At the end of April 2023, the State Bank of Vietnam issued a series of circulars, including Circular No. 02/2023/TT-NHNN, which allows debt repayment rescheduling and the maintenance of debt classifications, and Circular No. 03/2023/TT-NHNN, which permits credit institutions to repurchase corporate bonds immediately.
Circular No. 02 gives credit institutions the authority to assess and classify debts. However, the requirement to determine whether borrowers can feasibly meet their debt obligations over the restructured repayment period presents a challenge for credit institutions in both implementation and assessment. Circular No. 03 requires issuers whose bonds are repurchased to receive the highest internal credit rating of the relevant credit institution. However, this requirement may be interpreted in different ways, potentially making implementation difficult for credit institutions.
FiinRatings has released a report assessing the impact of Circular No. 02/2023/TT-NHNN and Circular No. 03/2023/TT-NHNN on participants in the financial market.
WILL DEBT RESCHEDULING AND DEBT-CLASSIFICATION MAINTENANCE FOCUS ON LARGE BORROWERS?
Circular No. 02/2023/TT-NHNN contains several notable provisions.
Accordingly, Article 4 provides for the consideration and decision to reschedule repayment terms for outstanding debts.
The main conditions are: (i) principal and/or interest repayment obligations fall due on or before June 30, 2024; (ii) the outstanding debt subject to restructuring remains current or is overdue by no more than 10 days; (iii) the customer is unable to repay principal and/or interest on schedule under the contract or agreement due to declining revenue or income; and (iv) the customer is capable of fully repaying principal and/or interest within the restructured repayment period.
Article 5, on maintaining debt classifications and classifying debts, includes several notable provisions: (i) maintaining the debt classification for debts whose outstanding principal and/or interest has been restructured; (ii) debts that become overdue after restructuring must be reclassified into a higher-risk debt group; and (iii) accrued interest receivable on restructured debts is not recognized as income but is instead monitored off-balance sheet.
Article 6 provides for risk provisioning as follows: additional provisions required = A – B, where A is the specific provision that would be required after reclassifying the debt, and B is the specific provision already made while maintaining the existing debt classification.
Provisioning schedule: at least 50% must be set aside by December 31, 2023, and the full 100% by December 31, 2024.
In assessing the impact of these provisions on the banking system, experts believe that banks’ asset quality would be temporarily maintained during 2023.
Accordingly, the provisioning burden and the resulting effect on after-tax profit would vary among banks. Circular No. 02 would have the strongest impact on banks that had not proactively made excess provisions beforehand, reducing profits through higher provisioning expenses. However, the two-stage provisioning schedule would also substantially ease the pressure.
The requirement to move accrued interest to off-balance-sheet monitoring could affect the annual after-tax profits of banks with substantial accrued-interest balances. However, this does not require interest reversals; the income may still be recognized once collected.
For borrowers, Circular No. 02 helps reduce repayment pressure on customers facing difficulties in production and business activities, as well as those struggling to repay loans used for living or consumer purposes.
Businesses may still access new credit to refinance existing debt, continue production and business operations, and improve their financial condition.
Including consumer loans for living expenses among debts eligible for repayment restructuring signals an effort to stimulate demand and indirectly support demand-side liquidity in the property market, which had remained relatively subdued since the second half of 2022.
However, experts believe that restructured debts remain, in substance, non-performing loans. Therefore, they may still be moved to a higher risk category if the business environment and the borrower’s condition do not improve after the 12-month period during which the regulation is effective.
Consequently, some businesses that fail to improve their financial condition may face debt reclassification and increased pressure from both existing and new borrowings.
Circular No. 02 gives credit institutions the authority to assess and classify debts. However, the requirement to determine whether borrowers can feasibly meet their debt obligations throughout the restructured repayment period will be a challenge for credit institutions in implementation and assessment.
Therefore, experts expect credit institutions to prioritize large loans or major borrowers, rather than apply the measure broadly to all customers within the relatively short period permitted by the regulation.
COULD THIS CREATE A NEGATIVE PRECEDENT FOR THE CORPORATE BOND MARKET?
Circular No. 03/2023/TT-NHNN suspends the implementation of Clause 11, Article 4 of Circular No. 16/2021/TT-NHNN. It permits credit institutions to repurchase unlisted corporate bonds that they previously sold and/or unlisted corporate bonds issued in the same lot or tranche as bonds they previously sold, provided that the bond issuer receives the highest rating under the credit institution’s internal credit-rating regulations at the latest point before the institution purchases the bonds.
FiinRatings’ research team believes that Circular No. 03/2023/TT-NHNN temporarily removes a liquidity bottleneck in the market by allowing credit institutions to repurchase corporate bonds without having to wait for one year.
It also helps stabilize sentiment among issuers and investors by temporarily ensuring capital flows ahead of substantial upcoming maturities. Circular No. 03/2023/TT-NHNN is also expected to reduce the share of corporate bonds held by individual investors, helping return the market to a more balanced and stable condition as institutional investors hold more of these assets.
However, Circular No. 03 limits eligible bond issuers to those receiving the highest internal credit rating from the relevant credit institution. FiinRatings notes that most issuers have weak credit profiles or low credit ratings and therefore do not meet high credit-rating criteria. As a result, many may struggle to meet the Circular’s eligibility requirement.
In addition, implementing the requirement that issuers be assigned the highest rating may be difficult because the provision can be interpreted in multiple ways.
Internal credit ratings, established and implemented by banks, are regulated under Circular No. 11/2021/TT-NHNN. However, the “highest rating” under Circular No. 03 could be understood as the highest score in the internal credit-rating system prescribed by Circular No. 11/2021/TT-NHNN; the highest score among issuers of unlisted corporate bonds in a commercial bank’s previously sold unlisted corporate-bond portfolio; or the highest score within the industry group to which the issuer belongs. Commercial banks would need more specific guidance to avoid incorrect application.
Circular No. 03 remained effective only through the end of 2023. Therefore, credit institutions were expected to focus on resolving bond tranches that had matured or were nearing maturity in order to ease immediate repayment pressure. As a result, it was only a temporary solution and generated limited genuine liquidity for the corporate bond market.
Experts assessed that Circular No. 03 could inadvertently create a negative precedent for the corporate bond market: if banks effectively pay on behalf of issuers and the bonds return to bank ownership, the transaction takes on the nature of credit activity rather than a capital-market bond transaction. This may increase short-term concentration risk for the banking system, while helping stabilize the market over the longer term.
Source: SBV, VnEconomy, FiinRatings
