Tightening regulations on banks pouring capital into corporate bonds?

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On September 1, Minister of Finance Ho Duc Doc signed Official Letter No. 10059/BTC-VP to the Securities Commission, the Department of Finance and Banking and the Vietnam Stock Exchange requesting to strengthen the inspection and supervision of the corporate bond market.

Like many warnings over the past time, the above dispatch of the Ministry of Finance stated that: Over the past time, corporate bonds (Corporate bonds) have become a large and important capital mobilization channel in the market. However, besides the positive effects for businesses, the private placement of corporate bonds also exposes many risks to investors and threatens to cause insecurity and safety of the national financial system.

In order to strengthen the inspection and supervision of the corporate bond market, Minister Ho Duc Doc requested the clues on research, continue to improve regulations on management and supervision of the TPDN market; in particular, focusing on building measures to inspect, supervise and tighten the issuance of individual TPDN without collateral or the quality of secured assets and the reputation of the issuer is low in order to aim for a transparent, safe and risk-limiting market.

At the same time, the above focal points strengthen and step up the inspection, examination and supervision of the issuance and provision of services on individual corporate bonds, especially the issuance of small and new enterprises. established and operated in high-risk fields with unclear and substantive business results; focus on reviewing, checking and detecting enterprises showing signs of violations or circumvention of the law in the issuance of corporate bonds.

At the same time, a number of representatives of market participants had comments sent to the State Bank of Vietnam (SBV), about a draft with the direction of tightening the regulation of capital pouring into this field of commercial banks.

Many prohibitions for commercial banks

Since 2020, the State Bank of Vietnam has issued a draft circular regulating the purchase and sale of corporate bonds by credit institutions and foreign bank branches.

As reflected by a industry association, the new draft still retains many of the expected directions as set out in 2020 despite comments, even adding many more strict provisions than the previous draft.

In short, the SBV aims to tighten the regulations on credit institutions pouring capital into this field, with many things expected to be prohibited.

Specifically, credit institutions are not allowed to borrow capital from other credit institutions to buy corporate bonds.

Credit institutions may only buy corporate bonds when the ratio of bad debts is less than 3% according to the financial statements at the time of purchase, except for the purchase of corporate bonds under the restructuring plan approved by competent authorities.

Credit institutions may only buy and sell corporate bonds when they meet the safety limits and ratios as prescribed by law.

Credit institutions may not buy bonds (including purchases from initial issuance and acquisitions from other organizations and individuals) of issuers that have incurred bad debts at credit institutions purchased and at other credit institutions within the last 12 months before the time of decision on approval of purchase.

Credit institutions are not allowed to buy corporate bonds that are issued for the purpose of restructuring the debts of the issuing enterprises themselves.

Credit institutions are not allowed to buy corporate bonds issued for the purpose of contributing capital or buying shares in other enterprises.

A credit institution may not sell corporate bonds to its own subsidiary, except in the case of selling corporate bonds to a subsidiary under an approved restructuring plan.

Still ban the points that do not prohibit?

On behalf of credit institutions, on the basis of collecting opinions from members, the Vietnam Banks Association (VNBA) has also sent a written comment to the State Bank of Vietnam, stating its views on most of the proposed regulations mentioned above.

As with the regulation that credit institutions are not allowed to borrow capital from other credit institutions to buy corporate bonds, VNBA believes that the Law on Credit Institutions does not prohibit this activity, so there is no basis to introduce such a ban. And the introduction of this prohibition is not really consistent with the principle of law-making.

According to VNBA, credit institutions mobilize capital from various sources including capital from people, organizations and financial institutions (including other credit institutions) and conduct centralized capital management. Concentrated capital is used for many different purposes such as investment, lending, debt repayment… and does not separate the source of capital formation when used.

“Therefore, credit institutions have no basis to determine from which source the capital used to buy corporate bonds is formed. Therefore, it is proposed to remove this content because it is not suitable with the capital management activities of credit institutions”, VNBA proposed.

At the point of stipulating a limit on the ratio of bad debts to less than 3% when buying TPDN, the representative organization of credit institutions also proposed to consider not applying to general financial companies, because the characteristics of this group often have a high bad debt ratio.

With the regulation that credit institutions are not allowed to buy corporate bonds issued with the purpose to restructure the debts of the issuing enterprises themselves, VNBA proposed the Drafting Board to specify more clearly what is “the purpose of restructuring”. debt recovery” because there is currently no legal document with a definition on this issue. In Circular 02/2013/TT-NHNN regulating the classification of assets and provisioning for risks… only the definition of debt is structured and the repayment term.

With the provision that credit institutions cannot buy corporate bonds issued for the purpose of contributing capital or buying shares in other enterprises, VNBA said that “the purpose of bonds to buy shares, capital contributions are purposes not prohibited by law, nor are they factors affecting credit quality, therefore, there is no basis to prohibit credit institutions from buying bonds for this purpose.” Therefore, VNBA also asked the Drafting Committee to consider removing this regulation.

In addition, VNBA commented on many other content points in the draft of the State Bank and proposed to reconsider.

Along with VNBA, on September 1, the Vietnam Bond Market Association (VBMA) said that it had also gathered the opinions of its members on the above draft and sent specific comments to SBV.

According to VBMA, this draft circular, if issued, will have a lot of impacts on corporate bond investment activities of credit institutions in particular and the corporate bond market in general.

Also according to VBMA’s report, the total value of successfully issued corporate bonds in 2020 is 368 trillion, up 24% compared to 2019. The high growth rate continues to show in the first 7 months of 2021, when the total price value reached VND 235,094 billion, up 35.8% over the same period in 2020.

Source: bizlive.vn – Translated by fintel.vn