Circular No. 02/2013/TT-NHNN stipulates on the classification of assets, the level of specific provisions for risk, the method of establishing risk provisions, and the use of provisions to address risks in the operations of credit institutions and foreign bank branches.

 

CIRCULAR

Provisions on classification of assets held, provisioning rates, methods for establishing provisions for risks, and the use of provisions to address risks in operations

risk and the use of provisions to handle risks in operations

 of credit institutions, branches of foreign banks

_______________________

 

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

Pursuant to the Law on Credit Organizations No. 47/2010/QH12 dated June 16, 2010;

Pursuant to Decree No. 96/2008/NĐ-CP dated May 26, 2008 of the Government stipulating the functions, tasks, powers, and organizational structure of the State Bank of Vietnam;

After reaching consensus with the Ministry of Finance;

At the proposal of the Director of Banking Inspection and Supervision;

The Governor of the State Bank of Vietnam shall issue a Circular to stipulate the classification of assets held, provisioning rates, methods for establishing provisions for risks, and the use of provisions to handle risks in operations for credit institutions and foreign bank branches.

PART I

GENERAL PROVISIONS

Article 1. Scope of Regulation

1. This Circular stipulates the classification, provisioning rates, methods for establishing provisions for credit risks, and the use of provisions to handle credit risks in banking activities for the following assets held (hereinafter referred to as debts):

a) Lending;

b) Financial leasing;

c) Discounting, rediscounting transferable instruments and other negotiable instruments;

d) Factoring;

d) Credit facilities provided in the form of credit card issuance;

e) Payments made under off-balance sheet commitments;

g) The amount purchased and entrusted to purchase corporate bonds that have not been listed on the stock market or registered for trading on the over-the-counter market of unlisted public companies (Upcom) (hereinafter referred to as unlisted bonds), excluding purchases of unlisted bonds with entrusted funds where the entruster bears the risk;

h) Entrusted lending;

i) Deposits (excluding demand deposits) at domestic credit institutions and foreign bank branches in Vietnam in accordance with the law, and deposits at foreign credit institutions.

2. Off-balance sheet commitments, including guarantees, acceptance of payment, irrevocable loan commitments (hereinafter collectively referred to as off-balance sheet commitments) must be classified according to this Circular to manage and monitor the quality of credit provision activities of credit institutions and foreign bank branches.

3. The establishment and use of provisions for inventory write-downs, investment losses, and bad debt provisions, except for the items specified in Clause 1 of this Article, shall be carried out in accordance with the law.

Article 2. Applicability

1. This Circular applies to:

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

b) Foreign bank branches.

2. Foreign bank branches applying the risk provisioning policy of the foreign bank to classify debts, off-balance sheet commitments, establish and use provisions to address risks must be approved by the State Bank of Vietnam (hereinafter referred to as the State Bank) with the condition that the foreign bank's risk provisioning policy is more advanced and superior to the provisions of Article 6 of this Circular. The file, procedures, and process for obtaining approval from the State Bank to apply the foreign bank's risk provisioning policy in accordance with Clause 3 and Clause 4 of Article 11 of this Circular.

3. Foreign bank branches that have been approved by the State Bank to apply the foreign bank's risk provisioning policy before the effective date of this Circular shall implement the foreign bank's regulations. During the inspection and supervision process, if the State Bank assesses that the foreign bank's risk provisioning policy does not adequately reflect the level of credit risk in actual banking operations in Vietnam, the State Bank may require the foreign bank branch to classify debts, off-balance sheet commitments, establish and use provisions to address risks in accordance with this Circular.

4. Credit institutions during the implementation period of restructuring plans, mergers, and acquisitions experiencing difficulties in classifying debts, off-balance sheet commitments, establishing and using provisions to address risks shall report to the Governor of the State Bank to take measures to ensure system safety.

Article 3. Explanation of Terms

In this Circular, the following terms shall be understood as follows:

1. Credit risk in banking activities (hereinafter referred to as risk) is potential loss to the debts of credit institutions and foreign bank branches due to customers failing to fulfill or being unable to fulfill part or all of their obligations as agreed.

2. Debt is the amount of money that credit institutions and foreign bank branches have deposited or disbursed in installments according to agreements for debts specified in Clause 1 of Article 1 of this Circular.

3. Risk provision is the amount of money set aside and recorded as operating expenses to provide for potential losses on the debts of credit institutions and foreign bank branches. Risk provisions include specific provisions and general provisions.

4. Specific provision is the amount of money set aside to provide for potential losses on specific individual debts.

5. General reserve the amount of money set aside to provide for potential losses that cannot be identified when setting aside specific provisions.

6. Overdue debt is a debt where a portion or the entire principal and/or interest has become overdue.

7. Restructured debt is debt that credit institutions and foreign bank branches agree to adjust repayment terms and/or extend the debt for customers who are unable to repay the principal and/or interest on time as stipulated in the contract but are assessed by the credit institution and foreign bank branch to be able to fully repay the principal and interest according to the restructured repayment schedule.

8. Non-performing debt (NPL) belongs to groups 3, 4, and 5.

9. Earnings before interest and tax to equity ratio is the ratio between non-performing debt and total debt from group 1 to group 5.

10. Bad credit ratio is the ratio between total debt and off-balance sheet commitments from group 3 to group 5 compared to total debt and off-balance sheet commitments from group 1 to group 5.

11. Customer is an entity (including credit institutions and foreign bank branches), individuals, and other subjects as prescribed by civil law having credit, deposit relationships; issuing bonds, securities that have been purchased by credit institutions and foreign bank branches.

12. Using provisions to address risks involves credit institutions and foreign bank branches recording transferred risk-managed debt accounts as off-balance sheet accounts and continuing to monitor and take measures to fully recover the debt according to signed contracts and agreed commitments with customers.

