Hanoi (VNS/VNA) - The State Bank of Vietnam (SBV) has decided to extend apolicy allowing commercial banks to keep debt classificationsfor COVID-19 affected borrowers unchanged to help customers accessbank loans.

Circular 03/2021/TT-NHNN, which amends Circular 01/2020/TT-NHNN allowingcommercial banks to maintain the debt classifications to support customersaffected by the COVID-19 pandemic, will take effect from May 17.

In Vietnam, debts are currently classified into five groups based on their riskstatus: standard debt, debt needing special attention, subprime debt, doubtfuldebt, and potentially irrecoverable debt.

Previously, many commercial banks were worried if debt classifications were notextended, bad debts would increase sharply.

Banks restructured loans worth about 350 trillion VND (15.2 billion USD) forCOVID-19-affected borrowers by the end of 2020. Industry insiders estimated ifhalf of the loans became bad loans, the bad debt ratio of the banking systemwould increase to more than 3 percent by the end of this year.

However, commercial banks this year will not be permitted to add profits gainedfrom the loans to their total revenue, according to the new circular.

To qualify for maintaining the debt classifications, the debts must arise fromlending and financial leasing activities with the obligation to repay theprincipals and/or interest from January 23, 2020, to March 31, 2021.

Besides, borrowers must be unable to pay the debts and/or interest in timebecause of decreases in revenues and incomes caused by the impacts of thepandemic.

Despite the extension of the debt classifications, the new circularstates commercial banks must set aside money for potentially unrecoverable COVID-19affected loans within three years, starting from 2021. The central bank lastyear allowed commercial banks to avoid making the provisions in 2020 to supportbanks and borrowers affected by the pandemic.

According to SBV deputy governor Dao Minh Tu, the amended circularregulates provisions on COVID-19 loans to ensure the safety of creditinstitutions and the national financial system.

Under the new circular, the ratio of the provisions will increase gradually,from 30 percent of COVID-19-affected loans by the end of 2021 to 60 percent bythe end of 2022 and 100 percent by the end of 2023.

To control the risk of bad loans, banking expert Nguyen Tri Hieurecommended besides recovering bad loans, banks must set aside provisionsfor bad and risky loans.

Some banks have already increased provisions for risky loans.

VietinBank, for example, increased its provisions from 120 percent in 2019 to130 percent of loans in 2020. In 2021, VietinBank aimed to keep the bad debtratio below 2 percent./.