the last quarter of an accounting year, within the first 15 (fifteen) working days of the last month of the quarter, a credit institution or foreign bank branch shall classify loans and off-balance sheet commitments by the end of the last working day of the second month of the last quarter of the accounting year.
In addition to the above time of classification, a credit institution or foreign bank branch shall classify loans and off-balance sheet commitments under its internal regulations.
2. Within 3 (three) days after receiving results of the classification of loans and off-balance sheet commitments of credit institutions and foreign bank branches under Clause 1 of this Article, the CIC shall summarize a list of customers with loans with the highest risk level as classified by such credit institutions and foreign bank branches and may provide it at the latter’s request.
3. Within 5 (five) days after the CIC summarizes a list of customers mentioned in Clause 2 of this Article, a credit institution or foreign bank branch shall request the CIC to provide such list and use results of customer loan grouping provided by the CIC to adjust the result of its classification of loans and off-balance sheet commitments on the principle provided in Clause 1 of Article 9; and set aside sufficient provisions and use them for handling risks under this Circular.
Chapter II
SPECIFIC PROVISIONS
Section 1
CLASSIFICATION OF LOANS AND OFF-BALANCE SHEET COMMITMENTS
Article 9. Methods and principles of classification
1. A credit institution or foreign bank branch shall classify by itself loans and off-balance sheet commitments under Articles 10 and 11 of this Circular and use results of customer loan grouping provided by the CIC at the time of classification to adjust the result of its classification of loans and off-balance sheet commitments. In case its customer loans and off-balance sheet commitments are classified into a group of loans with a risk level lower than that of the group of loans on the list provided by the CIC, the credit institution or foreign bank branch shall classify its customer loans and off-balance sheet commitments into the group of loans provided by the CIC.
2. All loans and the whole value of off-balance sheet commitments of a customer of a credit institution or foreign bank branch must be classified into the same group of loans. For a customer that has two or more loans and/or off-balance sheet commitments at a credit institution or foreign bank branch, any of which is classified into a group with a risk level higher than that of other loans or off-balance sheet commitments, the credit institution or foreign bank branch shall classify the remaining loans or off-balance sheet commitments of such customer into a group with the highest risk level.
3. For a syndicated credit facility, each credit institution or foreign bank branch involved shall independently conduct the classification and promptly notify one another of classification results. All loans and off-balance sheet commitments of a customer receiving a syndicated credit facility from credit institutions and foreign bank branches must be classified into a group with the highest risk level according to the classification by a credit institution or foreign bank branch involved in such syndicated credit facility.
4. For an entrusted credit facility not yet disbursed by the entrusted party under the entrustment contract, the entrusting credit institution or foreign bank branch shall classify such entrusted credit facility as a loan for the entrusted party.
5. For a sold loan with the payment money not yet collected or a sold loan with the purchaser having the right to recourse against the seller, the uncollected payment or the balance of the sold loan associated with recourse to the seller must be classified and a provision must be set aside under this Circular before selling the loan.
6. For purchased loans, a credit institution or foreign bank branch shall classify the payments already made for the purchase of loans into a group with a risk level not lower than that of the group into which such loans are classified before being purchased.
7. A credit institution or foreign bank branch shall classify payments for purchase or entrusted purchase (possibly by another credit institution or foreign bank branch) of corporate bonds of an unlisted business as an unsecured loan for the bond issuer, unless such bonds are secured with assets.
8. A credit institution or foreign bank branch shall classify a discount in the form of termed purchase of negotiable instruments or other valuable papers of a beneficiary as a loan for such beneficiary.
9. A credit institution or foreign bank branch shall classify a loan granted or credit facility provided under approval or direction of the Government or Prime Minister and set aside and use a provision for handling risks of such loan under a decision of the State Bank Governor on a case-by-case basis.
10. On principle, a credit institution or foreign bank branch shall immediately recover the violating balance of loans specified at Point c (iv), Clause 1, Article 10 of this Circular and may not reschedule their due dates. Pending the recovery, it shall classify them and set aside a provision under this Circular.
11. Based on inspection and supervision results and relevant credit information, the State Bank may request credit institutions and foreign bank branches to evaluate and classify specific loans and set aside sufficient provisions commensurate to the risk level of such loans.
