Circular No. 07/2009/TT-NHNN on the ratios ensuring safety in the operation of small-scale financial organizations

CIRCULAR

Provisions on safety ratios in the operation of small-scale financial organizations

Pursuant to the Law on the State Bank of Vietnam No. 01/1997/QH10 dated 1997 and the Law Amending and Supplementing Certain Articles of the Law on the State Bank of Vietnam No. 10/2003/QH11 dated 2003;
Pursuant to the Law on Credit Organizations No. 02/1997/QH10 dated 1997 and the Law Amending and Supplementing Certain Articles of the Law on Credit Organizations No. 20/2004/QH11 dated 2004;
Pursuant to Decree No. 178/2007/NĐ-CP dated December 3, 2007 of the Government stipulating the functions, tasks, powers, and organizational structure of Ministries and ministerial-level agencies;
Pursuant to Decree No. 28/2005/NĐ-CP dated March 9, 2005 on the organization and operation of small-scale financial organizations in Vietnam and Decree No. 165/2007/NĐ-CP dated November 15, 2007 amending and supplementing, abolishing certain articles of Decree No. 28/2005/NĐ-CP;
The State Bank of Vietnam (hereinafter referred to as the State Bank) shall stipulate safety ratios in the operation of small-scale financial organizations as follows:

PART I

GENERAL PROVISIONS

Article 1. Scope of regulation and applicable subjects

1. Small-scale financial organizations operating in Vietnam must maintain safety ratios as prescribed in this Circular, including:

a) Minimum capital adequacy ratio.

b) Loan limits for customers.

c) Liquidity ratio.

2. Based on the results of inspections and examinations by banking supervisory authorities regarding the operational situation of small-scale financial organizations, the State Bank may require small-scale financial organizations to maintain higher safety ratios than those specified in Article 4 and Article 7 of this Circular.

Article 2. Definitions

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

1. Capital adequacy ratio (3)/(4) is the total value of assets "Have" of small-scale financial organizations calculated according to the risk levels prescribed in Article 5 of this Circular.

2. Amount Due are on-balance sheet assets formed from deposits, loans, and other business activities carried out in accordance with the guidance of the State Bank.

3. Borrower's Real Estate includes land that the borrower has lawful rights to use; buildings and construction works attached to the land, and other real estate assets as defined by law belonging to the borrower. In cases where the real estate has been leased by the borrower, it must be agreed upon by the lessee to be used as collateral during the lease period.

4. A Customer is a legal entity, individual, household, cooperative, private enterprise, partnership company, or other organization having credit relations with small-scale financial organizations.

5. Related Customer Group includes two or more customers having credit relations with small-scale financial organizations and being related to each other, falling under one of the following situations:

5.1. An individual customer holding at least 25% of the charter capital of a legal entity which is a customer of a small-scale financial organization.

5.2. An individual customer who is a member of a household as defined in the Civil Code, where such household is a customer of a small-scale financial organization or within the household there are other individuals (including independent individuals bearing responsibility with their own assets) also being customers of a small-scale financial organization.

5.3. An individual customer who is a member of a cooperative as defined in the Civil Code, where such cooperative is a customer of a small-scale financial organization.

5.4. An individual customer who is a partner in a partnership company which is a customer of a small-scale financial organization.

5.5. An individual customer who is the owner of a private enterprise which is a customer of a small-scale financial organization.

5.6. An individual customer holding a position as a member of the management, operation, and control body of a legal entity which is a customer of a small-scale financial organization.

5.7. A legal entity customer holding at least 50% of the charter capital of another legal entity which is a customer of a small-scale financial organization.

5.8. A legal entity customer which is a customer of a small-scale financial organization has its representative holding a position as a member of the management, operation, and control body of another legal entity which is also a customer of a small-scale financial organization.

6. Total Loan Balance includes all overdue and non-overdue loan balances of small-scale financial organizations.

7. Undistributed Profit is the portion of profit determined through an audit by an independent auditing organization after tax payment and setting aside funds as required by law, retained to supplement the capital of small-scale financial organizations as required by law.