Article 4. Collection of Customer Data and Information and Information Technology

1. Credit institutions and foreign bank branches must take measures and regularly collect and utilize information and data about customers, including information from the Credit Information Center (CIC), to:

a) Amend and supplement the internal credit rating system, internal regulations on granting credit, managing loans, and risk management policies.

b) Monitor and assess the debt repayment capacity of customers after they have been rated according to the internal credit rating system, and take appropriate risk management measures and credit quality management measures.

c) Implement loan classification, off-balance sheet commitments, provision for risk, and use provisions in accordance with the provisions of this Circular.

2. Credit organizations and foreign bank branches must establish an information technology system throughout their organization to meet the requirements for managing data and customer information, operating and managing the internal credit rating system, risk management, implementing loan classification, off-balance sheet commitments, provision establishment and usage for risk handling.

Article 5. Internal Credit Rating System

1. The internal credit rating system is a system consisting of financial and non-financial indicators, processes for evaluating customers based on qualitative and quantitative aspects regarding finance, business conditions, management, and reputation. The internal credit rating system must be established for different customer categories, including restricted credit-granting entities and related parties of these entities.

2. The internal credit rating system must be established according to the following principles:

a) Be based on data and information collected from all customers over at least one (1) consecutive year prior to the year of establishing the internal credit rating system.

b) At least once a year, the internal credit rating system must be reviewed, amended, and supplemented based on customer data and information collected during that year.

c) Specify rating levels corresponding to risk levels from low to high.

d) Be approved for implementation by the Board of Directors (for joint-stock credit organizations), the Board of Members (for limited liability credit organizations), or the General Director or Director (for foreign bank branches).

3. Credit organizations and foreign bank branches must establish an internal credit rating system to rate customers periodically or when necessary, serving as a basis for reviewing credit grants, managing credit quality, and developing risk management policies suitable for the scope of operations and actual conditions of the credit organization or foreign bank branch.

Non-bank credit institutions are not required to have an internal credit rating system.

4. Within ten (10) days from the date of issuance, amendment, or supplementation of the internal credit rating system, credit organizations and foreign bank branches must directly send or mail via post office to the State Bank (Bank Inspection and Supervision Department) the following documents:

a) In the case of new issuance:

(i) A report on the issuance and application of the internal credit rating system;

(ii) The internal credit rating system, documentation describing the internal credit rating system, procedures for collecting customer information and rating customers;

(iii) Guidelines for using the internal credit rating system, including the process of authorization and delegation in collecting customer information and rating customers.

b) In case of amendment or supplementation:

(i) A report on the modification and supplementation of the internal credit rating system, clearly stating the reasons for modification and supplementation;

(ii) Documents amending and supplementing the internal credit rating system and guidelines for using the internal credit rating system.

Article 6. Internal Regulations on Granting Credit, Managing Loans, and Risk Management Policies

1. Credit organizations and foreign bank branches must issue internal regulations on granting credit, managing loans, and risk management policies.

2. Minimum requirements for internal regulations on credit granting and loan management must be met, including:

a) Based on information and data collected from customers and the results of customer ranking according to the internal credit rating system;

b) Uniformly applied throughout the system as a basis for reviewing and granting credit and managing loans for specific customers;

c) Include credit policies for customers, which include provisions on credit granting conditions, credit limits, interest rates, application forms, procedures, approval processes, loan management;

d) Includes provisions to ensure compliance with the State Bank of Vietnam's regulations on safety ratios in the operations of credit institutions and foreign bank branches;

đ) Include provisions on the responsibilities and authorities of units and individuals in credit assessment, credit granting, credit quality management, collateral assessment, and collateral management;

e) Specifies procedures and contents for pre-, during-, and post-grant credit checks and controls;

g) Specifies guarantee measures, collateral asset assessment, and management;

h) Include provisions on self-assessment of collateral value, including principles, methods, procedures, and responsibilities of each unit and individual involved in collateral valuation in compliance with legal provisions on collateral and for determining the specific value of collateral to be deducted when calculating the amount of provision as specified in Clause 5, Article 12 of this Circular;

i) Specifies measures for debt recovery.

3. Minimum requirements for risk reserve policy include:

a) Comply with legal provisions on accounting systems, financial reporting, and statistics;

b) Include procedures for collecting customer information to ensure accurate loan classification, off-balance sheet commitments, bad debt management, non-performing loan management, and full provision establishment in accordance with regulations;

c) Specifically provide for loan classification, off-balance sheet commitments, provision levels, provision establishment methods, and the use of provisions for risk handling for each customer category periodically or unexpectedly;

d) Provide for the authorities and responsibilities of units and individuals in loan classification, off-balance sheet commitments, provision establishment, and provision usage for risk handling in activities;

đ) Have mechanisms for monitoring, supervising, and reporting on the contents stipulated from point a to point d of this clause.

Article 7. Report on internal regulations on credit granting, loan management, and risk reserve policy

Within ten (10) days from the date of issuance, amendment, or supplementation of internal regulations on credit granting, loan management, and risk reserve policy, credit organizations and foreign bank branches must directly submit or send by post to the State Bank (Bank Inspection and Supervision Authority) one set of documents including the following:

a) In the case of new issuance:

(i) A report document on the issuance of internal regulations on credit granting, loan management, and risk reserve policy.

(ii) Internal regulations on credit granting, loan management, and risk reserve policy.

b) In case of amendment or supplementation:

(i) A report document on the amendment or supplementation of internal regulations on credit granting, loan management, and risk reserve policy, clearly stating the reasons for such amendments or supplements.

(ii) Documents amending or supplementing internal regulations on credit granting, loan management, and risk reserve policy.

Article 8. Time Points for Classification, Provisioning, and Utilization of Provisions for Risk Management

1. At least once every quarter, within the first fifteen (15) days of the first month of each quarter, credit organizations and foreign bank branches must independently classify debts and off-balance sheet commitments up to the end of the last working day of the previous quarter based on the debt repayment capacity of customers as stipulated in Articles 10 and 11 of this Circular and submit the results of self-classification of debts and off-balance sheet commitments to CIC.