Article 10. Classification of loans and off-balance sheet commitments by the quantitative method
1. A credit institution or foreign bank branch shall classify loans (excluding amounts to be paid under off-balance sheet commitments) into the following 5 groups:
a/ Group 1 (Pass) including:
(i) Loans that are not due and assessed as fully recoverable (both principal and interests) on their due dates;
(ii) Loans that are overdue for less than 10 days and assessed as fully recoverable (overdue and due principals and interests);
(iii) Loans that are classified into group 1 under Clause 2 of this Article.
b/ Group 2 (Special mention) including:
(i) Loans that are overdue for between 10 and 90 days;
(ii) Loans with their due dates rescheduled for the first time;
(iii) Loans that are classified into group 2 under Clauses 2 and 3 of this Article.
c/ Group 3 (Sub-standard) including:
(i) Loans that are overdue for between 91 and 180 days;
(ii) Loans with their payment period prolonged for the first time;
(iii) Loans with no or reduced interests because customers are unable to fully pay interests under credit contracts;
(iv) Loans in one of the following cases:
- Loans of a customer or securing party being an institution or individual ineligible for credit extension by credit institutions or foreign bank branches in accordance with law;
- Loans secured with stocks of the very credit institution or its affiliated companies, or loans used to contribute capital to another credit institution on the basis that the lending credit institution receives security assets being stocks of the capital contribution-receiving credit institution;
- Unsecured loans or loans granted on preferential conditions or of a value exceeding 5% of the equity capital of a credit institution or foreign bank branch to a customer subject to credit extension limits prescribed by law;
- Loans granted to affiliated or associated companies of a credit institution or a business of which the credit institution holds control and of a value exceeding the limits prescribed by law;
- Loans of a value exceeding credit extension limits, unless the excess is allowed, as prescribed by law;
- Loans in violation of regulations on credit extension, foreign exchange management and prudential ratios applicable to credit institutions and foreign bank branches;
- Loans in violation of internal regulations on credit extension, loan management and risk provisioning policy of credit institutions and foreign bank branches.
(v) Loans that are being recovered under inspection conclusions;
(vi) Loans that are classified into group 3 under Clauses 2 and 3 of this Article.
d/ Group 4 (Doubtful) including:
(i) Loans that are overdue for between 181 and 360 days;
(ii) Loans that have had their due dates rescheduled for the first time and are overdue for less than 90 days according to the first-time rescheduled payment period;
(iii) Loans that have their due dates rescheduled for the second time;
(iv) Loans that are specified at Point c (iv), Clause 1 of this Article and overdue for between 30 and 60 days after recovery decisions are issued;
(v) Loans that must be recovered under inspection conclusions but remain unrecovered up to 60 days past the recovery deadline;
(vi) Loans that are classified into group 4 under Clauses 2 and 3 of this Article.
dd/ Group 5 (Potential loss) including:
(i) Loans that are overdue for more than 360 days;
(ii) Loans that have had their due dates rescheduled for the first time and are overdue for 90 days or more according to the first-time rescheduled payment period;
(iii) Loans that have had their due dates rescheduled for the second time and are overdue according to the second-time rescheduled payment period;
(iv) Loans that have had their due dates rescheduled for the third time on, regardless of whether they are overdue or not;
(v) Loans that are specified at Point c (iv), Clause 1 of this Article and overdue for more than 60 days after recovery decisions are issued;
(vi) Loans that must be recovered under inspection conclusions but remain unrecovered more than 60 days past the recovery deadline;
(vii) Loans of customers being credit institutions that are announced by the State Bank as being placed under special control or foreign bank branches that have their capital and assets frozen;
(viii) Loans that are classified into group 5 under Clause 3 of this Article.
2. Loans may be classified into groups with lower risk levels in the following cases:
a/ A credit institution or foreign bank branch shall reclassify overdue loans into groups with lower risk levels (including group 1) when the following conditions are satisfied:
(i) Its customers have fully paid the overdue principals and interests (including interests on overdue principals) and the principals and interests for subsequent loan payment periods within 3 (three) months, for medium- and long-term loans, or 1 (one) month, for short-term loans, from the date of starting the full payment of the overdue principals and interests;
(ii) It has documents evidencing the payment of loans by customers;
(iii) It has sufficient information and documents to assess that customers are able to fully pay remaining principals and interests on time.
b/ A credit institution or foreign bank branch shall reclassify rescheduled loans into groups with lower risk levels (including group 1) when the following conditions are satisfied:
(i) Its customers have fully paid the principals and interests in the rescheduled payment periods within 3 (three) months, for medium- and long-term loans, or 1 (one) month, for short-term loans, from the date of starting the full payment of principals and interests in the rescheduled payment periods;
(ii) It has documents evidencing the payment of loans by customers;
(iii) It has sufficient information and documents to assess that customers are able to fully pay remaining principals and interests in the rescheduled payment periods.
