Circular 22/2023/TT-NHNN amend Circular 41/2016/TT-NHNN prudential ratios for operations of banks and foreign bank branches

CIRCULAR

Amending and supplementing a number of articles of Circular No. 41/2016/TT-NHNN dated December 30, 2016 of the Governor of the State Bank of Vietnam prescribing prudential ratios for operations of banks and foreign bank branches

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Pursuant to the Law on the State Bank of Vietnam dated June 16, 2010;

Pursuant to the Law on Credit Institutions dated June 16, 2010 and the Law Amending and Supplementing a Number of Articles of the Law on Credit Institutions dated November 20, 2017;

Pursuant to the Government’s Decree No. 102/2022/ND-CP dated December 12, 2022, defining the functions, tasks, powers and organizational structure of the State Bank of Vietnam;

At the request of the Chief Inspector of the SBV Banking Supervision Agency;

The Governor of the State Bank of Vietnam promulgates the Circular amending and supplementing a number of articles of the Circular No. 41/2016/TT-NHNN dated December 30, 2016 of the Governor of the State Bank of Vietnam prescribing prudential ratios for operations of banks and foreign bank branches.

Article 1. Amending and supplementing a number of articles of Circular No. 41/2016/TT-NHNN

1. To amend and supplement Clause 11, Article 2 as follows:

“11. Home mortgage loan refers to a real estate-secured loan granted to an individual to purchase home, including:

a) Real estate-secured loans granted to individuals to purchase home, provided the following conditions are met:

i) Source of financing for debt payment is not derived from leasing of the home formed from that loan;

ii) Home must be completely built for handover in accordance with the signed home purchase agreement;

iii) The bank or foreign bank branch is fully vested legal right to the home put up as collateral in the event that its customer fails to pay his/her debt obligations in accordance with the law provisions on secured transactions and housing;

iv) The home formed from this type of mortgage loan must be independently valued (by a third party or a division separate from the credit approval department of a bank or foreign bank branch) in a discreet manner (appraised value is not greater than market value of that home at a specified loan approval date) in accordance with regulations of the bank and foreign bank branch.

b) Loans for purchasing of social home or home under the Government’s support programs and projects determined in accordance with the law provisions on housing, provided the conditions at Points a(i), a(iii), a(iv) of this Clause are met.”

2. To amend and supplement Point c, Clause 12, Article 2 as follows:

“c) Banks and/or foreign bank branches have the rights as referred to in credit agreements to control all payments and disbursements according to the progress of projects, invest in machinery, equipment and purchase goods and manage operating income or cash flow, operate such projects, machinery, equipment and goods to recoup debts according to these credit agreements;”

3. To amend and supplement Clause 15, Article 2 as follows:

“15. Reverse Repo transaction refers to a transaction in which one party buys and receives ownership of a financial asset transferred from another party with a promise to sell and transfer ownership of that financial asset back at a specific date and a predetermined price, including buying forwards of negotiable instruments and financial instruments in accordance with the SBV’s regulations on discounted transfer of negotiable instruments and other negotiable instruments.”

4. To amend and supplement Clause 3, Article 8 as follows:

“3. The exposure value of a claim (including the outstanding principal amount; any interest and fee receivables which are recorded as incomes as prescribed by the law provisions) of a bank or foreign bank branch shall be calculated according to the following formula:

E_i = Eon_i + Eoff_i x CCF_i

Of which:

- E_i: The exposure value defined according to the method of determining the historical cost of the i^th claim;

- Eon_i: Exposure value of the on-balance sheet portion of the i^th claim;

- Eoff_i: Exposure value of the off-balance-sheet (OBS) commitment portion of the i^th claim;

- CCF_i: Credit conversion factor of the OBS commitment portion of the i^th claim, as specified in Article 10 hereof.”

5. To amend and supplement Clause 7, Article 9 as follows:

“7. As for assets which are claims on financial institutions (including credit institutions), the credit risk weight is subject to the following regulations:

a) As for foreign financial institutions (including foreign credit institutions) other than international financial institutions as specified in Clause 20, Article 2 hereof, the credit risk weight is relative to the credit rating as follows:

b) As for foreign bank branches operating within Vietnam, foreign bank branches operating in other countries, overseas branches of Vietnamese banks, the credit risk weight is relative to the credit rating of credit institutions that are their parent banks.

c) As for assets which are claims on domestic credit institutions, except those under the form of reserve repo transactions in which counterparty credit risks are taken into account in accordance with Clause 4, Article 8 hereof, the credit risk weight is applied as follows:

d) As for banks that are transferees under approved mandatory transfer plans and other credit institutions, the 0% credit risk weight shall be applied to their loans, guarantees and deposits at transferors under such approved mandatory transfer plans.