For the final quarter of the accounting year, within the first fifteen (15) working days of the last month, credit organizations and foreign bank branches must classify debts and off-balance sheet commitments up to the end of the last working day of the second month of the final quarter of the accounting period.

In addition to the classification time points mentioned above, credit organizations and foreign bank branches must classify debts and off-balance sheet commitments according to their internal regulations.

2. Within three (3) days from the date of receiving the results of self-classification of debts and off-balance sheet commitments of credit organizations and foreign bank branches as stipulated in Clause 1 of this Article, CIC must compile a list of customers with the highest risk level that these organizations have self-classified and provide it upon request of the credit organizations and foreign bank branches.

3. Within a maximum of five (5) days from the date CIC compiles the customer list as stipulated in Clause 2 of this Article, credit organizations and foreign bank branches must request CIC to provide the aforementioned customer list, adjust the classification results of customer debts and off-balance sheet commitments based on the group classification results provided by CIC according to the principles stipulated in Clause 1 of Article 9; provision sufficient funds and utilize provisions to manage risks as prescribed in this Circular.

Chapter II

SPECIFIC PROVISIONS

Section 1

DEBT CLASSIFICATION AND OFF-BALANCE SHEET COMMITMENTS

Article 9. Methods and Principles of Classification

1. Credit organizations and foreign bank branches must independently classify debts and off-balance sheet commitments according to Articles 10 and 11 of this Circular and must use the group classification results for customers provided by CIC at the time of classification to adjust their self-classification results of debts and off-balance sheet commitments. If the customer's debts and off-balance sheet commitments are classified into a lower risk group compared to the list provided by CIC, credit organizations and foreign bank branches must adjust their classification results of debts and off-balance sheet commitments according to the group provided by CIC.

2. The entire balance of debts and value of off-balance sheet commitments of a customer at a credit organization or foreign bank branch must be classified into the same group. For customers having two or more debts and/or off-balance sheet commitments at a credit organization or foreign bank branch where any debt or off-balance sheet commitment is classified into a higher risk group than others, the credit organization or foreign bank branch must reclassify the remaining debts or off-balance sheet commitments of the customer into the highest risk group.

3. For joint credit facilities, each participating credit organization or foreign bank branch must independently perform classification and promptly notify each other of the classification results. All debts and off-balance sheet commitments of customers receiving joint credit facilities at credit organizations and foreign bank branches must be classified into the highest risk group that one participating credit organization or foreign bank branch has classified.

4. For entrusted credit facilities where the entrustee has not disbursed funds according to the entrustment agreement, the entrusting credit organization or foreign bank branch must classify these entrusted facilities as a loan to the entrustee.

5. For sold debts that have not been recovered, or sold debts where the buyer has the right to reclaim from the seller, the unrecovered amount and the outstanding sold debt with the right to reclaim from the seller must be classified and provisions for risk must be established according to this Circular as if the debt had not been sold.

6. For purchased debts, credit organizations and foreign bank branches must classify the amount paid to purchase the debt into a risk group not lower than the group into which the debt was classified before purchase.

7. For amounts invested in purchasing corporate bonds not listed, credit organizations and foreign bank branches must classify the investment amount as an unsecured loan to the bond issuer, except when the corporate bond is secured by assets.

8. For discounting under the form of purchasing negotiable instruments and other securities of the beneficiary with a maturity date, credit organizations and foreign bank branches must classify the discounting as a loan to the beneficiary.

9. For debts where lending and credit provision are carried out based on the approval or directive of the Government, the Prime Minister, financial institutions shall classify debts, establish and utilize provisions to address risks according to the decision of the Governor of the State Bank for each specific case.

10. For debts specified in point c (iv) clause 1 Article 10 of this Circular, in principle, financial institutions, foreign bank branches must immediately recover the overdue principal and interest in violation, and may not restructure the repayment period; during the period when recovery has not been achieved, they must classify debts and establish provisions in accordance with the provisions of this Circular.

11. Based on the results of inspections, supervision, and related credit information, the State Bank has the right to require financial institutions, foreign bank branches to reassess and reclassify specific debts and establish adequate and appropriate provisions in accordance with the level of risk of those debts.

Article 10. Classification of debts and off-balance sheet commitments by quantitative method

1. Credit institutions and foreign bank branches shall classify debts (excluding substitute payments under off-balance sheet commitments) into five groups as follows:

a) Group 1 (Standard Debts) includes:

(i) Debts within the term and assessed as having the ability to fully recover both principal and timely interest;

(ii) Overdue debts under ten days and assessed as having the ability to fully recover both overdue principal and interest and timely remaining principal and interest;

(iii) Debts classified into Group 1 as stipulated in clause 2 of this Article.

b) Group 2 (Debts of Concern) includes:

(i) Debts overdue from ten to ninety days;

(ii) Debts with the first restructuring of the repayment period;

(iii) Debts classified into Group 2 as stipulated in clauses 2 and 3 of this Article.

c) Group 3 (Substandard Debts) includes:

(i) Debts overdue from ninety-one to one hundred eighty days;

(ii) Debts with the first extension of the repayment period;

(iii) Debts exempted or reduced interest due to the borrower's inability to pay full interest as stipulated in the credit agreement;

(iv) Debts falling into one of the following cases:

- Debts of customers or guarantors who are organizations or individuals belonging to the restricted credit-granting categories as prescribed by law;

- Debts secured by shares of the financial institution itself or its subsidiary or funds borrowed to invest in another financial institution based on the financial institution granting loans receiving collateral in the form of shares of the financial institution receiving capital contribution;

- Debts without collateral or granted with preferential conditions or value exceeding five percent of the financial institution's own capital when granted to restricted credit-granting customers as prescribed by law;

- Debts granted to subsidiaries, associated companies of the financial institution or enterprises in which the financial institution holds control exceeding the prescribed limits;

- Debts exceeding credit limits except in cases permitted to exceed such limits as prescribed by law;

- Debts violating laws on credit granting, foreign exchange management, and safety ratio requirements for financial institutions;

- Debts violating internal regulations on credit granting, loan management, and risk reserve policies of financial institutions;

(v) Debts being recovered pursuant to inspection conclusions;

(vi) Debts classified into Group 3 as stipulated in clauses 2 and 3 of this Article.

d) Group 4 (Doubtful Debts) includes:

(i) Debts overdue from one hundred eighty-one to three hundred sixty days;

(ii) Debts with the first restructuring of the repayment period overdue less than ninety days according to the newly structured repayment period;

(iii) Debts with the second restructuring of the repayment period;

(iv) Debts specified in point c (iv) clause 1 of this Article overdue from thirty to sixty days from the date of the recovery decision;

(v) Debts required to be recovered pursuant to inspection conclusions but have exceeded the recovery deadline by more than sixty days without recovery;

(vi) Debts classified into Group 4 as stipulated in clauses 2 and 3 of this Article.

