Thông tư 02/2013/TT-NHNN

CIRCULAR

PROVIDING ON CLASSIFICATION OF ASSETS, LEVELS AND METHOD OF SETTING UP OF RISK PROVISIONS, AND USE OF PROVISIONS AGAINST CREDIT RISKS IN THE BANKING ACTIVITY OF CREDIT INSTITUTIONS, FOREIGN BANKS’ BRANCHES  

Pursuant to the Law on the State bank of Vietnam No. 46/2010/QH12, of June 16, 2010;

Pursuant to the Law on credit institutions No. 47/2010/QH12, of June 16, 2010;

Pursuant to the Government’s Decree No. 96/2008/ND-CP of May 26, 2008 defining the functions, tasks, powers and organizational structure of the State bank of Vietnam;  

After obtaining consensus with the Ministry of Finance;

At the proposal of the Chief of banking Inspection and supervision;

The Governor of the State bank promulgates this Circular providing on classification of assets, levels and method of setting up of risk provisions, and use of provisions against credit risks in the banking activity of credit institutions, foreign banks’ branches,

Chapter 1.

GENERAL PROVISIONS

Article 1. Scope of regulation

1. This Circular provides on classification, levels and method of setting up of risk provisions, and use of provisions against credit risks in the banking activity for assets (hereinafter referred to as debts) including:

a) Loans;

b) Financial leases;

c) Discounts, rediscounts of negotiable instruments and other valuable papers;

d) Factoring;

dd) Credit extensions under form of credit card issuance;

e) Payments on behalf of someone under off-balance sheet commitments;

g) Amounts in service for purchase and entrustment of purchase of corporate bonds unlisted on securities market or not conducted transaction registration on trading market of unlisted public companies (UPCoM) (hereinafter referred to as unlisted bonds), excluding purchase of unlisted bonds by entrustment capital sources which the entrusting party bears risks.

h) Credit extension entrustment;

i) Deposits (excluding deposit for payment) at domestic credit institutions, foreign banks’ branches in Vietnam as prescribed by law and deposits at foreign credit institutions.

2. Guarantee amounts, payment acceptances, lending commitments which are irrevocable (hereinafter referred to as off-balance sheet commitments) must be classified as prescribed in this Circular in order to manage, supervise quality of credit extension activity of credit institutions, foreign banks' branches. 

3. The setting up and use of provisions for the fall of inventory prices, the loss of financial investments, the loss of bad receivable debts, excluding amounts specified in clause 1 this Article shall comply with regulation of law. 

Article 2. Subjects of application

1. This Circular applies to:

a) Credit institutions, including:  commercial banks and non-bank credit institutions;

b) Foreign banks' branches.

2. Foreign banks' branches which apply policy on risk provisions of foreign banks in for classification of debts, off-balance sheet commitments, setting un and use of provisions against credit risks must be accepted by the State bank of Vietnam (hereinafter referred to as the State bank) with condition that such policy are more progressive and preeminent than provisions in Article 6 of this Circular.  Dossiers, orders, procedures for being accepted by the State bank to apply the policy on risk provisions of foreign banks shall comply with provisions in clause 3, clause 4 Article 11 of this Circular.

3. Foreign banks' branches which have been accepted by the State bank for application of policy on risk provisions of foreign banks before the affective day of this Circular, Foreign banks' branches which have been accepted by the State bank for application of policy on risk provisions of foreign banks in accordance with clause 2 this Article shall implement according to regulations of foreign banks.  In the course of inspection, supervision, if the State bank assesses that a foreign bank’ policy on provisions fails to reflect fully the credit risk extent in actual bank activity in Vietnam, the State bank may request its branches to implement debt classification, off-balance sheet commitments, setting up and use of provisions against credit risks as prescribed in this Circular.   

4. If credit institutions during implementation of plan on re-structuring, merging, consolidating have difficulties in classification of debts, off-balance sheet commitments, setting up and use of provisions against credit risks, they should report to the Governor of the State bank for having the handling measures aiming to ensure the system’s safety.  

Article 3. Interpretation of terms

In this Circular, the below terms are construed as follows:

1. Credit risks in banking activity (hereinafter referred to as risks) mean loss which able to happen with respect to debts of credit institutions, foreign banks’ branches because customers fail to implement or have no capacity to implement part or whole their obligations as committed.

2. Debt amounts mean amounts which credit institutions, foreign banks’ branches has sent or disbursed each times under agreements for debts specified in clause 1 Article 1 of this Circular.

3. Risk provisions mean the amounts set up and accounted into the operational cost in order to provide for losses which may happen for debts of credit institutions, foreign banks’ branches.  Risk provisions include specific provisions and general provisions.

4. Specific provisions mean the amount set up in order to provide for losses which may happen for each specific debt.

5. General provisions mean the amounts set up in order to provide for losses which may happen but have not defined when setting up specific provisions.

6. Overdue debt means a debt which part or whole of its principal and interest has become overdue.

7. Debts with restructured repayment term are debts, the payment term of which a credit institution accepts to restructure or reschedule for customers because the customers have no capability to duly pay the principals or interests as stated in the credit contract, but there are sufficient grounds for the credit institutions, foreign banks’ branches to assess that customers are capable to fully pay the principals and interests under the restructured repayment term.

8. Bad debt (NPL) means debts which have been classified as those in Groups 3, 4 and 5.

9. Rate of bad debt means rate of bad debts in comparison with total debts of from group 1 to group 5.

10. Rate of bad credit extensions means rate total debts and off-balance sheet commitments of from group 3 to group 5 in comparison with total debts and off-balance sheet commitments of from group 1 to group 5.

11. Customers mean organizations (including credit institutions, foreign banks’ branches), individuals, other subjects as prescribed by civil law which have relationship on credit extension, deposit; issuance of bonds, valuable papers, which have been bought by credit institutions or foreign banks’ branches.

12. Use of provisions against credit risks means accounting of credit institutions, foreign banks’ branches in order to transfer debts which have been dealt with risks to the off-balance sheet accounts and continue following up, having measures for full debt recovery as the contracts have signed, or commitments have agreed with customers.  

