Using Provisions to Address Risks in the Operations of Cooperative Credit Institutions

The use of reserves to handle risks is a form of changing the accounting for the debt, transferring the risk-handled debt to off-balance sheet accounts.

This draft Circular regulates the classification, amounts, methods for establishing risk reserves, and the use of reserves to handle credit risks in banking activities for assets (commonly referred to as debts) arising from the following activities:

a- Lending;

b- Discounting, rediscounting negotiable instruments and other valuable papers;

c- Providing credit in the form of credit card issuance;

d- Factoring

e- Payment guarantees according to off-balance sheet commitments;

f- Buying and entrusting the purchase of corporate bonds (including bonds issued by other credit institutions) that are not listed on the securities market or not registered for trading on the Upcom trading system (hereinafter referred to as unlisted bonds), excluding the purchase of unlisted bonds with entrusted capital where the entruster bears the risk;

g- Entrusted lending;

h- Depositing money (excluding demand deposits) at credit institutions, foreign bank branches according to legal regulations;

i- Buying and selling debts according to the State Bank's regulations on debt trading activities;

j- Repurchase agreements for Government of Vietnam bonds in the securities market under legal regulations on the issuance and trading of Government of Vietnam debt instruments in the securities market;

k- Purchasing promissory notes, Treasury bills, and certificates of deposit issued by other credit institutions and foreign bank branches.

Principles of using reserves to handle risks

The draft clarifies that credit institutions that are cooperatives use reserves to handle risks in cases where the customer is an organization that has dissolved, gone bankrupt; an individual who has died, disappeared; or debts classified into group 5 (Debts with potential loss).

Credit institutions that are cooperatives use reserves to handle risks according to the following principles:

a- For cases where collateral has been handled to recover debts according to agreements between parties, in compliance with the law, cooperatives use specific reserves to handle the remaining debt balance; if the specific reserves are insufficient to cover the debt risk, general reserves must be used to handle the risk;

b- For cases where collateral has not been handled to recover debts, cooperatives handle risks by: Using specific reserves established according to Article 11 of this Circular to handle the debt; promptly handling collateral according to agreements with the customer and legal regulations to recover debts; if specific reserves and proceeds from handling collateral are insufficient to cover the debt risk, general reserves must be used to handle the risk.

c- Cooperatives account for off-balance sheet the remaining debt balance after specific reserves and general reserves have been used to handle the risk as stipulated at points a and b of this clause.

The use of reserves to handle risks is a form of changing the accounting for the debt, transferring the risk-handled debt to off-balance sheet accounts; it is an internal activity of the cooperative credit institution; it does not alter the customer's obligation to repay the debt for which reserves were used to handle risks or the responsibility of related organizations and individuals toward the debt.

Cooperatives must not inform customers about the debt that has had reserves used to handle risks. After handling the risk, cooperatives must closely monitor and have measures to completely and thoroughly recover the debt that has been handled for risk, except in cases where the debt has been sold to an organization or individual and the full amount of the debt sale has been collected under the Debt Purchase and Sale Contract.

Please refer to the full draft and provide feedback here.

Minh Duc

According to the Electronic Information Portal of the Government of Vietnam

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