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Issuance of Circular No 06 is also being viewed as an opening salvo in the regulatory process required to implement the nation's plan to re-organise the banking industry by 2015.
Under the circular, the State Bank would play a key role in requiring stronger credit institutions to refinance debt loads for weaker banks or would provide financing directly.
Credit institutions which have lost their payment capacity due to serious problems will receive loans at preferential rates equivalent to the re-financing interest rate announced by the central bank. If the banks receiving the support fail to repay the loans when due, they will be charged interest on past due amounts at 1.5 times of the initial rates.
The borrowers must use funds from preferential loans to pay their individual depositors. Using the loan proceeds to cover institutional depositors may proceed with the approval of the State Bank Governor.
A number of banks have low liquidity because they have used short-term deposits to fund medium- and long-term lending. Under pressure to meet credit growth and profit forecasts, banks have also lent a significant amount of money to the high-risk real estate and securities industries.
Although the central bank has allowed banks to use up to 30 per cent of short-term deposits for medium- and long-term loans, a number of banks have lent up to 70 per cent. At a meeting held in Ha Noi last week, State Bank Governor Nguyen Van Binh said that the nation now had nine poorly-performing credit institutions. These were now under supervision by the central bank in order to prepare for their reorganisation.
Under a plan approved by Prime Minister Nguyen Tan Dung earlier this month to restructure the banking by 2015, domestic commercial banks would be classified into three groups – healthy, temporarily short of liquidity, and fragile – in order for authorities to approve suitable measures, such as re-organisation, merger or acquisition, reform of risk management systems, or the interference of the State Bank or other agencies.