Article 4. Collecting customers’ data, information and the information technology

1. Credit institutions, foreign banks’ branches must have measures and regularly implement collection, use of customers’ information, data, including information from the Credit Information Center (CIC), for:

a) Amending and supplementing the internal credit ranking system, internal regulations on credit extension, loan management, policy on risk provisions.  

b) Following up, assessing the capability of customers to pay debts after having ranked under the internal credit ranking system, had proper measures to control risks, manage credit quality.

c) Implementing classification of debts, off-balance sheet commitments, setting up risk provisions and using provisions as prescribed in this Circular.

2. Credit institutions, foreign banks’ branches must formulate an information technology system in their whole system for meeting requirements on management of customers’ data, information, operation and management of internal credit ranking system, risk management, classification of debts, off-balance sheet commitments, setting up and use of provisions in order to deal with risks.

Article 5. Internal credit ranking system

1. Internal credit ranking system means a system including financial and non-financial criteria, processes for assessing customers on the basis of financial qualitative and quantitative, business and administration situation, and prestige of customers. The internal credit ranking system must be formulated for each subject of various customers, including subjects restrained from credit extension and related persons of these subjects.

2. The internal credit ranking system must be formulated under the following principles:

a) Being formulated on the basis of data and information of all customers which have been collected within at least 01 (one) year preceding year of its formulation. 

b) At least each year one times, the internal credit ranking system must be considered, amended and supplemented on the basis of data and information of customers which have been collected during year.

c) Having regulation on ranking levels corresponding to risk extents from low up high.

d) Being approved by the Board of Directors (for credit institutions being joint-stock company), the Members' Council (for credit institutions being limited liability companies), General Director or Director (for foreign banks’ branches). 

3. Credit institutions, foreign banks’ branches must formulate the internal credit ranking system in order to rank customers periodically or as necessary, doing as basis for approval of credit extension, management of credit quality, formulation of policy on risk provisions in conformity with operational scope and actual situation of credit institutions, foreign banks’ branches.

Non-bank credit institutions are not forced to have an internal credit ranking system.

4. Within 10 (ten) days after issuing, amending and supplementing the internal credit ranking system, credit institutions, foreign banks’ branches must send directly or via post to the State bank (the banking inspection and supervision agency) the following documents:

a) For new issuance:

(i) A written report on issuance and application of an internal credit ranking system;

(ii) An internal credit ranking system, documents which describe internal credit ranking system, process of collecting customers' information and data, ranking customers;

(iii) Guidance for use of internal credit ranking system, including division of duty, authorization in collecting customers' information and data, ranking customers;

b) For amendments and supplementations :

(i) A written report on amendments and supplementations to internal credit ranking system, clarifying reason of amendments and supplementations;

(ii) Documents amending and supplementing internal credit ranking system and guidance for use of internal credit ranking system.

Article 6. Internal regulations on credit extension, loan management, policy on risk provisions

1. Credit institutions, foreign banks’ branches must issue internal regulations on credit extension, loan management, policy on risk provisions.

2. Internal regulations on credit extension, loan management must meet minimally the following conditions:

a) Being formulated on the basis of data and information of customers which have been collected, results of customer ranking under the internal credit ranking system;

b) Being unified for use in all system, doing as basis for approval, extension of credit, management of loans for specific customers;

c) Having regulations on credit policy applicable to customers, including regulations in condition of credit extension, limit of credit extension, interest, dossiers, orders, procedures for, process of appraisal, approval of credit extension, management of loans; 

d) Having regulations on management aiming to ensure compliance with regulations of the State bank on rates for safe assurance in activity of credit institutions, foreign banks’ branches;

dd) Having regulations on duties, powers of units, individuals in appraisal, credit extension, credit quality control, appraisal, management of security assets;

e) Having regulations on process, content of inspection, supervision before, during and after extending credit;

g) Having regulations on security measures, appraisal and management of security assets;

h) Having regulation on self-defining value of security assets including principles, methods, process and duties of each unit, individual related to defining value of security assets, ensuring to be proper with regulations of law on security assets and aiming to implement defining of value of security assets which shall be deducted when calculating the specific amounts set up provisions as specified in clause 5 Article 12 of this Circular;    

i) Having regulations on measures for debt recovery.

3. A policy on risk provisions must meet minimally the followings requirements:

a) In conformity with regulations of law on financial, accounting and report, statistical regimes;

b) Having process to collect customers’ data and information, ensuring exact classification of debts, off-balance sheet commitments, management of bad debts, management of bad credit extension balance, setting up the sufficient provision as prescribed;

c) Having specific regulations on classification of debts, off-balance sheet commitments, levels and method of setting up of risk provisions, and use of provisions against credit risks in the banking activity for each customer periodically, irregularly;

d) Having regulations on powers, duties of units, individuals in classification of debts, off-balance sheet commitments, setting up of risk provisions, and use of provisions against credit risks in the banking activity;

e) Having mechanisms to inspect, supervise and report for contents prescribed from point a to point d of this clause.

Article 7. Report on internal regulations on credit extension, loan management, policy on risk provisions

Within 10 (ten) days after issuing, amending and supplementing the internal regulations on credit extension, management of loans, policy on risk provisions, credit institutions, foreign banks’ branches must send directly or via post to the State bank (the banking inspection and supervision agency) 01 set of dossier including the following documents:

a) For new issuance:

(i). A written report on issuance of internal regulations on credit extension, loan management, policy on risk provisions.

(ii) Internal regulations on credit extension, loan management, policy on risk provisions.

b) For amendments and supplementations:

(i). A written report on amending and supplementing internal regulations on credit extension, loan management, policy on risk provisions, clarifying reasons of amendments and supplementations.

(ii) Documents amending and supplementing internal regulations on credit extension, loan management, policy on risk provisions.

Article 8. Time of classification, setting up and use of provisions against credit risks

1. At least each quarter for one times, within 15 (fifteen) first days of first month of each quarter, credit institutions, foreign banks’ branches must self-implement classification of debts, off-balance sheet commitments which have arisen until the ending time of final working day of last quarter, based on the capability of customers to pay debts as prescribed in Article 10, Article 11 of this Circular and send results of self-classification of debts, off-balance sheet commitments to the CIC.

For the last quarter of annual accounting period, within 15 (fifteen) first working days of final month, credit institutions, foreign banks’ branches must implement classification of debts, off-balance sheet commitments which have arisen until the ending time of final working day of second month of final quarter of the accounting period.

