Circular 42/2016/TT-NHNN regulating the rating of people's credit funds issued by the Governor of the State Bank of Vietnam

CIRCULAR

PRESCRIBING CREDIT RATING OF PEOPLE’S CREDIT FUNDS

Pursuant to the Law on State Bank of Vietnam No. 46/2010/QH12 dated June 16, 2010;

Pursuant to the Law on Credits Institutions No. 47/2010/QH12 dated June 16, 2010;

Pursuant to the Government’s Decree No. 156/2013/ND-CP dated November 11, 2013 defining functions, tasks, powers and organizational structure of the State Bank of Vietnam (SBV);

At the request of the Head of the SBV Banking Supervision Agency;

The Governor of the State Bank of Vietnam hereby promulgates the Circular prescribing the credit rating of people’s credit funds.

Chapter I

GENERAL PROVISIONS

Article 1. Scope

This Circular provides for the credit rating of people’s credit funds.

Article 2. Regulated entities

1. This Circular shall apply to the following entities:

a) People’s credit funds;

b) Organizations and individuals involved in the credit rating of people’s credit funds.

2. This Circular shall not apply to:

a) People’s credit funds that are placed under special control;

b) People’s credit funds that are following procedures in case their establishment and operation licenses are revoked as prescribed by law;

c) People’s credit funds whose operating period is less than 24 months from the commencement of operation date.

Article 3. Methods of credit rating of people’s credit funds

1. People’s credit funds shall be rated according to the criteria specified in Article 5 hereof.

2. People’s credit funds shall be rated A (Excellent), B (Good), C (Fair) or D (Poor) according to Article 12 hereof.

Article 4. Credit rating materials, data and information

1. Materials and information used for credit rating of people’s credit funds include:

a) Statistical reports prepared according to regulations on statistical reporting by people’s credit funds;

b) Independent auditor’s reports and management letters; reports on internal inspection and assessment of internal control system; internal audit reports and audit documents (if the people’s credit fund is subject to audit);

c) Internal regulations/procedures and charter of the people’s credit fund;

d) Balance sheets; annual financial statements (if a people’s credit fund is subject to independent audit, its financial statements must be audited in accordance with regulations of law);

dd) Inspection results, post-inspection documents if a people’s credit fund falls under the authority of SBV Banking Supervision Agency;

e) Minutes of works between the SBV Banking Supervision Agency and the people’s credit fund, and written representations made by the people’s credit fund at the request of the SBV Banking Supervision Agency;

g) Inspection reports of relevant agencies, including tax authorities, Deposit Insurance of Vietnam, and Co-operative Bank of Vietnam.

2. Figures and data used for evaluation and calculation of credit rating scores:

a) Figures used for scoring of capital (except maintenance of capital adequacy ratio), asset quality and business efficiency criteria are those released on December 31 of the credit rating year;

b) Scores of maintenance of capital adequacy ratio, management, administration and control, and solvency shall be calculated according to periodical inspection reports in the fiscal year.

Article 5. Credit rating criteria and scores thereof

Total score of credit rating criteria is 100 points and is the sum of the following component scores:

1. Capital: 10 points.

2. Asset quality: 30 points.

3. Management, administration and control: 30 points.

4. Business efficiency: 10 points.

5. Solvency: 20 points.

Chapter II

SPECIFIC PROVISIONS

Section 1. SCORING OF CREDIT RATING CRITERIA

Article 6. Capital

The maximum score and minimum score of the capital criterion are 10 points and 0 point respectively. The capital criterion includes 3 sub-criteria as follows:

1. Charter capital/legal capital ratio:

a) 500% or higher: 3 points;

b) From 400% to under 500%: 2 points;

c) From 300% to under 400%: 1 point;

d) Less than 300%: 0 point.

2. Capital adequacy ratio:

a) 10% or higher: 5 points;

b) From 9% to under 10%: 3 points;

c) From 8% to under 9%: 1 point;

d) Less than 8%: 0 point.

3. Maintenance of capital adequacy ratio:

The people’s credit fund that has complied with SBV’s regulations on minimum capital adequacy ratios during the year will be given 2 points.  1 point will be deducted from total score of this sub-criterion for each violation against regulations on capital adequacy ratio (regardless of time of commission of the violation in the year) but no more than 2 points can be deducted.

Article 7. Asset quality

The maximum score and minimum score of the asset quality criterion are 30 points and 0 point respectively. The asset quality criterion includes 3 sub-criteria as follows:

1. Ratio of bad debts to total outstanding loans:

a) 0%: 14 points;

b) Above 0% to 1%: 12 points;

c) Above 1% to 2%: 10 points;

d) Above 2% to 3%: 8 points;

dd) Above 3% to 4%: 4 points;

e) Above 4%: 0 point.