Chapter II

SPECIFIC PROVISIONS

Article 3. Tier 1 own capital

1. The own capital of small-scale financial organizations includes:

1.1. Tier 1 Capital:

a) Registered capital;

b) Capital contributed by organizations and individuals without repayment to small-scale financial organizations;

c) Funds as prescribed by the Ministry of Finance (including: Additional Charter Capital Reserve Fund; Financial Reserve Fund; Business Development Investment Fund);

d) Undistributed profit.

Tier 1 capital serves as the basis for determining the limit on purchasing and investing in fixed assets of small-scale financial organizations.

1.2. Tier 2 Capital:

a) 50% of the increased value of fixed assets revalued according to the provisions of the law;

b) Debts of small-scale financial organizations satisfying the following conditions:

- Being a secondary creditor compared to other creditors, specifically: in all circumstances, the creditor can only be paid after the small-scale financial organization has settled all other creditors with and without collateral;

- Having an initial term of at least 10 years;

- Not secured by the assets of the small-scale financial organization itself;

- The small-scale financial organization may suspend interest payments and carry forward accrued interest to the next year if paying interest leads to a loss in the annual results;

- The creditor can only be repaid early by the small-scale financial organization after obtaining written approval from the State Bank;

- Interest rate adjustments can only be made after five years from the date of signing the contract and can only be adjusted once throughout the loan period.

c) General provision, maximum equal to 1.25% of the total risky assets "Have".

2. Limitations when determining Tier 2 Capital:

2.1. The total value of Tier 2 Capital shall not exceed 100% of the value of Tier 1 Capital.

2.2. The total value of the debts specified in point 1.2.b Clause 1 of this Article shall not exceed 50% of the value of Tier 1 capital.

2.3. During the five years immediately preceding the maturity date, the debts included in Tier 2 capital must be deducted annually at a rate of 20% of their initial value.

3. Items to be deducted from own capital:

3.1. The entire portion of the decrease in the value of fixed assets due to revaluation as prescribed by law.

3.2. Business losses, including accumulated losses.

Article 4. Minimum Capital Adequacy Ratio

1. Small-scale financial organizations must maintain a minimum ratio of 10% between own capital and total risk-weighted assets.

2. The method for determining the minimum capital adequacy ratio is provided in Appendix A attached to this Circular.

Article 5. Classification of Assets "Held"

Assets "Held" are categorized according to the following levels of risk:

1. The group of assets "Held" with a risk weight of 0% includes:

1.1. Cash;

1.2. Deposits at the State Bank;

1.3. Loans made using entrusted funds under agency agreements, where the small-scale financial organization only receives agency fees and does not bear the risk;

1.4. Loans fully secured by deposits (voluntary savings and/or mandatory savings) at the small-scale financial organization itself;

1.5. The principal and interest of loans secured by mandatory savings at the small-scale financial organization itself;

1.6. Claims against the Government of Vietnam, including government bonds (treasury bills, treasury bonds, central construction bonds, investment bonds, national construction certificates), government-guaranteed bonds;

1.7. Loans secured by securities issued by the Government or the State Bank.

2. The group of assets "Held" with a risk weight of 20% includes:

2.1. Deposits at commercial banks and domestic credit institutions;

2.2. Loan balances (principal and interest) owed by credit institutions and other small-scale financial organizations (if any);

2.3. Loan balances (principal and interest) secured by deposits at credit institutions in Vietnam;

2.4. Loan balances (principal and interest) secured by securities issued by credit institutions in Vietnam and state financial organizations;

2.5. Cash currently being collected.

3. The group of assets "Held" with a risk weight of 50% includes:

3.1. Loan balances (principal and interest) secured by real estate of the borrower;

3.2. Small-scale credit balances (principal and interest) to small-scale financial customers with a loan term of less than one year.

