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Circular No. 02/2013/TT-NHNN dated January 21, 2013 of the State Bank of Vietnam on classification of assets, levels and method of setting up of risk provisions, and use of provisions against credit r
20/02/2013
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THE STATE BANK OF VIETNAM
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No. 02/2013/TT-NHNN

SOCIALIST REPUBLIC OF VIETNAM
Independence Freedom Happiness
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Hanoi, January 21, 2013

 

CIRCULAR

PROVIDING ON CLASSIFICATION OF ASSETS, LEVELS AND METHOD OF SETTING UP OF RISK PROVISIONS, AND USE OF PROVISIONS AGAINST CREDIT RISKS IN THE BANKING ACTIVITY OF CREDIT INSTITUTIONS, FOREIGN BANKS’ BRANCHES 

 

Pursuant to the Law on the State bank of Vietnam No. 46/2010/QH12, of June 16, 2010;

Pursuant to the Law on credit institutions No. 47/2010/QH12, of June 16, 2010;

Pursuant to the Government’s Decree No. 96/2008/ND-CP, of May 26, 2008 defining the functions, tasks, powers and organizational structure of the State bank of Vietnam;  

After obtaining consensus with the Ministry of Finance;

At the proposal of the Chief of banking Inspection and supervision;

The Governor of the State bank promulgates this Circular providing on classification of assets, levels and method of setting up of risk provisions, and use of provisions against credit risks in the banking activity of credit institutions, foreign banks’ branches,

Chapter 1.

GENERAL PROVISIONS

Article 1. Scope of regulation

1. This Circular provides on classification, levels and method of setting up of risk provisions, and use of provisions against credit risks in the banking activity for assets (hereinafter referred to as debts) including:

a) Loans;

b) Financial leases;

c) Discounts, rediscounts of negotiable instruments and other valuable papers;

d) Factoring;

dd) Credit extensions under form of credit card issuance;

e) Payments on behalf of someone under off-balance sheet commitments;

g) Amounts in service for purchase and entrustment of purchase of corporate bonds unlisted on securities market or not conducted transaction registration on trading market of unlisted public companies (UPCoM) (hereinafter referred to as unlisted bonds), excluding purchase of unlisted bonds by entrustment capital sources which the entrusting party bears risks.

h) Credit extension entrustment;

i) Deposits (excluding deposit for payment) at domestic credit institutions, foreign banks’ branches in Vietnam as prescribed by law and deposits at foreign credit institutions.

2. Guarantee amounts, payment acceptances, lending commitments which are irrevocable (hereinafter referred to as off-balance sheet commitments) must be classified as prescribed in this Circular in order to manage, supervise quality of credit extension activity of credit institutions, foreign banks’ branches. 

3. The setting up and use of provisions for the fall of inventory prices, the loss of financial investments, the loss of bad receivable debts, excluding amounts specified in clause 1 this Article shall comply with regulation of law. 

Article 2. Subjects of application

1. This Circular applies to:

a) Credit institutions, including:  commercial banks and non-bank credit institutions;

b) Foreign banks’ branches.

2. Foreign banks’ branches which apply policy on risk provisions of foreign banks in for classification of debts, off-balance sheet commitments, setting un and use of provisions against credit risks must be accepted by the State bank of Vietnam (hereinafter referred to as the State bank) with condition that such policy are more progressive and preeminent than provisions in Article 6 of this Circular.  Dossiers, orders, procedures for being accepted by the State bank to apply the policy on risk provisions of foreign banks shall comply with provisions in clause 3, clause 4 Article 11 of this Circular.

3. Foreign banks’ branches which have been accepted by the State bank for application of policy on risk provisions of foreign banks before the affective day of this Circular, Foreign banks’ branches which have been accepted by the State bank for application of policy on risk provisions of foreign banks in accordance with clause 2 this Article shall implement according to regulations of foreign banks.  In the course of inspection, supervision, if the State bank assesses that a foreign bank’ policy on provisions fails to reflect fully the credit risk extent in actual bank activity in Vietnam, the State bank may request its branches to implement debt classification, off-balance sheet commitments, setting up and use of provisions against credit risks as prescribed in this Circular.   

4. If credit institutions during implementation of plan on re-structuring, merging, consolidating have difficulties in classification of debts, off-balance sheet commitments, setting up and use of provisions against credit risks, they should report to the Governor of the State bank for having the handling measures aiming to ensure the system’s safety.  

Article 3. Interpretation of terms

In this Circular, the below terms are construed as follows:

1. Credit risks in banking activity (hereinafter referred to as risks) mean loss which able to happen with respect to debts of credit institutions, foreign banks’ branches because customers fail to implement or have no capacity to implement part or whole their obligations as committed.

2. Debt amounts mean amounts which credit institutions, foreign banks’ branches has sent or disbursed each times under agreements for debts specified in clause 1 Article 1 of this Circular.

3. Risk provisions mean the amounts set up and accounted into the operational cost in order to provide for losses which may happen for debts of credit institutions, foreign banks’ branches.  Risk provisions include specific provisions and general provisions.

4. Specific provisions mean the amount set up in order to provide for losses which may happen for each specific debt.

5. General provisions mean the amounts set up in order to provide for losses which may happen but have not defined when setting up specific provisions.

