Decision No. 493/2005/QD-NHNN on the classification of debts, provision for and utilization of reserves to address credit risks in banking activities of credit institutions.

DECISION OF THE GOVERNOR OF THE STATE BANK OF VIETNAM

Issuing Regulations on Loan Classification, Provisioning, and Utilization for Credit Risk Management in Banking Activities of Credit Institutions

Issued pursuant to the Law on the State Bank of Vietnam No. 01/1997/QH10 dated December 12, 1997, and the Law Amending and Supplementing Certain Provisions of the Law on the State Bank of Vietnam No. 10/2003/QH11 dated June 17, 2003;

_____________________

GOVERNOR OF THE STATE BANK OF VIETNAM

Pursuant to the Law on Credit Institutions No. 02/1997/QH10 dated December 12, 1997, and the Law Amending and Supplementing Certain Provisions of the Law on Credit Institutions No. 20/2004/QH11 dated June 15, 2004;

Pursuant to Decree No. 52/2003/NĐ-CP dated May 19, 2003 of the Government stipulating the functions, tasks, powers, and organizational structure of the State Bank of Vietnam;

After reaching agreement with the Minister of Finance in Circular No. 4280 TC/TCNH dated April 12, 2005 of the Ministry of Finance;

At the proposal of the Director of the Department of Banks and Non-Bank Financial Institutions;

Issued herewith are the Regulations on Loan Classification, Provisioning, and Utilization for Credit Risk Management in Banking Activities of Credit Institutions.

DECISION:

Article 1. These Regulations shall take effect fifteen days from the date of publication in the Official Gazette. The provisions regarding asset classification "Have", provisioning, and utilization for risk management in banking activities of credit institutions in the following documents shall cease to be effective:

Article 2. 1. Decision No. 488/2000/QĐ-NHNN5 dated November 27, 2000 of the Governor of the State Bank of Vietnam promulgating Regulations on Asset Classification "Have", Provisioning, and Utilization for Risk Management in Banking Activities of Credit Institutions.

2. Circular No. 354/CV-CNH dated July 10, 2002 of the State Bank of Vietnam on the classification and provisioning when transferring overdue loans according to Decision No. 688/2002/QĐ-NHNN of the Governor of the State Bank of Vietnam.

Chief of the Office, Directors of the Departments of Banks and Non-Bank Financial Institutions, Heads of Units under the State Bank of Vietnam, Governors of Provincial Branches of the State Bank of Vietnam, Chairmen of the Boards of Directors, General Managers (Directors) of credit institutions are responsible for implementing this Decision.

Article 3. On Loan Classification, Provisioning, and Utilization for Credit Risk Management

 

REGULATIONS

In Banking Activities of Credit Institutions

(Issued pursuant to Decision No. 493/2005/QĐ-NHNN dated April 22, 2005)

1. Credit institutions operating in Vietnam (hereinafter referred to as credit institutions), except for the Social Policy Bank, must implement loan classification, provisioning, and utilization for credit risk management in banking activities in accordance with these Regulations.

of the Governor of the State Bank)

PART I

GENERAL PROVISIONS

Article 1.

In the case where foreign bank branches in Vietnam wish to implement loan classification, provisioning, and utilization for credit risk management according to the regulations of their home banks, such foreign bank branches must submit to the State Bank of Vietnam the policy on provisioning of their home banks for review and decision. Foreign bank branches may only implement loan classification, provisioning, and utilization for credit risk management according to the regulations of their home banks after obtaining written approval from the State Bank of Vietnam.

2. The establishment of provisions and utilization of inventory write-down reserves, securities write-down reserves, financial reserve funds shall be carried out in accordance with the laws on financial systems applicable to credit institutions.

1. "Credit risk in banking activities of credit institutions" (hereinafter referred to as "risk") is the possibility of losses occurring in banking activities of credit institutions due to customers not performing or being unable to perform their obligations as committed.

Article 2.

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

2. "Risk provision" is the amount set aside to cover potential losses that may occur due to customers of credit institutions not fulfilling their commitments. Risk provisions are calculated based on the principal balance and recorded as part of the operational expenses of credit institutions. Risk provisions include specific provisions and general provisions.