3. Loans may be classified into groups with higher risk levels in the following cases:
a/ An adverse change occurs in the business environment or sector (natural disaster, epidemic, war, unfavorable economic environment), negatively impacting the loan payment ability of customers;
b/ Indicators of profitability, solvency, loan-to-capital ratio, cash flow and loan payment ability of customers have constantly declined or experienced big changes in the declining direction affect 3 consecutive times of loan assessment and classification;
c/ Customers fail to supply sufficient, timely and truthful financial information at the request of credit institutions or foreign bank branches for assessment of their loan payment ability.
d/ These loans have been classified into group 2, 3 or 4 according to Point a, b or c of this Clause for 1 (one) year or more but still lack conditions for being classified into groups with lower risk levels.
dd/ Loans resulted from acts of credit extension which have been administratively sanctioned under law.
4. Classification of off-balance sheet commitments and amounts paid under off-balance sheet commitments:
a/ Classification of off-balance sheet commitments:
(i) Off-balance sheet commitments will be classified into group 1 if credit institutions and foreign bank branches assess that their customers are able to fulfill committed obligations.
(ii) Off-balance sheet commitments will be classified into group 2 if credit institutions and foreign bank branches assess that their customers are unable to fulfill committed obligations.
(iii) Off-balance sheet commitments will be classified into group 3 if they fall into one of the cases specified at Point c (iv), Clause 1 of this Article.
b/ Classification of amounts paid under off-balance sheet commitments:
(i) The number of overdue days will be counted right from the date a credit institution or foreign bank branch performs the committed obligation.
(ii) Amounts paid under off-balance sheet commitments are classified as follows:
- They are classified into group 3 if they are overdue for under 30 days;
- They are classified into group 4 if they are overdue for between 30 and under 90 days;
- They are classified into group 5 if they are overdue for 90 days or more.
In case an amount to be paid is classified into a group with a risk level lower than that of the group into which the off-balance sheet commitment of payment on customer behalf has been classified under Point a (ii) or (iii) of this Clause, such amount must be transferred to the group into which the off-balance sheet commitment has been classified.
Article 11. Classification of loans and off-balance sheet commitments by the qualitative method
1. A credit institution or foreign bank branch shall classify loans and off-balance sheet commitments into the following 5 groups:
a/ Group 1 (Pass) including: Loans that are assessed by the credit institution or foreign bank branch as fully recoverable (both principal and interest) on their due dates; and
Off-balance sheet commitments that are assessed by the credit institution or foreign bank branch as having been made by customers that are able to fulfill committed obligations.
b/ Group 2 (Special mention) including: Loans that are assessed by the credit institution or foreign bank branch as fully recoverable (both principal and interest) there are signs that customers’ loan payment ability is declining; and
Off-balance sheet commitments that are assessed by the credit institution or foreign bank branch as having been made by customers that are able to fulfill committed obligations but there are signs of their declining ability to fulfill such commitments.
c/ Group 3 (Sub-standard) including: Loans that are assessed by the credit institution or foreign bank branch as irrecoverable (both principal and interest) on their due dates. These loans are assessed by the credit institution or foreign bank branch as possible losses; and
Off-balance sheet commitments that are assessed by the credit institution or foreign bank branch as having been made by customers that are unable to fulfill committed obligations.
d/ Group 4 (Doubtful) including: Loans that are assessed by the credit institution or foreign bank branch as highly possible losses; and
Off-balance sheet commitments made by customers whose inability to fulfill committed obligations is very high.
dd/ Group 5 (Possible loss) including: Loans that are assessed by the credit institution or foreign bank branch as irrecoverable and likely to be lost; and
Off-balance sheet commitments made by customers that are unable to fulfill committed obligations.
2. A credit institution or foreign bank branch that classifies loans and off-balance sheet commitments under Clause 1 of this Article must obtain the State Bank’s written approval when fully satisfying the following conditions:
a/ Having an internal credit-rating system suitable to its business operations, customers and types of risk of loans, and having tested this system for at least 1 year;
b/ Having a risk provisioning policy under Clause 3, Article 6 of this Circular;
c/ Having a credit risk management policy, credit risk supervision model, credit risk identifying and measuring methods (including methods of assessing the loan payment ability of customers under credit contracts, security assets and loan recoverability), and loan management methods;
d/ Having clearly defined responsibilities and powers of the Board of Directors, Members Council and General Director (Director) for approving, operating and inspecting the operation of its internal credit-rating system and provisioning policy, and independence of risk management sections.
