Central Bank Introduces New Risk Rating System

Central Bank Introduces New Risk Rating System

The State Bank of Vietnam (SBV) launched a new risk rating system for commercial bank loans and a new fund to hedge repayment risks.

In a decision earlier this month, SBV classified debt into five categories: regular, watch-list, below standard, doubtful and non-performing loans, from the earlier normal and overdue categories.

SBV also ordered the banks to set aside a percentage of the outstanding loans, depending on risk category, to take care of future repayment defaults.

The regular loans are those for which principal and interest repayments are timely.

The watch-list loans are overdue for less than 90 days with banks having to keep 5% of the loan amount in the new risk fund.

Below standard loans are overdue for 91-180 days and banks have to earmark 20%.

Doubtful debts are overdue for 181-360 days and banks have to keep 50% in reserve.

Loans become non-performing when they are overdue for over 360 days, and the banks have to keep 100% of the amount in the fund.

Both provisions, which come into immediate effect, will help keep a close watch on bank lending and provide a safety net against bad debts. However, they may threaten to squeeze banks' profits.

The new classification would increase the banks' bad debts, said Le Thi Kim Nga, head of the Credit Management Division at the Bank for Foreign Trade of Vietnam (Vietcombank).

However, Vietcombank's overdue debts would still be under 10%, Nga said.

General director of Vietnam Commercial Joint Stock Bank for Private Enterprises (VP Bank), Le Dac Son, said banks' profits would fall this year, making it harder for them to maintain shareholders' dividends.

But the decrease would be temporary, only during the first year of implementing the decision, Son said, predicting the new provisions would not affect joint stock commercial banks too much.

"VP Bank's profit will be around 5% lower than last year," he said.

VNS