đ) Group 5 (Loss Probable Debts) includes:

(i) Debts overdue over three hundred sixty days;

(ii) Debts with the first restructuring of the repayment period overdue ninety days or more according to the newly structured repayment period;

(iii) Debts with the second restructuring of the repayment period overdue according to the newly structured second repayment period;

(iv) Debts with the third or subsequent restructuring of the repayment period, including those not yet overdue or already overdue;

(v) Debts specified in point c (iv) clause 1 of this Article overdue over sixty days from the date of the recovery decision;

(vi) Debts required to be recovered pursuant to inspection conclusions but have exceeded the recovery deadline by more than sixty days without recovery;

(vii) Debts of customers who are financial institutions placed under special control by the State Bank, foreign bank branches whose capital and assets are frozen;

(viii) Debts classified into Group 5 as stipulated in clause 3 of this Article.

2. Debts shall be classified into lower risk groups in the following cases:

a) For overdue debts, financial institutions, foreign bank branches shall reclassify into lower-risk debt groups (including Group 1) when meeting all of the following conditions:

(i) The customer has fully repaid the overdue principal and interest (including interest applied to overdue principal) and the principal and interest of subsequent repayment periods for at least three months for medium and long-term debts, and one month for short-term debts, starting from the date of full repayment of overdue principal and interest;

(ii) There are documents and records proving the customer's repayment;

(iii) Credit institutions and foreign bank branches have sufficient information and documents to assess the customer's ability to repay the remaining principal and interest on time.

b) For restructured debts, financial institutions, foreign bank branches shall reclassify into lower-risk debt groups (including Group 1) when meeting all of the following conditions:

(i) The customer has fully repaid the principal and interest according to the restructured repayment period for at least three months for medium and long-term debts, and one month for short-term debts, starting from the date of full repayment of principal and interest according to the restructured repayment period;

(ii) There are documents and records proving the customer's repayment;

(iii) Credit institutions and foreign bank branches have sufficient information and documents to assess the customer's ability to repay the remaining principal and interest on time according to the restructured schedule.

3. Debts shall be classified into higher risk groups in the following cases:

a) Unfavorable changes occur in the environment or business sector directly impacting the customer's ability to repay (natural disasters, epidemics, wars, economic environment);

b) Indicators of profitability, liquidity, debt-to-equity ratio, cash flow, and the customer's ability to repay show continuous decline or significant negative fluctuations through three consecutive assessments and classifications;

c) The customer fails to provide complete, timely, and truthful financial information as requested by the financial institution, foreign bank branch for assessing the customer's ability to repay.

d) A debt that has been classified into groups 2, 3, or 4 according to the provisions of points a, b, and c of this clause for at least one year but does not meet the conditions to be classified into a lower risk group.

đ) Debts where the credit-granting act is subject to administrative violation penalties under the law.

4. Classification of off-balance sheet commitments and substitute payments under off-balance sheet commitments:

a) Classification of off-balance sheet commitments:

(i) Classify into Group 1 if the credit institution, foreign bank branch assesses that the customer has the ability to fully fulfill all obligations as committed.

(ii) Classify into Group 2 or higher if the credit institution, foreign bank branch assesses that the customer does not have the ability to fulfill the obligations as committed.

(iii) Classify into Group 3 or higher for off-balance sheet commitments falling under one of the cases specified in point c of sub-clause (iv) of Clause 1 of this Article.

b) Classification of substitute payments under off-balance sheet commitments:

(i) The overdue date is calculated from the day the credit institution, foreign bank branch fulfills its obligation as committed.

(ii) Substitute payments under off-balance sheet commitments are classified as follows:

- Classify into Group 3 if overdue for less than 30 days;

- Classify into Group 4 if overdue from 30 days to less than 90 days;

- Classify into Group 5 if overdue for 90 days or more.

In case the substituted payment is classified into a lower risk group than the off-balance sheet commitment it replaces, as stipulated in point a (ii) and point a (iii) of this clause, it must be transferred to the group that the off-balance sheet commitment was classified into.

Article 11. Classification of debts and off-balance sheet commitments by qualitative method

1. Credit institutions, foreign bank branches classify debts and off-balance sheet commitments into five groups as follows:

a) Group 1 (Standard Loans) includes: Debts assessed by the credit institution, foreign bank branch as having the ability to recover both principal and interest on time.

Off-balance sheet commitments that credit institutions, foreign bank branches assess as customers having the ability to fully perform their obligations under the commitment.

b) Group 2 (Substandard Loans) includes: Debts assessed by the credit institution, foreign bank branch as having the ability to recover both principal and interest on time but showing signs of reduced ability to repay.

Off-balance sheet commitments that credit institutions, foreign bank branches assess as customers having the ability to perform their obligations under the commitment but show signs of reduced ability to fulfill the commitment.

c) Group 3 (Doubtful Loans) includes: Debts assessed by the credit institution, foreign bank branch as lacking the ability to recover both principal and interest when due. These debts are assessed by the credit institution, foreign bank branch as potentially loss-making.

Off-balance sheet commitments that credit institutions, foreign bank branches assess as customers not having the ability to fully perform their obligations under the commitment.

d) Group 4 (Loss Loans) includes: Debts assessed by the credit institution, foreign bank branch as highly likely to result in losses.

