An Dao of LNT Partners in Ho Chi Minh City discusses the changes to the regime around restructuring credit institutions
On April 7 2017, the State Bank of Vietnam (SBV) introduced a draft law on supporting the restructuring of credit institutions and dealing with bad debt (the “draft law”) to first obtain public opinion then to propose to the National Assembly for consideration in the next meeting session. Besides adding new regulations to the law on credit institutions, the draft law draws several noting points, including clarification of banks under special control, zero-VNĐ (0 VND) banks funded by the Government and bankruptcy of bank. If this draft law is passed, it will be the first legal instrument that recognises and legalizes the usage of state budget to deal with bad debt.
Regarding credit institution under special control, the draft law defines it as "under direct control of the SBV" (Article 4.2). More specific, Article 7.3 gives out circumstances that special control occurs, including inability to pay, risk of insolvency, accumulated losses are more than 50% of charter capital and reserves, failure to maintain the prescribed minimum capital adequacy ratio for a continuous year or failure to keep prescribed minimum capital adequacy ratio of less than 4% for six consecutive months.
Regarding zero-VND (0 VND) banks funded by the Government, Article 4.6 defines "compulsory purchase plan" means the plan of SBV or designated credit institutions to contribute capital, buy compulsory shares of weak credit institutions." The SBV takes compulsory purchase plan when the net worth of the charter capital is less than zero VND (0 VND) and no credit institution proposes to buy a credit institution under special control. The new regulation is that the weak banks are required to hire an independent auditor to assess the current financial situation and determine the net value (if any) of the charter capital (Article 29). On the basis of the audit, the banks in question have to increase its charter capital. If the charter capital is not rising sufficiently within the required time period, it will be put under compulsory purchase plan. According to Article 30, the purchase price is 0 VND. Moreover, Article 31 gives out methods to support banks under compulsory purchase, including: Government funding to supplement charter capital; Government long-term loans with interest rates to 0%; Reciprocated loans and special loans of the SBV at 0% interest rate; receipt of deposits or loans from a credit institution with interest rate up to 0%.
One significant point is that the draft law allows weak banks to go bankrupt, which when applied, the Government will decide the special lending rate at the request of the SBV to pay the outstanding balance of personal deposit after it has been paid by the Deposit Insurance and the mechanism for dealing with the special loan from the state budget uncollected.
The draft law is expected to create legal basis by which bad debts and weak credit institutions are substantially handled in a form suitable to the market mechanism. In addition, it aims to ensure the interests of depositors and preserving the stability of security system. This will make an impact on banking business as weak banks are pushed to actively deal with their problems. In case they cannot handle their problems thoroughly, merger and acquisition may take place more on a voluntary basis.