Circular No. 15/2010/TT-NHNN on the classification of debts, provision for and utilization of reserves to address lending risks in the operations of small-scale financial organizations

CIRCULAR

Provisions on classification of debts, establishment and utilization of provisions to address lending risks

 in the operations of small-scale financial organizations

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Based on the Law on the State Bank of Vietnam No. 01/1997/QH10 of 1997 and the Law Amending and Supplementing Certain Articles of the Law on the State Bank of Vietnam No. 10/2003/QH11 of 2003;

Based on the Law on Credit Institutions No. 02/1997/QH10 of 1997 and the Law Amending and Supplementing Certain Articles of the Law on Credit Institutions No. 20/2004/QH11 of 2004;

Based on Decree No. 96/2008/NĐ-CP dated August 26, 2008 of the Government stipulating the functions, tasks, powers, and organizational structure of the State Bank;

Based on Decree No. 28/2005/NĐ-CP dated March 9, 2005 on 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 the provisions on classification of debts, establishment and utilization of provisions to address lending risks in the operations of small-scale financial organizations as follows:

PART I

GENERAL PROVISIONS

Article 1. Scope of Regulation and Applicability

1. Small-scale financial organizations operating in Vietnam (hereinafter referred to as small-scale financial organizations) must implement debt classification, provision establishment, and utilization of provisions to address lending risks according to the provisions of this Circular.

2. The establishment of provisions and utilization of the financial reserve fund shall be carried out in accordance with the legal regulations on the financial system for small-scale financial organizations.

Article 2. Interpretation of Terms

In this Circular, the following terms are understood as follows:

1. Debt Classification is the arrangement of principal debt amounts into the debt groups specified in Clause 1, Article 4 of this Circular.

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

3. Non-performing Loans (NPL) are the debt amounts belonging to Groups 3, 4, and 5 as specified in Clause 1, Article 4 of this Circular.

4. Restructured debt is a debt amount that the small-scale financial organization agrees to adjust the repayment term or extend the loan for the customer based on the small-scale financial organization's assessment that the customer has reduced their ability to repay the principal and/or interest as stipulated in the loan contract, but the small-scale financial organization has sufficient grounds to determine that the customer has the ability to fully repay the principal and interest according to the adjusted repayment schedule.

5. Lending risk of small-scale financial organizations (hereinafter referred to as risk) is the potential loss that may occur in the operations of small-scale financial organizations due to customers not performing or lacking the ability to perform their obligations under the loan commitment.

6. Risk provision is the amount set aside as a provision to cover potential losses that may arise from customers of small-scale financial organizations failing to fulfill their obligations under the loan commitment. Risk provisions are calculated based on the outstanding principal and recorded as operational expenses of the small-scale financial organization. Risk provisions include: Specific provisions and General provisions.

Specific reserve is the amount set aside based on debt classification to cover potential losses for each debt group.

General reserve is the amount set aside to cover potential losses that cannot be identified during the debt classification process and specific provision establishment, and in cases of financial difficulties for small-scale financial organizations when the quality of the debt declines.

7. Utilization of provisions is the use of risk provisions by small-scale financial organizations to offset losses for debt amounts.

8. Collateral for the loan is the asset that the customer uses to guarantee the fulfillment of the obligation to repay the debt to the small-scale financial organization in accordance with the legal regulations on secured transactions.

9. Customer is an individual or organization currently borrowing and having outstanding debt at a small-scale financial organization.

Article 3. Periodic classification of debts and provision for credit risk

1. At least once every quarter, within the first fifteen working days of the first month of the subsequent quarter, small-scale financial organizations shall classify debts and provide for credit risk up to the end of the last working day of the previous quarter.

Specifically, for the fourth quarter, within the first fifteen working days of December, small-scale financial organizations shall classify debts and provide for credit risk up to the end of November 30th.

2. For loans funded from third-party sources where the third party commits to bear full responsibility for handling risks when they occur, small-scale financial organizations are not required to provide for credit risk but must classify debts according to Article 4 of this Circular to accurately reflect the financial situation and debt repayment capacity of customers for loan risk management purposes.