Specific provisions

""are amounts set aside based on the specific classification of debts as stipulated in Article 6 or Article 7 of these Regulations to cover potential losses.""are amounts set aside to cover potential losses that cannot be identified during the process of debt classification and specific provision establishment, and in cases of financial difficulties of credit institutions when the quality of debts deteriorates."

"General reserve3. "Utilizing provisions" refers to the use of risk provisions by credit institutions to offset losses on debts.

4. "Debt" includes:

a) Loans, advances, overdrafts, and financial leasing;

b) Discounting, rediscounting of commercial bills and other negotiable instruments;

c) Factoring;

d) Other forms of credit.

5. "Overdue debt" is a debt where a portion or all of the principal and/or interest has become overdue.

6. "Non-performing debt" (NPL) includes debts classified into Groups 3, 4, and 5 as stipulated in Article 6 or Article 7 of these Regulations. The ratio of non-performing debt to total outstanding debt is used to assess the quality of credit of credit institutions.

7. "Restructured debt" is a debt where the credit institution agrees to adjust the repayment period or extend the debt for a customer due to the credit institution's assessment that the customer has reduced their ability to repay the principal or interest on time as stipulated in the credit contract, but the credit institution has sufficient grounds to assess that the customer can fully repay the principal and interest according to the restructured repayment schedule.

8. "Customer" refers to organizations or individuals having credit relationships with credit institutions.

1. At least once every quarter, within the first 15 working days of the following month, credit institutions must classify principal debts and establish risk provisions up to the end of the last working day of the previous quarter (month).

Article 3.

For the fourth quarter, within the first 15 working days of December, credit institutions must classify debts and establish risk provisions up to the end of November 30.

As for the fourth quarter, within the first 15 working days of December, credit organizations shall classify debts and set aside provisions for risks up to the end of November 30.

2. For non-performing loans (NPLs), credit institutions must classify debts and assess customers' ability to repay on a monthly basis to serve quality management and credit risk control.

3. For loans funded from third-party sources where the third party commits to bear all risks when they occur, and for loans funded from joint contributions of other credit institutions where the credit institution does not bear any risk, the credit institution is not required to establish specific provisions for risk but must classify debts according to Article 6 or Article 7 of this Regulation to accurately evaluate the financial situation and repayment capacity of customers for credit risk management purposes.

4. For guarantees, loan commitments, and acceptance of payments, credit institutions must classify them into Group 1 as stipulated in Article 6 or Article 7 of this Regulation to manage and monitor the financial situation and ability to fulfill obligations of customers and establish general provisions.

Chapter II

SPECIFIC PROVISIONS

Section 1. Specific Debt Classification and Risk Provisions

Article 4.

1. Within a maximum period of three (03) years from the date this Regulation takes effect, credit institutions must establish an internal credit rating system to support debt classification and credit quality management consistent with their scope of operations and actual conditions. The minimum requirements for the internal credit rating system include:

- Legal bases related to the establishment and business activities of customers;

- Comprehensive economic indicators related to business and financial situations, assets, and the ability to fulfill commitments;

- Creditworthiness towards credit institutions that have previously transacted with them;

- Detailed, specific, systematic criteria for evaluating customers (industry and local factors) based on which specific ratings are assigned to customers.

2. The provisions of Clause 1 of this Article do not apply compulsorily to rural commercial joint-stock banks and grassroots people's credit funds.

Article 5.

Credit institutions shall implement debt classification and specific risk provisions as prescribed in Article 6 or Article 7 of this Regulation.

Article 6.

1. Credit institutions shall classify debts as follows:

Group 1 (Standard Debts) includes:

- Loans within the due date that the credit institution evaluates as having sufficient ability to fully recover both principal and interest on time;

- Other debts classified into Group 1 according to Clause 2 of this Article.

Group 2 (Debts Requiring Attention) includes:

- Overdue loans under ninety (90) days;

- Restructured loans within the due date according to the restructured payment terms;

- Other debts classified into Group 2 according to Clauses 3 and 4 of this Article.

c) Group 3 (Substandard Debts) includes:

- Overdue loans from ninety (90) to one hundred eighty (180) days;

- Restructured loans overdue under ninety (90) days according to the restructured payment terms;

- Other debts classified into Group 3 according to Clauses 3 and 4 of this Article.

d) Group 4 (Doubtful Debts) includes:

- Overdue loans from one hundred eighty-one (181) to three hundred sixty (360) days;

- Restructured loans overdue from ninety (90) to one hundred eighty (180) days according to the restructured payment terms;

- Other debts classified into Group 4 according to Clauses 3 and 4 of this Article.

