DIRECTIVE

ON THE ENHANCEMENT OF CREDIT QUALITY OF THE CREDIT INSTITUTIONS

Credit activities of credit institutions have, in recent time, made active developments, credit institutions have correctly realized and complied with the Regulation on lending by credit institutions to customers issued by the Governor of the State Bank of Vietnam. The State Management of credit activities has also been strengthened one step further, controlling the credit expansion at a reasonable level, contributing to the economic growth and monetary stability, the credit quality has been improved in the direction of reducing the bad debt ratio in the total credit outstanding.

The bad debt has, however, still occurred, many loans contain potential risks. Main reasons for it are the lack of serious compliance of credit institutions with the Lending Regulation, such as the undue appraisal of the project in the pre-lending phase, inadequate determination of sources of loan payments; the hiding of overdue debts to avoid the risk provisioning for attaining successes, the rescheduling of many loans for long periods without their classification to "overdue debts", the improper accounting of overdue debts. The internal control activity of credit institutions and supervision of the State Bank Inspection has failed to detect and seriously deal with violations, has not accorded due attention to the monitoring and early warning of potentially risky loans.

With the view to combating these shortcomings to enhance the credit quality and to contain the risks to the minimum level, the Governor of the State Bank of Vietnam instructs on the implementation of following measures:

1- Credit institutions must comply seriously with the Regulation on Lending by credit institutions to customers issued in conjunction with the Decision No. 1627/2001/QD-NHNN dated 31 December, 2001 and the Decision No.688/2002/QD-NHNN dated 1 July, 2002 of the Governor of the State Bank on the classification of customers' loans from credit institutions as overdue debts, especially following issues:

1.1- Reviewing for amendment, supplement of the guidelines on the implementation of the Regulation, setting up the procedures for the examination and supervision of the lending process, the usage of funds and payment by the customers in accordance with provisions of the State Bank, conditions of credit institutions and customers in order to ensure the due compliance with the Lending Regulation and the flexibility and initiative on the basis of the prudence.

1.2- Attention should, during the course of considering the loan application, be paid to the project appraisal capability, especially the thorough consideration of the financial capability, the repayment source of customers, the exploration of the information from the Credit Information Center and other information sources to deeply understand the financial obligations of customers, especially those, who have borrowed from different sources, for long-term investment, for large projects, for investment in real estate and entrepreneurs, which have borrowed short-term for performing projects in order to avoid the transfer of bad debts and risks from other entities to the banking system;

...

...

...

1.4- The determination of the payment period for principal and interests must be based on the funds turnover of the lending subject, in line with the repayment capability of each customer and mode of lending to overcome the subjective determination of the periods of principal and interest payment, the determination of a too short payment period in the lending to production households, consumer lending and installment lending, which have resulted in the debt rescheduling and incorrect overdue debt reflection.

1.5- The adjustment and rescheduling of debts should take into consideration of reasons why customers fail to pay debts on time, the rescheduling of debts beyond the stipulated time shall only be made in special cases due to objective reasons. The pervasive adjustment of the payment period, the rescheduling of debts, which will make the difficult recoverable debts not be reflected correctly in the account "overdue debts", should be avoided.

1.6- After rescheduling of debts beyond the stipulated time limit, credit institutions should report immediately to the Governor of the State Bank (submitting to the State Bank Inspection, the State Bank branch Inspection) according to applicable provisions on the delegated authority for supervision and inspection stated in Section III Chapter II Circular No.04/2000/TT-NHNN3 dated 28 March 2000 of the Governor of the State Bank guiding the implementation of the Decree No.91/1999/ND-CP dated 4 September, 1999 of the Government on the organization and operation of the State Bank Inspection. By the 5th of every month, credit institutions must consolidate rescheduled loans beyond the stipulated time limit of the previous month to report to the Governor of the State Bank (to be submitted to the State Bank Inspection at the Head-office).

1.7. To seriously comply with the provision on the classification of "overdue debts". Due principals, interests, which customers have failed to pay and have not been rescheduled by credit institutions, must be recorded to the account "overdue debts" in a timely and sufficient manner to truly reflect the quality of credits for the risk warning and provisioning; any form of hiding overdue debts is strictly forbidden.

2- Credit institutions must enhance the quality of the pre-lending, during-lending and after-lending control, the internal control and internal audit of the credit activities; detect and seriously deal with violations; detect and take measures to deal with risky loans.

3- Enhancement of the inspection and control activity of the State Bank over the credit activity

3.1- The State Bank Inspection should regularly perform the inspection and control activity in order to properly manage the credit quality, timely detect and provide warnings of risky loans; seriously deal with institutions and individuals who have committed violations under provisions of applicable laws.

3.2- State Bank Inspection and Inspections of the State Bank branches in provinces, cities under the central Government's management shall consolidate, monitor, analyze loans, which have been rescheduled beyond the stipulated time-limit as stated in reports submitted by credit institutions in order to provide warnings to credit institutions of risks involved in loans, which have been rescheduled for long time but not recovered.

3.3- The State Bank Inspection (at the Head-office) shall be responsible for the monitoring, consolidation, analysis, assessment of the status of bad debts (including overdue debts, frozen debts, debts pending settlement), performance of the results of the settlement of non-performing loans of the credit institutions system and recommend solutions to the Governor of the State Bank; provide warnings to credit institutions in case of risks.

...

...

...

4- This Directive shall be effective after 15 days since the date of publication in the Official Gazette.

5- Heads of units in the State Bank, General Managers of the State Bank Branches in provinces, cities under the Central Government's management, the Board of Directors and General Directors (Directors) of credit institutions shall be responsible for the implementation of this Directive

FOR THE GOVERNOR OF THE STATE BANK
DEPUTY GOVERNOR




Tran Minh Tuan