Revising Circular 16: More positive impact on corporate bond market

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The corporate bond market needs more supportive policies. Photo: Internet

Expectation to increase liquidity

The SBV has just announced a draft Circular amending and supplementing several articles and suspending the effect of Clause 11 Article 4 of Circular No. 16/2021/TT-NHNN dated November 10, 2021, of the Governor of the State Bank of Vietnam, regulating credit institutions, foreign bank branches buying and selling corporate bonds. According to the SBV, the trading activities of corporate bonds of credit institutions have many potential risks, such as there is no regulation that the conditions for bond issuance are to have financial capacity; the mechanism for inspecting and supervising the capital use of bond issuance is not strict; the ratio of bonds with collateral is large, but the actual quality of the collateral is not high.

Therefore, the draft of the SBV proposes to amend and supplement some of these important contents. The draft allows credit institutions to buy back unlisted corporate bonds which are issued in the same lot/same issue as unlisted corporate bonds that credit institutions have sold before December 31, 2023.

According to estimates of VNDirect Securities Company, the maturity value of corporate bonds in 2023 is about VND 252,000 billion, up 64% year-on-year; the pressure of maturity will soar in the second and third quarters of 2023. Therefore, experts said that the above provisions of the draft Circular amending Circular 16 would increase liquidity for the market, helping remove pressure on commercial banks and issuers when many investors are requesting the bond settlement.

Commenting on this issue, Ms Dinh Thi Quynh Van, Director General, Head of Tax Advisory Service, PwC Vietnam, affirmed that one of the key problems of the corporate bond market today is liquidity. Therefore, the draft Circular amending Circular 16 allows banks to buy back or resell corporate bonds to help create better liquidity and support businesses to raise capital in the bond market. Because compared to other countries, Vietnam's corporate bond market is still very low, not vibrant, and not a main channel to attract capital for businesses.

Sharing the same view, according to Mr Nguyen Quang Thuan, Chairman of FiinGroup, the regulation allowing credit institutions to buy back unlisted corporate bonds that credit institutions have previously sold will reduce the pressure on credit institutions. This will also facilitate monitoring the bank's credit quality because the issuer is usually a borrower of the credit institution and contribute to reducing "floating" bonds in the market owned by individual investors.

More risk control measures

According to many experts, the draft Circular amending Circular 16 has many positive points to make the corporate bond market healthy, helping the market develop sustainably. In particular, the draft stipulates that credit institutions are only allowed to buy corporate bonds with a debt ratio (including the expected volume of bonds) that is not five times higher than the equity reported in the most recent quarter's financial statements. In addition, credit institutions are not allowed to buy corporate bonds in case corporate bonds are issued to contribute capital, buy shares, buy capital contributions in other enterprises or for business cooperation or investment cooperation with other enterprises.

The draft adds a regulation that credit institutions are only allowed to buy corporate bonds issued to supplement working capital when they can manage the revenue from the business activities of issuers and collect documents to prove the use of working capital corresponding to the bond value according to the working capital circle during the holding period of corporate bonds. According to the SBV, this regulation ensures the supervision of the use of cash flow from the issuance of corporate bonds.

The draft also adds a regulation that credit institutions must use non-cash payment services to purchase corporate bonds to the issuer and the bond seller. This regulation is to help support the monitoring and supervision of the use of proceeds from bond issuance. In addition, the draft stipulates that credit institutions have the right and obligation to inspect and supervise the use of bond proceeds by the issuers to ensure that the proceeds from bond issuance are used for the right purposes in the plan and commitments with credit institutions and following the internal regulations.

It is concerned that allowing credit institutions to buy bonds will transfer risks from bond issuers to credit institutions, Ms. Dinh Thi Quynh Van said that risk control must start from issuers, and regulatory agencies. The regulator must set standard conditions for bond issuers in terms of transparency, while the credit institution is an investor, so they will consider the profit. According to Ms. Van, the credit institution is also a financial institution, so it will have a calculation tool to avoid risks.

However, Circular 16 still has some problems not mentioned in this draft. For example, the Real Estate Association of Ho Chi Minh City proposed the SBV to amend Circular 16 to allow credit institutions to buy corporate bonds for debt restructuring. In addition, the draft does not change the regulation prohibiting credit institutions from buying corporate bonds for a capital contribution of a share purchase in other enterprises. Therefore, according to experts, the draft Circular amending Circular 16 only opens a narrow door for credit institutions to handle the volume of corporate bonds in hand rather than to "rescue" the corporate bond market, but this also shows the cautiousness of regulators in the context of increasing risks to the global banking system.

The draft Circular amending Circular 16 is still in the process of collecting comments. But in general, it has also brought many expectations for policy changes, helping the banking sector return to transactions in the corporate bond market. At the same time, this amendment continues to show the Government's attention to the difficulties of the financial market after the issuance of Decree 08/2023/ND-CP amending and supplementing decrees on issuing individual corporate bonds and Resolution 33/NQ-CP on removing difficulties for the real estate market.