Directive No. 02/2006/CT-NHNN on Strengthening Measures to Prevent and Limit Risks in the Business Operations of Credit Institutions

DIRECTIVE

Regarding the strengthening of preventive measures to limit risks in

the business operations of credit organizations

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In the first months of 2006, monetary, credit, and banking activities continued to develop, contributing to monetary stability, inflation control, and economic growth. However, credit organizations' business operations are facing many difficulties and challenges due to limitations in scale of operation, financial capacity, and competitiveness, being adversely affected by some external factors both domestically and internationally.

To prevent and limit risks, ensuring safe, effective, and sustainable business operations for credit organizations, the Governor of the State Bank requests that credit organizations and units under the State Bank implement the following measures:

I. FOR CREDIT ORGANIZATIONS

1. Assess and forecast economic and social conditions, domestic and foreign currency markets for the remaining months of 2006, and their own business conditions, on this basis consider appropriate adjustments to targets to conduct business effectively.

2. Continue to implement solutions as stipulated in Directive No. 02/2005/CT-NHNN dated April 20, 2005 of the Governor of the State Bank regarding improving credit quality, credit growth commensurate with capital mobilization capacity and risk management, ensuring system safety, and other directives of the Governor of the State Bank on implementing banking tasks in 2006.

3. Review, amend, and perfect internal procedures for money trading, foreign exchange, payment, transfer, and information technology application in accordance with relevant legal provisions. Analyze potential risks in each business process to immediately implement preventive and risk-blocking measures such as setting loss limits for each foreign exchange trader; regulations on foreign currency status allocation and management, sales and transfer levels within and outside the country for branches in the system; specific responsibilities for payment, transfer, inspection, and storage of documents; installing software for immediate settlement of foreign exchange trading transactions.

4. Review and select staff with sufficient capability, qualifications, and moral integrity to perform business activities; establish delegation mechanisms and define responsibilities for managers and operators in line with the training, experience, and existing facilities of these staff members. Strengthen inspection, supervision, internal auditing, and the application of new technologies to promptly detect and prevent violations and risks.

5. Appropriately invest in business training in line with international standards and experience for managers and operators; modern computer and telecommunications equipment ensuring security, confidentiality, and openness; only enter new business areas and services when capable of assessing and controlling risks.

6. Accelerate the implementation of the second phase of the bank modernization project and payment system, connecting the new payment system to all branches; develop specific technical procedures with dedicated IT departments to handle security and payment network risks promptly.

7. Implement loan classification, provision establishment, and utilization to manage credit risks, ensuring all branches comply with the State Bank's regulations; implement customer credit rating; upgrade and ensure the accuracy and timeliness of information reporting and risk management systems.

8. Statistically monitor and strictly control the quality and volume of loans, ensuring timely debt recovery for investment and securities pledge, real estate business, gold-backed loans, and other high-risk loans due to market price fluctuations. Loan issuance must comply with legal regulations, not chasing after hot prices of goods and services.

II. FOR UNITS UNDER THE STATE BANK

1. According to their functions and tasks, units at the headquarters of the State Bank shall perform the following tasks:

a) Assist the Governor of the State Bank in drafting and submitting to the Government for promulgation or promulgating within their authority guiding documents for the Foreign Exchange Ordinance in accordance with the schedule, ensuring consistency, transparency, convenience, and compliance with international practices and customs, preventing potential foreign exchange risks.

b) Perfect the information mechanism, reporting, monitoring, and early warning system to enhance market foreign exchange management and control capabilities, promptly identifying hidden risks to take appropriate measures.

c) Complete the development of normative legal documents according to Decision No. 1891/QĐ-NHNN dated December 29, 2005 of the Governor of the State Bank approving the State Bank's legal normative document development program for 2006 and the industry work program for 2006.

d) Guide and urge credit organizations to issue regulations on minimum standards and requirements for an effective risk management system applicable within their system, including internal control and audit systems, asset and liability management, credit risk management, liquidity, and market risk management.

đ) Submit to the Governor of the State Bank for revision of the content of normative legal documents to ensure the safe and efficient operation of the national payment system, retail payment systems, especially those related to credit organization payment card services.

Average loan repayment period is 10 years;) Conduct a comprehensive assessment of payment risk levels and apply information technology to propose and implement integrated risk prevention solutions; develop necessary norms and standards as a basis for payment system investment approval and regularly warn credit organizations of risks.

g) Assist the Governor of the State Bank in coordinating with the Ministry of Finance to continue issuing revisions and completing accounting systems in line with international accounting standards.

2. Regarding the State Bank of Vietnam Inspectorate:

a) Establishing a risk monitoring system in banking operations capable of early warning for credit institutions; submitting to the Governor of the State Bank of Vietnam for issuance of new regulations to assess and rank credit institutions according to the CAMELS standards. Setting up a system of rules, procedures, and inspection manuals based on risk, while conducting a comprehensive evaluation of the bank's inspection and supervision work according to the 25 fundamental principles of the Basel Committee.

b) Cooperating with relevant departments and provincial branches of the State Bank of Vietnam under central cities to strengthen the inspection and control of business activities of credit institutions, particularly monetary business, lending, foreign exchange trading, payment, fund transfer, and information technology applications to promptly correct deficiencies in compliance with legal provisions, detect and prevent risks during the operation of credit institutions.

3. Regarding the provincial branches of the State Bank of Vietnam under central cities:

a) Continuously monitoring, inspecting, and supervising the implementation of legal regulations and unfair competition situations in the business operations of credit institutions within their province or city; proactively urging and coordinating with credit institutions within their jurisdiction to prevent and promptly address violations and risks.

b) Reporting to the Governor of the State Bank of Vietnam and proposing timely solutions to handle improper practices and high-risk situations that may affect the reputation and safety of credit institutions.

III. IMPLEMENTATION

1. This Directive shall take effect fifteen days after its publication in the Official Gazette.

2. The Director of the Office, Heads of the Monetary Policy Department, Heads of units under the State Bank of Vietnam, Governors of provincial branches of the State Bank of Vietnam under central cities; Boards of Directors and General Managers (Directors) of credit institutions are responsible for implementing this Directive./.