Central bank tightens banks' corporate bond purchase

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Under Circular No. 15/2018/TT-NHNN issued on June 18, which revises Circular No. 22/2016/TT-NHNN dated June 30, 2016, the central bank prohibits them from buying bonds for the purpose of restructuring the issuers’ existing loans, effective from August 2 this year.

The central bank also stipulates that for corporate bond purchase, credit institutions and foreign banks’ branches must have an internal credit rating system besides the system to rate the bond issuers. They are also required to issue internal regulations on the purchase of corporate bonds in accordance with the current legal regulations.

Accordingly, internal supervision regulations on corporate bond purchase, especially bonds issued for the purpose of implementing programmes and projects in areas of potential risk as identified by the assessment of credit institutions and foreign banks’ branches, must be established to detect risks and violations to ensure the recovery of principal and interest of corporate bonds.

Credit institutions and foreign banks’ branches must also issue internal regulations on specifying the areas of potential risks as well as their credit and investment policies on the areas. It is estimated that some 75 percent of corporate bond buyers in Vietnam are commercial banks, which makes these bonds no different from bank loans. Bui Quang Tin, professor at the HCM Banking University, told the Dau tu (Vietnam Investment Review) that some companies sold bonds to banks to restructure their existing loans rather than raise new capital, which defeated the original purpose of bond issuance.

According to Tin, outside investors, especially individual investors, usually have no access to a firm’s business activities. Vietnam does not have an independent credit rating agency, which makes bond investment risky, as investors do not know which issuer can pay back their bonds. To attract more international investors, Tin suggested setting up a credit rating agency, as well as diversifying bond offers to the market.

Besides, financial experts also believed that a streamlined legal framework will pave the way for more corporate bond issuers as fixed-income products, such as bonds, are still attractive to investors, thanks to its safety and lower risks.