Ensuring Safe Operations of Credit Institutions

12:02:49 AM | 7/8/2011

After polling market participants, the State Bank of Vietnam (SBV) has constructed and announced a draft circular on safety ratios in operations of credit institutions.
This circular is expected to be completed and issued in 2011. The first content of the new ruling is a requirement for higher quality of credits provided by banks.
 
The draft circular provides six safety ratios in operations of credit institutions, including capital adequacy ratio, solvency ratio, the maximum ratio of short-term funds used for medium and long term loans, lending ratio on total deposits, credit limits and financing limited, and share acquisition.
 
According to the new ruling, the maximum ratio of short-term funds used for medium and long term loans is 30 percent for banks and foreign bank branches and 40 percent for financial companies. In addition, credit institutions and foreign bank branches have to keep the ratio of outstanding loans on total deposits at 80 percent (applied to banks and foreign bank branches) and 85 percent (subject to financial companies).
In addition, a newly added additional content is the solvency ratio. Before and after lending, banks must ensure solvency ratio, capital adequacy ratio and other required safety rations.
 
Specially, conditions for stock investment loans will be tightened. According to Decision No. 03/2008/QD-NHNN on loans, discounts and valuable papers for securities investment, banks must meet a bad debt ratio of below 5 percent of the owner’s equity. According to the draft circular, the bad debt ratio will be 3 percent or less of their equity capital.
 
According to statistics from the State Bank of Vietnam (SBV), currently, the ratios of outstanding securities loans to equity are estimated to amount roughly 2.5 percent at State-owned banks, 4.5 percent at joint stock banks and 1.9 percent at foreign bank branches. Total outstanding securities loans of the lenders are over VND10 trillion.
 
According to the Decree 141 on the legal capital of credit institutions, by December 31, 2010, commercial banks basically raised their registered capital to at least VND3,000 billion.
 
This is a big adjustment as most of local lenders’ equity is charter capital. However, the circular draft’s composing team was positive that the cap of 3 percent is in line with current conditions of local banks.
 
According to many experts, this adjustment will lead to controversy. Indeed, a bad debt ratio of below 3 percent and capital adequacy ratio of at least 10 percent remain a daunting challenge for many commercial lenders in Vietnam, even leading ones.
 
Thu Hang