Off-balance sheet commitments where the likelihood of customers not fulfilling the commitment is very high.

đ) Group 5 (Write-off Loans) includes: Debts assessed by the credit institution, foreign bank branch as unrecoverable and resulting in capital loss.

Off-balance sheet commitments where customers are no longer able to perform their commitment obligations.

2. Credit institutions, foreign bank branches implementing debt classification and off-balance sheet commitments as prescribed in Clause 1 of this Article must obtain the written approval of the State Bank when meeting the following conditions:

a) Having an internal credit rating system appropriate to business operations, customer types, nature of loan risks, and with a minimum trial period of one year;

b) Having a risk reserve policy as prescribed in Clause 3, Article 6 of this Circular;

c) Having a credit risk management policy, credit risk monitoring model, methods for identifying and measuring credit risk (including ways to evaluate customers' repayment ability under credit contracts, collateral, and debt recovery ability) and debt management;

d) Clearly defining the responsibilities and authorities of the Board of Directors, Board of Members, General Director (Director) in approving, implementing, and supervising the implementation of the internal credit rating system and the reserve policy of the credit institution, foreign bank branch, and ensuring the independence of risk management units.

3. Credit institutions, foreign bank branches shall directly submit or send by post to the State Bank (Bank Inspection and Supervision Department) one set of documents requesting the State Bank's approval for debt classification under Clause 1 of this Article and Clause 2 of Article 2 of this Circular, including the following documents:

a) A document from the foreign bank branch requesting the State Bank's approval to apply the foreign bank's risk reserve policy as stipulated in Clause 2 of Article 2 of this Circular; a document from the credit institution, foreign bank branch requesting the State Bank's approval to implement debt classification and off-balance sheet commitments using the qualitative method as stipulated in Clause 1 of this Article, which must prove compliance with the conditions specified in Clause 2 of this Article;

b) A copy of the foreign bank's risk reserve policy for cases stipulated in Clause 2 of Article 2 of this Circular; a copy of the internal credit rating system, risk reserve policy, credit risk management policy, and draft guidance documents for implementing debt classification, off-balance sheet commitments, and risk reserve provisioning of the credit institution, foreign bank branch for cases stipulated in Clause 2 of this Article.

4. Within thirty days from the date of receiving complete documents as prescribed in Clause 3 of this Article, the State Bank shall issue a document approving the credit institution, foreign bank branch. If disapproval, the State Bank shall issue a document stating the reasons.

5. Annually, credit institutions, foreign bank branches must reassess the internal credit rating system, risk reserve policy, and credit risk management policy to align with actual circumstances and legal regulations.

6. Credit institutions, foreign bank branches approved to implement debt classification and off-balance sheet commitments as prescribed in Clause 1 of this Article must simultaneously implement debt classification and off-balance sheet commitments as prescribed in Article 10 of this Circular. In case the classification results for a debt and off-balance sheet commitment differ between Article 10 and Clause 1 of this Article, the debt and off-balance sheet commitment must be classified into the higher risk group. The minimum period for simultaneously implementing debt classification and off-balance sheet commitments as prescribed in Articles 10 and 11 of this Circular is five years from the date of State Bank approval.

Section 2

ESTABLISHING RISK RESERVES

Article 12. Specific Provisions for Provisioning Reserves

The specific amount of provision to be set aside for each customer is calculated using the following formula:

Where:

- R: Total amount of specific provisioning reserves to be set aside for each customer;

- : is the total specific provision amount for each customer from the first outstanding balance to the nth outstanding balance.

Ri: is the specific provision amount to be set aside for each customer for the principal outstanding balance of the ith debt. Ri is determined using the following formula:

Ri = (Ai - Ci) x r

Where:

Ai: The principal outstanding balance of the ith debt;

Ci: the value of collateral deduction, financial lease assets (hereinafter referred to as collateral) of the ith debt;

F: the specific provision ratio according to the group as prescribed in Clause 2 of this Article.

In case Ci > Ai then Ri is calculated as 0.

2. The specific provisioning ratio for each group of debts is as follows:

a) Group 1: 0%;

b) Group 2: 5%;

c) Group 3: 20%;

d) Group 4: 50%;

đ) Group 5: 100%.

3. Collateral for deduction when calculating the specific provision amount (R) as prescribed in Clause 1 of this Article must satisfy the following conditions:

a) Credit institutions and foreign bank branches have the right to dispose of collateral assets in accordance with the guarantee contract and the provisions of the law when the customer fails to fulfill their obligations as committed;

b) The time for disposing of collateral assets as planned shall not exceed one (1) year for non-real estate collateral assets and not more than two (2) years for real estate collateral assets, counted from the date when credit institutions and foreign bank branches have the right to dispose of collateral assets;

Collateral assets must meet all conditions as prescribed by the law on secured transactions;

d) Collateral assets specified in point d Clause 5 of this Article must be appraised by an organization with appraisal functions as prescribed by the law in the following cases:

(i) Collateral assets valued at fifty billion dong or more for loans to customers who are related parties of credit institutions and foreign bank branches and credit-limited entities as stipulated in Article 127 of the Law on Credit Institutions.

(ii) Collateral assets valued at VND 200 billion or more, except for cases specified in point d(i) of this clause.

In case the organization with appraisal functions is unable to appraise or there is no organization with appraisal functions to appraise the collateral assets specified in points d(i) and d(ii) of this clause, then credit institutions and foreign bank branches shall appraise according to internal regulations stipulated in point h Clause 2 of Article 6 of this Circular.

In case collateral assets do not fully meet the conditions stipulated in points a, b, c, and d of this clause, the value of such collateral assets must be considered as zero.

4. The deduction value of collateral assets is determined by multiplying the value of the collateral assets specified in Clause 5 of this Article with the deduction ratio for each type of collateral asset as prescribed in Clause 6 of this Article.

