The draft Circular on debt classification and provisioning of credit institutions has recently been finalised in replacement of Decision 493 and is expected to take effect from 1 January 2013. Accordingly, the amount of bad debts and provisions are very much likely to surge, yet reflect the actual debt conditions.
Debts are still categorised under qualitative and quantitative methods. According to the qualitative method, debts fall into five groups and provisions for each group remain unchanged. However, for regulations to be in accordance with the market movements, group 3 (classified as bad debts) would now include additional items such as loans with exempted and reduced interest payment; loans secured by credit institutions or their affiliates’ own shares; loans granted to credit institutions’ affiliates or enterprises at which credit institutions hold more controlling stake than ceiling proportion.
Normally, provisioning would largely depend on collateral quality which is clarified in the draft circular. For instance, the processing time would be within one year for collateral other than property and two years for real estate collateral since the time of being assigned to handle such items. Importantly, collateral worth of above 100 billion dong must be priced by authorised agencies in order to impede both overpricing and underpricing due to banks’ self-pricing.
In addition, unlisted securities and valuable papers issued by other enterprises and credit institutions will see a discount cap rate of 10pct of their face value. In the meantime, Decision 493 currently fails to differentiate listed and unlisted securities with a discount rate of 65pct-70pct of their market value. Given the low liquidity and volatile price fluctuations of OTC securities together with businesses’ in transparent financial conditions, the above reduction would be plausible.
Consequently, a range of mortgaged loans and those secured by unlisted securities and valuable papers issued by other enterprises are likely to require supplementary collateral. Lenders could, otherwise, experience considerable provision surges.
As such, banks would consider a debt extension, roll over for late principal and interest payment in an attempt to hinder overdue loans that are secured on unlisted securities, which is very likely to attract attention from the central bank’s investigation agencies.
Another important point is banks that are eligible to classify debts under quantitative method have to simultaneously adopt the other -qualitative method for at least five years since the time of being allowed to.