In order to address drawbacks for banks and foreign bank branches in Vietnam, the State Bank of Vietnam (SBV) on March 1 issued Consolidated Text 05/VBHN-NHNN of the Circular regulating capital adequacy ratios (CARs) for banks and foreign bank branches in Vietnam. The Document is the consolidation of three SBV Circulars, namely Circular No. 41/2016/TT-NHNN dated December 30, 2016, specifying capital adequacy ratios for banks and foreign bank branches (effective as of January 1, 2020); Circular No. 22/2019/TT-NHNN dated November 15, 2019, specifying prudential and capital adequacy ratios applicable to operation of banks and foreign bank branches (effective as of January 1, 2020); and Circular No. 22/2023/TT-NHNN dated December 29, 2023, revising a number of articles of Circular No. 41/2016/TT-NHNN (effective as of July 1, 2024).
Types of collateral for offsetting banks’ credit risks
Under the new regulation, from July 1, the offsetting of credit risks may only be made with the following types of collateral:
(i) Cash, valuable papers, and savings certificates issued by credit institutions and foreign bank branches;
(ii) Gold (physical gold, standard gold, and gold jewelry with value convertible into 99.99 percent (24-karat) gold);
(iii) Valuable papers issued or underwritten by the Government of Vietnam, the SBV, provincial-level People’s Committees and social policy banks of Vietnam;
(iv) Debt securities issued by governments and public-sector entities of governments of foreign countries which are rated BB- or higher by independent credit rating agencies;
(v) Debt securities issued by enterprises which are rated BBB- or higher by independent credit rating agencies; and,
(vi) Stocks listed on the Vietnam Exchange.
To be used for offsetting banks’ credit risks, the aforesaid types of collateral must comply with regulations on secured transactions; and be other than valuable papers, debt securities and stocks issued or underwritten by customers and/or parent companies, subsidiaries and affiliated companies.
Collateral being enterprise-issued debt securities and stocks must be put into order-matching transactions within 10 working days preceding the time of computation and calculated at daily mark-to-market prices.
Real estate-secured loans for individuals to purchase houses
According to Circular 22/2023/TT-NHNN, house mortgage loan is defined as a real estate-secured loan for an individual to buy a house or as a loan for purchase of a social house or a house under the Government’s housing support programs or projects. To make it more specific, the Circular says that a real estate-secured loan for an individual to buy a house must satisfy four conditions below. First, funding sources for loan repayment are not incomes from the lease of such house. Second, the house has been completed for handover under the house purchase and sale contract. Third, a bank or foreign bank branch in Vietnam has the total lawful right to handle the mortgaged house when the borrower fails to repay the loan in accordance with the laws on secured transactions and housing. Lastly, the house is independently priced (by a third party or a division independent from the bank’s or foreign bank branch’s loan-approving division) on the principle of prudence (its value is not higher than the market price at the time of loan approval) under regulations of the bank or foreign bank branch.
In fact, the only difference between the above conditions and those specified in Circular 41/2016/TT-NHNN is the phrase “for handover” stated in the second condition: “The house has been completed for handover under the house purchase and sale contract”.
As for a loan for purchase of a social house or a house built under the Government’s housing support program or project, the first, third and last conditions mentioned above will apply.
The credit risk weight (CRW) applicable to house mortgage loans ranges from 30-100 percent, depending on the loan-to-value (LTV) ratio. The condition that the house must have been completed under the house purchase and sale contract applies only to house mortgage loans (which are eligible for a CRW lower than that applicable to loans secured with other types of real estate).
In case an organization or individual that wishes to build or purchase a future house puts such house for mortgage for borrowing a loan, such loan will be considered a real estate-secured loan specified in Article 2.10, and subject to the corresponding CRW specified in Article 9.10, of Circular 41/2016/TT-NHNN. This provision does neither restrict the rights of future house purchasers nor contravene relevant provisions currently in force (Civil Code, Housing Law, Law on Real Estate Business, Investment Law, and Law on Credit Institutions).
Facilitation of credit extension for fields eligible for Government priorities
Circular 22/2023/TT-NHNN has not only addressed drawbacks for banks and foreign bank branches that arise in the course of implementation of Circular 41/2016/TT-NHNN but also provided an important legal basis for facilitating credit extension for fields entitled to the Government’s priorities.
As industrial development is among the Government’s priority fields, the construction of infrastructure facilities in industrial parks requires appropriate support policies. To deal with this, Circular 22/2023/TT-NHNN offers several support policies for real estate business projects.