Credit institutions and foreign bank branches shall independently determine the deduction ratio for each type of collateral asset based on the assessment of the recovery potential when disposing of such collateral assets but shall not exceed the maximum deduction ratio for each type of collateral asset as prescribed in Clause 6 of this Article.

5. The value of collateral assets is determined as follows:

a) Gold bars: Purchase price at the headquarters of the enterprise or credit institution owning the gold bar brand at the end of the day before the specific provision period. In case the purchase price is not listed, the value of the gold bar is determined according to point d of this clause.

b) Government bonds listed on the Stock Exchange: Reference price at the Stock Exchange at the end of the day before the specific provision period or at the nearest time before the specific provision period (if there is no reference price at the end of the day before the specific provision period).

c) Securities issued by enterprises (including credit institutions) listed on the Stock Exchange: Reference price at the Stock Exchange at the end of the day before the specific provision period or the nearest time before the specific provision period (if there is no reference price at the end of the day before the specific provision period).

Unlisted securities and other negotiable instruments issued by enterprises (including credit institutions): calculated at face value.

d) Chattels, real estate, and other types of collateral assets: The value of the collateral assets is appraised by an organization with appraisal functions as prescribed in point d Clause 3 of this Article or the value of the collateral assets is appraised according to internal regulations of credit institutions and foreign bank branches as prescribed in point h Clause 2 of Article 6 of this Circular. In case there is no valuation document for the collateral assets, the value of the collateral assets must be considered as zero.

đ) Financial lease assets (the value of leased assets under the financial lease contract minus rent payable): remaining rental amount according to the contract at the time of specific provision or the valuation value of the organization with appraisal functions as prescribed by the law.

6. Maximum deduction ratio for collateral assets:

a) Customer deposits in Vietnamese Dong: 100%;

b) Gold bars, except for gold bars specified in point i of this clause; customer deposits in foreign currency: 95%;

c) Government bonds, transferable instruments, negotiable instruments issued by the credit institution itself; savings cards, deposit certificates, bills, promissory notes issued by other credit institutions and foreign bank branches:

- Remaining term under 1 year: 95%;

- Remaining term from 1 year to 5 years: 85%;

- Remaining term over 5 years: 80%.

d) Securities issued by other credit institutions listed on the Stock Exchange: 70%;

đ) Securities issued by other enterprises listed on the Stock Exchange: 65%;

e) Unlisted securities, negotiable instruments, except those specified in point c of this clause, issued by credit institutions registered for listing on the Stock Exchange: 50%;

Unlisted securities, negotiable instruments, except those specified in point c of this clause, issued by credit institutions not registered for listing on the Stock Exchange: 30%;

g) Unlisted securities, negotiable instruments issued by enterprises that have registered securities listing on the Stock Exchange: 30%;

Unlisted securities, negotiable instruments issued by enterprises that have not registered securities listing on the Stock Exchange: 10%;

Real estate: 50%;

i) Unlisted gold bars, other gold, and other types of collateral assets: 30%.

Article 13. General Provision Reserve Rate

1. The amount of general provision required to be set aside is determined by 0.75% of the total balance of loans from Group 1 to Group 4, excluding the following:

a) Deposits specified in point i Clause 1 of Decision No. 1 of this Circular;

b) Loans and purchases of negotiable instruments with terms for other credit institutions and foreign bank branches in Vietnam.

2. Based on the results of inspection, supervision, and relevant credit information, the State Bank has the right to require commercial banks and foreign bank branches to set aside general provisions for the items specified in points a and b Clause 1 of this Article in accordance with the level of risk.

Article 14. Supplementing and Reversing the Provision Amount

1. In case the specific provision amount and the remaining general provision of the previous quarter are less than the required specific provision and general provision amount for the current quarter, credit institutions and foreign bank branches must make up the difference.

2. In case the specific provision amount and general provision amount remaining from the previous quarter exceed the amount of specific provision and general provision that must be set aside for the current quarter, the credit organization or foreign bank branch must reverse the excess amount.

Section 3

USE OF PROVISIONS TO HANDLE RISKS

Article 15. Risk Management Council

1. Composition of the Risk Management Council:

The credit organization must establish a Risk Management Council consisting of one member who is a member of the Board of Directors or Board of Members as chairman; one member who is a member of the risk management committee; one member who is the General Director (Director), and at least two other members decided by the Board of Directors or Board of Members.

The foreign bank branch must establish a Risk Management Council consisting of the General Director (Director) as chairman and at least two other members decided by the General Director (Director).

2. Responsibilities of the Risk Management Council:

Based on internal regulations regarding loan classification and off-balance-sheet commitments, provision setting aside, and using provisions to handle risks, the Risk Management Council is responsible for:

a) Approving the consolidated system-wide report on the results of collecting debts that have used provisions to manage risks, including the results of handling collateral assets and clearly stating the basis for approval;

b) Deciding or approving the classification of debts, off-balance sheet commitments, setting aside provisions, using provisions to manage risks throughout the system;

c) Deciding or approving measures to recover debts that have been handled with provisions throughout the system, including the disposal of collateral assets.

Article 16. Principles and Documentation for Managing Risks

1. Credit organizations and foreign bank branches shall use risk provisions to handle risks in the following cases:

a) The customer is an organization dissolved or bankrupt according to the law, or an individual who has died or gone missing;

b) Debts classified into Group 5.

2. Credit institutions, foreign bank branches use provisions to manage risks according to the following principles:

a) Using specific provisions established in accordance with Clause 1, Article 12 of this Circular to handle risks associated with that debt;

b) Selling collateral assets to recover debts: If specific provisions are insufficient to handle the debt, the credit organization or foreign bank branch must promptly proceed with selling the collateral assets in accordance with agreements with customers and the law to recover the debt;

c) In cases where specific provisions and the proceeds from selling collateral assets are insufficient to cover the risk of the debt, general provisions must be used to handle it;

d) Credit organizations and foreign bank branches shall record off-balance-sheet residual debts that have been handled according to points a, b, and c of this clause.

