Sector Insights_Impact of Circular 06_20160601_EN

 On 27th, May 2016, SBV has officially promulgated Circular 06/2016/TT-NHNN (Circular 06) amending and supplementing a number of articles of Circular 36/2014/TT-NHNN (Circular 36), stipulating prudent ratios in operations of credit institutions and branches of foreign banks.

Significant changes in Circular 06 (see Appendix 01)
Raise the risk index of receivable lending for real estate from 150% to 200% from Jan 1, 2017, lower than the cap of 250% proposed in the draft amendment to Circular 36.
Create a roadmap to reduce the maximum ratio of short-term funds used for medium and long-term loans from 60% to 50% in 2017 and to 40% from Jan 1, 2018. Draft amendment to Circular 36 in Feb 2016 required this ratio to be 40%.
Increase the ratio of purchased, invested G-bonds to average short-term funds of the previous month, with the maximum ratio increases from 15% to 25% for State-owned for commercial banks (SOCBs) and to 35% for foreign bank branches. Draft amendment to Circular 36 raised this ratio from 15% to 35% for foreign bank branches (no increase for SOCBs).
Add a provision of “Lending and discount of valuable papers for customer to entrust with the task of trading and investing in stocks” inside the categories defined in “Granting credit for securities trading”, the same with the draft amendment to Circular 36.

Potential effects of Circular 06 to Vietnam’s economy:
In comparison with Circular 36, Circular 06 tightened provisions on medium and long-term loans, loans for commercial real estate and securities. However, compared to harsh provisions in the draft amendment and supplement to Circular 36, Circular 06 displays the neutralization between the aim of tightening risky loans, purifying banking system and the aim of economic growth, lending rate stabilization.
Circular 06 has some positive aspects compared to Draft amendment to Circular 36. The requirements are looser. Roadmap for implementation is lengthened by 6-18 months. More room for credit growth, especially real estate credit, lower pressure to increase interest rate will have more positive impact on performance of banks as well as companies in real estate and related industries, and on the stock market than expected.
Interest rate. Pressure to increase interest rate is not high in short term. In the long-term, lending rate will sustain upward pressure and this may affect cost of capital, reduce demand for investment as well as consumption.
Credit. More room for growth, compared to Circular 36 draft amendment and supplement.
Purification of banking activities: Stabilize liquidity and improve transparency of bad debts.
Performance of firms, including banks will take more benefit than stipulated in Circular 36 draft amendment and supplement. 
Cash flows into stock market may decline, although this was already anticipated from Circular 36 draft amendment and supplement.
Bond market - Positive: Increase ratio of purchased, invested G-bonds to average short-term funds of previous month from 15% to 25% for SOCBs and from 15% to 35% for foreign bank branches.