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The move provides a starker portrait of the banking system’s challenges as it effectively acknowledges that the sum of the bad debts burdening the system is significantly larger than the State Bank’s most recent estimate of $12.1 billion, disclosed on September 30, 2012. No new estimate has been released, and the amount is difficult to calculate.
Accordingly, based on the State Bank’s Circular 02/2013/TT-NHNN dated January 21, 2013, which replaced its Decision 493/2005/QD-NHNN, more credit types are classified as debts and need loan loss provision.
Under the new circular, the purchase and entrusted purchase of unlisted bonds were officially placed under provisioning. Banks must also have provision for their deposits at other domestic and international credit institutions, except for deposits for transaction payments, credits in the form of credit card issuance and off-balance-sheet commitments.
Moreover, more kinds of debts are added to debts of group three, sub-prime debt and group five potentially irrevocable debt and considered non-performing loans (NPLs).
The ratios for specific provisioning of each debt category are still kept the same. The minimum general provision is 0.75 per cent. That means banks must spend more from their budget on loan loss provision, affecting their profit.
Doan Van Thang, deputy general director of LienVietPostBank, said the circular was suitable with the current context as the banking system faced big troubles. “Although many NPLs have been recovered, the credit quality is still a problem concerning the government, State Bank and credit institutions,” he said.
“This circular will affect banking activities as well as the capital market, making the banking system safer. It can increase banks’ expenses and reduce banks’ profits,” said Thang.
However, there is also concern on the market that banks will then try to raise borrowing costs to compensate. But, Thang discounted such worries, saying the lending rate would be determined by the market demand and supply.
Agreeing that following the new regulation was good for the banking system, Ngo Van Dung, director of BIDV’s Hanoi branch, said it was still necessary to have a road map for credit institutions and enterprises to follow the new regulation.
“Previously, the government and State Bank drastically required credit institutions to restructure and reschedule debts so that enterprises could access banks’ capital. Now with the new regulation, more debts are classified as NPLs, which would make enterprises have more difficulty to get financing,” said Dung.
Based on Circular 02, loans which are rescheduled for the first time and for the second time are now added to debt group three and debt group four, respectively.
Circular 02 will take effect from June 1, 2013. Credit institutions will start classifying loans and make loan loss provisions from the beginning of next year.
Loan loss provision was a leading cause of a sharp decline in profits in the banking system in 2012. From State Bank figures, the banking system in 2012 reaped a total profit of VND28,600 billion ($1.37 billion), or 50 per cent lower than 2011. Total system assets as of October, 2012 also reduced by VND21,500 billion ($1.03 billion).
In addition, another important document amending and supplementing banks’ financial ratios is waiting to be issued. The new regulation is also expected to be stricter than the previous one to ensure a safe banking system.