Hard limit for credit institutions buying corporate bonds

The State Bank of Vietnam (SBV) in Circular No.16/2021/TT-NHNN, published on November 10, 2021 approved the acquisition and selling of corporate bonds by credit institutions and foreign bank branches.

One notable provision is that credit institutions are only permitted to buy corporate bonds if their bad debt ratio is less than 3 per cent based on the latest classification period, provisions to mitigate risks in credit institution operations prior to the purchase of corporate bonds.

First and foremost, credit institutions are forbidden from obtaining corporate bonds issued with the intent of settling the issuing firms’s debts.

Second, credit institutions are prohibited to purchase corporate bonds issued for the purpose of raising capital or acquiring shares in other businesses.

Third, credit institutions are not permitted to buy corporate bonds to expand operational capital.

Furthermore, credit institutions are not allowed to sell corporate bonds to subsidiaries in their ecosystem, unless the credit institution is a compulsory transferee and sells corporate bonds to a commercial bank subject to compulsory transfer.

The SBV’s new regulation was introduced amid the rapid expansion of the corporate bond market.