3. A credit institution or foreign bank branch shall submit directly or send by post to the State Bank (the Bank Inspection and Supervision Agency) 1 set of dossier of request for the latter’s approval of the loan classification under Clause 1 of this Article and Clause 2, Article 2 of this Circular, which comprises:
a/ A written request of the foreign bank branch for the State Bank’s permission for application of its risk provisioning policy under Clause 2, Article 2 of this Circular; a written request of the credit institution or foreign bank branch for the State Bank’s approval of the classification of loans and off-balance sheet commitments by the qualitative method specified in Clause 1 of this Article, which must prove the satisfaction of the conditions specified in Clause 2 of this Article;
b/ A copy of the risk provisioning policy of the foreign bank in the case specified in Clause 2, Article 2 of this Circular; a copy of the internal credit-rating system, risk provisioning policy and credit risk management policy, and draft documents guiding the classification of loans and off-balance sheet commitments and setting aside of risk provisions of the credit institution or foreign bank branch in the case specified in Clause 2 of this Article.
4. Within 30 (thirty) days after receiving a complete dossier specified in Clause 3 of this Article, the State Bank shall issue a written approval to the credit institution or foreign bank branch. In case of disapproval, the State Bank shall reply in writing, clearly stating the reason.
5. Annually, a credit institution or foreign bank branch shall re-assess its internal credit-rating system, credit risk provisioning policy and risk management policy against the practical conditions and law.
6. A credit institution or foreign bank branch that has its classification of loans and off-balance sheet commitments approved under Clause 1 of this Article shall at the same time classify loans and off-balance sheet commitments under Article 10 of this Circular. In case the results of classification of a loan or an off-balance sheet commitment under Article 10 and Clause 1 of this Article are different, such loan or off-balance sheet commitment must be classified into a group with a higher risk level. The minimum period for classification of loans and off-balance sheet commitments under both Articles 10 and 11 of this Circular is 5 (five) years after the State Bank’s approval is obtained.
Section 2
PROVISIONING
Article 12. Specific provisioning ratios
1. A specific provision amount to be set aside for each customer is calculated according to the following formula:
R = 
Ri
In which:
- R: Total specific provision amount to be set aside for each customer;
- Ri: Total specific provision amount for each customer from the balance of loan number 1 to the balance of loan number n.
- Ri: Specific provision amount to be set aside for each customer for the principal balance of loan number i. Ri is determined according to the following formula:
Ri = (Ai – Ci) x r
In which:
Ai: Principal balance of loan number I;
Ci: Deductible value of security assets, financial leasing assets (below commonly referred to as security assets) of loan number I;
r: Specific provisioning ratio by group as specified in Clause 2 of this Article.
In case Ci > Ai, Ri is zero.
2. Specific provisioning ratios for different groups of loans are as follows:
a/ Group 1: 0%;
b/ Group 2: 5%;
c/ Group 3: 20%;
d/ Group 4: 50%;
dd/ Group 5: 100%.
3. Security assets to be deducted upon calculation of a specific provision amount (R) specified in Clause 1 of this Article must fully satisfy the following conditions:
a/ The credit institution or foreign bank branch has the right to dispose of security assets under the security contracts and law when customers fail to fulfill their committed obligations;
b/ The projected duration for disposal of security assets does not exceed 1 (one) year, for security assets other than immovables, or 2 (two) years, for security assets being immovables, from the date the credit institution or foreign bank branch has the right to dispose of such security assets;
c/ Security assets fully satisfy the conditions specified by the law on secured transactions;
d/ Security assets specified at Point d, Clause 5 of this Article must be valued by an organization with the valuation function as defined by law in the following cases:
(i) They are valued at VND 50 billion or more for loans of customers being affiliated persons of the credit institution or foreign bank branch and the entities subject to credit extension limits specified in Article 127 of the Law on Credit Institutions.
(ii) They are valued at VND 200 billion or more, except the cases specified at Point d (i) of this Clause.
In case the organization with the valuation function is unable to value security assets or there is no organization with the function of valuing security assets specified at Point d (i) or d (ii) of this Clause, the credit institution or foreign bank branch shall conduct the valuation under its internal regulations specified at Point h, Clause 2, Article 6 of this Circular.
In case security assets fail to fully satisfy the conditions specified at Points a, b, c and d of this Clause, the deductible value of such security assets must be regarded as zero.