Apart from mentioned-above time of classification, credit institutions, foreign banks’ branches implement classification of debts, off-balance sheet commitments according to internal regulations.

2. Within 03 (three) days after receiving result of self-classification of debts, off-balance sheet commitments of credit institutions, foreign banks’ branches as prescribed in clause 1 of this Article, the CIC shall summarize list of customers according to group of debts with highest risk extent which have been self-classified by credit institutions, foreign banks’ branches and supply them at the requests of credit institutions, foreign banks’ branches.

3. Within 05 (five) days after the CIS had summarized a list of customers as prescribed in clause 2 this Article, credit institutions, foreign banks’ branches must request the CIC for supply of the mentioned-above list of customers, use result of classification of customer debt groups supplied by the CIC in order to adjust their result of classification of debts, off-balance sheet commitments according to the principles specified in clause 1 Article 9; setting up sufficient provisions and use provisions for dealing with risks as prescribed in this Circular.

Chapter 2.

SPECIFIC PROVISIONS

ITEM 1. CLASSIFICATION OF DEBTS AND OFF-BALANCE SHEET COMMITMENTS

Article 9. Methods and principles of classification

1. Credit institutions, foreign banks’ branches self-implement classification of debts, off-balance sheet commitments according to Article 10, Article 11 of this Circular and must use result of classification of customer debt groups supplied by the CIC at the classification time in order to adjust their result of self-classification of  debts, off-balance sheet commitments.  If debts and off-balance sheet commitments of customers are classified into the group of debts with risk extent lower than group of debts according to list supplied by the CIC, credit institutions, foreign banks’ branches must adjust result of classification of debts, off-balance sheet commitments according to the debt group supplied by the CIC.

2. All debt balances and value of off-balance sheet commitments of a customer at a credit institution or foreign bank’s branch must be classified into a same debt group. For a customer who have two debts and/or off-balance sheet commitments or more than at a credit institution, foreign bank’s branch, if any debt or off-balance sheet commitment is classified into the group with risk extent higher than others, that credit institution, foreign bank’s branch must classify the remaining debts or off-balance sheet commitments of such customer into the group which have highest risk extent.

3. For a syndicated credit extension, each credit institution, foreign bank’s branch joining syndicated credit extension must implement independent classification and have responsibility to immediately report together result of classification. All debts and off-balance sheet commitments of customer who is extended the syndicated credit at a credit institution or foreign bank’s branch must be classified into the group with the highest risk extent which a credit institution or foreign bank’s branch joining in syndicated credit extension has classified. 

4. For credit extension entrustment, if the receiving-entrustment party has not disbursed under the entrustment contract, credit institution or foreign bank’s branch conducting entrustment must classify this entrustment such as a loan for the receiving-entrustment party.

5. For a debt which has been sold but not received payment, the debt which is sold but the buyer has right to claim the seller, the amounts which has not been paid, the sold debt balance enclosed with right to claim the seller shall be classified and set up a risk provision as prescribed in this Circular before selling debt. 

6. For a debt purchased, credit institution, foreign bank’s branch shall classify the amounts which has been paid for purchase of debt into the group of risk extent not lower than the group into which such debt had been classified before purchased.

7. For the amounts of purchase or entrustment for other organization (including credit institutions, foreign banks’ branches) to purchase unlisted corporate bonds, credit institutions, foreign banks’ branches must classify it such as an unsecured loan for the party issuing bonds, unless corporate bonds have been secured for payment by assets.

8. For the discount under form of purchase on a definite term of negotiable instruments, other valuable papers of beneficiary, credit institution, foreign bank's branch, the discount shall be classified as a loan for the beneficiary.

9. For debts which the supply of loan or credit extension is implemented under acceptance and direction of the Government, or the Prime Minister, credit institutions, foreign banks’ branches shall implement classification of debts, setting up and use of provisions against credit risks in comply with decisions of the Governor of the State bank for each specific case.

10. For debts specified in point c (iv) clause 1 Article 10 of this Circular, in principle, credit institutions, foreign banks’ branches must immediately recover part of violated debt balance, not permit to restructure repayment term; during time of failing to recover, they must implement classification of debts, setting up of provisions as prescribed in this Circular.     

11. Based on result of inspection, supervision and relevant credit information, the State bank is entitled to require credit institutions, foreign banks’ branches to implement assessment, re-classification of specific debts and setting up of sufficient provisions in conformity with the risk extent of such debts.

Article 10. CLASSIFICATION OF DEBTS AND OFF-BALANCE SHEET COMMITMENTS UNDER QUANTITATIVE METHOD

1. Credit institutions, foreign banks’ branches implement classification of debts (excluding payments under off-balance sheet commitments) according to 05 groups as follows:

a) Group 1 (standard debts) includes:

(i) Current debts that being assessed as fully and timely recoverable, both principals and interests;

(ii) Debts which are overdue for a period of less than 10 days and being assessed as fully recoverable, both overdue principals and interests, and fully and timely recoverable, both remaining principals and interests;

(iii) Other debts which are classified to the Group 1 in accordance with provisions in clause 2, this Article.

b) Group 2 (debts, which need attention) includes:

(i) Debts which are overdue for a period of between 10 days and 90 days;

(ii) Debts which are restructured repayment term for the first time;

(iii) Other debts which are classified to the Group 2 in accordance with provisions in clause 2 and clause 3 this Article.

c) Group 3 (sub-standard debts) includes:

(i) Debts which are overdue for a period of between 91 days and 180 days;

(ii) Debts which are extended repayment term for the first time;

(iii) Debts which are exempted or reduced interests because customers are not sufficient capability to pay all interests under credit contracts;

(iv) Debts which are fallen in one of the following cases:

- Debts of customers or the guarantee party being organizations, individuals who are not subject to be extended credit by credit institutions, foreign banks’ branches as prescribed by law.

- Debts which are secured by stocks of credit institution or its subsidiary companies or the loans are used to contribute capital into another credit institutions on the basis which the credit institution supplying loans shall receive security assets being stocks of credit institution that receive the contributed capital;

- Unsecured debts or debts which have been extended credit with preferential conditions or a value exceeding 5% of own capital of credit institutions, foreign banks’ branches when supply for customers subject to be restrained credit extension as prescribed by law.