Chapter II

SPECIFIC PROVISIONS

Article 4. Specific classification of debts and provision for credit risk

1. Based on the financial status of customers and/or the terms for repayment of principal and interest, small-scale financial organizations shall classify debts into five (05) groups as follows:

a) Group 1 (Standard Debts) includes:

- In-time debts;

- Debts overdue for less than ten days;

b) Group 2 (Debts of Concern) includes:

- Debts overdue from ten to less than thirty days;

- First-time restructured debts;

c) Group 3 (Substandard Debts) includes:

- Debts overdue from thirty to less than ninety days;

- First-time restructured debts overdue for less than thirty days according to the newly structured repayment term;

- Debts with interest waived or reduced due to the customer's inability to fully pay interest as stipulated in the credit agreement.

d) Group 4 (Doubtful debts) includes:

- Debts overdue from ninety to less than one hundred eighty days;

- First-time restructured debts overdue from thirty to less than ninety days according to the newly structured repayment term;

- Second-time restructured debts;

đ) Group 5 (Loss Probable Debts) includes:

- Debts overdue for one hundred eighty days or more;

- First-time restructured debts overdue for ninety days or more according to the newly structured repayment term;

- Second-time restructured debts overdue according to the second restructuring repayment term;

- Third-time or later restructured debts, including those that have not yet become overdue or have already become overdue.

2. The specific provision ratio for each group of debts as specified in Clause 1 of this Article is as follows:

a) Group 1 (Standard debts): 0%;

b) Group 2 (Substandard debts): 2%;

c) Group 3 (Doubtful debts): 25%;

d) Group 4 (Loss debts): 50%;

đ) Group 5 (Problem debts): 100%.

3. The value of collateral assets securing the loan shall be deducted from the principal balance of the loan before calculating the specific provision, including:

a) One hundred percent of the balance of mandatory savings and voluntary deposits at small-scale financial organizations;

b) One hundred percent of the face value of government bonds (Treasury bills, Treasury bonds, central construction bonds, investment bonds, national construction bonds), and bonds guaranteed by the government.

4. The amount of specific provision for each debt shall be calculated using the following formula (specific guidance provided in Appendix A attached to this Circular):

R = (A – C) x r

Where:

R: the amount of specific provision to be set aside;

A: the outstanding principal balance of the debt;

C: the value of the collateral deduction;

r: the specific provision ratio.

If the value of the collateral deduction (C) exceeds the outstanding principal balance of the debt (A), the debt does not require a specific provision.

Article 5. General Provisions on Reserve Fund

1. Small-scale financial organizations shall establish and maintain a general reserve fund at a rate of 0.5% of the total principal balance of all loans from Group 1 to Group 4 as defined in Clause 1, Article 4 of this Circular.

2. Within a maximum period of three (03) years from the date this Circular takes effect, small-scale financial organizations must fully establish the general reserve fund according to the provisions of Clause 1 of this Article.

Article 6. Utilization of Reserve Fund

1. Small-scale financial organizations shall utilize the reserve fund to address loan risks in the following cases:

a) For small-scale financial customers: individuals who have borrowed funds and died, disappeared, or suffered permanent disability that renders them unable to generate income.

b) For non-small-scale financial customers: organizations or businesses that have been dissolved or declared bankrupt in accordance with the law; individuals who have died or disappeared.

c) Loans classified under Group 5 as defined in Clause 1, Article 4 of this Circular.

2. Small-scale financial organizations shall utilize the reserve fund to address loan risks once every quarter. The utilization of the reserve fund to address loan risks shall follow these principles:

a) Utilize the specific reserve fund as defined in Clause 4, Article 4 of this Circular to address loan risks for that particular loan.

b) Auction collateral assets to recover debts: Small-scale financial organizations must promptly carry out the auction of collateral assets in accordance with agreements with customers and legal regulations to recover debts.

c) In cases where the proceeds from the auction of collateral assets are insufficient to cover loan risks, the general reserve fund may be utilized to address such risks.

3. If the amount of the reserve fund is insufficient to address all loan risks, small-scale financial organizations shall directly record the shortfall in operating expenses.

If the remaining amount of the reserve fund exceeds the required amount, small-scale financial organizations must offset the excess back into revenue for the period.

4. The utilization of the reserve fund by small-scale financial organizations to address loan risks does not constitute debt forgiveness for customers. Small-scale financial organizations and related individuals are not permitted to inform customers about the handling of loan risks in any form.