4. The deductible value of a security asset is determined by the value of such security asset as specified in Clause 5 of this Article multiplied by the deduction ratio for each type of security asset specified in Clause 6 of this Article.
A credit institution or foreign bank branch shall determine by itself the deduction ratio for each type of security asset on the basis of assessment of recoverability upon the disposal of such security assets, provided such ratio does not exceed the maximum deduction ratio set for each type of security asset specified in Clause 6 of this Article.
5. The value of security assets is determined as follows:
a/ For gold bars: Purchase price at the head office of the business or credit institution that owns the marks of gold bars at the end of the day preceding the date of setting aside a specific provision. In case the purchase price is not posted up, the value of gold bars may be determined under Point d of this Clause.
b/ For government bonds listed on a stock exchange: Reference price at the stock exchange at the end of the day preceding the date of setting aside a specific provision or at the latest time prior to the date of setting aside a specific provision (if no reference price is available at the end of the day preceding the date of setting aside a specific provision);
c/ For securities issued by businesses (including credit institutions) and listed on a stock exchange: Reference price at the stock exchange at the end of the day preceding the date of setting aside a specific provision or at the latest time prior to the date of setting aside a specific provision (if no reference price is available at the end of the day preceding the date of setting aside a specific provision);
For securities not yet listed on a stock exchange and other valuable papers issued by businesses (including credit institutions): Par value.
d/ Movables, immovables and other security assets: Value of security assets determined by an organization with the valuation function as defined by law specified at Point d, Clause 3 of this Article or value of security assets determined under the internal regulations of the credit institution or foreign bank branch specified at Point h, Clause 2, Article 6 of this Circular. In case there is no document on valuation of security assets, the value of such security assets is regarded as zero;
dd/ For financial leasing assets (value of financial leasing assets under the financial leasing contract minus payable rent): Remaining rent under the contract at the time of setting aside a specific provision or value determined by an organization with the valuation function as defined by law.
6. The maximum deduction ratio for security assets:
a/ Vietnam-dong deposits of customers: 100%;
b/ Gold bars, except those specified at Point i of this Clause; foreign-currency deposits of customers: 95%;
c/ Government bonds, negotiable instruments, valuable papers issued by credit institutions; savings cards, deposit certificates, promissory notes and bills issued by other credit institutions or foreign bank branches:
- With the remaining term of under 1 year: 95%;
- With the remaining term of between 1 year and 5 years: 85%;
- With the remaining term of over 5 years: 80%.
d/ Securities issued by other credit institutions and listed on a stock exchange: 70%;
dd/ Securities issued by other businesses and listed on a stock exchange: 65%;
e/ Securities not yet listed on a stock exchange and valuable papers, except the items specified at Point c of this Clause, issued by credit institutions that have registered for listing securities on a stock exchange: 50%;
Securities not yet listed on a stock exchange and valuable papers, except the items specified at Point c of this Clause, issued by credit institutions that have not yet registered for listing securities on a stock exchange: 30%;
g/ Securities not yet listed on a stock exchange and valuable papers, except the items specified at Point c of this Clause, issued by businesses that have registered for listing securities on a stock exchange: 30%;
For securities not yet listed on a stock exchange and valuable papers, except the items specified at Point c of this Clause, issued by businesses that have not yet registered for listing securities on a stock exchange: 10%;
h/ Immovables: 50%;
i/ Gold bars without posted prices, other kinds of gold and other security assets: 30%.
Article 13. General provisioning ratio
1. A general provision amount to be set aside is equal to 0.75% of the total balance of loans in groups 1 thru 4, except the following:
a/ Deposits specified at Point i, Clause 1, Article 1 of this Circular;
b/ Loans and valuable papers purchased for a definite term from other credit institutions and foreign bank branches in Vietnam.
2. Based on inspection and supervision results and relevant credit information, the State Bank may request commercial banks and foreign bank branches to set aside general provisions for the amounts specified at Points a and b, Clause 1 of this Article suitable to their risk levels.
Article 14. Provision addition and reversion
1. In case the remaining specific provision and general provision amounts of the previous quarter are smaller than those which must be set aside in the current quarter, a credit institution or foreign bank branch shall additionally set aside the deficit.
2. In case the remaining specific provision and general provision amounts of the previous quarter are larger than those which must be set aside in the current quarter, a credit institution or foreign bank branch shall reverse the surplus.
Section 3
USE OF PROVISIONS TO HANDLE RISKS
Article 15. Risk handling council
1. Composition of a risk handling council:
A credit institution shall set up a risk handling council which is composed of one member of the Board of Directors or Members’ Council as its chairman; one member of the Risk Management Board as its member; the General Director (Director) as its member, and at least two other members decided by the Board of Directors or Members’ Council.