- Debts which are supplied for subsidiary companies, associate companies of credit institutions or enterprises in which credit institutions hold right of control and have a value exceeding limit rates as prescribed by law.

- Debts which have value exceeding limits of credit extension, unless being allowed to exceed limit, as prescribed by law;

- Debts which violated provisions of law on credit extension, foreign exchange management and rates of safety assurance for credit institutions, foreign banks’ branches;

- Debts which violated internal regulations on credit extension, loan management and policy on risk provisions of credit institutions, foreign banks’ branches.

(v) Debts which are recovered under inspection conclusions;

(vi) Other debts which are classified to the Group 3 in accordance with provisions in clause 2 and clause 3 this Article.

d) Group 4 (doubtful debts) includes:

(i) Debts which are overdue for a period of between 181 days and 360 days;

(ii) Debts which are restructured repayment term for the first time but still overdue for a period of less than 90 days under that restructured repayment term;

(iii) Debts which are restructured repayment term for the second time;

(iv) Debts which are specified in point c (iv) clause 1 this Article and overdue for a period of between 30 days and 60 days after decisions on recovery have been issued;

(v) Debts which must be recovered under inspection conclusions but fail to be repaid although recovery term was overdue from 60 days ago;

(vi) Other debts which are classified to the Group 4 in accordance with provisions in clause 2 and clause 3 this Article.

e) Group 5 (potentially irrecoverable debts) includes:

(i) Debts which are overdue for a period of more than 360 days;

(ii) Debts which are restructured repayment term for the first time but still overdue for a period of 90 days or more than under that first restructured repayment term;

(iii) Debts which are restructured repayment term for the second time but still overdue under that second restructured repayment term;

(iv) Debts which are restructured repayment term for the third time or later, whether debts are overdue or not;

(v) Debts which are specified in point c (iv) clause 1 this Article and overdue for a period of more than 60 days after decisions on recovery have been issued;

(vi) Debts which must be recovered under inspection conclusions but fail to be repaid although recovery term was overdue for more than 60 days;

(vii) Debts of customers being credit institutions which are announced by the State bank to place in special control status, or foreign banks’ branches of which capital and assets are blockaded;

(viii) Other debts which are classified to the Group 5 in accordance with provisions in clause 3, this Article.

2. Debts shall be classified to the group with lower risks in the following cases:

a) For overdue debts, credit institutions, foreign banks’ branches may classify to Group of debts with lower risks (including Group 1) when meet fully the following conditions:

(i) In case where customers have made full repayment of the overdue principal and interests (including interests applicable to overdue principals) and the principals and interests of the following repayment terms for at least 03 (three) months in respect of long and medium-term debts and 01 (one) month in respect of short-term debts, since the day begins full repayment of the overdue principals and interests; 

(ii) Having documents which prove that customers have paid debts;

(iii) Credit institutions, foreign banks’ branches have sufficient grounds to assess that the customers have full capability to fully and timely repayment of principals and interests.

b) For overdue debts, credit institutions, foreign banks’ branches may classify to Group of debts with lower risks (including Group 1) when meet fully the following conditions:

(i) In case where customers have made full repayment of the principal and interests under the restructured repayment term for at least 03 (three) months in respect of long and medium-term debts and 01 (one) month in respect of short-term debts, since the day begins full repayment of the principals and interests under the restructured term;

(ii) Having documents which prove that customers have paid debts;

(iii) Credit institutions, foreign banks’ branches have sufficient grounds of information, documents in order to assess that the customers have capability to fully repayment of principals and interests in proper with the restructured term.

3. Debts shall be classified to the group with higher risks in the following cases:

a) Happening disadvantage changes in environment, business field which impact negatively directly to the capability of customers to pay debt (natural calamities, epidemics, economic environment);

b) Norms on profitability, solvency, rate of debts on capital, cash flow, capability of customers to pay debts are reduced continuously or have big change in tendency of reduction after 03 consecutive times of assessment, debt classification;

c) Customers fail to supply fully, timely, and honestly financial information at the request of credit institutions, foreign banks’ branches for assessment on the capability of customers to pay debt.

d) Debts which have been classified to Group 2, Group 3, Group 4 as prescribed in point a, b and c this clause for 01 (one) year or longer but not enough conditions to classify to Group of debts with lower risks.

e) Debts of which acts of credit extension have been administratively sanctioned as prescribed by law.

4. Classification of off-balance sheet commitments and payments under off-balance sheet commitments:

a) Classification of off-balance sheet commitments:

(i) To classify to Group 1 when credit institutions, foreign banks’ branches assess that customers have capability to implement fully obligations under commitments.

(ii) To classify to Group 2 or over when credit institutions, foreign banks’ branches assess that customers have no capability to implement obligations under commitments.

(iii) To classify to Group 3 or over for off-balance sheet commitments which fall in one of cases specified in point c (iv) clause 1 this Article.

b) Classification of payments under off-balance sheet commitments:

(i) The matured day is calculated as soon as credit institutions, foreign banks’ branches implement obligation under commitments.

(ii) Payments under off-balance sheet commitments are classified as follows:

- To classify to Group 3 when debts are overdue for less than 30 days;

- To classify to Group 3 when debts are overdue for between 30 days and less than 90 days;

- To classify to Group 5 when debts are overdue for 90 days or more than;

If a payment is classified to a group which has risks lower than group which off-balance sheet commitments of payment has been classified as prescribed in point a (ii), point a (iii) this clause, it must be moved to group which such off-balance sheet commitment has been classified.

Article 11. CLASSIFICATION OF DEBTS AND OFF-BALANCE SHEET COMMITMENTS UNDER QUANLITATIVE METHOD

1. Credit institutions, foreign banks’ branches may classify debts, off-balance sheet commitments according to 05 Groups as follows:

a) Group 1 (standard debts) includes: Debts which credit institutions, foreign banks’ branches assess that there is capability to recover fully and timely both of principals and interests.

Off-balance sheet commitments which are assessed by credit institutions, foreign banks’ branches that customers have capability to implement fully obligations under commitments.

b) Group 2 (debts, which need attention) includes: Debts which credit institutions, foreign banks’ branches assess that there is capability to recover fully both of principals and interests but there are signs showing that customers are declined capability to pay debts.

