When is a credit institution considered insolvent? Will a credit institution facing insolvency possibilities be placed under special control?
When is a credit institution considered insolvent?
According to Article 4 of Circular No. 11/2019/TT-NHNN on insolvency due to low liquid assets as follows:
Insolvency due to low liquid assets
1. A credit institution will be considered facing insolvency due to low liquid assets when it lacks 20% or more of highly liquid assets at the time of calculation of its solvency ratio and thus it has failed to meet the required solvency ratio as regulated in Point a Clause 1 Article 130 of the Law on credit institutions (as amended in 2017) and State Bank of Vietnam’s regulations for a period of 03 consecutive months.
2. A credit institution will become insolvent when it is unable to meet its debt obligations within 01 month as they come due and has the ratio of sum of its bad debts as regulated by State Bank of Vietnam, debts restructured as potentially bad debts and debts sold to Vietnam Asset Management Company as bad debts yet to be disposed of to sum of its debts as regulated by State Bank of Vietnam and debts sold to Vietnam Asset Management Company as bad debts yet to be disposed of at 10% or higher after 01 month as debt obligations come due.
3. The credit institution becomes insolvent or is facing insolvency due to low liquid assets must quickly submit reports to State Bank of Vietnam on its actual status, reasons and remedial measures that have been or will be adopted, and suggested solutions.
Thus, based on the above provisions, a credit institution will become insolvent when it is unable to meet its debt obligations within 01 month as they come due and has the ratio of sum of its bad debts as regulated by State Bank of Vietnam, debts restructured as potentially bad debts and debts sold to Vietnam Asset Management Company as bad debts yet to be disposed of to sum of its debts as regulated by State Bank of Vietnam and debts sold to Vietnam Asset Management Company as bad debts yet to be disposed of at 10% or higher after 01 month as debt obligations come due.
When is a credit institution considered insolvent? Will a credit institution facing insolvency possibilities be placed under special control? (Image from the Internet)
Will a credit institution facing insolvency possibilities be placed under special control?
According to Article 146 of the 2010 Law on Credit Institutions in Vietnam on the application of special control as follows:
Application of special control
1. Special control means placing a credit institution which faces insolvency possibilities under the direct control of the State Bank of Vietnam.
2. The State Bank of Vietnam shall inspect and detect in time cases facing insolvency possibilities.
3. The State Bank of Vietnam shall consider and place a credit institution under special control when the credit institution fails into any of the following cases:
a/ It faces insolvency possibilities;
b/ Its irrecoverable debts likely result in its insolvency:
c/ It has an cumulative loss exceeding 50% of the actual value of its charter capital and reserve funds stated in the latest audited financial statement.
d/ It has been ranked "poor" under the State Bank's regulations for 2 consecutive years;
e/ It fails to maintain the minimum capital safely ratio specified at Point b, Clause 1, Article 130 of this Law within 1 year or has this ratio fallen below 4% for 6 consecutive months.
Thus, according to regulations, credit institutions in Vietnam that face insolvency possibilities will be placed under special control.
What forms of special control are there?
Pursuant to Clause 1, Article 7 of Circular No. 11/2019/TT-NHNN stipulating the forms of special control as follows:
Based on the facts and level of operational risks of a specific credit institution, the SBV’s Governor or Director of SBV’s branch shall consider making decisions on:
- Putting that credit institution under special control in the form of special supervision or comprehensive control;
- Contents, scope, methods and works relating to operational control specified in the Decision on special control which must be conformable with the form of special control and contents prescribed in Clause 1 Article 15 of this Circular.
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