State Bank of Vietnam set to plug lending loopholes that worsen bad debt situation

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Banks have been exploiting loopholes in regulations to avoid making adequate provisions for bad debts, but analysts expect a new circular from the central bank to plug them through stricter regulations for loan classification.

Circular 02/2013, to take effect on June 1, requires provisioning to be made for more loans including those given through credit cards and for buying unlisted bonds.

Banks are prohibited from paying dividends until they make adequate provisions for bad debts, which were estimated by the State Bank of Vietnam at 8.82 percent of total loans as of the end of last September.

But banks have been increasing lending through credit cards, thus becoming exempt from making provisions for possible bad debts.

Thanh Nien discovered that many banks are lending to credit card holders two or three times their income, while a person is issued even four or five cards at the same time.

Such loans are very risky since they are not secured by collateral. 

Economist Le Tham Duong said banks have been dishonest about bad debts and making provisions, which could worsen an already bad situation.

The new regulation will definitely help improve banking safety, he said.

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The central bank has also ordered banks to set up their own credit rating systems to assess lending risks.

Banks will have to classify their loans and furnish the data to the central bank's Credit Information Center. Based on this the center will instruct them to make provisions for bad debts.

Viet Capital Securities Company said it saw the central bank's move as attempts to bring regulations on loan classification and risk provisions closer to international standards.

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