6. To amend and supplement Point b, Clause 9, Article 9 as follows:

“b) Other enterprises, banks and foreign bank branches are required to define their sales targets, leverage ratios or owners’ equity shown on the annual financial statement (consolidated financial statement) which is audited on the latest date with respect to enterprises subject to independent audits, or in the annual financial statement (audited where applicable), or the financial statement submitted to a tax authority (including documents used as evidence of such submission) on the latest date with respect to enterprises exempted from independent audits in accordance with the law provisions as follows:

- Sales are defined by using figures shown on the income statement;

- Leverage ratio = Total debt/ Total asset;

Of which: Total debt is calculated as the sum of borrowings and debts arising from short-term finance leases plus borrowings and debts arising from long-term finance leases in accordance with applicable regulations on accounting.

- Owners’ equity is defined by using figures shown on the balance sheet.

(i) The credit risk weight varies depending on sales target, leverage ratios and owners' equity of an enterprise as follows:

(ii) The credit risk weight equal to 200% shall be applicable to enterprises failing to provide their financial statements to banks or foreign bank branches to calculate sales targets, leverage ratios and owners’ equity;

(iii) As for enterprises coming into existence through initial establishment procedures (excluding those created through reorganization or legal ownership transformation procedures, etc.), and operating within a period of less than 1 year, the credit risk weight is 150%.”

7. To amend and supplement Clause 10, Article 9 as follows:

“10. As for assets which are real estate secured loans, the credit risk weight is subject to the following regulations:

a) Each bank or foreign bank branch must define the loan-to-value (LTV) ratio for loans secured by real estate property as follows:

(i) LTV ratio = Total outstanding balance of loan/ Value of the asset pledged as collateral. Of which:

- Total outstanding balance of loan (outstanding principal amount of the on-balance sheet and off-balance sheet commitment portions) includes total outstanding amount of loan and total outstanding amount of other loans secured by real estate property at the bank or foreign bank branch;

- Value of the asset pledged as collateral is value of real property put up as collateral for these debts, which is determined on the lending approval date.

(ii) The asset pledged as collateral will undergo a revaluation when the bank or foreign bank branch is informed of a devaluation of such collateral by more than 30% compared with the value determined at the lending approval date (for initial revaluation) or compared with the value determined at the latest date.

b) The credit risk weight for debts secured by non-income producing real estate property relative to the LTV ratio shall be applied as follows:

c) The credit risk weight relative to LTV ratio for debts secured by income producing real estate property shall be applied as follows:

d) As for debts secured by real estate property which is both income producing and non-income producing real estate property, the credit risk weight shall be particularly applied to either of such real estate property and be proportionate to the gross floor area in the respective type of real estate;

dd) The credit risk weight equal to 150% shall be applied to debts secured by real estate property for which banks and/or foreign bank branches are not informed of the LTV ratio;

e) The credit risk weight equal to 200% shall be applied to assets which are specialized lending used for financing income producing real estate projects. The credit risk weight equal to 160% shall be applied to assets which are specialized lending used for financing income producing real estate projects in industrial parks.”

8. To amend and supplement Point b, Clause 11, Article 9 as follows:

“b) The credit risk weight applied to home mortgage loans relative to the LTV ratio and DSC ratio is as follows:

(i) As for loans for purchasing of social home or home under the Government’s support programs/projects:

(ii) As for loans other than those specified at Point b(i), Clause 11 of this Article:

9. To add Clause 12a to Clause 12, Article 9 as follows:

“12a. The credit risk weight equal to 50% shall be applied to debts which are loans granted to individual borrowers for agricultural and rural development purposes under the Government’s credit policies for agricultural and rural development.”

10. To amend and supplement Point e, Clause 3, Article 11 as follows:

“e) In the case where two or multiple different risk mitigation techniques are applied to a single claim or transaction, banks and/or foreign bank branches will be required to subdivide that transaction or claim into portions covered by each type of credit risk mitigation technique to measure the exposure value of these portions as provided herein. If the claim or transaction cannot be subdivided into portions covered by each type of credit risk mitigation technique, the most effective risk mitigation technique will be applied.”