Off-balance sheet commitments which are assessed by credit institutions, foreign banks’ branches that customers have capability to implement obligations under commitments but there are signs of declining capability to implement commitments.

c) Group 3 (sub-standard debts) includes: Debts which credit institutions, foreign banks’ branches assess that it is not recoverable both of principals and interests to due date. These debts are assessed by credit institutions, foreign banks’ branches to be potential losses.  

Off-balance sheet commitments which are assessed by credit institutions, foreign banks’ branches that customers have no capability to implement fully obligations under commitments.

d) Group 4 (doubtful debts) includes: Debts which are assessed by credit institutions, foreign banks’ branches to be high-potential losses.

Off-balance sheet commitments which capability of commitments not to be implemented by customers are very high.

e) Group 5 (potentially irrecoverable debts) includes: Debts which credit institutions, foreign banks’ branches assessed as irrecoverable and lost.

Off-balance sheet commitments which customers have no capability to implement committed obligations.

2. Credit institutions, foreign banks’ branches which implement classification of debts, off-balance sheet commitments according to clause 1 this Article must be approved in writing by the State bank when meeting fully the following conditions: 

a) Having an internal credit ranking system which is conformable with business activities, customer subjects, risk nature of debts and has been tested for a period of at least 01 year;

b) Having a policy on risk provisions as prescribed in clause 3 Article 6 of this Circular;

c) Having a policy to mange credit risks, a model of credit risk supervision, method to define, measure credit risk (including method to assess on solvency of customers under credit contracts, security assets, capability of debt recovery) and debt management;

d) Dividing clearly duties and powers of the Board of Directors, Members' Council, General Director (Directors) in approval, implementation and implementation inspection of internal credit ranking system and policy on provisions of credit institutions, foreign banks’ branches, and independence of divisions controlling risk. 

3. Credit institutions, foreign banks’ branches send directly or via post to the State bank (Banking inspection and supervision agency) 01 set of dossier to request the State bank for acceptance of classification of debts according to clause 1 this Article and clause 2 Article 2 of this Circular, including the following documents:

a) A written request of foreign bank’s branch for acceptance of the State bank to allow to apply policy on risk provisions of foreign bank as prescribed in clause 2 Article 2 of this Circular; a  written request of credit institution or foreign bank’s branch for acceptance of the State bank to allow to implement classification of debts, off-balance sheet commitments under the qualitative method specified in clause 1 this Article, which proving sufficient satisfication of conditions specified in clause 2 this Article; 

b) Copy of policy on risk provisions of foreign bank for case specified in clause 2 Article 2 of this Article; copy of internal credit ranking system, policy on risk provisions, policy on credit reis control and drafts of documents guiding classification of debts, off-balance sheet commitments and setting up of risk provisions of credit institutions, foreign banks’ branches for case specified in clause 2 this Article.

4. Within 30 (thirty) days after receiving full dossier as prescribed in clause 3 this Article, the State bank shall have a written approval to credit institutions, foreign banks’ branches.  If refursal, the State bank must clearly state reason thereof.

5. Annually, credit institutions, foreign banks’ branches must re-assess their internal credit ranking system, policy on risk provisions, policy on credit risk control in order to be conformable with actual situation and provisions of law.

6. Credit institutions, foreign banks’ branches which are accepted for classification of debts, off-balance sheet commitments according to clause 1 this Article must concurrently implement classification of debts and off-balance sheet commitments according to Article 10 of this Circular.  If results of classification of a debt and off-balance sheet commitment as prescribed in Article 10 and clause 1 this Article are different, debt and off-balance sheet commitment must be classified to group with higher risk extent. The minimum time which have to implement classification of debts, off-balance sheet commitments according to both Article 10 and 11 of this Circular shall be 05 (five) year after being approved by the State bank. 

ITEM 2. SETTING UP OF PROVISIONS

Article 12. Specific levels of setting up provisions

Amount of specific provision required to set up for each customer shall be calculated under the following formula:

Of which:

- R: total amount of specific provisions required to set up of each customer;

- : Being total amount of specific provisions required to set up of each customer from debt balance first to n.

Ri: Being amount of specific provision required to set up for each customer respect to original balance of debt i shall be calculated under the following formula:

Ri = (Ai - Ci) x r

Of which:

Ai: The original balance i;

Ci: the deducted value of security assets, financial leasing assets (hereinafter referred to as security assets) of debt i;

r: rate of specific provisions required to set up under group as prescribed in clause 2 this Article.

If Ci > Ai, Ri shall be calculated equal to 0.

2. Ratio of specific provisions required to set up for each debt group as follows:

a) Group 1: 0%;

b) Group 2: 5%;

c) Group 3: 20%;

d) Group 4: 50%; 

e) Group 5: 100%.

3. Security assets for deduction when calculating amount of specific provision (R) specified in clause 1 this Article must satisfy fully the following conditions:

a) Credit institutions, foreign banks’ branches have right to handle security assets according to the guarantee contracts and provisions of law when customers fail to implement their obligations under commitments.

b) Time to handle security assets estimatedly shall not exceed 01 (one) year for security assets which are not real estates and not exceed 02 (two) year for security assets which are real estates, since credit institutions, foreign banks’ branches have right to handle security assets;

c) Security assets must satisfy fully conditions as prescribed by law on guarantee transactions;

d) Security assets specified in point d, clause 5 this Article must be valued by an organization which have function on price appraisal as prescribed by law in the following cases:

(i) Security assets with value of 50 billion dong or more for debts of customers who are persons related to credit institutions, foreign banks’ branches and customer who are subjects restrained for credit extension as prescribed in Article 127 of Law on credit institutions.

(ii) Security assets with value of 200 billion dong or more, except for cases specified in point d(i) this clause. 

If organization which has function of price appraisal has insufficient capability for valuation or if there is no organize which has function of price appraisal  for security assets specified in points d(i), d(ii) this clause, credit institutions, foreign banks’ branches may implement valuation according to internal regulation specified in point h, clause 2 Article 6 of this Circular.

If a security asset fails to meet fully conditions specified in point a, b, c, d this clause, the deducted value of such asset must be considered as zero.

