Debt Classification
BANKING AND FINANCE
NEW RULES ON DEBT CLASSIFICATION AND LOSS RESERVE
By Truong Nhat Quang
Duong Thu Ha
Following Decision No. 127/2005/QD-NHNN dated February 3, 2005 issuing the Regulations on Loans
Extended by Credit Institutions to Customers, the State Bank of Vietnam (SBV) has enacted a number of legal documents aimed at improving credit quality and risk supervision and management, including
Decision No. 493/2005/QD-NHNN dated April 22, 2005 issuing the Regulations on Classification of
Debts and Loss Provisioning in Banking Operation of Credit Institutions. This article addresses certain significant provisions of Decision 493.
Scope of Application
According to Decision 493, all credit institutions operating in Vietnam (excluding the Bank for Social
Policies) are subject to debt classification and loss provisioning requirements. Decision 493 however allows foreign bank branches licensed to operate in Vietnam, subject to SBV approval, to apply the loss provisioning policies of their parent banks.
The loss provisioning aims to compensate for credit losses of credit institutions. The loss reserve is calculated on the basis of the principal of debt and is treated as operating expenses of credit institutions. "Debt" is broadly defined in Decision 493. "Debt" includes indebtedness or liability incurred under or in relation to loans, advances, overdrafts, financial leases, discounting or rediscounting of valuable papers, factoring (a new form of credit facility permitted in accordance with the Regulations on
Factoring Transactions of Credit Institutions promulgated in conjunction with Decision No.
1096/2004/QD-NHNN dated September 6, 2004 of the SBV Governor) and "other forms of credit facility." Classified Debt not Subject to Provisioning Requirements
Credit institutions are not required to make loss reserves with respect to (i) loans using funds entrusted by a third party who undertakes to be responsible for "settlement of risks" or
NEW RULES ON DEBT CLASSIFICATION AND LOSS RESERVE
By Truong Nhat Quang
Duong Thu Ha
Following Decision No. 127/2005/QD-NHNN dated February 3, 2005 issuing the Regulations on Loans
Extended by Credit Institutions to Customers, the State Bank of Vietnam (SBV) has enacted a number of legal documents aimed at improving credit quality and risk supervision and management, including
Decision No. 493/2005/QD-NHNN dated April 22, 2005 issuing the Regulations on Classification of
Debts and Loss Provisioning in Banking Operation of Credit Institutions. This article addresses certain significant provisions of Decision 493.
Scope of Application
According to Decision 493, all credit institutions operating in Vietnam (excluding the Bank for Social
Policies) are subject to debt classification and loss provisioning requirements. Decision 493 however allows foreign bank branches licensed to operate in Vietnam, subject to SBV approval, to apply the loss provisioning policies of their parent banks.
The loss provisioning aims to compensate for credit losses of credit institutions. The loss reserve is calculated on the basis of the principal of debt and is treated as operating expenses of credit institutions. "Debt" is broadly defined in Decision 493. "Debt" includes indebtedness or liability incurred under or in relation to loans, advances, overdrafts, financial leases, discounting or rediscounting of valuable papers, factoring (a new form of credit facility permitted in accordance with the Regulations on
Factoring Transactions of Credit Institutions promulgated in conjunction with Decision No.
1096/2004/QD-NHNN dated September 6, 2004 of the SBV Governor) and "other forms of credit facility." Classified Debt not Subject to Provisioning Requirements
Credit institutions are not required to make loss reserves with respect to (i) loans using funds entrusted by a third party who undertakes to be responsible for "settlement of risks" or