A foreign bank branch shall set up a risk handling council which is composed of the General Director (Director) as its chairman and at least two other members decided by the General Director (Director).
2. Responsibilities of a risk handling council:
Based on internal regulations on classification of loans and off-balance sheet commitments, setting aside and use of provisions to handle risks, a risk handling council shall:
a/ Approve general reports of the entire system on results of recovery of loans for which provisions have been used to handle risks, including results of disposal of security assets and clearly state the grounds for approval;
b/ Decide or approve the classification of loans and off-balance sheet commitments, setting aside and use of provisions to handle risks in the entire system;
c/ Decide or approve measures to recover loans for which provisions have been used to handle risks in the entire system, including the disposal of security assets.
Article 16. Risk handling principles and dossiers
1. A credit institution or foreign bank branch shall use risk provisions to handle risks in the following cases:
a/ Its institutional customers are dissolved or go bankrupt under law or its individual customers are dead or missing;
b/ Loans are classified into group 5.
2. A credit institution or foreign bank branch shall use risk provisions to handle risks on the following principles:
a/ Use of specific provisions set aside under Clause 1, Article 12 of this Circular to handle risks for loans specified in such Clause;
b/ Public sale of security assets for loan recovery: In case specific provisions are not enough to handle loans, the credit institution or foreign bank branch shall expeditiously conduct the public sale of security assets under agreements with its customers and law for recovering such loans;
c/ In case specific provisions and proceeds from the public sale of security assets are not enough to offset the risks of loans, the general provision may be used to handle the risks;
d/ The credit institution or foreign bank branch shall account off-balance sheet the loan balance for which risks have been handled under Point a, b or c of this Clause.
3. A risk handling dossier comprises:
a/ Dossier for credit extension and dossier for recovery of loans for which risks have been handled;
b/ Dossier of security assets and other relevant documents;
c/ Decision or approval of the risk handling council on results of classification of loans and setting aside of provisions to handle risks;
d/ Decision or approval of the risk handling council on the risk handling;
dd/ For customers being bankrupt or dissolved institutions or businesses, in addition to the documents specified at Points a, b, c and d of this Clause, there must be a certified copy of the court decision on bankruptcy declaration or the decision on business dissolution issued under law;
e/ For individual customers who are dead or missing, in addition to the documents specified at Points a, b, c and d of this Clause, there must be a certified copy of the death certificate, certificate or decision on declaration of missing under law.
Article 17. Responsibilities of credit institutions and foreign bank branches for handling risks
1. The use of risk provisions for accounting related loans into appropriate off-balance sheet accounts and the monitoring, supervision and recovery of loans are internal affairs of credit institutions and foreign bank branches and do not alter the obligation of customers to repay loans for which risks have been handled. After handling risks, credit institutions and foreign bank branches shall take measures to fully and thoroughly recover loans and continue monitoring and recovering loans for which risks have been handled under credit contracts and commitments agreed with their customers.
2. At least 5 (five) years after the date of using provisions to handle risks and after unsuccessfully taking all loan recovery measures put forth by the risk handling council, a credit institution or foreign bank branch may decide to remove from off-balance sheet accounts loans for which risks have been handled.
For state-run commercial banks and joint-stock commercial banks of which the State owns over 50% of charter capital, the removal of loans for which risks have been handled from off-balance sheet accounts may only be made when they have sufficient documents evidencing their failure to recover loans despite having taken all loan recovery measures and obtain written approval of the Ministry of Finance and the State Bank.
Dossiers for loans removed from off-balance sheet accounts, including risk handling dossiers and all documents evidencing the failure of credit institutions or foreign bank branches to recover loans despite having taken all loan recovery measures, must be preserved under law.
Article 18. Handling of amounts recovered from loans for which risks have been handled
Amounts recovered from loans for which risks have been handled, including proceeds from the disposal of security assets, are regarded as revenue in the accounting period of credit institutions or foreign bank branches.
Section 4
MANAGEMENT OF LOANS AND OFF-BALANCE SHEET COMMITMENTS, SETTING ASIDE AND USE OF RISK PROVISIONS
Article 19. Management of loans and off-balance sheet commitments, setting aside and use of risk provisions
1. A credit institution or foreign bank branch must have a section in charge of management of loans and off-balance sheet commitments (a division, department or an equivalent unit) at its head office to manage the classification of loans and off-balance sheet commitments, setting aside and use of provisions to handle risks in the entire system.