đ) Group 5 (Loss Probable Debts) includes:

- Overdue loans over three hundred sixty (360) days;

- Loans awaiting government resolution;

- Restructured loans overdue over one hundred eighty (180) days according to the restructured payment terms;

- Other debts classified into Group 5 according to Clauses 3 and 4 of this Article.

2. In cases where a customer repays the full principal and interest according to the restructured terms for at least one (01) year for medium and long-term loans and three (03) months for short-term loans, and the credit institution evaluates that the customer has the ability to fully repay the principal and interest on time according to the restructured terms, the credit institution may reclassify such debt into Group 1.

3. In cases where a customer has more than one (01) debt with the credit institution and any of these debts is transferred to a higher-risk group, the credit institution must reclassify the remaining debts of that customer into corresponding higher-risk groups according to the level of risk.

4. In cases where the credit institution has sufficient grounds to assess that the customer's ability to repay has declined, even for loans within the due date and restructured loans within the due date according to the restructured payment terms, the credit institution may proactively decide to reclassify such debts into higher-risk groups according to the level of risk.

5. The specific provision ratio for each debt group as stipulated in Clause 1 of this Article is as follows:

a) Group 1: 0%

b) Group 2: 5%

c) Group 3: 20%

d) Group 4: 50%

đ) Group 5: 100%. Specifically, for loans awaiting government resolution, the specific provision ratio is determined based on the financial capability of the credit institution.

Article 7.

Credit institutions capable of and meeting the conditions to classify debts using qualitative methods shall establish policies for debt classification and risk provisions as follows:

1. Based on the internal credit rating system, credit institutions shall submit risk management policies to the State Bank for approval in writing.

2. Conditions for the State Bank to approve risk management policies:

a) The credit rating system has been tested for at least one (01) year;

b) Credit rating results have been approved by the Board of Directors;

c) The internal credit rating system is appropriate for the credit institution's business activities, customer base, and nature of credit risk;

d) Effective credit risk management policies, risk monitoring models, and methods for identifying and measuring credit risk, including ways to assess customers' repayment ability, credit contracts, collateral, debt recovery, and debt management;

đ) Clearly defined responsibilities and authorities of the Board of Directors and General Director in approving, implementing, and supervising the implementation of the internal credit rating system and risk management policies, and the independence of risk management units.

e) An effective information system to make decisions, manage, and control the business operations of credit institutions and suitable for the Credit Rating System and loan classification.

3. The dossier of credit institutions requesting the State Bank of Vietnam (Department of Commercial Banks and Non-Bank Financial Institutions) to approve the risk mitigation policy shall include:

a) A document from the Chairman of the Board of Directors requesting the State Bank of Vietnam to approve the risk mitigation policy, which must explain that the internal credit rating system and the risk mitigation policy of the credit institution meet all conditions stipulated in Clause 2 of this Article.

b) Copies of the internal credit rating system and the risk mitigation policy, as well as draft guidance documents on loan classification and risk provision implementation of the credit institution.

4. Within thirty (30) days from the date of receipt of the complete dossier as prescribed in Clause 3 of this Article, the State Bank of Vietnam shall issue a document approving the risk mitigation policy of the credit institution. In case of non-approval, the State Bank of Vietnam shall issue a document requiring the credit institution to amend according to regulations.

5. Annually, credit institutions must re-evaluate their internal credit rating system and risk mitigation policy to be consistent with actual circumstances and legal provisions. Any changes or adjustments to the risk mitigation policy of the credit institution must be approved in writing by the State Bank of Vietnam.

6. Credit institutions with a risk mitigation policy approved by the State Bank of Vietnam as stipulated in Clause 1 of this Article shall classify loans and establish specific risk provisions as follows:

6.1. Loan Classification:

a) Group 1 (Standard Loans) includes: Loans assessed by the credit institution as having full recovery capability of both principal and interest within the due period.

b) Group 2 (Substandard Loans) includes: Loans assessed by the credit institution as having full recovery capability of both principal and interest but showing signs of reduced debtor repayment capacity.

c) Group 3 (Doubtful Loans) includes: Loans assessed by the credit institution as not having the ability to recover both principal and interest at maturity. These loans are assessed as potentially suffering partial loss of principal and interest.

d) Group 4 (Loss Loans) includes: Loans assessed by the credit institution as highly likely to suffer losses.

