Types of credit risk mitigation by the collateral in Vietnam as of July 1, 2024

Types of credit risk mitigation by the collateral in Vietnam as of July 1, 2024 (Internet image) 

Regarding this issue, LawNet would like to answer as follows:

On December 29, 2023, the Governor of the State Bank of Vietnam issued Circular 22/2023/TT-NHNN amending Circular 41/2016/TT-NHNN prescribing prudential ratios for operations of banks and foreign bank branches (FBBs).

1. Types of credit risk mitigation by the collateral in Vietnam as of July 1, 2024 

Credit risk mitigation by collateral shall only be applied to the following types of eligible collateral:

- Cash, securities, credit cards issued by credit institutions or foreign bank branches;

- Gold (standard gold, physical gold, gold jewelry of which value is converted into 99.99% purity gold);

- Financial instruments issued or guaranteed by the Government of Vietnam, SBV, provincial People’s Committees or banks for social policies;

- Debt securities rated at least BB- by an independent credit rating company when issued by sovereigns or public sector entities (PSEs);

- Debt securities rated at least BBB- by an independent credit rating company when issued by enterprises;

- Equities listed on Vietnam Exchange.

(Clause 1 of Article 12 of Circular 41/2016/TT-NHNN (amended in Circular 22/2023/TT-NHNN))

2. Requirements for types of credit risk mitigation by the collateral in Vietnam

The collateral referred to in Section 1 is required to meet the following requirements:

- It complies with laws and regulations on secured transactions;

- Securities, debt securities or equities must not be issued or guaranteed by customers and/or their parent companies, subsidiaries and affiliates.

- There are order matching transactions involving the collateral referred to in points dd and e clause 1 of this Article occurring within 10 business days prior to the calculation date, and the daily mark-to-market price is employed to the calculation.

(Clause 2, Article 12 of Circular 41/2016/TT-NHNN (amended in Circular 22/2023/TT-NHNN))

3. Credit risk mitigation by the on-balance sheet netting in Vietnam

According to Article 13 of Circular 41/2016/TT-NHNN, regulations on credit risk mitigation by the on-balance sheet netting are as follows:

- On-balance sheet netting is defined as a decreasing adjustment by banks and/or foreign bank branches to value of a claim in proportion to the balance amount of deposit of a customer made at these banks and/or foreign bank branches.

- Banks and/or foreign bank branches shall be entitled to make a decreasing adjustment to value of claims by applying the on-balance sheet netting technique upon calculation of total risk-weighted asset only if the following conditions are met:

+ Have a well-founded legal basis for concluding that the agreement on netting and offsetting of assets and liabilities of customers or counterparties is enforceable regardless of whether the counterparty is insolvent or bankrupt;

+ Determine assets and liabilities with each customer or counterparty that are subject to the on-balance sheet netting agreement at any time;

+ Monitor and control their risks;

+ Monitor and control the relevant exposures on a net basis.

Nguyen Ngoc Que Anh

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