Late last week saw the State bank of Vietnam (SBV)’s releasing Circular 06 on SBV’s and other credit institutions’ exceptional lending to insolvent banks that could hurt the sector’s stability. The movement is considered the first legal corridor for restructuring weak banks in accordance with the recent issued government’s Decision 254.
Accordingly, the central bank would either determine special loans or ask a lender to provide such credit to credit institutions, which is subject to their insolvency.
The lending rate would be at the discretion of the state bank and overdue interest rate would be equivalent to 150pct of lending rate. The lending term and payment dates would differ among specific cases depending on credit institutions’ requests and actual solvency. Yet, the maximum loan duration would not prolong to more than 2 years. Extension of such loans could be considered on the basis of credit institutions’ payment capacity, but each extension would not surpass the initial loan duration.
For credit institutions that become broke as a result of a severe breakdown, lending rate would be refinancing rate which is periodically fixed by the central bank. Overdue rate would be 150pct of lending rate and the maximum duration would be one year. Extension could be allowed, yet the combined extension and initial term would not exceed 2 years.
The state bank’s provincial branches would be the agencies in charge of disbursement, supervision and debt collection. Such special loans would be given the first priority to be settled compared to other debts of credit institutions even including collateral loans.
Special loans would only be to cover payment of deposits for individual depositors at credit institutions. Payment for depositors other than these subjects would be at discretion of the Governor and for other depositors related to credit institutions would be prohibited.
In addition, credit institutions should be proactive in debt settlement even if loans have yet reach maturity when any source of fund is available. It is obligatory that debtors make full payment of principal and interest to the state bank and other lending credit institutions.
For those which fail to make payment at maturity, the following measures could be carried out: deducting deposit accounts at the state bank, other income sources of credit institutions, transferring special loans into capital contribution of the central bank or other methods of debt recovery upon the prime minister’s decision.
It is vital that a special lending mechanism that fits financial health of each weak bank be built so as to facilitate the lending of the state bank and other credit institutions to these borrowers, said a banking expert. Importantly, the central bank and other lenders could become shareholders should such borrowing credit institutions fail to make repayment.