4. The deducted value of a security asset is defined by multiplication of value of security asset specified in clause 5 this Article and rate of deduction for each type of security asset specified in clause 6 this Article.

Credit institutions, foreign banks’ branches may self-define rate of deduction for each type of security asset on the basis of assessment of recovery capability when handling such security asset but not exceed the maximum deduction rate of each type of security assest specified in clause 6 this Article. 

5. Value of security asset is defined as follows:

a) Gold bar: The purchase price at head office of enterprises, credit institutions owning label of gold bar at time ending day before day of setting in specific provisions.   If the purchase price is not be listed, value of  gold bar shall be defined as prescribed in point d this clause.

b) The Government's bonds which are listed on the Stock Exchange: The reference price of the Stock Exchange at time ending day before day of setting up specific provisions or at latest time before day of setting up specific provisions (if there is no reference price at time ending day before day of setting up specific provisions);

c) Securities issued by enterprises (including credit institutions) and listed on the Stock Exchange:  The reference price of the Stock Exchange at time ending day before day of setting up specific provisions or at latest time before day of setting up specific provisions (if there is no reference price at time ending day before day of setting up specific provisions);

Securities issued by enterprises (including credit institutions) but have not yet listed on the Stock Exchange:  Being calculated by face value;

d) Movable assets, real estate and other security assets: Value of security asset which is valued by an organization which has function of price appraisal as prescribed by law specified in point d clause 3 this Article or value of security asset which is valued according to internal regulation of credit institution or foreign bank’s branch specified in point h clause 2 Article 6 of this Circular.  If there is no document on valuation of security asset, value of security asset must be considered as zero;

e) The financial-leasing asset (value of financial-leasing asset according to the financial-leasing contract subtracts the payable rents):  The remaining rents according to contract at time of setting up specific provision or value which is valuated by an organization possessing function on price appraisal as prescribed by law.

6. The maximum deduction rate for security assets:

a) Deposit of customer in Vietnam dong: 100%;

b) Gold bar, except gold bar specified in point i this clause; deposit of customer in foreign currency: 95%;   

c) The Government’s bonds, negotiable instruments, valuable papers which are issued by itself; saving card, deposit certificates, exchange bills, treasury bills issued by other credit institutions, foreign banks’ branches:

- With remaining term of less than 1 year: 95%;

- With remaining term of between 1 year and 5 years: 85%;  

- With remaining term of more than 5 years: 80%.

d) Securities which are issued by other credit institutions and listed on the Stock Exchange: 70%;

dd) Securities which are issued by other enterprises and listed on the Stock Exchange: 65%;

e) Securities which are unlisted on the Stock Exchange, valuable papers, except clauses specified in point c this clause, and issued by credit institutions which have registered securities listing on the Stock Exchange: 50%;

Securities which are unlisted on the Stock Exchange, valuable papers, except clauses specified in point c this clause, and issued by credit institutions which fail to register securities listing on the Stock Exchange: 30%;

g) Securities which are unlisted on the Stock Exchange, valuable papers issued by enterprises which have registered securities listing on the Stock Exchange: 30%;

Securities which are unlisted on the Stock Exchange, valuable papers issued by enterprises which fail to register securities listing on the Stock Exchange: 10%;

h) Real estate: 50%;

i) Gold bar which has no listing price, other gold and other security assets: 30%.

Article 13. Levels of setting up general provision

1. The amount of general provision which have to set up is defined by 0.75% of total balances of debts from group 1 to group 4, except the following clauses:

a) Deposit specified in point i clause 1 of this Circular;

b) Loans, purchases with defined term of valuable papers for other credit institutions, foreign banks’ branches in Vietnam.

2. Based on result of inspection, supervision and relevant credit information, the State bank is entitled to require commercial banks, foreign banks’ branches to set up general provision for clauses specified in point a, point b, clause 1 this Article in conformity with the risk extent.

Article 14. Addition and returning the provision

1. In case where the remaining specific provision and general provision of previous quarter are less than the specific provision and general provision have to set up of the quarter of setting up, credit institutions, foreign banks’ branches must set up to add to the deficient amount.  

2. In case where the remaining specific provision and general provision of previous quarter are more than the specific provision and general provision have to set up of the quarter of setting up, credit institutions, foreign banks’ branches must return the excessive amount.

ITEM 3. USE PROVISIONS TO DEAL WITH RISKS

Article 15. Risks Settlement Committee

1. Members of a Risks Settlement Committee:

Credit institutions must establish a Risks Settlement Committee consisting of 01 member, who is member of Board of Directors, Members' Council, as president; 01 member who is member of risk control committee; 01 member who is  General Director (Director), and at least other 02 members who is selected by Board of Directors, Members' Council.

Foreign banks’ branches must establishe a Risks Settlement Committee consisting of General Director (Director) as president and at least 02 other members who are selected by General Director (Director).

2. Duties of a Risks Settlement Committee:

Based on internal regulation on classification of debts and off-balance sheet commitments, setting up of provision, use of provision against credit risks, a Risks Settlement Committee shall:

a) To approve reports which summarize reports of whole system regarding result of debt recovery and provisions which have been used to deal with risks, including result of handling of security assets and to clarify basis of approval;

b) To decide or approve classification of debts and off-balance sheet commitments, setting up of provision, use of provision against credit risks within whole system;

c) To decide or approve measures of debt recovery which have been used provision for settlement in whole system, including handling of security assets.

Article 16. The principles and dossiers of risk settlement

1. Credit institutions, foreign banks’ branches may use risk provision against credit risk in the following cases:

a) Customer is an organization which is dissolved, goes bankrupt as prescribed by law, or an individual who dies or is missing;

b) Debts which are classified to Group 5.

2. Credit institutions, foreign banks’ branches may use provision against credit risks under the following principles:

a) Using specific provision set up according to clause 1 Article 12 of this Circular in order to deal with risks for such debts;

b) To dispose of the security assets for debt recovery:  If specific provision is insufficient to deal with a debt, credit institutions, foreign banks’ branches must promptly put on sale the security assets according to the agreement with customers and in accordance with provisions of laws for debt recovery;

c) In case where both the specific provision and the amounts from disposal of asset are not sufficient to cover the credit risks of the debt, the general provisions can be used for the full settlement;

d) Credit institutions, foreign banks’ branches implement off-balance sheet accounting for debt balance which is dealt with risks as prescribed in point a, point b, point c this clause.

