Law

Debate over amendment of Circular 01

Saigon Investment
 In January 2021, the State Bank of Vietnam submitted a draft amendment to the Ministry of Finance for some changes to Circular 01/2020, asking credit institutions to restructure the time limit for debt payment, exemption, reducing of interest and fees, and keeping the debt group intact to support customers affected by the Covid-19 pandemic. 

Illustrative photo.

Illustrative photo.

The State Bank of Vietnam also proposed to extend the time to make provisions for commercial banks to follow the planned roadmap ending in 2024, which will help to reduce the pressure to increase provision costs and give banks time to handle bad debts.

In fact, the request to amend Circular 01 was done in May last year. However, until the beginning of this year, the State Bank of Vietnam had not made a clear move. It is possible that after the follow-up period, there were seen potential difficulties if there was no supportive solution.

For example, from the State Bank of Vietnam data, the ratio of bad debts and risk assets increased from 3% at the end of 2019 to 4.5% in the third quarter of 2020. By the end of 2020, 25 banks had announced bad debt data with a total debt of nearly VND 87,135 bn, up 4.31% compared to the beginning of the year. Of which, 17 banks had an average increase of 15% to 45% compared to the beginning of the year. This amount of bad debt was not included as potential bad debt in debts that are kept intact, rescheduling the repayment period to support customers affected by the Covid-19 pandemic, with a structured loan balance of nearly VND 335,000 bn.

However, bad debts are growing day by day, but Circular 01 allows bad debts and potential bad debts to be kept intact, and be covered up to become normal debts. In a way, banks are allowed to sweep them under the rug. In fact, when applying Circular 01, the pressure on banks decreased. The rescheduling of the debt repayment term, keeping the debt group, means that banks only need to set up general risk provisions for restructured debts at 0.75%. Thus, banks reduce the cost of setting up, and retain a portion of the reasonable profit that must be deducted from the cost of risk provision.

The fact that Circular 01 requires banks to conditionally implement business support programs has made data on restructured debts likely to become bad debts that are not specifically disclosed, pushing the pressure to deal with debts in the future.

Banks naturally agree with the provisions of rescheduling of debt structure in the draft amendment of Circular 01. According to some calculations, for every 1% of additional bad debt, the Capital Adequacy Ratio (CAR) will decrease by 40 to 80 basis points. Thus, if the debt structure is not continued, keeping the debt group intact will affect the banks' capital sources. Many economists have pointed out the dangerous point of bad debt from Circular 01, which is that if banks do not closely monitor, State Bank inspectors will not closely control bad debts of banks, and banks will easily fall into a condition of heavy damage due to bad debt. This is the risk for each bank and for the whole banking system.

Up until now, after nearly one year, the actual bad debt data of debts affected by the Covid-19 pandemic are still unknown, after the banking industry applied Circular 01. Thus, these debts have not been fully recognized and appropriated. While for the banking industry, forecasting the risk of increasing bad debts is extremely necessary. Therefore, a majority of opinions agreed to prolong the time to make provisions for banks according to the roadmap ending in 2024, helping the banking system to have conditions to both handle the bad debt problem but still perform the task of supporting the economy.

In contrast, the regulations to maintain the debt group and restructure the debts did not receive a high consensus. There are currently proposals that the banking industry needs to change the real debt group for restructured debts. Thus, although the current bad debt levels of banks are likely to worsen, the level of bad debts will be clearer, so that each bank will be able to find own solution.

Yen Lam

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