On Inspection and Supervision Work of the State Bank

Through studying the above judgments, the author found that:

+ There is a confusion of the court about the application of the provisions of the law on secured transactions according to the Civil Code and Decree 163/2006/ND-CP on secured transactions, Decree 11/2012/ND-CP amending and supplementing a number of articles of Decree 163/2006/ND-CP mentioned above. Indeed, according to Clause 1, Article 342 of the 2005 Civil Code (now stipulated in Clause 1, Article 317 of the 2015 Civil Code), property mortgage is when one party (hereinafter referred to as the mortgagor) uses property owned by him/her to secure the performance of obligations and does not transfer the property to the other party (hereinafter referred to as the mortgagee) . Thus, the use of property owned by oneself to secure the performance of civil obligations for oneself or for another person without transferring that property is called property mortgage. Meanwhile, a guarantee is a commitment by a third party (hereinafter referred to as the guarantor) to the entitled party (hereinafter referred to as the beneficiary) to perform the obligation on behalf of the obligated party (hereinafter referred to as the guaranteed party), if when the time comes to perform the obligation, the guaranteed party fails to perform or improperly performs the obligation. (Article 361 of the 2005 Civil Code, now regulated in Clause 1, Article 335 of the 2015 Civil Code). It is clear that a guarantee is a commitment to perform the obligation on behalf of another person, it is a "personal" security measure, not a "material" one like a mortgage. Thus, there is confusion among the above courts about credit security measures;

+ The above-mentioned mistake of the court has led to a very unfortunate consequence of causing risks and adverse consequences for commercial banks, because when the secured party (the commercial bank) and the secured party (the borrower or a third party) establish a secured transaction to create a secured transaction for the commercial bank to handle the secured assets to recover debts from the borrower. When the court declares that secured transaction invalid, the commercial bank cannot handle the assets, which causes credit risks for the commercial banks. Realizing this, in the process of law enforcement, many agencies have sent official dispatches to the Supreme People's Court to consider guiding the unified application of the law on measures to secure the performance of civil obligations.

Indeed, on February 2, 2012, the Vietnam Banking Association sent Official Letter No. 17/HHNH to the Supreme People's Court. In this Official Letter, the Vietnam Banking Association stated clearly: " ...the fact that some courts declare a mortgage contract for land use rights of a third party signed between a commercial bank and a third party invalid will lead to unpredictable economic and legal consequences. Obligated parties and third parties can rely on unclear, inconsistent and inconsistent provisions of the 2005 Civil Code, the 2003 Land Law... and implementing guidelines to breach their agreements and evade their responsibilities and obligations by requesting the court to declare the third party's land use rights mortgage contract invalid and the commercial bank's loan is at risk of being converted into an unsecured debt, causing damage to commercial banks and possibly leading to great instability in the economy... The Vietnam Banking Association respectfully requests the Supreme People's Court to provide specific and precise guidance on

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The understanding and application of the law to the above case of accepting mortgage of land use rights as a specific secured asset is regulated by many different specialized laws, currently there is overlap creating risks for lending activities of commercial banks..." 180 .

In addition, on October 27, 2012, the Ministry of Justice also sent Official Letter No. 1345/BTP-ĐKGDBĐ to the Supreme People's Court requesting guidance on the application of the law on land use rights mortgage. In this Official Letter, the Ministry of Justice also stated: " ...the competent people's court's declaration of invalidity of land use rights mortgage contracts to secure the performance of civil obligations of third parties when resolving disputes related to credit contracts leads to the consequence that secured loans of credit institutions become unsecured loans.... directly affecting the operation of the financial and credit market. In the face of the above situation, in order to promptly protect the legitimate rights and interests of the parties involved in the transaction, contributing to promoting the sustainable development of relations in the socialist-oriented market economy, the Ministry of Justice respectfully requests that the Court study and guide local People's Courts to uniformly apply the provisions of the 2005 Civil Code and the 2003 Land Law on

Mortgaging land use rights to secure the performance of obligations of a third party” 181 .