3. Dossier of risk settlement inludes:

a) Dossier of credit extension and dossier of debt recovery for debts which are dealt with risks;

b) Dossier of security assets and other relevant papers;

c) Decision or approval of the Rist Settlement Committee regarding result of classification of debts, setting up of provision against credit risks;

d) Decision or approval of the Rist Settlement Committee regarding risk seetlement;

dd) For customer being organization, or enterprise which is dissolved, goes bankrupt, apart from dossier stated in point a, point b, point c and point d this clause, it is required for an authenticated copy of decision on bankruptcy declaration of court or decision on dissolution of enterprise as prescribed by law; 

e) For customer being individual who dies or is missing, apart from dossier stated in point a, point b, point c and point d this clause, it is required for an authenticated copy of the Death Certificate, Certificate of or decision on missing declaration as prescribed by law;

Article 17. The responsibility of credit institutions, foreign banks’ branches for risk settlement

1. The suitable use of provision against credit risks in order to account relevant debts into the off-balance sheet account, and following up, urging, collecting of debts are internal activities of credit institutions, foreign banks’ branches, not make change of obligation to pay debt of customers for debts which are dealt with risks.  After dealing with risks, credit institutions, foreign banks’ branches must have measure to collect debts fully, thoroughly and continue following up, collecting of debts for debts which are dealt with risks under credit contracts, commitments which have been agreed with customers.

2. For at least 05 (five) years, after using provision against credit risks and after all measures for debt recovery of the risk settlement committee had been implemented but debts were still irrevocable, credit institutions, foreign banks’ branches shall be entitled to release the settled debts from the off-balance sheets accounts.

For state commercial banks, joint-stock commercial banks owned by state for more than 50% of charter capital, the release of settled debts from the off-balance sheets accounts shall be implemented when there are sufficient dossier, documents proving that all measures of debt recovery had been implemented but debts were still irrevocable and they must be accepted in writing by the Ministry of Finance and the State bank.

Dossier for a debt which is released from off-balance sheet account must be kept as prescribed by law, in which includes dossier of risk settlement and all documents proving that credit institution, or foreign bank’s branch had performed all measures to collect debt but it still is irrevocable.

Article 18. Handling the amount collected from settled debts

The amounts which are collected from settled debts, including amounts which are collected from handling of security assets, are considered as revenue in the accounting period of credit institutions, foreign banks’ branches.

ITEM 4. MANAGEMEN OF DEBTS, OFF-BALANCE SHEET COMMITMENTS, SETTING UP AND USE OF PROVISIONS AGAINST CREDIT RISKS

Article 19. Managemen of debts, off-balance sheet commitments, setting up and use of provisions against credit risks

1. Credit institutions, foreign banks’ branches must have a division in charge for management of debts, off-balance sheet commitments (section, department or equivalent) at their head office in order to manage implementation of classification of debts, off-balance sheet commitments, setting up and use of provisions against credit risks applicable to whole system.

2. The responsibility of division on management of debts, off-balance sheet commitments:

a) To formulate, submit to General Director (Director) in order to submit to Board of Directors, Members' Council (for credit institutions) or to submit to General Director (Director) (for foreign banks’ branches) for promulagation of: 

(i) The internal credit ranking system, amendments, supplementations to the internal credit ranking system; regulations on management, operation of the internal credit ranking system, collection, addition of customers’ data and information;

(ii) Policy on risk provisions, amendments, supplementations to policy on risk provisions.

b) Management and operation of the internal credit ranking system;

c) Summarizing and reporting to the risk settlement committee result of classification of debts, off-balance sheet commitments, setting up and use of provisions against credit risks and debt recovery after having used provisions to deal with risks of previous quarter in whole system; proposing the risk settlement committee for classification of debts, off-balance sheet commitments, setting up and use of provision against credit risks, measures to control bad debts and to collect debt thoroughly;

d) Managing, following up units, individuals in implemenatation of provisions on point d, clause 3 Article 6 of this Circular;

dd) Supplying information, coordinating with functional units at head office in formulation and submiting to General Director (Director) in order to submit to Board of Directors, Members' Council (for credit institutions) or to submit to General Director (Director) (for foreign banks’ branches) for promulagation or amendments, supplementations of internal regulations on credit extension, loan management of credit institutions, foreign banks’ branches;

e) Implementing other tasks as prescribed by credit institutions, foreign banks’ branches.

ITEM 5. ACOUNTING, REPORT

Article 20. Acounting

Credit institutions, foreign banks’ branches implement accounting of setting up, use, addition, returning of specific provision and general provision according to provisions of law on regime of accounting as prescribed by law.

Article 21. Report

1. Credit institutions, foreign banks’ branches must report on result of classification of debts, off-balance sheet commitments, setting up and use of provisions against credit risks according to regulations on the regime on report and statistic applicable to credit institutions, foreign banks’ branches which are promulgated by the State bank.

2. Credit institutions, foreign banks’ branches shall supply for CIC the information according to regulations on credit information activities of the State bank and as prescribed in this Circular;

3. Credit institutions, foreign banks’ branches must report result of classification of debts, off-balance sheet commitments, setting up and use of provisions against credit risks, result of debt recovery to the Ministry of Finance and provincial-level Tax Department where their head offices are located according to regulations on tax report of the Ministry of Finance.

Chapter 3.

THE RESPONSIBILITY OF THE STATE BANK AND HANDLING OF VIOLATIONS

Article 22. The responsibility of the State Bank

1. The banking inspection and supervision agency shall:

a) To inspect, assess formulation of internal regulations according to Article 6 this Circular, quality and extent meeting requirement of internal regulations which are promulagetd by credit institutions, foreign banks’ branches;

b) To examine, inspect implementation of internal regulations on credit extension, loan management and policy on risk provisions of credit institutions, foreign banks’ branches.

c) To examine, inspect implementation of classification of debts, off-balance sheet commitments, setting up and use of provisions against credit risks of credit institutions, foreign banks’ branches;

d) To handle violations of credit institutions, foreign banks’ branches as prescribed in Article 23 of this Circular;

e) To submit to the Governor of the State bank to issue documents specifying classification, setting up and use of provisions against credit risks for cases specified in clause 3, clause 4 Article 24 of this Circular; to supervise implemenatation according to the State bank’s guiding documents of credit institutions, foreign banks’ branches.

