NONPERFORMING LOANS

Loan is classified into 5 group : standard, attention, sub-standard, doubtful

and bad( loss) loan. Nonperforming loans is debt belonging to group 3, 4 and
5
A nonperforming loan (NPL) is a sum of borrowed money upon which the debtor
has not made the scheduled payments for a specified period. Although the exact
elements of nonperformance status vary, depending on the specific loan's terms,
"no payment" is usually defined as zero payments of either principal or interest.
The specified period also varies, depending on the industry and the type of loan.
Generally, however, the period is 90 days or 180 days.

How a Nonperforming Loan – NPL – Works

A nonperforming loan (NPL) is considered in default or close to default. Once a

loan is nonperforming, the odds the debtor will repay it in full are substantially
lower. If the debtor resumes payments again on an NPL, it becomes
a reperforming loan, even if the debtor has not caught up on all the missed
payments.

In banking, commercial loans are considered nonperforming if the debtor has

made zero payments of interest or principal within 90 days, or is 90 days past
due. For a consumer loan, 180 days past due classifies it as NPL.

According to the statistics of SSI and HSC, at the end of December 2016, the
bad debt ratio on Vietnam's outstanding debt was 10.9%, while, in the first half of
2018, this figure was recorded as only 6.85 %, a big improvement step. However,
the internal NPL ratio of Vietnam is still in the highest level in the region, just
behind Thailand. It is estimated that by the end of December 2018, the whole
system of credit institutions has handled 149.22 thousand. billion dong of bad
debt. The internal NPL ratio of the credit system is 1.89%, down from 2.46% at
the end of 2016 and 1.99% at the end of 2017.

BASEL
To make sure all commercial banks are avoided from risk to loose ability to
make payment for customer, The Basel Committee on Banking Supervision
(BCBS) in Basel, Switzerland has published standards of minimum capital
requirements for banks. The Basel Accords are three series of banking
regulations (Basel I, II and III) set by the Basel Committee on Bank
Supervision (BCBS), which provides recommendations on banking regulations in
regards to capital risk, market risk and operational risk. The purpose of the
accords is to ensure that financial institutions have enough capital on account to
meet obligations and absorb unexpected losses. The first Basel Accord, known
as Basel I, focuses on the capital adequacy of financial institutions. The second
Basel Accord, Basel II, served as an update of the original accord, these areas of
focus are known as the three pillars. Basel III is a continuation of the three pillars,
along with additional requirements and safeguards. There are many critiria to
evaluate the safety of banks , typically CAR -The capital adequacy ratio .
CAR is a measurement of a bank's available capital expressed as a percentage
of a bank's risk-weighted credit exposures. The capital adequacy ratio, also
known as capital-to-risk weighted assets ratio (CRAR), is used to protect
depositors and promote the stability and efficiency of financial systems around
the world. Two types of capital are measured: tier-1 capital, which can absorb
losses without a bank being required to cease trading, and tier-2 capital, which
can absorb losses in the event of a winding-up and so provides a lesser degree
of protection to depositors.
The reason minimum capital adequacy ratios (CARs) are critical is to make sure
that banks have enough cushion to absorb a reasonable amount of losses before
they become insolvent and consequently lose depositors’ funds. The capital
adequacy ratios ensure the efficiency and stability of a nation’s financial system
by lowering the risk of banks becoming insolvent. Generally, a bank with a high
capital adequacy ratio is considered safe and likely to meet its financial
obligations.

To raise capital and apply of Basel II have become the target for many
Vietnamese banks. This is considered an extremely big challenge and has
important implications in the process of upgrading domestic credit institutions.
According to the State Bank's statistics, as of May 31, 2018, the average CAR of
the whole system reached 12.14%. In which, state-owned commercial banks had
the lowest CAR of 9.39% and joint-venture banks and foreign banks had the
highest CAR of 27.36%. Looking at the above figures, we can see that the capital
improvement has not created any major breakthrough in the above period. This
implies that Basel II is still quite far away. Increasing capital to ensure Basel II is
the most important issue today. However, the current roadmap is that by 2020,
the application of Basel II standards in a banking group is an overwhelming
requirement, because to achieve the goal, every year banks need to raise capital
by about 3 to 4 billion USD for, while in the past few years, banks only achieved
ahalf of it. In other words, the route to achive CAR in standard level ( 8%) and
apply sucessfully Basel II will not work