Draft circular to prevent banks from hiding bad debts
Draft circular to prevent banks from hiding bad debts
The State Bank of Vietnam (SBV) expects new draft regulations on debt purchase and sale of credit institutions will prevent the institutions from hiding bad debts.
The regulations are drafted in a new circular, which will revise Circular No. 09/2015 on debt purchase and sale of credit institutions. The draft circular is to be made public for comments.
Besides preventing institutions from hiding bad debts, the SBV believes the revision of Circular No. 09/2015 is necessary as credit institutions reported they faced some difficulties in implementing debt trading according to Circular No. 09/2015 due to a lack of specific guidelines to handle financial issues, debt valuation and exchange rate differences in case the debt purchaser is a credit institution.
According to SBV, it recently saw debt buyers of some credit institutions were not credit institutions themselves, and the buyers were allowed to make late payments for the debt purchase. It is concerned the trading may lead to issues granting credit for debts at credit institutions. The SBV, therefore, said it is necessary to amend Circular No. 09/2015 to prevent credit institutions from cross lending to hide bad debts.
Specifically, under the revised draft, a credit institution will not be allowed to grant credit to customers to buy their own debts at the institution or other credit institutions.
“The regulation aims to ensure that debt purchases are transparent and prevent the possibility that credit institutions can use loopholes in debt trading to hide bad debts,” the SBV noted.
Besides, according to the draft, for debts that haven’t completed trading despite having signed debt purchase and sale contracts, credit institutions will still have to manage the classification and make provisions for the debts according to the current legal regulations.
According to the SBV, though the banking industry has actively taken measures to handle bad debts worth VND78.86 trillion in the first half of this year through debt sales and provisions, as well as limiting newly arising bad debts, the debts have been on a rising trend due to the impact of the COVID-19 pandemic. By the end of June 2021, the bad debt ratio was 1.73 per cent against 1.69 per cent at the end of 2020.
According to the SBV’s statistics, banks restructured loans worth about VND350 trillion for COVID-19-affected borrowers. 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.
The SBV said the process of restructuring the system of credit institutions and handling the bad debt is being accelerated.