2. The Department of Monetary Statistic and Forecast shall, based on provisions in this Circular, formulate and submit to the Gorvernor of the State bank for promulgation of regulation on regime of report ans statistic of classification of debts, off-balance sheet commitments, setting up and use of provisions against credit risks in activities of credit institutions, foreign banks’ branches.

3. The Department of Finance and Accounting shall, based on provisions in this Circular, formulate and submit to the Gorvernor of the State bank for documents guiding implememtation of the relevant accounting regime as prescribed by law.

4. The Credit Information Center shall summarise, suply at the requests of credit institutions, foreign banks’ branches for list of customers under group of debts with highest risk extent which are classified and reported by credit institutions, foreign banks’ branches as prescribed om clause 1 Article 8 of this Circular.

Article 23. Handling of violations

Credit institutions, foreign banks’ branches and relevant individuals who break provisions in this Circular, apart from implementation of classification of debts and off-balance sheet commitments, setting up of provisions against risks, use of provisions against risks for debts in accordance with provisions in this Circular, depend on nature and seriousness of violations, they shall be handled according provisions on administrative violation sanction in the field of monetary and banking operation.

Chapter 4.

IMPLEMENTATION PROVISIONS

Article 24. Transitional provisions

1. Foreign banks’ branches which have been accepted by the State bank to allow to implement classification of debts, setting up and use of provisions agains credit risks according to regulation of foreign banks before the effective day of this Circular, are entitled to implement classification of debts and off-balance sheet commitments, setting up provisions against risks according to written approval of the State bank. 

2. Credit institutions which have been accepted by the State bank for implememtation of policy on risk provision in order to classify debts according to Article 7 stipulating on classification of debts, setting up and use of provisions against credit risks in banking activities of credit institutions promulgated together with the Decision No. 493/2005/QD-NHNN of April 22, 2005 of the Governor of the State bank shall implement classification of debts and off-balance sheet commitments according to Article 10 and clause 1 Article 11 of this Circular for time of 03 (three) years after this Circular takes effect. If results of classification of a debt and off-balance sheet commitment as prescribed in Article 10 and clause 1 this Article of the Circular are different, debt and off-balance sheet commitment must be classified to group with higher risk extent.

3. Credit institutions, foreign banks’ branches which have debts specified in point c (iv) clause 1 Article 10 of this Circular arised before the effective day of this Circular and have not yet recovered, shall deal as follows:  

a) Beside of implementation under proposals, inspection conclusions (if any), within 10 days, after this Circular takes effect, credit institutions, foreign banks’ branches must formulate plan to deal, and report it to the State bank (the banking inspection and supervision agency), in which it is required maximally the following contents:

(i) A specific list of each debt and name, address, tax code, business lines of each customer who possess debt;

(ii) Result of classification of debts, setting up of provisions against credit risks as prescribed in this Circular;

(iii) The financial situation and capability of setting up of provisions for debts;

(iv) Plan on setting upp of provisions, use of provisions to deal with credit risks;

(v) Plan, measure and commitment on settlement in order to ensure  thoroughly debt recovery.

b) Credit institutions, foreign banks’ branches shall implement classification, setting up and use of provisions against credit risks for debts according to guides of the State bank for each specific case. While the State bank have not yet issued guides, credit institutions, foreign banks’ branches shall, based on overdue time specified in Article 10 of this Circular, implement classification of debts, setting up and use of provisions against credit risks as prescribed by this Circular.

4. Credit institutions, foreign banks’ branches which have debts specified in points g, h, i clause 1 Article 1 of this Circular arised before the effective day of this Circular, shall deal as follows: 

a) Within 10 days, after this Circular takes effect, credit institutions, foreign banks’ branches must report to the State bank (the banking inspection and supervision agency), which is required maximally for the following contents:

(i) A specific list of each debt and name, address, tax code, business lines of each customer who possess debt;

(ii) Result of classification of debts, setting up of provisions against credit risks as prescribed in this Circular;

(iii) The financial situation and capability of setting up of provisions for debts;

(iv) Plan on setting upp of provisions, use of provisions to deal with credit risks;

(v) Plan, measure and commitment on settlement in order to ensure thoroughly recovery.

b) Credit institutions, foreign banks’ branches shall implement classification, setting up and use of provisions against credit risks for debts according to guides of the State bank for each specific case.

Article 25. Effect

1. This Circular takes effect on June 01, 2013.

2. Credit institutions, foreign banks’ branches shall implement classification of debts, setting up provisions against credit risks for debts specified in point c(iv) clause 1 Article 10 of this Circular from January 01, 2014.

3. The following documents and regulations shall cease effect:

- Directive No. 05/2005/CT-NHNN of April 26, 2005 of the Governor of the State bank, on implementation of classification of debts and setting up of provisions against credit risks according to the Decision No. 493/2005/QD-NHNN of April 22, 2005 of the Governor of the State bank;   

- Decision No. 780/QD-NHNN of April 23, 2012 of the Governor of the State bank, on classification of debts respect to loans restructured repayment term; 

- Regulations on classification of debts,setting up and use of provisions against credit risks in bank activities aplicable to commercial banks, non-bank credit institutions, foreign banks’ branches at the Decision No. 493/2005/QD-NHNN of April 22, 2005 of the Governor of the State bank on promulgating Regulation on classification of debts, setting up of provisions against credit risks in the banking activity of credit institutions, Decision No. 18/2007/QD-NHNN of April 25, 2007 on amending and supplementing a number of articles of Regulation on classification of debts, setting up and use of provisions against credit risks in the banking activity of credit institutions promulgated together with the Decision No. 493/2005/QD-NHNN of April 22, 2005.

4. The Chief of office, the Chief of banking Inspection and supervision, heads of units of the State bank, directors of the State bank’s provincial branches, Chairperson of Board of Directors, chairperson of Members' Council and general directors (directors) of credit institutions, foreign banks’ branches shall implement this Circular.