đ) Group 5 (Problem Loans) includes: Loans assessed by the credit institution as unrecoverable, resulting in capital loss.

6.2. Specific provisioning ratios for each loan group as stipulated in Clause 6.1 of this Article are as follows:

a) Group 1: 0%

b) Group 2: 5%

c) Group 3: 20%

d) Group 4: 50%

đ) Group 5: 100%

Article 8.

1. The amount of specific provision required shall be calculated using the following formula:

R = max {0, (A - C)} x r

Where:

R: the amount of specific provision required

A: the value of the loan

C: the value of the collateral

r: the specific provisioning ratio

2. The value of the collateral (C) is determined based on the product of the applicable rate specified in Clause 3 of this Article and:

- The market value of gold;

- The face value of government bonds, treasury bills, and other securities issued by financial institutions;

- The market value of corporate and financial institution stocks;

- The value of movable and immovable property collateral and other types of collateral recorded in the guarantee contract, finance lease contract.

3. The maximum rate applicable for determining the value of collateral is as follows:

 

Government Bonds: - Remaining term of less than one year - Remaining term of one to five years - Remaining term over five years   95% 85% 80%

 

4. For finance leases, the leased asset is considered collateral.

 

Section 2. General Provisions on Reserve Fund

Article 9.

1. Credit institutions shall establish and maintain a general reserve fund at a rate of 0.75% of the total value of debts from Group 1 to Group 4 as stipulated in Article 6 or Article 7 of this Regulation.

2. Within a maximum period of five (05) years from the date this Regulation takes effect, credit institutions must fully establish the general reserve fund as prescribed in Clause 1 of this Article.

 

Section 3. Utilization of Reserve Fund

 

Article 10.

Credit institutions shall utilize the reserve fund to address credit risks in the following cases: for debts in the following cases:

1. The customer is an organization or enterprise that has been dissolved or declared bankrupt in accordance with the law; an individual who has died or gone missing.

2. Debts classified under Group 5 as defined in Article 6 and Article 7 of this Regulation. For debts that have been set aside for government resolution, credit institutions may use the reserve fund (if available) to address credit risks.

Article 11.

1. Credit institutions shall utilize the reserve fund to address credit risks once every quarter. The utilization of the reserve fund to address credit risks shall be carried out according to the following principles:

a) Utilize the specific reserve fund established as provided in Clause 1 of Article 8 of this Regulation to address credit risks associated with that debt.

b) Auction collateral assets to recover debts: Credit institutions must promptly carry out the auction of collateral assets in accordance with agreements with customers and the provisions of the law to recover debts.

c) In cases where the proceeds from the auction of assets are insufficient to cover the credit risk of the debt, the general reserve fund may be utilized to fully address the risk.

2. The utilization of the reserve fund by credit institutions to address credit risks does not constitute the cancellation of debts for customers. Credit institutions and individuals involved are not permitted to inform customers in any form about the handling of credit risks.

3. After utilizing the reserve fund to address credit risks, credit institutions must transfer debts that have been addressed for credit risks from on-balance sheet accounting to off-balance sheet accounting for continued monitoring and implementing measures to thoroughly recover debts.

4. Five (05) years after the utilization of the reserve fund to address credit risks, credit institutions may write off debts that have been addressed for credit risks from off-balance sheet accounting for cases specified in Clause 1 of Article 10 of this Regulation. For state commercial banks, such write-offs can only be implemented after approval by the Ministry of Finance and the State Bank.

Article 12.

1. In cases where the reserve fund amount is insufficient to address all credit risks of debts requiring resolution, credit institutions shall directly record the shortfall in the reserve fund as operating expenses.

2. If the remaining amount of the reserve fund exceeds the required reserve fund amount, credit institutions must return the excess amount in accordance with the financial regulations applicable to credit institutions.

Article 13.

