Minimizing New Bad Debts

The Prime Minister’s Directive 01/CT-TTg on urgent tasks required the State Bank of Vietnam (SBV) to strengthen inspection, examination and supervision of credit institutions; guide them to execute solutions to improve credit quality, speed up the handling of bad debts, control and minimize emerging bad debts.

The SBV also needs solutions to encourage credit institutions to lend enterprises and people; direct credit flows to production and business fields and priority fields; immediately handle and restructure two weak commercial banks approved by competent authorities; and continue to develop plans to handle and restructure remaining weak banks.

Rising bad debts

Data showed that the bad debt ratio in the on-balance sheet in 2021 was 1.9%, higher than 1.69% in 2020. However, the possible bad debt is much higher than the above figure because if bad debts sold to the Vietnam Asset Management Company (VAMC) are counted, the ratio is up to 3.79%.

In the midst of the COVID-19 pandemic, banks restructured debts borrowed by customers affected by the pandemic. If unpaid debts are taken into account according to Circulars 01, 03 and 14, this ratio can increase to 7.31%.

According to SBV Deputy Governor Dao Minh Tu, more than 10 years ago, overheating economy, high inflation and a real estate bubble caused bad debts of the banking system to swell to 12%. The banking industry had to struggle for many years after that with the determination of the political system and the introduction of Resolution 42/2017/QH14 to almost handle bad debts before the COVID-19 pandemic outbreak. The SBV determined the size and extent of bad debts that may occur in 2022 and beyond to have appropriate solutions to prevent bad debts from going up.

Currently, the SBV is developing a legal framework on asset quality and bad debt settlement, including Circular 11/2021 on debt classification and provisioning; draft amendments to Circular 52/2018 on credit institution assessment; Circular 16/2021 on tightened trading of corporate bonds by credit institutions and draft amendments to Decree 153/2020 on the corporate bond market.

Besides, solutions to deal with nonperforming loans were also discussed because Resolution 42 is set to expire in 2022 and the SBV is speeding up the settlement of zero-dong banks.

Sharp increase for risk hedging

Currently, the debt restructuring period only lasts until June 30, 2022. Then, the real picture of bad debt of banks will be clearer and a likely sharp increase in bad debt is what banks have anticipated. Many have prepared to deal with this pressure and have sharply raised their risk provisioning to strengthen the buffering support.

Vietcombank has raised its hedge against bad debt on the balance sheet to 424%, a record high in the banking industry. By the end of 2021, its bad debts were VND963.67 trillion and 0.63%, the scale of bad debt on the balance sheet and the provision fund were VND6.07 trillion and VND25.74 trillion. Thus, if the lender uses its entire provision fund to bring bad debt to zero, it still has tens of trillions of dong left.

BIDV also increased provisioning in 2021 and brought its hedge for the nonperforming loan to the highest-ever level of 235%. VietinBank reported its bad debt coverage ratio at 171% in 2021 from 132% in 2020. Agribank raised its provision for bad debt from 120% in 2021 to 140% in 2022.

Joint stock commercial banks also boosted their coverage ratio for bad debts, with MB from 134% to 233%, ACB from 160% to 198%, and Techcombank from 171% to 184%.

Although it is time to be optimistic about bad debts because banks are applying the SBV’s Circular 14 on reducing, postponing, and maintaining debt categories to support customers affected by the COVID-19 pandemic, as a result, bad debts have not been clearly revealed. However, according to many experts, the recovery rate of restructured loans will improve when the pandemic is controlled and businesses gradually resume their business operations. At that time, banks will recover and handle bad debts better.

Dr. Nguyen Quoc Hung, General Secretary of the Vietnam Banking Association, said, the banking industry will need to review the implementation of Resolution 42/2017 to propose and submit the Law on Bad Debt Settlement to the lawmaking National Assembly for introduction to have more effective tools against bad debts. The regulatory framework for the handling of bad debts is very necessary. Then, bad debt settlement will be governed by its own laws that give higher legality and help banks and other relevant authorities to coordinate to handle bad debts more effectively.

 By Quynh Chi, Vietnam Business Forum