In addition, on March 19, 2012, the State Bank of Vietnam also sent Official Dispatch No. 1573/NHNN-PC to the Supreme People's Court on guidance on the unified application of regulations on secured transactions, in which it requested the Supreme People's Court to guide people's courts at all levels to adjudicate cases of mortgage of land use rights of third parties in accordance with the provisions of law and review the judgments of people's courts at all levels related to the declaration of invalidity of mortgage contracts of land use rights of third parties in accordance with the procedures prescribed by law.

The author finds that the relevant agencies have sent official dispatches to the Supreme People's Court requesting guidance for courts to uniformly apply the law to resolve cases related to credit contract disputes and credit guarantee contracts, which is appropriate. However, the important issue is that the legal system needs to clearly and consistently regulate. At the same time, people's courts at all levels need to have correct awareness and apply the law accurately to enhance the protection of the legitimate rights and interests of commercial banks as well as parties participating in transactions on securing the performance of civil obligations.

In addition to the above difficulties and problems, the practical application of credit guarantee measures and handling of secured assets still faces many obstacles due to the borrower's poor awareness of contract compliance; lack of uniformity and consistency.

180 Vietnam Banking Association (2012), Official Dispatch No. 17/HHNH dated February 2, 2012 summarizing disputes in handling real estate secured assets for loans sent to the Supreme People's Court.

181 Ministry of Justice (2012), Official Dispatch No. 1345/BTP-ĐKGDBĐ dated October 27, 2012 Regarding the request for guidance on the application of the law on mortgage of land use rights sent to the Supreme People's Court.

Inconsistency between legal regulations on credit guarantees and other relevant legal departments such as property law, land law, contract law, dispute resolution law, enforcement law... is an important cause contributing to difficulties and obstacles for banks in handling secured assets.

In summary, through the analysis of the current legal status on credit security measures, it can be seen that the provisions of the law and the practice of implementing the law on credit security measures have not yet created the necessary safety for ensuring safety in credit activities of commercial banks. This reality requires the continued improvement of the law as well as the implementation of the law to prevent risks in credit activities of commercial banks.

3.1.2.4. About credit information

The current status of law and practice of law implementation on TTTD still has some limitations as follows:

Firstly, the credit information system is still fragmented and not yet linked into a highly reliable system . For example, information on the stock market is managed by the Ministry of Finance, credit information is managed by the State Bank, investment information is managed by the Ministry of Planning and Investment, information on enterprises is managed by the Ministry of Industry and Trade... but this information is sometimes not consistent with each other, the information exchange mechanism is not effective. Thus, if commercial banks want to comprehensively understand credit information from customers, it will take a lot of time, effort and cost.

Second, the quality of credit information still does not meet the requirements for risk prevention . In fact, banks have difficulty in exploiting information from customers. For example, information from financial statements of enterprises is often not audited; information of individuals and households is often difficult to determine regarding asset ownership, asset transaction history or other relationships. It is very difficult to find out credit information of customers from tax, customs, police agencies..., mainly provided based on relationships. Therefore, there are still cases

A common case is that the financial report sent to the tax authority shows a loss and tax arrears, but the financial report sent to the bank still shows a profit that the bank does not know or cannot know .

Third, some credit information channels are still limited : information on the stock market in recent times has been weak in terms of publicity and transparency. Information from credit rating companies in Vietnam is still quite new, with a database system that is not really large and diverse enough. In addition, the standards and rating systems of these organizations are temporarily used from different organizations in the world and it is not possible to build a unified system of indicators for Vietnam. Up to now, if not counting CIC, there are only two credit information companies in Vietnam, which are the Vietnam Credit Information and Rating Company (VietnamCredit) and the Vietnam Credit Rating Company (CRV).

182 Le Thi Huyen Dieu (2010), Tlđd (No. 18) , p. 176.

Fourth, the source of TTTD from commercial banks themselves has not yet been effective in practice. A specific manifestation of the above situation is that the credit scoring system of commercial banks to evaluate borrowers still has many shortcomings because commercial banks mainly apply the risk measurement model according to the qualitative method (according to the expert method and classical credit analysis). Therefore, according to author Nguyen Thi Mui, credit assessment in Vietnam is still subjective, based on feelings, many banks rely on their "taste" to build criteria for ranking enterprises 183 . In addition, according to the author

According to Le Thi Huyen Dieu, Vietnamese commercial banks mainly apply the decentralized risk organization model (80%), the single risk control model (87.5%) 184 , so there is no separation of risk management, business and operational functions in the credit union. Therefore, credit officers are the ones who directly handle lending, so it is difficult to avoid negative aspects and not pay attention to the credit information of borrowers.