2. Responsibilities of the section in charge of management of loans and off-balance sheet commitments:
a/ To elaborate and submit to the General Director (Director) for submission to the Board of Directors or Members’ Council (for credit institutions) or to General Director (Director) (for foreign bank branches) for issuance:
(i) Its internal credit-rating system, amendments and supplements to this system; regulations on management and operation of the internal credit-rating system, the collection and addition of customer data and information;
(ii) Its risk provisioning policy and amendments and supplements to this policy.
b/ To manage and operate the internal credit-rating system;
c/ To summerise and report to the risk handling council on results of the classification of loans and off-balance sheet commitments, the setting aside and use of provisions to handle risks, and the loan recovery after using provisions to handle risks of the previous quarter in the entire system; to propose the risk handling council the classification of loans and off-balance sheet commitments, the setting aside and use of provisions to handle risks and measures to manage non-performing loans and thoroughly recover loans;
d/ To manage and monitor units and individuals in the observance of Point dd, Clause 3, Article 6 of this Circular;
dd/ To provide information to, and coordinate with, functional units at its head office in elaborating and submitting to the General Director (Director) for submission to the Board of Directors or Members’ Council (for credit institutions) or to General Director (Director) (for foreign bank branches) for issuance or amendment and supplementation internal regulations on credit extension and management of loans of the credit institution or foreign bank branch.
e/ To perform other tasks as prescribed by the credit institution or foreign bank branch.
Section 5
ACCOUNTING AND REPORTING
Article 20. Accounting
Credit institutions and foreign bank branches shall account money amounts set aside and used as, added to, or charged off from, their specific and general provisions in accordance with the accounting regulations.
Article 21. Reporting
1. Credit institutions and foreign bank branches shall report results of the classification of loans and off-balance sheet commitments, setting aside and use of provisions to handle risks in accordance with the State Bank’s regulations on reporting and statistical regimes applicable to credit institutions and foreign bank branches.
2. Credit institutions and foreign bank branches shall provide information to the CIC in accordance with the State Bank’s regulations on credit information activities and this Circular.
3. Credit institutions and foreign bank branches shall report on results of the classification of loans and off-balance sheet commitments, setting aside and use of provisions to handle risks and results of loan recovery to the Ministry of Finance and provincial-level Tax Departments of localities where their head offices are located in accordance with the Ministry of Finance’s regulations on tax reports.
Chapter III
RESPONSIBILITIES OF THE STATE BANK AND HANDLING OF VIOLATIONS
Article 22. Responsibilities of the State Bank
1. The Bank Inspection and Supervision Agency shall:
a/ To examine and appraise the elaboration of internal regulations under Article 6 of this Circular; quality and level of satisfaction of requirements of internal regulations issued by credit institutions and foreign bank branches;
b/ To examine and inspect the observance by credit institutions and foreign bank branches of internal regulations on credit extension, loan management and risk provisioning policies;
c/ To examine and inspect the classification of loans and off-balance sheet commitments, setting aside and use of provisions to handle risks by credit institutions and foreign bank branches;
d/ To handle violations of credit institutions and foreign bank branches under Article 23 of this Circular;
dd/ To propose the State Bank Governor to issue documents to specifically guide the classification, setting aside and use of provisions to handle risks for specific cases specified in Clauses 3 and 4, Article 24 of this Circular; to supervise the compliance of credit institutions and foreign bank branches with these guiding documents of the State Bank.
2. The Department for Monetary Forecasts and Statistics shall base itself on this Circular to elaborate and submit to the State Bank Governor for promulgation regulations on statistical reporting on the classification of loans and off-balance sheet commitments, setting aside and use of provisions to handle risks in operations of credit institutions and foreign bank branches.
3. The Finance and Accounting Department shall base itself on this Circular to elaborate and submit to the State Bank Governor for promulgation documents guiding the relevant accounting regime in accordance with law.
4. The Credit Information Center shall summerize and provide at the request of credit institutions and foreign bank branches lists of their customers involved in the group of loans with the highest risk level as classified and reported by these credit institutions and foreign bank branches under Clause 1, Article 8 of this Circular.
Article 23. Handling of violations
Apart from classifying loans and off-balance sheet commitments, setting aside and using provisions to handle loan risks under this Circular, credit institutions and foreign bank branches and their affiliated persons that violate the provisions of this Circular shall, depending on the nature and severity of their violations, be handled under regulations on sanctioning of administrative violations in the monetary and banking fields.
