Latest regulations on classification of loans/debts in Vietnam

Latest regulations on classification of loans/debts in Vietnam (Internet image)

1. Classification of loans/debts using quantitative method in Vietnam

Classification of loans/debts and off-balance sheet commitments according to the quantitative method in Vietnam according to Article 10 of Circular 11/2021/TT-NHNN stipulates as follows:

(1) Credit institutions and foreign bank branches shall classify debts/loans (except on-behalf payments under off-balance sheet commitments) into the following five groups:

* Group 1 (Standard debts/loans) including:

- Unmatured debts/loans rated likely to be fully recovered in terms of both principal and interest by due dates;

- Debts/loans that are less than 10 days overdue and are rated likely to be fully recovered in terms of delinquent principal and interest, and likely to be fully recovered in terms of the remaining principal and interest by due dates;

- Debts/loans classified into group 1 as provided in group 2.

* Group 2 (Debts/loans needing attention) including:

- Debts/loans which are up to 90 days overdue, except those prescribed in point a (ii) of this clause and group 3;

- Debts/loans with first-time adjusted repayment terms that are unmatured, except those prescribed in point b of clause 2 and group 3;

- Debts/loans classified into group 2 as provided in clause 2 and group 3.

* Group 3 (Sub-standard debts/loans), including:

- Debts/loans which are from 91 days to 180 days overdue, except those prescribed in group 3;

- Debts/loans with first-time extended repayment terms that are unmatured, except those prescribed in group 2 and group 3;

- Debts/loans on which interest is exempted or reduced due to the borrower's inability to pay in full as agreed upon, except for those specified in group 3;

- Debts/loans falling in one of the following cases that have not yet been recovered within less than 30 days from the effective dates of recovery decisions:

+ Those violating provisions laid down in clause 1, 3, 4, 5 and 6 of Article 126 in the Law on Credit Institutions (amended);

+ Those violating provisions laid down in clause 1, 2, 3 and 4 of Article 127 in the Law on Credit Institutions (amended);

+ Those violating provisions laid down in clause 1, 2 and 5 of Article 128 in the Law on Credit Institutions (amended);

- Debts/loans falling within the recovery periods under inspection and examination conclusions;

- Debts/loans that need to be recovered under premature debt recovery decisions of credit institutions or foreign bank branches due to borrowers’ breach of agreements with them, but are not yet recovered within a period of less than 30 days from the effective dates of recovery decisions;

- Debts/loans that are classified into group 3;

- Debts/loans that are classified into group 3.

* Group 4 (Doubtful debts/loans), including:

- Debts/loans which are from 181 days to 360 days overdue, except those prescribed in group 3;

- Debts/loans with first-time rescheduled repayment terms that are up to 90 days past due from the first-time rescheduled maturity dates, except those specified in group 3;

- Debts/loans with second-time rescheduled repayment terms that are unmatured, except those prescribed in point b of clause 2 and group 3;

- Debts/loans referred to in point c(iv) of group 1 that are not yet been recovered in 30 and 60 days from the effective dates of recovery decisions.

- Debts/loans that need to be recovered under inspection and examination conclusions, but are not yet recovered in up to 60 days after expiry of the recovery deadlines;

- Debts/loans that need to be recovered under premature debt recovery decisions of credit institutions or foreign bank branches due to borrowers’ breach of agreements with them, but are not yet recovered in 30 and 60 days from the effective dates of recovery decisions;

- Debts/loans that are classified into group 4 as provided in Group 2 and group 3;

- Debts/loans that are classified into group 4 as provided in clause 4 of Article 8 of Circular 11/2021/TT-NHNN.

* Group 5 (Debts/loans likely giving rise to loss), including:

- Debts/loans that are more than 360 days past due;

- Debts/loans with first-time rescheduled repayment terms that are at least 91 days past due from the first-time rescheduled maturity dates;

- Debts/loans with second-time rescheduled repayment terms that are past due from the second-time rescheduled maturity dates;

- Debts/loans with third- or more-time rescheduled repayment terms, except those prescribed in point b of group 2;

- Debts/loans referred to in point c(iv) of clause 1 of this Article that are not yet been recovered in more than 60 days from the effective dates of recovery decisions;

- Debts/loans that need to be recovered under inspection and examination conclusions, but are not yet recovered in more than 60 days after expiry of the recovery deadlines;

- Debts/loans that need to be recovered under premature debt recovery decisions of credit institutions or foreign bank branches due to borrowers’ breach of agreements with them, but are not yet recovered in more than 60 days from the effective dates of recovery decisions;

- Debts/loans of borrowers that are credit institutions put under special control, or foreign bank branches of which capital and assets are frozen;

- Debts/loans classified into group 5 as provided in group 3;

- Debts/loans that need to be classified into group 5 as provided in clause 4 of Article 8 of Circular 11/2021/TT-NHNN.