The above difficulties and problems are mainly due to the following reasons:

+ The Vietnamese legal system regulating credit card activities has only been promulgated or amended in recent years, so it is difficult to avoid the existence of legal "gaps" regulating credit card activities. For example, credit card activities that commercial banks can access from tax authorities, customs authorities, police authorities... are very difficult due to unclear legal mechanisms...

+ The operation of the credit information system in our country is still new. This has affected the quantity and quality of credit information. In addition, commercial banks still mainly focus on credit information sources from data at their own banks, not on information from other sources. Thus, to effectively implement credit information activities in practice, it takes time and it is important that commercial banks pay more attention to many credit information sources that they can exploit.

+ The coordination mechanism between entities capable of providing credit information sources is still limited. Therefore, the credit information system is still fragmented, patchwork, and has not yet been linked into a highly reliable system as mentioned above. In reality, to collect many sources of information, commercial banks must "knock on the door" of many different places to collect credit information.

+ In fact, after more than 20 years of establishment and operation, CIC has achieved some positive results, however, it must be said that the quality of information provided by CIC has not really met the risk prevention needs of commercial banks. The reason for this phenomenon is that CIC operates as a revenue-generating public service unit, collecting information according to the tasks assigned by the State. Therefore, the provision of information about borrowers of credit institutions by CIC is only a coping measure to complete the assigned tasks 185 .

183 Khanh Linh, “Vietnam's credit rating still relies on sentiment” see at: http://cafef.vn/tai-chinh-ngan- hang/xep-hang-tin-dung-cua-viet-nam-con-dua-vao-cam-tinh-2012092107437206ca34.chn. Accessed on October 24, 2013. 184 Le Thi Huyen Dieu (2010), Tlđd (No. 18) , p. 87.

185 Nguyen Thi Thuy (2000), Tlđd (No. 26) , p. 87.

+ Credit information companies are limited in their right to provide information to credit institutions, accordingly, each credit institution is only allowed to commit to providing credit information to one credit information company (Clause 5, Article 7 of Decree 10/2010/ND-CP). According to the State Bank, in Vietnam there are currently 4 State banks owning over 50% of charter capital, 31 joint stock commercial banks, 8 banks with 100% foreign capital and 02 joint venture banks 186 . Article

This will affect the number of credit institutions and the supply of credit institutions will not fully reflect the overall picture of credit relations in the market.

In short, the credit information system plays a very important role in ensuring safety in the credit activities of commercial banks. In recent times, the law on the credit information system has been gradually improved; the credit information system has been built in a professional direction. However, the current legal status on the credit information system has not met the requirements of risk prevention in the credit activities of commercial banks, and needs to be further improved in the coming time.

3.1.2.5. On the inspection and supervision work of the State Bank

Through the provisions of law and the practice of banking inspection and supervision, the State Bank has fulfilled its responsibility in maintaining the stable and effective development of the Vietnamese commercial banking system, thereby contributing to the socio-economic development of the country. However, the current state of law and practice of law enforcement on banking inspection and supervision still have certain limitations, affecting the safety of banking operations such as:

- According to the summary of the State Bank, the inspection and supervision activities have not been really effective in ensuring the safety and soundness of the operations of the credit institution system and promoting financial stability. In the case of Huynh Thi Huyen Nhu and accomplices 187 , the Trial Council made recommendations to strengthen the mechanism for monitoring the safety of commercial banks' operations due to loopholes in the State Bank's monetary business management by recommending that the Banking Inspection and Supervision Agency clarify the causes in order to

There have been prolonged violations, causing particularly serious consequences, caused by individuals and groups in the Vietnam Joint Stock Commercial Bank for Industry and Trade system.

In addition, Decree 26/2014/ND-CP has provisions on inspection and supervision of banks based on risk factors, but these are only general and general provisions, so they do not meet the requirements of inspection and supervision in the new situation.

- The law on banking inspection and supervision has not yet fully reflected the basic principles of effective banking supervision according to Basel 189 (see Appendix 3). Specific contents that have not yet reflected Basel principles include: accountability, resources and protection.

