On July 30, 2021, the State Bank of Vietnam (SBV) issued Circular No. 11/2021/TT-NHNN stipulating the classification of assets, the level of deduction, the method of making provision for risks, and the use of the provision to handle risks in the operation of credit institutions, foreign bank branches. This document takes effect from October 1, 2021.

Accordingly, in principle, the circular stipulates that all outstanding debts of a customer at a credit institution or foreign bank branch must be classified into the debt group. Credit institutions classify debt into 5 groups: (i) Group 1: Qualified debt; (ii) Group 2: Debts needing attention; (iii) Group 3: Subprime debt; (iv) Group 4: Doubtful debts; (v) Group 5: Debts likely to lose capital. Specific provisioning rates for each debt group are as follows: (i) Group 1: 0%; (ii) Group 2: 5%; (iii) Group 3: 20%; (iv) Group 4: 50%; (v) Group 5: 100%.

The level of general provision to be deducted is determined at 0.75% of the total balance of debts from group 1 to group 4. Besides, credit institutions use provisions to deal with risks in the following cases: Customers is an organization that is dissolved or goes bankrupt; an individual is dead or missing; Debts are classified into the group of debts that are likely to lose capital.

After a period of at least 5 years from the date of using provisions to deal with risks and after taking all measures to recover but not being able to recover, the credit institution may decide to pay the debt that has already been treated from abroad.

Compared with Circular No. 02/2013/TT-NHNN dated January 21, 2013, Circular 09/2014/TT-NHNN dated March 18, 2014, Circular No. 11/2021/TT-NHNN provided a legal framework for stricter management on debt classification and provisioning in accordance with the outbreak of the epidemic which makes banks’ potential bad debts likely to increase sharply in the next few years.