Firstly, Circular 22/2023/TT-NHNN promotes the provision of loans for real estate development projects in industrial parks while taking into account risks of loans for real estate business in general with a view to helping revitalize the real estate market.
Circular 22/2023/TT-NHNN, like Circular 41/2016/TT-NHNN, sets the CRW of 200 percent applicable to loans provided for real estate development projects in general. Particularly, in order to stimulate the provision of loans for real estate development projects in industrial parks and concurrently consider the degree of risks of loans for real estate business in general, Circular 22/2023/TT-NHNN provides the CRW of 160 percent, which is equal to that applicable to specialized lending and lower than that applicable to donations for other real estate development projects[1].
Secondly, under Circular 22/2023/TT-NHNN, credit institutions are encouraged to provide more loans for borrowers to purchase social houses or houses built under the Government’s housing support programs and projects.
So far, the Government has adopted numerous mechanisms and policies to promote the building of social houses for low-income earners and industrial park workers in order to better meet their demand and suit their financial capability. The range of persons entitled to these policies has also been broadened.
Specifically, in order to encourage credit institutions to provide more loans for projects to build social houses and houses under the Government’s housing support programs and projects and, at the same time, promote the development of social housing projects, Circular 22/2023/TT-NHNN states that borrowers of loans for house purchase are not required to satisfy the condition that houses must have been completed for handover, and such loans are eligible for a CRW lower than that for other house-mortgage loans (20-50 percent). Meanwhile, the CRW for other cases of house purchase is kept unchanged at 25-100 percent as provided in Circular 41/2016/TT-NHNN, depending on the LTV ratio and debt service coverage (DSC) ratio. As evaluated by credit institutions, to date, loans for purchase of social houses and houses built under the Government’s housing support programs and projects have accounted merely for a small proportion on their loan portfolios. As a result, the adjustment of the CRW for those loans has exerted a trivial impact on the CAR of credit institutions. Hopefully, this support policy will positively facilitate credit institutions’ provision of loans to individual borrowers who are eligible to buy social houses or houses for low-income earners in the coming period.
Thirdly, Circular 22/2023/TT-NHNN helps promote lending for agriculture and rural development, focusing on loans for farmers to develop agricultural production, thereby helping repel various forms of usury in rural areas[2].
Based on the provisions of Government Decree 55/2015/ND-CP dated June 9, 2015, on credit policies serving agricultural and rural development, Circular 22/2023/TT-NHNN adds Clause 12a below Clause 12, Article 9 of Circular 41/2016/TT-NHNN, which stipulates: “For loans to be provided to individuals for the purpose of agricultural and rural development under the Government’s regulations on credit policies serving agricultural and rural development, the credit risk weight is 50 percent.”
Lastly, Circular 22/2023/TT-NHNN provides a facilitative mechanism for credit institutions that are transferees of poorly-performing banks subject to mandatory transfer with a view to restructuring weak banks. It additionally provides: “Banks that are transferees of credit institutions subject to mandatory transfer and other credit institutions may apply the credit risk weight of 0 percent for loans, guarantee amounts and deposits at the transferred credit institutions under approved mandatory transfer plans.”[3]
This provision aims to encourage banks as transferees and other credit institutions to extend credit for mandatorily transferred banks for the latter to restore their normal operation on the inter-bank monetary market and get funds from receiving banks to successfully implement mandatory transfer plans.
Nevertheless, it should be noted that, both Circular 22/2023/TT-NHNN and Circular 41/2016/TT-NHNN have the scope of application covering the CARs applicable to Vietnam-based banks and foreign bank branches. They are not legal texts specifying credit extension operations or conditions of commercial banks. Both documents are silent about purposes for which loans may or may not be provided. In fact, the provisions on lending purposes, and subjects eligible for, subjects ineligible for and subjects restricted from taking loans can be found in the current Law on Credit Institutions.- (VLLF)
[1] Circular 41/2016/TT-NHNN provides only the CRW for house mortgage loans and is silent about the CRW for loans for purchase of social houses or houses built under the Government’s housing support programs and projects.
[2] Circular 41/2016/TT-NHNN says nothing about the CRW for loans for agriculture and rural development.
[3] Circular 41/2016/TT-NHNN lacks provisions on the CRW applicable to credit institutions that are transferees of weak banks subject to mandatory transfer.