1. Credit institutions must establish a Risk Management Committee chaired by the Chairman of the Board of Directors and members including the Head of the Supervisory Board, the person in charge of the accounting department, the person in charge of the credit department, credit management, and other members appointed by the Chairman of the Board of Directors.

2. For credit institutions without a Board of Directors and a Supervisory Board, the Risk Management Committee includes the General Director (Director) as Chairperson and other members appointed by the General Director (Director).

Article 14.

Tasks of the Risk Management Committee:

1. Review the classification of debts and the establishment of credit risk reserves for the current quarter performed by the General Director (Director).

2. Review reports on the monitoring, reconciliation, and recovery of debts for debts that have been resolved for credit risks.

3. Decide on the resolution of credit risks for the current quarter and the collection plan for the next quarter (month) for debts that have been resolved for credit risks, specifying the time frame and measures for debt recovery.

Article 15.

Documents serving as the basis for addressing credit risks:

1. Loan and collection documents; discounting and rediscounting documents for commercial bills and other negotiable instruments; guarantee and loan commitment documents; financial leasing documents; collateral asset documents and other related documents.

2. For cases specified in Clause 1 of Article 11 of this Regulation, in addition to the documents mentioned in Clause 1 of this Article, there must also be:

a) For organizational or business customers:

- A copy of the court's decision declaring bankruptcy or the competent authority's decision dissolving the organization or enterprise in accordance with the law;

- 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 documents resolving debts of dissolved organizations or enterprises.

b) For individual customers:

- A copy of the death certificate or missing person confirmation issued by the competent authority.

Article 16.

All funds recovered from debts that have been resolved for credit risks using the risk reserve fund shall be accounted for in accordance with the financial regulations applicable to credit institutions.

 

Section 4. Accounting and Reporting

Article 17.

1. General provisions and specific provisions shall be accounted for as operating expenses of credit organizations.

2. General provisions and specific provisions shall be recorded in the account "Provision for Risk." Credit organizations shall account for the establishment, utilization of provisions, and the amount recovered after using provisions to address credit risks in accordance with the regulations of the State Bank of Vietnam.

Article 18.

1. Credit organizations must report on loan classification, provision establishment, and utilization for addressing credit risks in accordance with the reporting and statistical system applicable to units under the State Bank of Vietnam and credit organizations issued by the State Bank of Vietnam.

2. Before the 15th day of the second month of each quarter, credit organizations must report on loan classification, provision establishment, and utilization for addressing credit risks to the Ministry of Finance and the provincial or municipal tax bureaus where the main office of the credit organization is located as follows:

a) Credit organizations that classify loans according to Article 6 of this Regulation shall prepare loan classification reports, provision establishment, and utilization reports using forms 1A and 1B (attached).

b) Credit organizations that classify loans according to Article 7 of this Regulation shall prepare loan classification reports, provision establishment, and utilization reports using forms 2A and 2B (attached).

Section 5. Implementation Organization

Article 19.

1. Joint-stock commercial banks, finance companies, financial leasing companies, people's credit funds, joint venture banks, wholly foreign-owned banks, and foreign bank branches (except foreign bank branches permitted to operate under Clause 1 of Article 1 of this Regulation) shall implement the establishment of specific provisions and general provisions in accordance with this Regulation.

2. State-owned commercial banks shall assess the situation of establishing specific provisions and the ability to establish general provisions, report to the State Bank of Vietnam and the Ministry of Finance for consideration and decision based on individual cases but not exceeding five (05) years, and state-owned commercial banks must fully establish provisions in accordance with this Regulation.

Section 6. Inspection and Handling of Violations

Article 20.

1. The State Bank of Vietnam (State Bank of Vietnam Inspectorate) shall be responsible for coordinating with the Ministry of Finance to inspect the implementation of loan classification, provision establishment, and risk provision utilization in the banking activities of credit organizations.

2. In case credit organizations violate this Regulation, depending on the nature and behavior of the violation, they will be handled as follows:

- Administrative fines.

- Increase the provision establishment ratio corresponding to the level of risk of the loans.

- Limiting credit, restricting expansion of the network, and limiting the scope of operations.

- Suspension of operations in serious violation cases.

Chapter III

IMPLEMENTING PROVISIONS

Article 21.

Amendments, supplements, and replacements to this Regulation shall be decided by the Governor of the State Bank of Vietnam after consultation with the Minister of Finance./.