186 Statistics from data published on the State Bank's website ( http://www.sbv.gov.vn - accessed July 31, 2017).

187 Ho Chi Minh City People's Court (2014), Judgment No. 46/2014/HSST dated January 27, 2014 on the case of Huynh Thi Huyen Nhu and accomplices, page 157.

189 See also: Basel Committee on banking supervision (2011), ibid (No. 153).

legal framework for inspection and supervision agencies (Principle 2); techniques and tools for supervision (Principle 9)...

- Current laws do not have specific instructions on the procedures for bank inspection and supervision. The 2010 Law on the State Bank of Vietnam only stipulates the most basic contents on bank inspection and supervision from Article 49 to Article 61. Decree 26/2014/ND-CP and Circular 03/2015/TT-NHNN also do not clearly stipulate the procedures for bank inspection and supervision (except for Circular 03/2015/TT-NHNN regulating the procedures for extending the duration of an inspection to more than 70 days). Therefore, the current procedures for conducting inspection and supervision are still implemented on the basis of the 2010 Law on Inspection, such as Circular 05/2014/TT-TTCP dated October 16, 2014 on the organization, operation, working relationship of the inspection team and the procedures for conducting an inspection issued by the Government Inspector General. The author found that, only when the order and procedures of inspection and supervision

issued, then some effective banking supervision principles according to Basel 190 will be

specific institutionalization. The existence of legal "gaps" in the order and procedures for bank inspection and supervision will limit the effectiveness of inspection and supervision work to ensure the safety of banking operations in Vietnam today.

- In addition, the inspection and supervision of banks also has organizational limitations, that is: in addition to the Inspection and Supervision Agency of the State Bank, there is also an inspection and supervision department at the branches of the State Bank of provinces and centrally-run cities 191 , which is under the leadership of both the Branch Director and the direction of the Inspection and Supervision Agency of the State Bank (Article 9 of Decree 26/2014/ND-CP). Such an organizational model is too cumbersome, overlapping, limiting the effectiveness of inspection and supervision. 192 ; The coordination of supervision between the State Bank and other domestic and international agencies is still limited.

It is undeniable that the role of the State Bank's inspection and supervision activities in creating stability and health for the Vietnamese commercial banking system in recent times. However, the limitations and shortcomings of the positive law as well as the difficulties and obstacles in the practical implementation of the law on the State Bank's responsibility in risk prevention and creating safety in the credit activities of commercial banks show us the need for solutions to this issue.

3.1.2.6. On debt classification and risk provisioning

The main limitations of the law on debt classification, risk provisioning and their implementation in practice include:

190 Principles 14 to 29 of the document “Core Principle for effective banking supervision” issued by the Basel Committee mainly stipulate the requirements of the inspection and supervision agency for banks, expressed through specific procedures and processes for inspection and supervision.

191 Currently, according to Article 6 of Decree 26/2014/ND-CP, the establishment of an Inspection and Supervision agency under the State Bank of Vietnam branches in areas where there is no Inspection and Supervision Department under the Banking Inspection and Supervision Agency.

192 Le Thi Huyen Dieu (2010), Tlđd (No. 18) , p. 117.

Firstly , the current law on debt classification methods has not yet fully reflected the risks of the credit granted to customers. Indeed, according to the provisions of Circular 02/2013/TT-NHNN dated January 21, 2013 of the Governor of the State Bank of Vietnam regulating the classification of assets, the level of provisions, the method of setting up risk provisions and the use of provisions to handle risks in the operations of credit institutions and foreign bank branches, amended by Circular 09/2014/TT-NHNN dated March 18, 2014 of the Governor of the State Bank of Vietnam ( hereinafter referred to as Circular 02/2013/TT-NHNN) , the quantitative method is mainly used. However, this method is mainly based on information provided by the Credit Information Center (CIC) and the term of the debt, without mentioning other factors such as the financial situation, business results of the customer... to accurately determine the risk of the debt. For banks classifying debt by the qualitative method, they must meet the conditions prescribed in Clause 2, Article 11 of Circular 02/2013/TT-NHNN. The application of debt classification by the qualitative method must simultaneously apply debt classification by the quantitative method to classify the debt into a group with a higher risk level (Clause 6, Article 11 of Circular 02/2013/TT-NHNN).

