The State Bank of Vietnam (SBV) is developing a Circular regulating safety limits and ratios in operations of banks and foreign bank branches (hereinafter referred to as banks) to replace Circular 36/2014/TT-NHNN and the Circulars amending and supplementing Circular 36.
Basically, banks still have to comply with the current seven safety limits and ratios, including the minimum capital adequacy ratio (CAR), except the CAR applicable to banks and foreign bank branches under specific regulations of the SBV; credit limit; solvency ratio; maximum ratio of short-term capital sources used for medium and long-term lending; maximum ratio on government bond and bond government purchase; limit on capital contribution and stock purchase; and Loan-to-deposit ratio. However, the level of each safety limit and ratio is expected to be significantly raised.
For example, the regulation on minimum CAR will be closer to the norm and international practice (Basel I and Basel II) on the basis of maintaining a separate CAR and consolidated CAR. At the same time, it will better protect the interests of depositors and enhance the ability to withstand risks of credit institutions (CIs) against market shocks, etc.
Accordingly, although banks still have to ensure a minimum CAR and consolidated CAR of nine present, there are many changes in the structure of risk-weighted assets as the risk level is adjusted to ensure control and restriction on the areas with potential risks. Specifically, from January 1st 2020, the risk factor for personal loans to meet the needs of life with principal balance from three billion dong and more will be raised to 150 percent instead of 50 percent as current.
Most notably, the SBV proposed two plans to reduce the ratio of using short-term funds for medium and long-term lending to 30%. According to plan 1, the maximum ratio of short-term funds used for medium and long-term lending will be 40 percent from the effective of this Circular to the end of June 30th 2020. From July 1st 2020 to the end of June 30th 2021, this ratio will be reduced to 35 percent and will continue to decline to 30 percent from July 1st 2021.
Meanwhile, according to plan 2, the adjustment is slower. From the effective date of this Circular to the end of June 30th 2020, the maximum ratio is 40%, and will be reduced to 37 percent from July 1st 2020 to the end of June 30th 2021, 34 percent from July 1st 2021 to the end of June 30th 2022, and 30 percent from July 1st 2022.
According to a banking expert, raising banks’ defense system through tightening regulations on limits and ratios will make banks’ operations more secure with better resistance against shocks. However, these regulations will also limit banks’ ability of credit provision, particularly medium and long-term loans.
“When the risk factor of many loans is increased, CAR of banks will decline, even when their total assets remain unchanged. Of course, that will reduce the ability to provide credit of banks,” said the expert.
However, the most interested issue, according to the expert, is the proposal to reduce the maximum ratio of short-term funds used for medium and long-term lending to 30%. He added that “this regulation is no small challenge not only for banks but also for the economy.”
For example, although the deadline to apply the ratio of using short-term capital for medium and long-term loans of 40 percent was postponed from January 1st 2018 to January 1st 2019, many banks still faced many difficulties in compliance. As many banks are currently having the proportion of medium and long-term lending of up to 60-70%, it is not easy to reduce it in a short time.
Statistics of the SBV also showed that at the end of January 1st 2019, the ratio of short-term capital used for medium and long-term loans of state-owned banks was 31.56 percent and of private joint stock banks was 32.94%. It also means that if the draft Circular is approved, many banks will have to limit their medium and long-term lending, and some banks will have to lower the outstanding medium and long-term credit.
Meanwhile, business currently still rely heavily on bank loans, in both short, medium and long terms. “Although the credit size has reached over 130 percent of the Gross Domestic Product (GDP), the size of corporate bond market has only reached 8.57 percent of GDP. It shows that bond is not yet the main capital mobilisation channel of businesses and they still heavily dependent on bank credit,” said the expert. He forecasted that this situation is unlikely to change in the next few years. Since most businesses are small and micro scaled with limited transparency in operation, governance, and financial statements, it is very difficult for them to issue bonds for mobilising capital. It also means that if the medium and long-term capital continues to be tightened, it will certainly be a shock to businesses. Not to mention, tightening the ratio of short-term capital used for medium and long-term loans can push interest rate level up, especially medium and long-term interest rates.
“Real estate businesses will encounter the biggest difficulty when the reducing the ratio of using short-term funds for medium and long-term lending or raising risk factor for consumer loans of over three billion dong will mainly impact on this area,” the expert emphasized.