11. To amend and supplement Clause 4, Article 11 as follows:

“4. The exposure value of a claim or transaction after risk mitigation shall be calculated according to the following formula:

Of which:

E_i = E_j + E_k + E_l+ E_n + E_x

- E_i^*: The exposure value of the i^th claim or transaction to which a decreasing adjustment is made by implementing credit risk mitigation techniques;

- E_i: The exposure value of the i^th claim or transaction calculated as prescribed by Article 8 hereof;

- E_j: The exposure value of the i^th claim or transaction calculated as prescribed by Article 8 hereof after credit risk mitigation by collateral;

- E_k: The exposure value of the i^th claim or transaction calculated as prescribed by Article 8 hereof after credit risk mitigation by on-balance sheet netting;

- E_l: The exposure value of the i^th claim or transaction calculated as prescribed by Article 8 hereof after credit risk mitigation by the third party guarantee;

- E_n: The exposure value of the i^th claim or transaction calculated as prescribed by Article 8 hereof after credit risk mitigation by credit derivative;

- E_x: The exposure value of the i^th claim or transaction calculated as prescribed by Article 8 hereof for which no credit risk mitigation is made;

- C_j^*: Value of the collateral subject to the haircut appropriate to maturity mismatch;

- Hc_j: Collateral haircut;

- L_k^*: Value of on-balance sheet liability subject to the haircut appropriate to maturity mismatch;

- G_l: Value of the third party guarantee;

- CRWgtor_l: CRW of the guarantor;

- CRW_l: CRW of the customer;

- CD_n^*: Value of the credit derivative subject to the haircut appropriate to maturity mismatch;

- Hfxc, Hfxl, Hfxcd: haircut appropriate to currency mismatch between the claim, transaction and credit risk mitigation technique. The haircut appropriate to currency mismatch equals zero (0) when the claim, transaction and credit risk mitigation technique are expressed in the same currency.”

12. To amend and supplement Article 12 as follows:

“Article 12. Credit risk mitigation by collateral

1. Credit risk mitigation by collateral shall only be applied to the following types of eligible collateral:

a) Cash, securities, credit cards issued by credit institutions or foreign bank branches;

b) Gold (standard gold, physical gold, gold jewelry of which value is converted into 99.99% purity gold);

c) Financial instruments issued or guaranteed by the Government of Vietnam, SBV, provincial-level People’s Committees or banks for social policies;

d) Debt securities rated at least BB- by an independent credit rating company when issued by sovereigns or public sector entities (PSEs);

dd) Debt securities rated at least BBB- by an independent credit rating company when issued by enterprises;

e) Equities listed on Vietnam Exchange.

2. The collateral specified in Clause 1 of this Article must meet the following requirements:

a) It complies with the law provisions on secured transactions;

b) Securities, debt securities or equities must not be issued or guaranteed by customers and/or their parent companies, subsidiaries and affiliates.

c) The collateral specified at Points dd and e, Clause 1 of this Article must have order matching transactions within 10 working days prior to the calculation date, and the daily mark-to-market price is employed to the calculation.

3. The collateral haircut (H_c) calculated in percent (%) shall be applied according to the following principles:

a) Cash, savings cards and financial instruments issued by the bank or foreign bank branch, financial instruments issued or guaranteed by the Government of Vietnam, SBV, provincial-level People's Committees or banks for social policies will be subject to the haircut of zero;

b) Savings cards, financial instruments, securities and gold will be subject to the following haircuts:

4. Value of the collateral adjusted for maturity mismatch (C*) is calculated according to the following formula:

C* = C x (t - 0.25) / (T- 0.25)

Of which:

- C: Value of the collateral;

- T: min (5, residual maturity of a transaction or claim, expressed in years);

- t: min (T, residual maturity of the collateral, expressed in years).

5. The haircut appropriate to currency mismatch between the claim, transaction and collateral (H_fxc) is 8%.”

13. To add Point d after Point c, Clause 2, Article 14 as follows:

“d) International financial institutions.”

14. To amend and supplement Article 17 as follows:

“Article 17. Policies and procedures for determination of market risk exposures for market risk management

1. To identify the regulatory capital for market risk, a bank or foreign bank branch must develop documented policies on conditions and criteria for determining items of the trading book in order to calculate exposures on the trading book to ensure that they are separated from the banking book. The bank or foreign bank branch shall:

a) Make a distinction between trading-book and banking-book transactions. Transaction data must be recorded in an accurate, adequate and timely manner into the risk management database and accounting records thereof;

b) Determine the sales department directly performing transactions;

c) Recognize trading-book and banking-book transactions on the system of accounting records and compared with figures recorded by the sales department (journal for transactions or other recording form);

d) The internal audit department must regularly review and assess items of the trading and banking books.