2. Ratio of non-performing loans to total outstanding loans:

a) 0%: 10 points;

b) Above 0% to under 0,5%: 9 points;

c) From 0,5% to under 1%: 7 points;

d) From 1% to under 1,5%: 5 points;

dd) From 1,5% to under 2%: 3 points;

e) 2% or higher: 0 point.

3. Ratio of doubtful debts to total outstanding loans:

a) 0%: 6 points;

b) Above 0% to under 1%: 5 points;

c) From 1% to under 2%: 4 points;

d) From 2% to under 3%: 3 points;

dd) From 3% to under 4%: 2 points;

e) 4% or higher: 0 point.

Article 8. Management, administration and control

The maximum score and minimum score of the management, administration and control criterion are 30 points and 0 point respectively. The management, administration and control criterion includes 4 sub-criteria as follows:

1. Compliance with regulations of the Law on Credit Institutions and SBV’s regulations on eligibility requirements and standards of members of Boards of Directors, Control Boards or full-time controllers, and Directors: 3 points. Each member of the Board of Directors, Control Board or full-time controller, or Director fails to meet any eligibility requirements or standards: 1 point will be deducted (no more than 3 points can be deducted).

2. Compliance with regulations of the Law on Credit Institutions and SBV’s regulations on capital contribution, transfer and return of stakes, eligibility requirements to be satisfied by capital contributors, and operating areas: 2 points. 1 point will be deducted for each violation but no more than 2 points can be deducted.

3. Compliance with regulations of the Law on Credit Institutions and SBV’s regulations on operations: 23 points. The following points will be deducted for violations committed by the people’s credit fund:

a) It fails to promulgate internal regulations, internal procedures and charter of the people’s credit fund, or contents of its internal regulations, internal procedures and charter are not conformable with regulations of law. In this case, 1 point will be deducted for each inadequate or unconformable regulation, procedure or charter but no more than 2 points can be deducted;

b) It fails to comply with internal regulations, internal procedures or charter. In this case, 1 point will be deducted for each violation (regardless of time of commission of the violation in the year) but no more than 2 points can be deducted;

c) It fails to comply with regulations on credit extension, lending limits; debt classification, contribution to and use of risk provisions; budget, payment, opening of accounting records, opening and use of accounts; accounting; financial revenues and expenses; income statements and profit distribution; capital mobilization and service fees; offer and acceptance of trusteeship; acquisition, investment in, management and use of assets; vault and asset safety; participation in the Fund for assurance of safety of people’s credit fund system, deposit insurance; anti-money laundering; credit information; implementation of requests and recommendations of competent authorities; management and use of the license. 1 point will be deducted for each violation (regardless of time of commission of the violation in the year) but no more than 13 points can be deducted;

d) Loans are provided for profiteering or appropriation of money or assets of the people’s credit fund. 6 point will be deducted for each violation but no more than 6 points can be deducted.

4. Compliance with regulations on reporting and information provision: 2 points. The following points will be deducted for violations committed by the people’s credit fund:

a) If it has insufficiently submitted reports or failed to submit reports by the deadlines prescribed by SBV to the relevant SBV’s branch of province or city where the office of the SBV Banking Supervision Agency is not available (hereinafter referred to as “SBV’s provincial branch”) or to the office of SBV Banking Supervision Agency for 2 times or more, 1 point will be deducted;

b) If it has submitted reports containing inaccurate information or data for 2 times or more, 1 point will be deducted.

Article 9. Business efficiency

The maximum score and minimum score of the business efficiency criterion are 10 points and 0 point respectively. The business efficiency criterion includes 3 sub-criteria as follows:

1. Ratio of profit to total revenue:

a) 10% or higher: 4 points;

b) From 5% to under 10%: 3 points;

c) From 1% to under 5%: 2 points;

d) Less than 1%: 0 point.

2. Ratio of profits to average total assets:

a) 2% or higher: 4 points.

b) From 1,5% to under 2%: 3 points;

c) From 1% to under 1,5%: 2 points;

d) Less than 1%: 0 point.

3. Ratio of net profit to charter capital:

a) 10% or higher: 2 points;

b) From 8% to under 10%: 1 point;

c) Less than 8%: 0 point.

Article 10. Solvency

The maximum score and minimum score of the solvency criterion are 20 points and 0 point respectively. The solvency criterion includes 3 sub-criteria as follows:

1. The solvency ratio in the following business day:

a) The ratio is always higher than or equal to 1: 8 points;

b) The ratio is smaller than 1 one time: 4 points;

c) The ratio is smaller than 1 two times: 1 point;

d) The ratio is smaller than 1 three times or more: 0 point.

2. The solvency ratio in the following 7 business days:

a) The ratio is always higher than or equal to 1: 8 points;

b) The ratio is smaller than 1 one time: 4 points;

c) The ratio is smaller than 1 two times: 1 point;

d) The ratio is smaller than 1 three times or more: 0 point.

