VietNamNet Bridge – Commercial banks have warned that the credit flow may get stuck when the new regulation on debt classification takes effects on June 1, 2013.

From June 2013, when the new regulation on bank debt classification becomes valid, a lot of “good debts” would turn into “bad debts.” This also means that banks would have to make higher provisions against the debts, which would lead to the higher capital costs. If so, banks would have to raise the lending interest rates, or curb the lending.

According to Ngo Van Dung, Director of the Hanoi branch of the Bank for Investment and Development of Vietnam (BIDV), said the government has released two resolutions requesting commercial banks to restructure debts and accept debt payment delays in order to create best conditions for businesses to access new loans. However, it would be very difficult for commercial banks to implement the instruction, when banks have to obey the new regulation on debt classification.

Under the Circular No. 02, which has replaced the Decision No. 493 on debt classification and provisioning against bad debts, a lot of debts would be listed as “bad debts” for which banks would have to make provisions.

Under the current regulation, some kinds of debts are classified as ”safe”, including the loans guaranteed by the credit institutions’ or credit institutions’ subsidiaries’ shares. However, when the circular No. 02 takes effect, the loans would be listed as the third-group bad debts.

Meanwhile, the other kinds of debts which are now listed as the bad debts with “medium alarms” would be classified as the fifth-group bad debt, or irrecoverable debts.

With the new regulation, the State Bank of Vietnam shows its determination to take one more step towards the international standards. At present, Vietnam is believed to set up easier conditions on debt classification, because of which the bad debt panorama in Vietnam cannot be seen clearly.

Dung from BIDV, on one hand, said that he understands the reason behind the central bank’s decision, on the other hand, said it is now still not the right time to apply the new stricter regulations on debt classification.

The government has requested banks and businesses to sit together to discuss the debt restructuring to make it easier for businesses to approach bank loans. Meanwhile, the State Bank has requested to apply the new regulation on debt classification, which would certainly lead to the fewer opportunities for banks to push up lending and for businesses to access bank loans.

Once the bad debt ratios increase, banks would have to make higher provisions against bad debts, which means that they would have to curb the lending. Meanwhile, businesses would not be able to satisfy the requirements to be eligible for getting loans, because a lot of debts would turn into bad debts.

A banker who asks to be anonymous, has predicted that once the new regulation is applied, the bank’s provisioning against bad debts would increase by 20-30 percent due to the increase of the bad debts.

With the higher capital costs, banks would have to narrow the credit growth, focus on collecting debts, set up stricter requirements on borrowers. “It would be a tough year for banks in 2013,” he said.

However, the State Bank has been very resolute in the issue. Nguyen Dang Hong, Deputy Chief Inspector of the State Bank said the bank once discovered that different banks classified the same debt in different groups. Therefore, it’s necessary to set up the criteria for banks to refer when classifying debts. In the long term, this would help ease the bad debt ratios and improve the credit quality.

DDDN