In the near past, some banks have been buying up convertible bonds from businesses in order to restructure their debt. This carries many risks if the businesses continue to run into difficulties and are unable to repay both principal and interest, leading to the issuance of more bonds to restructure debt, the State Bank of Vietnam (SBV) said in a statement Thursday.

As such, the SBV has published for gathering feedback a draft regulation that will not allow banks to purchase corporate bonds issued for the purpose of restructuring their debt, or bonds issued with one of its purposes being the restructuring of debt.

In addition, the draft proposes that banks should be banned from purchasing corporate bonds if their internal bad debt ratio exceeds 3 percent, unless the bond issue is part of a debt restructuring scheme approved by competent authorities.  

Banks will also not be allowed to purchase bonds from enterprises that had bad debt issues in the past 12 months, whether they are buying it from the issuing enterprise or from another investor. This would prevent banks with high bad debt ratios from worsening the quality of credit further, the SBV said.

Lastly, banks will not be able to acquire corporate bonds issued for the purpose of raising capital to buy shares in other business. According to the SBV, this practice has been observed in recent times, making it difficult for lending institutions to control or monitor what borrowers do with their capital.

The draft regulation comes shortly after banks’ first quarter financial reports were published last month, with many saying that bad, doubtful and overdue debt had surged because of the coronavirus epidemic.

Some banks had to set aside double the amount of reserves they had done last year as provision for credit risks, causing first quarter profits to plummet.

Last year, the banking sector’s internal bad debt ratio, which excludes debts sold to state-owned debt collecting agency VAMC, was 1.89 percent, in line with the SBV’s target of 2 percent, but the SBV predicts that bad debts would rise across the whole banking sector by the end of this year as a result of the Covid-19 pandemic.

The SBV's latest report said Covid-19 is expected to affect the quality of VND2 quadrillion ($85.2 billion) worth of debt issued by Vietnamese banks, accounting for 23 percent of the banking system’s outstanding debt.