Hanoi (VNS/VNA) – The State Bank of Vietnam (SBV)is drafting a new circular regulating credit institutions’ trading and handlingof non-performing loans (NPL) with the aim of forcing the institutions to focusmore on bad debt settlement.

Under the draft, private creditinstitutions, which still hold special bonds issued by the Vietnam AssetManagement Company (VAMC) – meaning they have not settled bad debts kept at theVAMC yet – will not be allowed to make dividend payments in cash. The fund mustinstead be used to handle bad debts and enhance the institutions’ financestatus.

Manycredit institutions have sold their NPLs to VAMC for special bonds to lowertheir NPLs to below 3 percent of the total outstanding loans as required by thecentral bank. The special bonds are used only ascollateral to secure funding from the central bank.

Thenew regulation will not apply to State-owned commercial banks because underDecree 93/2017/NĐ-CP, dividend payouts of banks in which the State holds morethan 51 percent of the charter capital still need approval from both the SBVand the Ministry of Finance.

Themove to draft a new circular was made after some private banks paid dividendsin cash despite still holding VAMC’s special bonds.

According to Can Van Luc, chief economist of the Bank forInvestment and Development of Vietnam (BIDV), the draft regulation is necessaryto promote the handling of bad debts.

Credit institutions need to prioritise dealingwith bad debts before paying dividends.

The measure could help resolve bad debts more quickly, hesaid, explaining that credit institutions might use the capital to implementnecessary measures to reduce bad debts.

The draft circular also has conditions for bad debts toqualify to be purchased by VAMC with special bonds. NPLs and their collateralmust be legal with valid documents and have no disputes at the time of trading.

The SBV will focus on bad debt settlement this yearto reduce the NPL ratio of the entire banking system, including NPLs soldto the VAMC, from 6.6 percent at the end of 2018 to below 5 percent by the endof this year.

The development strategy for the banking sector to 2025,approved in August last year, also targets reducing the ratio of bad debts tobelow 3 percent of outstanding loans by 2020.

According to SBV Governor Le Minh Hung,the organisation has actively implemented policies to restructure thebanking system and deal with bad debts.

The central bank has issued directives requiring creditinstitutions to review and provide detailed roadmaps and solutions for settlingtheir bad debts for each year until 2022.

Credit institutions have also been required to look forbuyers for the debts they sold to the VAMC, while the VAMC has been asked tospeed up the handling of bad debts and collateral the company purchasedfollowing market-based mechanisms.

The SBV has also issued regulations and policies in linewith international practices to improve safety standards in banking, which hascontributed to stronger governance and risk management capability under theBasel II standards.-VNS/VNA