However, due to the qualitative assessment method, there is still subjective human intervention, so the debt classification management and observation system is still weak193 .

The author believes that in order to classify debt objectively and scientifically, it is necessary to combine qualitative and quantitative risk measurement methods as some economic research projects have recently published 194 . At the same time, debt classification needs to be based on many factors such as: credit appraisal results, credit information from CIC, from credit information companies, from other sources of credit information of customers, assessments of credit rating companies and importantly, assessments of the internal credit rating system (IRB) organized at commercial banks that have been recommended for application by Basel 2 195 . Thus, the law needs to regulate the "connection" of the above factors to create a unified entity for objective and scientific assessment of customer debts.

Second , the law on the frequency of customer risk assessment still does not allow for the fastest identification of debt risks. Indeed, Clause 1, Article 8 of Circular 02/2013/TT-NHNN stipulates that the frequency of debt classification is at least once a quarter. This is only true for assessing risk factors that change slowly. As for risk factors that change daily or monthly, it is difficult for commercial banks to quickly and accurately assess (identify).

Third , the practical implementation of debt classification and risk provisioning at commercial banks is still limited as follows:

193 Le Thi Huyen Dieu (2010), Tlđd (No. 18) , p. 144.

194 Le Thi Huyen Dieu (2010), Tlđd (No. 18), p. 137.

195 See also: Basel II (2004), ibid (No. 55), paragraph 49.

+ Many banks still classify debts and set aside risk provisions incorrectly according to regulations. According to author Hoang Xuan Que, 93% of inspected bank branches made mistakes in classifying debts and extending debts 196 ; In addition, many banks announced bad debts but did not accurately reflect the true nature of credit risks. The main reasons for this situation are: (i) The internal credit rating system at many commercial banks in Vietnam has not yet accurately assessed customers' debts at credit institutions; (ii) Commercial banks have not yet accounted for

Debt settlement according to international standards because if accounting is done according to international standards, bad debt will increase, leading to high risk provisions, increasing costs, directly affecting the bank's profits, making it difficult to expand the operating network.

+ In fact, when the reserve fund has been used to handle risks, the debt is "moved" from the balance sheet to the off-balance sheet. However, it is necessary to recognize that the debt still exists and it needs to be thoroughly recovered according to the provisions of Article 17 of Circular 02/2013/TT-NHNN. However, for many commercial banks, the debt that has been moved off-balance sheet is considered "finished", the attention or active handling of the debt is neglected .

In summary, although the law on debt classification and risk provisioning has been amended and supplemented to better suit the current banking business practices in Vietnam, there are still some problems and difficulties in both the current status of legal regulations and their practical application. That requires amendments and supplements to ensure safety in the credit activities of commercial banks.

3.1.2.7. On minimum capital adequacy ratio

According to Clause 1, Article 9 of Circular 36/2014/TT-NHNN, the minimum capital adequacy ratio is the ratio reflecting the capital adequacy of credit institutions and foreign bank branches based on the value of equity capital and the level of risk in the operations of credit institutions and foreign bank branches. Although Vietnamese law has gradually approached the Basel Convention on minimum capital adequacy, the components for calculating the minimum capital adequacy ratio are not necessarily consistent with each other. Specifically, according to Basel 2, total assets "with" risk must take into account credit risk, market risk and operational risk, while Circular 36/2014/TT-NHNN has obviously "applied" the risk coefficient (according to Part II, Appendix 2 of Circular 36/2014/TT-NHNN), without clearly stating the basis for applying such risk coefficient. This results in the capital adequacy ratio of commercial banks in our country being inconsistent with the capital adequacy ratio according to international practice. In addition, the method of calculating the capital adequacy ratio of commercial banks in Vietnam is according to the Vietnamese Accounting Standards (According to Clause 1, Article 1 of Decision 16/2007/QD-NHNN, amended by

196 Hoang Xuan Que, “The Vietnamese accounting standards system has not yet reflected the reality of bad debts of commercial banks”, Journal of Financial and Accounting Research, No. 06 (47) 2007, p. 24.

197 Hoang Xuan Que, Tlđd (No. 196) , p. 24.

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