3. Risk handling files include:

a) Loan application files and debt collection files for debts that have been handled;

b) Collateral asset files and other related documents;

c) Decisions or approvals of the Risk Management Council on the results of loan classification and provision setting aside to handle risks;

d) Decisions or approvals of the Risk Management Council on risk handling;

đ) For cases where the customer is an organization or enterprise declared bankrupt or dissolved, in addition to the files mentioned in points a, b, c, and d of this clause, there must be certified copies of the court's bankruptcy declaration decision or dissolution decision according to the law;

e) For cases where the customer is an individual who has died or gone missing, in addition to the files specified in points a, b, c, and d of this clause, there must be certified copies of death certificates, confirmation letters, or disappearance declaration decisions according to the law.

Article 17. Responsibilities of credit organizations and foreign bank branches in handling risks

1. Using risk provisions to record related debts in off-balance-sheet accounts, monitoring, urging, and collecting debts is an internal task of credit organizations and foreign bank branches, which does not change the debtor's obligation to repay the debt handled for risks. After handling risks, credit organizations and foreign bank branches must take comprehensive and thorough measures to recover the debt and continue to monitor and collect the debt handled for risks according to the loan agreement and commitments agreed with the customer.

2. After a minimum period of five years from the date of using provisions to handle risks and after implementing all recovery measures decided by the Risk Management Council but failing to recover the debt, credit organizations and foreign bank branches may decide to write off the debt handled for risks from off-balance-sheet accounts.

For state-owned commercial banks and joint-stock commercial banks where the State owns more than 50% of the charter capital, writing off debts handled for risks from off-balance-sheet accounts can only be implemented when sufficient files and documents proving that all recovery measures have been taken but the debt could not be recovered, and must be approved in writing by the Ministry of Finance and the State Bank.

Files for debts that have been written off from off-balance-sheet accounts must be retained in accordance with the law, including risk handling files and all documents proving that credit organizations and foreign bank branches have taken all measures to recover the debt but failed to do so.

Article 18. Handling of recovered funds from risk-managed debts

Funds recovered from risk-managed debts, including funds recovered from the disposal of collateral assets, shall be considered as revenue for the accounting period of credit organizations and foreign bank branches.

Section 4

MANAGEMENT OF DEBT, OFF-BALANCE SHEET COMMITMENTS, PROVISIONING AND UTILIZATION OF RISK RESERVES

Article 19. Management of Debts, Off-Balance Sheet Commitments, Provisioning and Utilization

1. Credit organizations and foreign bank branches must have a debt management department responsible for off-balance sheet commitments (department, division, or equivalent) at their headquarters to manage the classification of debts, off-balance sheet commitments, provisioning, and utilization of provisions to address risks throughout the system.

2. Responsibilities of the department managing debt and off-balance sheet commitments:

a) Develop and submit to the General Director (Director) for submission to the Board of Directors, Board of Members (for credit organizations) or directly to the General Director (Director) (for foreign bank branches) for issuance:

(i) Internal credit rating system, amendments, and supplements to the internal credit rating system; regulations on managing and operating the internal credit rating system, data collection, and customer information supplementation;

(ii) Risk provisioning policy, amendment, and supplementation of the risk provisioning policy.

b) Manage and operate the internal credit rating system;

c) Summarize and report to the Risk Management Council the results of debt classification, off-balance sheet commitments, provisioning, and utilization of provisions to address risks, and the recovery of debts after utilizing provisions to address risks in the previous quarter throughout the system; propose to the Risk Management Council recommendations on debt classification, off-balance sheet commitments, provisioning, and utilization of provisions to address risks, measures to manage non-performing debts, and thorough debt recovery;

d) Manage and monitor units and individuals in the implementation of point d, Clause 3 of Article 6 of this Circular;

d) Provide information and coordinate with functional units at headquarters in developing and submitting to the General Director (Director) for submission to the Board of Directors, Board of Members (for credit organizations) or directly to the General Director (Director) (for foreign bank branches) for issuance or amendment of internal regulations on credit granting and loan management of credit organizations and foreign bank branches;

e) Perform other tasks as prescribed by the credit institution or foreign bank branch.

Section 5

ACCOUNTING AND REPORTING

Article 20. Accounting Entries

Credit organizations and foreign bank branches must record specific provisions and general provisions according to the accounting entries regulations stipulated by law.

Article 21. Reporting

1. Credit organizations and foreign bank branches must report the results of debt classification, off-balance sheet commitments, provisioning, and utilization of provisions to address risks in accordance with the reporting and statistical regime applicable to credit organizations and foreign bank branches issued by the State Bank.

2. Credit organizations and foreign bank branches are responsible for providing the National Credit Information Center with information on credit activities as prescribed by the State Bank and as stipulated in this Circular.

3. Credit organizations and foreign bank branches must report the results of debt classification, off-balance sheet commitments, provisioning, and utilization of provisions to address risks, and the results of debt recovery to the Ministry of Finance and the Provincial Tax Department where the credit organization or foreign bank branch is headquartered, in accordance with the tax reporting regulations of the Ministry of Finance.

Chapter III

RESPONSIBILITIES OF THE STATE BANK AND VIOLATION HANDLING

Article 22. Responsibilities of the State Bank

1. The Banking Inspection and Supervision Authority is responsible for:

a) Inspect and evaluate the construction of internal regulations pursuant to Article 6 of this Circular; the quality and level of compliance with requirements of internal regulations issued by credit institutions and foreign bank branches;

b) Inspect and audit the implementation by credit institutions and foreign bank branches of internal regulations on credit granting, loan management, and risk reserve policies;

c) Inspect and audit the implementation of debt classification, off-balance sheet commitments, provision establishment and utilization for risk handling by credit institutions and foreign bank branches;

d) Handle violations by credit institutions and foreign bank branches according to the provisions of Article 23 of this Circular;

e) Submit to the Governor of the State Bank for issuance of specific guidance documents regarding debt classification, provision establishment and utilization for risk handling for each case specified in Clause 3 and Clause 4 of Article 24 of this Circular; supervise the implementation by credit institutions and foreign bank branches according to the guidance documents of the State Bank;

2. The Department of Forecasting and Monetary Statistics shall base on the provisions of this Circular to develop and submit to the Governor of the State Bank for issuance of regulations on reporting systems for statistical purposes concerning debt classification, off-balance sheet commitments, provision establishment and utilization for risk handling in the operations of credit institutions and foreign bank branches;

3. The Finance and Accounting Department shall base on this Circular to develop and submit to the Governor of the State Bank guiding documents for implementing related accounting systems in accordance with the law.