2. Banks or foreign bank branches may reclassify and transfer items from the trading book to the banking book only when these items no longer satisfy conditions and criteria specified in Clause 1 of this Article, and shall not transfer financial instruments from the banking book to the trading book.

3. Each bank or foreign bank branch must develop their own policies and procedures for determining exposures in order to calculate the regulatory capital for market risk. These policies and procedures should, at a minimum, address:

a) Proprietary trading strategies for each type of currency, financial instrument, derivative product, and for assurance of no selling and buying restriction or risk-hedging capability;

b) Market risk limits set out in SBV's regulations on internal control system of commercial banks and foreign bank branches; limits subject to review or assessment occurring once a year or upon the time when there are significant changes resulting in impacts on market risk exposures;

c) Procedures for management of market risk exposures which are required to ensure that:

(i) Market risk exposures will be closely identified, measured, monitored, managed and supervised;

(ii) There will be a separate department to perform proprietary trades where customer service advisers are granted autonomy to perform transactions within permitted limits and scope of proprietary trading strategies; there will be a department in charge of managing and keeping account of proprietary trades and trading-book items;

(iii) Risk exposures and risk measurement results must be reported to regulatory authorities in accordance with regulations on management of risks of banks or foreign bank branches;

(iv) All of the financial statuses on the trading book must be measured and valued at current market price or data available on the market at least once a day to determine amounts of loss, profit and market risk exposure;

(v) Input market data must be collected in a maximum manner from appropriate sources and regularly reexamined in terms of appropriacy of input market data.

d) Regulations on conditions and criteria for recording of trading-book items and transfer of items between the trading and banking books as prescribed by the law provisions;

dd) Methods for measuring market risk (including detailed description of used assumptions and parameters); methods for measuring market risk subject to review and assessment occurring annually or upon the time when any sudden change resulting in market risk exposures occurs;

e) Procedures for monitoring risk exposures and compliance with market risk limits in line with proprietary trading strategies of the bank or foreign bank branch.

4. Policies and procedures specified in Clauses 1 and 3 of this Article must be periodically approved, released, amended or revised by relevant competent authorities of banks or foreign bank branches at least once a year and internally audited in accordance with SBV’s regulations on internal control system of credit institutions and foreign bank branches.

5. Banks and foreign bank branches shall submit regulations specified in Clauses 1 and 3 of this Article to the SBV (SBV Banking Supervision Agency) for supervision before implementation. Where necessary, the SBV (SBV Banking Supervision Agency) may request banks and foreign bank branches in writing to revise such policies and procedures.”

15. To amend and supplement Clause 4, Article 18 as follows:

“4. Regulatory capital for foreign exchange risk (K_FXR) shall apply in the event that total value of net foreign exchange exposure (including gold) of a bank or foreign bank branch is greater than 2% of its owner equity. Regulatory capital for foreign exchange risk and total value of net foreign exchange exposure (including gold) shall be calculated under instructions provided in the Appendix 4 to this Circular.”

16. To amend and supplement Clause 1, Article 21 as follows:

“1. Supervise, examine and inspect the compliance with regulations in this Circular by banks and foreign bank branches in accordance with the law provisions and assignments of the SBV’s Governor.”

17. To amend and supplement Clause 2, Article 22 as follows:

“2. SBV’s provincial-level branches shall supervise, examine and inspect the compliance with regulations in this Circular by banks and foreign bank branches located in their localities in accordance with the law provisions and assignments of the SBV’s Governor.”

Article 2. To replace Appendices 01, 02, 03, 04 and 06 enclosed with Circular No. 41/2016/TT-NHNN with Appendices 01, 02, 03, 04 and 06 enclosed herewith.

Article 3. Implementation responsibilities

The Chief of Office, Chief Inspector of SBV Banking Supervision Agency, heads of units under the SBV, banks and foreign bank branches shall implement this Circular.

Article 4. Effect

This Circular takes effect from July 01, 2024./.

For the Governor

The Deputy Governor

DOAN THAI SON

* All Appendices are not translated herein.