Debt classification policy extended to aid customers impacted by pandemic
Debt classification policy extended to aid customers impacted by pandemic
The State Bank of Viet Nam (SBV) has decided to extend a policy allowing commercial banks to keep debt classifications for COVID-19 affected borrowers unchanged to help customers access bank loans. 
Circular 03/2021/TT-NHNN, which amends Circular 01/2020/TT-NHNN allowing commercial banks to maintain the debt classifications to support customers affected by the COVID-19 pandemic, will take effect from May 17.
In Viet Nam, debts are currently classified into five groups based on their risk status: standard debt, debt needing special attention, subprime debt, doubtful debt, and potentially irrecoverable debt.
Previously, many commercial banks were worried if debt classifications were not extended, bad debts would increase sharply.
Banks restructured loans worth about VND350 trillion (US$15.2 billion) for COVID-19-affected borrowers by the end of 2020. Industry insiders estimated if half of the loans became bad loans, the bad debt ratio of the banking system would increase to more than 3 per cent by the end of this year.
However, commercial banks this year will not be permitted to add profits gained from the loans to their total revenue, according to the new circular.
To qualify for maintaining the debt classifications, the debts must arise from lending and financial leasing activities with the obligation to repay the principals and/or interest from January 23, 2020, to March 31, 2021.
Besides, borrowers must be unable to pay the debts and/or interest in time because of decreases in revenues and incomes caused by the impacts of the pandemic.
Despite the extension of the debt classifications, the new circular states commercial banks must set aside money for potentially unrecoverable COVID-19 affected loans within three years, starting from 2021. The central bank last year allowed commercial banks to avoid making the provisions in 2020 to support banks and borrowers affected by the pandemic.
According to SBV deputy governor Dao Minh Tu, the amended circular regulates provisions on COVID-19 loans to ensure the safety of credit institutions and the national financial system.
Under the new circular, the ratio of the provisions will increase gradually, from 30 per cent of COVID-19-affected loans by the end of 2021 to 60 per cent by the end of 2022 and 100 per cent by the end of 2023.
To control the risk of bad loans, banking expert Nguyen Tri Hieu recommended besides recovering bad loans, banks must set aside provisions for bad and risky loans.
Some banks have already increased provisions for risky loans.
VietinBank, for example, increased its provisions from 120 per cent in 2019 to 130 per cent of loans in 2020. In 2021, VietinBank aimed to keep the bad debt ratio below 2 per cent.
