The State Bank of Vietnam recently issued Circular 03/2021/TT-NHNN amending and supplementing a number of articles of Circular 01/2020/TT-NHNN on credit institutions and foreign bank branches rescheduling terms of debt repayment and rate and fee reduction and exemption in order to support customers affected by Covid-19 pandemic. This is considered good news for both businesses and banks.

Clearing obstacles

In Circular 01 of 2020, the State Bank only allowed restructuring for debts carrying obligations arising from January 23, 2020 until the third month after the Prime Minister announced the end of the pandemic.

According to experts, this troubled credit institutions to figure out eligible debts for restructuring, track and record in accounting when the chosen date may not coincide with the bank's accounting period.

To overcome this setback, in the new Circular 03, the central bank added more conditions to enable credit institutions and foreign bank branches to restructure their remaining due debts.

Specifically, credit institutions are allowed to reschedule repayment terms of loans with repayment obligations from January 23, 2020 to the end of 2021.

In addition, the regulators keep unchanged the time for restructuring the repayment term; that cannot exceed 12 months from the date on which credit institutions start restructuring. The debt payment rescheduling will be implemented until December 31, 2021.

Another difficulty solved by Circular 03 is to avoid the "profit" shock for banks.

Currently, outstanding loans with rescheduled repayment terms will be assigned to the previously classified debt group as the new classification may pose more risks than the regulatory level. However, at the end of the restructuring period, banks must use a large amount of money for provisions, likely resulting in a considerable shrinkage of profit.

To avoid this end, instead of letting banks set aside funds for hedging, the regulators launched a 3-year specific roadmap and forced commercial banks to comply.

Specifically, the amount of additional hedging funds is the difference between the hedging funds set aside for all outstanding loans in case of no debt restructuring and the hedging funds of loans restructured for customers affected by the Covid-19 pandemic. The rate must reach at least 30% of additional provisions by December 31, 2021, which will be raised to 60% and 100% at the end of 2022 and 2023, respectively.

Businesses and banks are happy

In a recent report, VnDirect Securities Corporation said, Circular 03 will enable businesses to recover their performance and reduce provisioning pressures on commercial banks.

For enterprises, the addition of conditions for loan restructuring will help them borrow more funds for business while their so-called bad debts will be extended the repayment term, thus helping alleviate their financial expense pressure in the post-Covid-19 recovery period.

In the perspective of commercial banks, this amendment will have more positive effects, both in the short and long term.

In particular, banks’ restructured loan portfolios may increase slightly in 2021 on widening restructured loans. However, the impact on asset yields of banks is negligible.

In fact, since the end of 2020, many banks have stopped expanding their restructured loan portfolios on concern about the timing of Circular 01 (only allowing loans with repayment obligations arising from January 23, 2020 to the third month when the Prime Minister announces the end of the pandemic).

The State Bank's data also showed this. By mid-November 2020, credit institutions rescheduled repayment terms for outstanding loans of over VND341.8 trillion, not much higher than VND 321 trillion announced in mid-September.

Besides, VnDirect acknowledged that the addition of regulations on gradual provisioning in three years will ease costs for banks, especially in 2021.

“Circular 01 only stipulates that credit institutions will have to classify and make provisions according to the rescheduled time, which means that they will have to make normal provisions when the debt restructuring period ends. This will place huge pressure on provisioning expenses for commercial banks with large restructured loans (e.g. BIDV and VPBank) when loans reach the maturity of extended terms in 2021 as roadmap, said VnDirect.

However, with the rescheduled provisioning roadmap, banks' hedging expenses will not increase too sharply in 2021, thereby giving banks room for retained earnings to support capital adequacy and increase loans for businesses.