HA NOI (Biz Hub)  — The State Bank of Viet Nam (SBV) finally agreed to give commercial banks at least six additional months before implementing the new standards of loans classification.

This is the third postponement that the banks were eagerly awaiting. The new deadline for loans classification is extended to early 2015, instead of ending sharply on June 1, 2014.

Loans classification is one of the important contents of Circular 02/2013/TT-NHNN of January 21, 2013, which also regulates a wide array of loans and risk-related issues, such as the levels and methods of risk provisioning and the use of provisions to handle risks by credit institutions and branches of foreign banks.

Except for such significant amendments to the loans classification, Circular 02 will be still put into practice on June 1, 2014, which was intended to help banks in coping with problems, as the central bank explained.

Circular 02 was initially expected to come into effect on June 1, 2013. But, after deliberation amid growing enquiries from commercial banks, who were concerned about a surge in bad debts, a collapse of major businesses, and a financial domino crisis after implementing the regulation, the Circular was postponed by a year to June 1, 2014.

"I think the central bank has taken into consideration the good and the bad aspects related to the commercial banks implementing the loans classification as scheduled. If the good outweigh the bad at this time, then we go for it," stated Nguyen Thanh Toai, the deputy general director of Asia Commercial Bank (ACB).

Some banks, which are struggling to bring their bad debt ratio to below 3 per cent, noted that the new regulation on loans classification will turn a series of positive loans into negative or alert status. If it happens, credit businesses will be consequently frozen.

State Bank Governor Nguyen Van Binh recently announced that SBV was determined to apply international standards to the regulation of the banking system as soon as possible, rather than prescribing temporary solutions. However, he also stressed that his strategy was to catch the mouse without breaking any vases.

Apart from loans classification, the amended Circular 02 also incorporated some new rules on the issuance of special bonds by the Viet Nam Asset Management Company (VAMC) and on the debts that violate covenants.

VAMC, a 100 per cent state-owned company managed by SBV, is allowed to spare 20 per cent for risk provision fund.

The company has purchased VND39 trillion (US$1.8 billion) worth of bad debts from commercial banks, of which VND200 billion ($9.4 million) has been recovered. The wholly-state owned company plans to buy an additional VND10 trillion ($473 million) in the first quarter of this year, however, there will be pressure to sell the bought debts in 2014.

Regarding the plans on debt refinancing through the special bonds issued by VAMC, Head of the central bank's Monetary Policy Department Nguyen Thi Hong yesterday remarked that the plans are yet to be implemented.

The strong purchase of VAMC has helped the Vietnamese banks to get their bad debts off books and polish their balance sheets. As per the standards set by the central bank, the bad debt ratio of the system increased from 4.08 per cent in 2012 to 4.73 per cent in October, 2013, and the ratio reduced to 3.63 per cent last December.

If the bad debt rescheduled under the Decision No780/QD-NHNN dated April 23, 2012, is included then Viet Nam's bad debt ratio will increase to about 9 per cent, according to the central bank's announcement last week. — VNS