What does credit risk include? Regulations on credit risk limits in Vietnam

What does credit risk under the law in Vietnam include?

Pursuant to Clause 8, Article 3 of Circular 14/2023/TT-NHNN (effective from October 1, 2024), credit risk includes:

(1) “Credit risk” means the risk of a customer’s failure or incapacity to fulfill part or all of debt repayment obligations under a contract or agreement with a non-bank credit institution, unless otherwise prescribed in Point (2).

In this case, customers (including credit institutions and foreign bank branches) have relationships with non-bank credit institutions in receipt of credit (including credit receipt through entrustment), deposits and issuance of corporate bonds;

(2) “Counterparty credit risk” refers to the risk of a counterparty’s failure or incapacity to discharge part or all of payment obligations prior to or by the maturity dates of proprietary trades; repo and reverse repo transactions; trades in derivatives for risk prevention; trades in foreign currencies and financial assets to serve the needs of customers and partners.

In this case, counterparties (including credit institutions and foreign bank branches) enter into transactions with non-bank credit institutions in proprietary trades; repo and reverse repo transactions; trades in derivatives for risk prevention; trades in foreign currencies and financial assets to serve the needs of customers and partners.

What does credit risk include? Regulations on credit risk limits in Vietnam (Internet image)

Requirements and strategies for credit risk management in Vietnam

Pursuant to Article 19 of Circular 14/2023/TT-NHNN, the non-bank credit institution shall formulate a credit risk management strategy with at least the following contents:

- Non-performing loan and bad credit extension rate targets.

- Principles of determination of costs for offsetting credit risk in the interest calculation method, credit product pricing according to the customer’s credit risk level;

- Principles of implementation of credit risk minimization measures (including competence in approving credit risk minimization measures).

Regulations on credit risk limits

Pursuant to Article 20 of Circular 14/2023/TT-NHNN, the non-bank credit institution shall set credit risk limits in accordance with regulations on restrictions to ensure the safety in its operations under the Law on Credit Institutions and the State Bank's regulations.

Credit risk limits include at least:

- Credit extension limit for each customer demographic on the basis of the customer’s solvency;

- Credit extension limit for each product.

Credit extension limits shall be reviewed and re-assessed (or adjusted if necessary) at least once a year according to the non-bank credit institution’s internal regulations.

Approval for credit risk-bearing decisions in Vietnam

Pursuant to Article 23 of Circular 14/2023/TT-NHNN, the non-bank credit institution shall approve credit risk-bearing decisions as follows:

- The competence in approving credit risk-bearing decisions shall be determined by quantitative and qualitative criteria.

- In case of approval by committee, the approval committee shall make an approval record or any equivalent, which clearly states the reason for approval or rejection and state committee members’ opinions either in the record or its appendix. The approval committee’s members shall be responsible for their decisions.

- The information provided for approval for credit risk-bearing decisions shall be sufficient and appropriate for the scale and type of credit extension in accordance with the non-bank credit institution’s internal regulations.

Regulations on the list of information to be used as basis for approval for credit risk-bearing decisions shall be assessed by the risk management department in order to ensure effectiveness of credit risk management.

Mai Thanh Loi

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