4. The Credit Information Center shall be responsible for compiling and providing upon request of credit institutions and foreign bank branches lists of customers classified under the highest risk category as self-classified by credit institutions and foreign bank branches and reported according to the provisions of Clause 1 of Article 8 of this Circular;

Article 23. Handling Violations

Credit institutions, foreign bank branches, and related individuals who violate the provisions of this Circular, in addition to being required to classify debts and off-balance sheet commitments, establish risk reserves, and utilize reserves to handle risks in accordance with the provisions of this Circular, will be subject to administrative penalties based on the nature and degree of violation according to the regulations on administrative penalties in the monetary and banking sectors;

Chapter IV

IMPLEMENTING PROVISIONS

Article 24. Transitional Provisions

1. Foreign bank branches that have been approved by the State Bank to implement debt classification and risk reserve establishment and utilization for credit risk handling according to the regulations of the foreign bank prior to the effective date of this Circular shall continue to classify debts and off-balance sheet commitments and establish risk reserves according to the approval document of the State Bank;

2. Credit institutions that have been approved by the State Bank to implement risk reserve policies for debt classification according to the provisions of Article 7 of the Regulations on Debt Classification, Provision Establishment and Utilization for Risk Handling in Banking Operations issued together with Decision No. 493/2005/QĐ-NHNN dated April 22, 2005 of the Governor of the State Bank shall implement debt classification and off-balance sheet commitments according to the provisions of Article 10 and Clause 1 of Article 11 of this Circular within three years from the effective date of this Circular. In cases where the results of debt classification and off-balance sheet commitments according to the provisions of Article 10 and Clause 1 of Article 11 of this Circular differ, the debt and off-balance sheet commitment must be classified into the higher risk category;

3. Credit institutions and foreign bank branches with debts as stipulated in Point c(iv) Clause 1 of Article 10 of this Circular arising before the effective date of this Circular and not yet recovered shall be handled as follows:

a) Simultaneously with implementing recommendations and inspection conclusions (if any), within a maximum period of ten days from the effective date of this Circular, credit institutions and foreign bank branches must develop a resolution plan and report to the State Bank (Inspection and Supervision Authority), including at least the following contents:

(i) A detailed list of each debt and the name, address, tax code, and business sector of each debtor;

(ii) Results of debt classification and risk reserve establishment for each debt according to this Circular;

(iii) Financial situation and ability to establish risk reserves for each debt;

(iv) Plan for risk reserve establishment and utilization;

(v) Plan, measures, and commitments to ensure full recovery;

b) Credit institutions and foreign bank branches shall classify, establish, and utilize risk reserves for each debt according to the guidance of the State Bank for each specific case. During the period without guidance from the State Bank, credit institutions and foreign bank branches shall base on the overdue period specified in Article 10 of this Circular to classify debts, establish, and utilize risk reserves according to the provisions of this Circular;

4. Credit institutions and foreign bank branches with debts as stipulated in Points g, h, i Clause 1 of Article 1 of this Circular arising before the effective date of this Circular shall be handled as follows:

a) Within a maximum period of ten days from the effective date of this Circular, credit institutions and foreign bank branches must report to the State Bank (Inspection and Supervision Authority) at least the following contents:

(i) A detailed list of each debt and the name, address, tax code, and business sector of each debtor;

(ii) Results of debt classification and risk reserve establishment for each debt according to this Circular;

(iii) Financial situation and ability to establish risk reserves for each debt;

(iv) Plan for risk reserve establishment and utilization;

(v) Plan, measures, and commitments to ensure full recovery;

b) Credit institutions and foreign bank branches shall classify, establish, and utilize risk reserves for each debt according to the guidance of the State Bank for each specific case;

Article 25. Effective Date

1. This Circular takes effect from June 1, 2013.

2. Non-bank financial institutions shall classify debts and establish risk reserves for debts as stipulated in Point c (iv) Clause 1 of Article 10 of this Circular starting from January 1, 2014;

3. The following documents and regulations shall cease to be effective:

- Directive No. 05/2005/CT-NHNN dated April 26, 2005 of the Governor of the State Bank on the implementation of debt classification and risk reserve establishment according to Decision No. 493/2005/QĐ-NHNN dated April 22, 2005 of the Governor of the State Bank;

- Decision No. 780/QĐ-NHNN dated April 23, 2012 of the Governor of the State Bank on debt classification for debts with adjusted repayment terms and extended debts;

- The provisions on classification of debts, setting aside and using reserves to address credit risks in banking operations for commercial banks, non-bank financial institutions, and foreign bank branches as stipulated in Decision No. 493/2005/QĐ-NHNN dated April 22, 2005 issued by the Governor of the State Bank of Vietnam regarding the classification of debts, setting aside and using reserves to address credit risks in banking operations of financial institutions, and Decision No. 18/2007/QĐ-NHNN dated April 25, 2007 amending and supplementing certain articles of the regulations on the classification of debts, setting aside and using reserves to address credit risks in banking operations of financial institutions issued together with Decision No. 493/2005/QĐ-NHNN dated April 22, 2005.

4. The Director of the Office, the Head of Banking Inspection and Supervision, Heads of units under the State Bank of Vietnam, Governors of provincial and centrally-administered city branches of the State Bank of Vietnam, Chairmen of the Board of Directors, Chairmen of the Board of Members, and General Managers (Directors) of financial institutions and foreign bank branches are responsible for implementing this Circular./.