3. The maximum ratio of short-term capital used for granting medium-term and long-term loans:

a) The ratio is always smaller than or equal to 30%: 4 points;

b) The ratio is higher than 30% one time: 2 points;

c) The ratio is higher than 30% two times: 1 point;

d) The ratio is higher than 30% three times or more: 0 point.

Article 11. Calculation of total rating scores

Total rating score of a people’s credit fund shall be the sum of points of the criteria in Articles 6, 7, 8, 9 and 10 hereof.

Section 2. RATING, NOTIFICATION AND MANAGEMENT OF CREDIT RATING RESULTS

Article 12. Rating

1. A people’s credit fund shall be rated: A (Excellent) if its total score is 80 points or higher; B (Good) if its total score is from 70 points to under 80 points; C (Fair) if its total score is from 60 points to under 70 points; D (Poor) if its total score is under 60 points.

2. The rating assigned to a people’s credit fund will be downgraded to a lower rating if it has 1 criterion or more, or 2 or more sub-criteria of any criterion, given “0” point.

Article 13. Rating procedures

1. By April 30 every year, SBV’s provincial branches and offices of SBV Banking Supervision Agency shall complete the credit rating of people’s credit funds in the previous year.

2. Within 05 working days from the day on which credit rating results are given, each SBV’s provincial branch or office of SBV Banking Supervision Agency shall submit reports on credit rating results of local people’s credit funds, which are made according to the form No. 01 or form No. 02 enclosed herewith, to SBV's Governor (through the SBV Banking Supervision Agency).

3. By June 15 every year, the SBV Banking Supervision Agency shall play the leading role in appraising and requesting the SBV’s Governor to issue a decision on approval of credit rating results of people’s credit funds, which shall be then sent to relevant SBV’s provincial branches and offices of SBV Banking Supervision Agency for implementation.

Article 14. Notification and management of credit rating results

1. Within 05 days from the receipt of credit rating results approved by SBV’s Governor, SBV’s provincial branches and offices of SBV Banking Supervision Agency shall notify such credit rating results to each of local people’s credit funds.

2. People’s credit funds shall manage their credit rating results according to information confidentiality policy, and are not allowed to provide such credit rating results to any entities other than people’s credit funds.

Chapter III

IMPLEMENTATION

Article 15. Effect

1. This Circular comes into force from May 01, 2017.

2. The credit rating of people’s credit funds in 2016 shall be carried out according to Decision No. 14/2007/QD-NHNN dated April 09, 2007 by the Governor of the State Bank of Vietnam.

3. The Decision No. 14/2007/QD-NHNN dated April 09, 2007 by the Governor of the State Bank of Vietnam shall cease to have effect from the effective date of this Circular.

Article 16. Implementation

Chief of SBV’s Office, Head of SBV Banking Supervision Agency, heads of relevant units affiliated to SBV, Directors of SBV’s provincial branches, Chairpersons of Boards of Directors and Directors of people’s credit funds shall implement this Circular.

FORM NO. 01

(Enclosed with Circular No. 42/2016/TT-NHNN dated December 30, 2016 of the Governor of the State Bank of Vietnam)

BRANCH OF THE STATE BANK OF VIETNAM/ OFFICE OF SBV BANKING SUPERVISION AGENCY IN…………….

REPORT ON CREDIT RATING RESULTS OF PEOPLE’S CREDIT FUNDS

Year …

Note:  In columns (3), (4), (5), (6), (7), specific points given according to the maximum score of each criterion shall be specified.

FORM NO. 02

(Enclosed with Circular No. 42/2016/TT-NHNN dated December 30, 2016 of the Governor of the State Bank of Vietnam)

BRANCH OF THE STATE BANK OF VIETNAM/ OFFICE OF SBV BANKING SUPERVISION AGENCY IN…………….

REPORT ON CREDIT RATING RESULTS OF ……..….. (name of the people’s credit fund)

Year …

Notes:

1. This form is used for credit rating of each people’s credit fund;

2. The “Note (*)” column shall specify other information (e.g. a people’s credit fund is downgraded);

3. “average total assets” are total assets determined according to SBV’s regulations on financial statements of people’s credit funds, and calculated by adopting the following formula: Average total asset = (beginning value of assets + ending value of assets)/2.

4. “revenue", “expenses”, “profit”, and “net profit” are determined according to SBV’s regulations on financial statements of people’s credit funds.

5. “capital adequacy ratio”, “solvency ratio” and “maximum ratio of short-term capital used for granting medium-term and long-term loans” are determined according to SBV’s regulations on limits and prudential ratios of people’s credit funds.

6. “total outstanding loans” and “bad debts” are determined according to SBV’s regulations on debt classification and establishment of provisions for risks incurred during operation of people’s credit funds.

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