4. The group of assets "Held" with a risk weight of 100% includes:

4.1. Real estate and other fixed assets;

4.2. Other receivables except those specified in Clauses 1, 2, and 3 of this Article.

Article 6. Internal Regulations

1. Based on the provisions of this Circular, current regulations of the State Bank, and actual operations, small-scale financial organizations must establish and promulgate internal regulations regarding:

1.1. Determining and classifying a single customer, a related customer group, lending limits applicable to a single customer and a related customer group, including the following contents:

a) Criteria for determining and classifying a single customer and a related customer group as stipulated in Clause 4 and Clause 5 of Article 2 of this Circular.

b) Determining lending limits applicable to a single customer and a related customer group; authority to decide on lending to a single customer and a related customer group.

c) Determining the method for monitoring loans exceeding 5% of the small-scale financial organization's own capital.

d) Limits and maximum lending ratios in total loan balances to small-scale financial customers and non-small-scale financial customers.

1.2. Management of payment capacity with the main contents as follows:

a) Assigning staff to monitor the ability to pay of the small-scale financial organization.

b) Measures to ensure payment capacity in cases of temporary shortfalls in payment capacity, as well as in cases of potential insolvency.

c) Provisions for managing cash reserves, income, expenditure, daily sources of funds, and holding securities that can easily be converted into cash.

2. The Board of Directors of the small-scale financial organization is responsible for reviewing and evaluating the internal regulations set forth in Clause 1 of this Article to promptly adjust them when necessary to ensure safety in the operation of the small-scale financial organization.

Article 7. Lending Limits for Customers

1. The lending limits of small-scale financial organizations for customers are as follows:

1.1. The total loan balance of a small-scale financial organization to a non-financial customer shall not exceed 10% of the small-scale financial organization's own capital.

1.2. The total loan balance of a small-scale financial organization to a small-scale financial customer shall not exceed 30 million VND. This lending limit may be adjusted by the Governor of the State Bank for each period.

1.3. The total loan balance of a small-scale financial organization to a related customer group as defined in Clause 5 of Article 2 of this Circular shall not exceed 15% of the small-scale financial organization's own capital, with the lending limit for a single customer not exceeding the ratio specified in points 1.1 and 1.2 of Clause 1 of this Article.

2. The limits specified in Clause 1 of this Article do not apply to the following cases:

2.1. Loans from entrusted funds of the Government of Vietnam, organizations, and individuals where the small-scale financial organization does not need to establish and use provisions to handle lending risks.

2.2. Loans fully secured by customer deposits at the small-scale financial organization itself.

2.3. Loans to credit institutions and other small-scale financial organizations with a term of less than one year (if any).

2.4. Loans secured by government bonds of Vietnam or government-guaranteed bonds.

Article 8. Liquidity Ratio

1. Small-scale financial organizations must maintain a liquidity ratio of at least 20% on a continuous basis.

2. This ratio is calculated as follows:

2.1. Numerator: includes cash and liquid assets, specifically comprising:

a) Cash;

b) Deposits at the State Bank (excluding required reserve deposits);

c) Deposits at credit institutions;

d) Government bonds, government-guaranteed bonds.

2.2. Model number: Total deposits include mandatory savings and voluntary deposits.

3. The method for determining the liquidity coverage ratio shall be in accordance with Appendix B attached to this Circular.

Article 9. Reporting and handling violations

1. Small financial organizations shall report on compliance with the prescribed safety ratios in accordance with the reporting system established by the Governor of the State Bank of Vietnam applicable to small financial organizations.

2. Small financial organizations that violate the provisions of this Circular shall be subject to administrative penalties according to the level of violation as stipulated by law.

Chapter III

IMPLEMENTING PROVISIONS

Article 10. Effectiveness

This Circular shall take effect forty-five days from the date of signature.

Article 11. Responsibility for Implementation

The Director of the Office, the Heads of the Department of Banks and Non-Bank Credit Institutions, the Heads of relevant units under the State Bank of Vietnam, the Governors of the State Bank of Vietnam branches in provinces and centrally-administered cities, the Chairmen of the Boards of Directors and General Managers (Directors) of small financial organizations are responsible for implementing this Circular.

During implementation, if there are any difficulties, they are requested to promptly reflect them to the State Bank of Vietnam for guidance and resolution.