Chapter IV
IMPLEMENTATION PROVISIONS
Article 24. Transitional provisions
1. Foreign bank branches that have been permitted in writing by the State Bank to classify loans, set aside and use provisions to handle credit risks under regulations of the State Bank before the effective date of this Circular may classify loans and off-balance sheet commitments and set aside risk provisions.
2. Credit institutions that have been permitted by the State Bank to implement their risk provisioning policies for classification of loans under Article 7 of the Regulation on classification of debts, setting aside and use of provisions for handling credit risks in their banking operations, promulgated together with the State Bank Governor’s Decision No. 493/2005/QD-NHNN of April 22, 2005, may classify loans and off-balance sheet commitments under Article 10 and Clause 1, Article 11 of this Circular within 3 (three) years from the effective date of this Circular. In case results of classification of a loan or off-balance sheet commitment under Article 10 and Clause 1, Article 11 of this Circular are different, such loan or an off-balance sheet commitment must be classified into a group with a higher risk level.
3. A credit institution or foreign bank branch that has loans specified at Point c(iv), Clause 1, Article 10 of this Circular lent before the effective date of this Circular and not yet unrecovered may handle them as follows:
a/ Apart from implementing inspection recommendations or conclusions (if any), within 10 days from the effective date of this Circular, it shall work out a handling plan and report it to the State Bank (the Bank Inspection and Supervision Agency), which must have at least the following details:
(i) The list of loans, and names, addresses, tax identification numbers and business lines of customers borrowing these loans;
(ii) Results of the classification of loans and setting aside of risk provisions for these loans under this Circular;
(iii) The financial status and ability to set aside provisions for loans;
(iv) Plan on setting aside and use of provisions to handle risks;
(v) Handling plan, measures and commitments to assure complete recovery of loans.
b/ A credit institution or foreign bank branch shall classify, and set aside and use risk provisions for its loans under the State Bank’s guidance on a case-by-case basis. Pending the State Bank’s guidance, it may base itself on the overdue period specified in Article 10 of this Circular to classify loans, set aside and use provisions to handle risks under this Circular.
4. A credit institution or foreign bank branch that has loans specified at Point g, h or i, Clause 1, Article 1 of this Circular lent before the effective date of this Circular may handle them as follows:
a/ Within 10 days from the effective date of this Circular, it shall report to the State Bank (the Bank Inspection and Supervision Agency) on the following details at least:
(i) The list of loans, and names, addresses, tax identification numbers and business lines of customers borrowing these loans;
(ii) Results of the classification of loans and setting aside of risk provisions for these loans under this Circular;
(iii) The financial status and ability to set aside provisions for loans;
(iv) Plan on setting aside and use of provisions to handle risks;
(v) Handling plan, measures and commitments to assure complete recovery of loans.
b/ A credit institution or foreign bank branch shall classify, and set aside and use risk provisions for its loans under the State Bank’s guidance on a case-by-case basis.
Article 25. Effect
1. This Circular takes effect one June 1, 2013.
2. Non-bank credit institutions shall classify loans and set aside risk provisions for loans specified at Point c(iv), Clause 1, Article 10 of this Circular from January 1, 2014.
3. The following documents and regulations cease to be effective:
- The State Bank Governor’s Directive No. 05/2005/CT-NHNN of April 26, 2005, on the classification of loans and risk provisioning under the State Bank Governor’s Decision No. 493/2005/QD-NHNN of April 22, 2005;
- The State Bank Governor’s Decision No. 780/QD-NHNN of April 23, 2012, on the classification of loans with rescheduled terms or extended repayment periods;
- The Regulation on classification of loans and setting aside and use of provisions to handle credit risks in banking operations of commercial banks, non-bank credit institutions and foreign bank branches, promulgated together with the State Bank Governor’s Decision No. 493/2005/QD-NHNN of April 22, 2005; and Decision No. 18/2007/QD-NHNN of April 25, 2007, amending and supplementing a number of articles of the said Regulation.
4. The director of the Office, Chief Bank Inspector-Supervisor, heads of the units of the State Bank, directors of the provincial-level State Bank branches, chairpersons of Boards of Directors, Members’ Councils and General Directors (Directors) of credit institutions and foreign bank branches shall implement this Circular.-
For the State Bank Governor
Deputy Governor
DANG THANH BINH
Vietnamese
Circular 02/2013/TT-NHNN DOC (Word)
Circular 02/2013/TT-NHNN PDF (Original)
Circular 02/2013/TT-NHNN ZIP (Word)