6. Overdue debt means a debt which part or whole of its principal and interest has become overdue.

7. Debts with restructured repayment term are debts, the payment term of which a credit institution accepts to restructure or reschedule for customers because the customers have no capability to duly pay the principals or interests as stated in the credit contract, but there are sufficient grounds for the credit institutions, foreign banks’ branches to assess that customers are capable to fully pay the principals and interests under the restructured repayment term.

8. Bad debt (NPL) means debts which have been classified as those in Groups 3, 4 and 5.

9. Rate of bad debt means rate of bad debts in comparison with total debts of from group 1 to group 5.

10. Rate of bad credit extensions means rate total debts and off-balance sheet commitments of from group 3 to group 5 in comparison with total debts and off-balance sheet commitments of from group 1 to group 5.

11. Customers mean organizations (including credit institutions, foreign banks’ branches), individuals, other subjects as prescribed by civil law which have relationship on credit extension, deposit; issuance of bonds, valuable papers, which have been bought by credit institutions or foreign banks’ branches.

12. Use of provisions against credit risks means accounting of credit institutions, foreign banks’ branches in order to transfer debts which have been dealt with risks to the off-balance sheet accounts and continue following up, having measures for full debt recovery as the contracts have signed, or commitments have agreed with customers.  

Article 4. Collecting customers’ data, information and the information technology

1. Credit institutions, foreign banks’ branches must have measures and regularly implement collection, use of customers’ information, data, including information from the Credit Information Center (CIC), for:

a) Amending and supplementing the internal credit ranking system, internal regulations on credit extension, loan management, policy on risk provisions.  

b) Following up, assessing the capability of customers to pay debts after having ranked under the internal credit ranking system, had proper measures to control risks, manage credit quality.

c) Implementing classification of debts, off-balance sheet commitments, setting up risk provisions and using provisions as prescribed in this Circular.

2. Credit institutions, foreign banks’ branches must formulate an information technology system in their whole system for meeting requirements on management of customers’ data, information, operation and management of internal credit ranking system, risk management, classification of debts, off-balance sheet commitments, setting up and use of provisions in order to deal with risks.

Article 5. Internal credit ranking system

1. Internal credit ranking system means a system including financial and non-financial criteria, processes for assessing customers on the basis of financial qualitative and quantitative, business and administration situation, and prestige of customers. The internal credit ranking system must be formulated for each subject of various customers, including subjects restrained from credit extension and related persons of these subjects.

2. The internal credit ranking system must be formulated under the following principles:

a) Being formulated on the basis of data and information of all customers which have been collected within at least 01 (one) year preceding year of its formulation. 

b) At least each year one times, the internal credit ranking system must be considered, amended and supplemented on the basis of data and information of customers which have been collected during year.

c) Having regulation on ranking levels corresponding to risk extents from low up high.

d) Being approved by the Board of Directors (for credit institutions being joint-stock company), the Members’ Council (for credit institutions being limited liability companies), General Director or Director (for foreign banks’ branches). 

3. Credit institutions, foreign banks’ branches must formulate the internal credit ranking system in order to rank customers periodically or as necessary, doing as basis for approval of credit extension, management of credit quality, formulation of policy on risk provisions in conformity with operational scope and actual situation of credit institutions, foreign banks’ branches.

Non-bank credit institutions are not forced to have an internal credit ranking system.

4. Within 10 (ten) days after issuing, amending and supplementing the internal credit ranking system, credit institutions, foreign banks’ branches must send directly or via post to the State bank (the banking inspection and supervision agency) the following documents:

a) For new issuance:

(i) A written report on issuance and application of an internal credit ranking system;

(ii) An internal credit ranking system, documents which describe internal credit ranking system, process of collecting customers’ information and data, ranking customers;

(iii) Guidance for use of internal credit ranking system, including division of duty, authorization in collecting customers’ information and data, ranking customers;

b) For amendments and supplementations :

(i) A written report on amendments and supplementations to internal credit ranking system, clarifying reason of amendments and supplementations;

(ii) Documents amending and supplementing internal credit ranking system and guidance for use of internal credit ranking system.

Article 6. Internal regulations on credit extension, loan management, policy on risk provisions

1. Credit institutions, foreign banks’ branches must issue internal regulations on credit extension, loan management, policy on risk provisions.

2. Internal regulations on credit extension, loan management must meet minimally the following conditions:

a) Being formulated on the basis of data and information of customers which have been collected, results of customer ranking under the internal credit ranking system;

b) Being unified for use in all system, doing as basis for approval, extension of credit, management of loans for specific customers;

c) Having regulations on credit policy applicable to customers, including regulations in condition of credit extension, limit of credit extension, interest, dossiers, orders, procedures for, process of appraisal, approval of credit extension, management of loans; 

d) Having regulations on management aiming to ensure compliance with regulations of the State bank on rates for safe assurance in activity of credit institutions, foreign banks’ branches;

dd) Having regulations on duties, powers of units, individuals in appraisal, credit extension, credit quality control, appraisal, management of security assets;

e) Having regulations on process, content of inspection, supervision before, during and after extending credit;

g) Having regulations on security measures, appraisal and management of security assets;

h) Having regulation on self-defining value of security assets including principles, methods, process and duties of each unit, individual related to defining value of security assets, ensuring to be proper with regulations of law on security assets and aiming to implement defining of value of security assets which shall be deducted when calculating the specific amounts set up provisions as specified in clause 5 Article 12 of this Circular;   

i) Having regulations on measures for debt recovery...

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