NEW REGULATIONS ON RISK RESERVE RATIO AND METHODS OF CREDIT INSTITUTIONS, INCLUDING MICRO-CREDIT INSTITUTIONS FROM JULY 11, 2024

The negative impacts from the world economic situation in general and the internal difficulties of the Vietnamese economy in the current period have significantly affected the production and business activities of enterprises, leading to a decline inability to repay bank principal/interest. According to statistics from the State Bank of Vietnam, the on-balance sheet bad debt of the system of credit institutions by the end of 2023 is 4.55.%, an increase of 2.03% in comparison to 2022.

To control and limit the situation of increasing in bad debts that may lead to risks in the credit system, the Government has issued Decree 86/2024/ND-CP specifically regulating the deduction level and method of deduction. Establishing risk provisions is the use of provisions to handle risks in the operations of credit institutions, foreign bank branches and in cases where credit institutions allocate interest receivables to divest (hereinafter referred to as “ Decree 86 ”).

This updated document provides notable provisions of Decree 86/2024/ND-CP related to the issue of risk provisions in the operations of credit institutions as follows:

1. Specific provisioning rate

In addition to inheriting the regulations in Circular 11/2021 on provisioning rates for each debt group of credit institutions and foreign bank branches, Decree 86 Article 4 adds regulations on the specific provisioning rates for each debt group of a microfinance institution are as follows:

2. General provision level

Decree 86, Article 7 provides 2 levels of the general provisioning rate, in particular: 0.75% of total outstanding debt and 0.5% of total outstanding debt, of which:

• Decree 86 inherits the provisions of Circular 11/2021/TT-NHNN on the amount of provisions that must be set aside for credit institutions and foreign bank branches at 0.75% of the total outstanding debts from group 1 to group 4, except for some items as follows:
• Deposits at credit institutions, foreign bank branches according to the provisions of law and deposits at credit institutions abroad.
• Loans and term purchases of valuable papers between credit institutions and foreign bank branches in Vietnam;
• Purchases of certificates of deposit and bonds issued domestically by credit institutions and other foreign bank branches (*Decree 86 removed the purchase of promissory notes and treasury bills from the list of exceptions) ;
• Repurchase and sale of Government bonds on the stock market in accordance with the provisions of law on issuance, registration, depository, listing and trading of Government debt instruments on the stock market.
• Decree 86 supplements regulations on the amount of provisions that must be set aside for microfinance institutions at 0.5% of the total outstanding balance of debts from group 1 to group 4.

3. Time to setting- up of risk provisions

Decree 86, Article 9 regulates the time of risk provisioning on the principle of ensuring compatibility between the time of classification and the time of risk provisioning, accordingly:

• Commercial banks, non-bank credit institutions and foreign bank branches will make provisions for the end of the last day of the previous month, based on the debt group with the higher risk level between the two. Debt groups: debt groups according to self-classification results and debt groups that have been adjusted according to the customer list of the Vietnam National Credit Information Center (CIC) .

In the first month of the quarter, commercial banks, non-bank credit institutions and foreign bank branches must adjust the amount of risk provisions within three days of receiving the customer list. goods from CIC. This result will be shown on the financial statements for the end of the last day of the previous month .

• For credit institutions that are cooperatives and microfinance institutions, risk provisions are also made in the first seven days of the month, based on the results of debt classification according to regulations of the Government. State bank governor .

Decree 86 is built on the basis of legal code and inherits the provisions of Circular 11/2021/TT-NHNN dated July 30, 2021, Circular 15/2010/TT-NHNN dated October 16, 2010 regulating Decision No. 493/2005/QD-NHNN dated April 22, 2005 of the Governor of the State Bank of Vietnam, Decision No. 493/2005/QD-NHNN dated April 22, 2005 of the Governor of the State Bank of Vietnam. promulgate regulations on debt classification, setting up and use of provisions to handle credit risks in banking activities of credit institutions (amended and supplemented).

The Decree takes effect from July 11, 2024.