(2) Debts/loans may be classified into groups with lower level of risk in the following cases:

- For overdue debts, credit institutions and foreign bank branches shall reclassify them into groups with lower level of risk (including group 1) when they fully meet the following conditions:

+ Borrowers have fully paid the overdue principal and interest (including interest on overdue principal), and those in the next repayment terms within at least 03 (three) months with respect to medium-term and long-term debts; 01 (one) month with respect to short-term debts, from the date of full payment of overdue principal and interest;

+ Proof of the borrower’s debt repayment is available;

+ Credit institutions, foreign bank branches possess sufficient information and documents to evaluate borrowers' ability to fully pay the remaining principal and interest by the predetermined due dates.

- For debts with rescheduled repayment terms, credit institutions, foreign bank branches shall reclassify them into groups with lower level of risk (including group 1) when they fully meet the following conditions:

+ Borrowers have fully paid the principal and interest varying according to the rescheduled repayment term in at least 03 (three) months with respect to medium-term and long-term debts; 01 (one) month with respect to short-term debts, from the start date of full repayment of such principal and interest;

+ Proof of the borrower’s debt repayment is available;

+ Credit institutions, foreign bank branches possess sufficient information and documents to evaluate borrowers' ability to fully pay the remaining principal and interest by the rescheduled due dates.

(3) Debts/loans may be classified into groups with higher level of risk in the following cases:

- The indicators such as profitability, solvency, debt-to-capital ratio, cash flow, debt repayment ability of borrowers decrease progressively after 03 continual debt assessment and classification sessions;

- Borrowers fail to provide sufficient, timely and truthful information at the request of credit institutions or foreign bank branches so that they can assess borrowers’ debt repayment ability;

- Debts/loans are classified into group 2, group 3, group 4 according to the provisions of point a and b of this clause for 01 (one) year or more, but are not eligible for being reclassified into groups with lower level of risk;

- Loans are granted by the act of credit extension subject to administrative penalties prescribed by law.

2. Classification of loans/debts using qualitative method in Vietnam

Classification of loans/debts and off-balance sheet commitments according to the qualitative method in Vietnam according to Clauses 1 and 2, Article 11 of Circular 11/2021/TT-NHNN is as follows:

(1) Credit institutions and foreign bank branches shall classify debts/loans and off-balance sheet commitments into the following five groups:

* Group 1 (Standard debts/loans) including:

Loans/debts rated by credit institutions and foreign bank branches to be recoverable in full in terms of the principal and interest by the maturity dates.

Off-balance sheet commitments with borrowers that are able to fulfill their agreed-upon obligations according to the assessment of credit institutions, foreign bank branches.

* Group 2 (Debts/loans needing attention), including:

Loans/debts with the principal and interest that are likely to be recovered in full, but borrowers showing signs of reduction in ability to pay according to the assessment of credit institutions, foreign bank branches.  .

Off-balance sheet commitments with borrowers that are able to fulfill their agreed obligations, but showing signs of decrease in ability to pay according to the assessment of credit institutions, foreign bank branches.

* Group 3 (Sub-standard debts/loans), including:

Loans/debts with the principal and interest that are unlikely to be recovered by the maturity dates according to the assessment of credit institutions and foreign bank branches. These loans/debts are rated by credit institutions and foreign bank branches as those likely to cause loss.

Off-balance sheet commitments with borrowers that are unable to fulfill their agreed obligations according to the assessment of credit institutions, foreign bank branches.

Debts/loans that need to be classified into group 3 as provided in clause 4 of Article 8 of Circular 11/2021/TT-NHNN.

* Group 4 (Doubtful debts/loans), including:

Loans/debts that are rated by credit institutions and foreign bank branches as those posing high risk of causing loss.

Off-balance sheet commitments with high possibility that borrowers fail to fulfill their commitments.

Debts/loans that need to be classified into group 4 as provided in clause 4 of Article 8 of Circular 11/2021/TT-NHNN.

* Group 5 (Debts/loans likely giving rise to loss), including:

Loans/debts rated by credit institutions, foreign bank branches as those unlikely to be recovered and posing risk of causing loss.

Off-balance sheet commitments with possibility that borrowers are unable to fulfill their agreed obligations.

Debts/loans that need to be classified into group 5 as provided in clause 4 of Article 8 of Circular 11/2021/TT-NHNN.

(2) When classifying debts/loans and off-balance sheet commitments in accordance with (1), a credit institution and foreign bank branch should fully meet the following requirements:

- Has an internal credit rating system which is suitable to their business activities, customers and nature of risks in debts, and is tested for a period of at least 01 (one) year;

- Adopts risk provisioning policies according to clause 3 of Article 6 of Circular 11/2021/TT-NHNN;

- Implements credit risk management policies, credit risk monitoring models, methods for identification and measurement of credit risk (including approaches for assessment of borrower's ability to repay debts under credit contracts, security property and debt recoverability) and management of debts;

- Clearly defines the responsibilities and powers of its Governing Board, Board of Directors and General Director (Director) regarding approval, implementation and inspection of the implementation of its internal credit rating system, risk provisioning policies and independence of risk management departments.

Quoc Dat

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