5. After utilizing the reserve fund to address loan risks, small-scale financial organizations must transfer the treated loans from on-balance sheet accounting to off-balance sheet accounting for continued monitoring and implementing measures to thoroughly recover debts. Any amounts recovered from off-balance sheet loans shall be recorded as revenue for the period.

6. Five (05) years after utilizing the reserve fund to address loan risks and having implemented recovery measures without success, small-scale financial organizations may write off the treated loans from off-balance sheet accounting.

Article 7. Risk Management Council

1. Small-scale financial organizations must establish a Risk Management Council chaired by the Chairman of the Board of Directors or a person authorized by the Chairman of the Board of Directors, with members including the Head of the Supervisory Board, the head of the accounting department, the head of the credit department, and other members decided by the Chairman of the Board of Directors.

2. Responsibilities of the Risk Management Council:

a) Review and evaluate the classification of loans and the establishment of risk reserves for loans carried out by the General Director (Director).

b) Approve the utilization of the reserve fund to address loan risks.

c) Approve plans to recover debts for loans that have utilized the reserve fund to address loan risks, specifying the time frame and measures for debt recovery.

d) Monitor the implementation of debt recovery for loans that have utilized the reserve fund to address loan risks.

Article 8. Documents for handling loan risks

1. The documents serving as the basis for handling loan risks include:

- Loan and debt collection documents;

- Security asset documents (if any);

- Other related documents.

2. For cases specified in points a and b of Clause 1 of Article 6 of this Circular, in addition to the documents mentioned in Clause 1 of this Article, there must also be:

a) For organizational and business customers:

- A copy of the court's decision declaring bankruptcy or the competent state agency's decision on dissolution according to the law, or confirmation from the competent authority regarding the business dissolution (in case of self-dissolution by the business);

- A copy of the report on the execution of the bankruptcy declaration decision and the report on the completion of the execution of the bankruptcy declaration decision by the Enforcement Department, and the document resolving debts of dissolved organizations and businesses.

b) For individual customers:

A copy of the death certificate, missing person certificate, or permanent disability and loss of labor capacity certificate issued by the competent authority.

3. For cases specified in point c of Clause 1 of Article 6 of this Circular, in addition to the documents mentioned in Clause 1 of this Article, there must also be:

- Documents and materials serving as the basis for classifying debts into Group 5;

- Documents and materials proving that the small financial organization has taken all measures to recover debts but has been unable to do so.

Article 9. Accounting and Reporting

1. Risk provisions are recorded as operating expenses of small financial organizations.

2. Risk provisions are recorded in the "Risk Provision" account. Small financial organizations shall record the establishment, use of provisions, and the amount recovered after using provisions to handle loan risks according to the regulations of the Ministry of Finance.

3. Small financial organizations must report on debt classification, provision establishment, and use of provisions to handle loan risks according to the reporting system applicable to small financial organizations issued by the State Bank.

4. Before the 15th day of the second month of each quarter, small financial organizations must submit reports on debt classification, provision establishment, and use of provisions to handle loan risks of the previous quarter to the Ministry of Finance and the provincial or municipal tax office where the main office of the small financial organization is located, according to Forms 01 and 02 attached to this Circular.

Article 10. Inspection and Administrative Sanctions

1. The State Bank (Bank Inspection and Supervision Authority) is responsible for inspecting and supervising the implementation of debt classification, provision establishment, and use of provisions to handle loan risks in the activities of small financial organizations.

2. In cases where small financial organizations violate the provisions of this Circular, depending on the nature and degree of violation, small financial organizations will be subject to one or more of the following forms of handling:

- Administrative sanctions;

- Increasing the provision ratio corresponding to the level of risk of the debts;

- Limiting loans, limiting expansion of the network and scope of operations;

- Suspension of operations for serious violations.

Chapter III

IMPLEMENTING PROVISIONS

Article 11. Effective Date

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

Article 12. Responsibility for Implementation

The Director of the Office, the Director of Bank Inspection and Supervision, the Heads of relevant units under the State Bank, the Governor of the State Bank Branches in provinces and centrally-administered cities, the Chairman of the Board of Directors, and the General Manager (Director) of small financial organizations are responsible for implementing this Circular.

During implementation, if there are difficulties, please promptly reflect them to the State Bank for guidance and resolution./.