Bad debts spell grim truth for banks

(ĐTTCO) - Although banks were successful in curbing a substantial balance of bad debts by the end of 2019, the entire banking industry is now facing serious obstacles after the sudden outbreak of the Covid-19 pandemic, and under fears of a prolonged period to curb the spread of the disease, commercial banks are now gearing up in preparation for coping with worst case bad debt scenarios.

Banks have to live with bad debt.

Banks have to live with bad debt.

Bad debt outbreak ahead

At the end of 2019, the State Bank of Vietnam (SBV) had announced a series of optimistic packages to tackle the bad debt situation that had been plaguing the entire banking industry for years. As of December 2019, the non-performing loan ratio of Credit Institutions (CIs) was estimated at 1.89%, which was less than 2%. The agency managing the banking industry from 2012 to the end of December 2019, revealed statistics of bad debt at VND 1,064,000 bn. Accumulated since 15 August 2017 to the end of December 2019, almost VND 305,700 bn of bad debts were handled under Resolution 42, which excluded the use of risk provisions and debt sales to Vietnam Asset Management Company (VAMC) through issue of special bonds. On an average, from 15 August 2017 to December 2019, each month, the system handled about VND 10,500 bn of bad debts, nearly VND 4,900 bn more than the average amount handled from 2012-2017, before Resolution 42 took effect.

However, only two months after the announcement of the above information, the SBV issued a poor forecast of a bad debt scenario for 2020, when the economy was suddenly hit by the outbreak of the Covid-19 pandemic. Soon after the disease was detected, the financial statements of the first quarter of 2020 made banks even more worried on the condition of bad debts, which had reversed in effect to a sharp increase. In the last three months, credit growth has slowed while bad debts have increased across several banks. In Vietcombank, in particular, the bad debt ratio in 2019 had been down from 0.97% to 0.78%, which in the first quarter of 2020 went up, with the value of non-performing loans (NPLs) increasing by 7% to touch VND 6,191 bn, and non-performing loans showing an increase by 0.82%.

NPLs at Sacombank also increased by almost VND 300 bn to reach VND 6,046 bn and the ratio of bad debts on the balance sheet to ratio of total outstanding loans increased from 1.94% to 1.97%. At TPBank, the value of NPLs increased by 53% to reach VND 1,884 bn, mostly falling into group-4 debt, which was up 61% to reach VND 771 bn, bringing the NPL ratio from 1.28% to 1.87% at the end of March. For SaigonBank, NPLs increased by 95% in the first quarter to reach VND 377 bn, mainly due to a sharp increase in sub-standard debts, pushing the ratio of NPLs to a sharp increase from 1.96% to 2.65%. At BacABank, the bad debt ratio increased from 0.69% to 0.79%; at VIB from 1.96% to 2.19% and at SeABank from 2.31% to 2.34%.

According to experts, in the first quarter, the banking sector actively restructured the repayment period, reduced interest rates, and did not transfer debt groups to customers affected by Covid-19 pandemic. Accordingly, the risk debts are still frozen, but by the end of June or by the end of September, the time for debt restructuring and debt rescheduling will end and it will be difficult for enterprises to recover immediately and will take a much longer time. This time when bad debt is most clearly revealed, it means that the risk of a bad debt outbreak is still ahead.

Gearing to face risks

Via many recent online conferences held within the banking industry, Mr. Nguyen Quoc Hung, Head of Credit Department of Economic Sectors, has emphasized that due to the impact of the prolonged Covid-19 pandemic, the bad debt ratio in the entire system is expected to last throughout 2020. There will be fluctuations, that will affect the implementation progress of debt structures associated with dealing with bad debts of Credit Institutions and the plan to revive weakened Credit Institutions. In this regard, experts believe that it is best to accept the fact that rising bad debts are hard to stop because now there are many businesses that have no orders, or ongoing production, and are stranded with unsold goods.

Data from the first quarter financial report also shows that banks are gearing up to deal with future debt risks. Specifically, in addition to reducing debt rescheduling, reducing lending interest rates, the buffer against credit loss is also widening. The amount of VND 2,152 bn is a risk provision made by Vietcombank in the first quarter, an increase of nearly 43% compared to the same period last year. TPBank also raised the provision to VND 1,432 bn, up 19%. ACB's provision for credit losses was nearly VND 93 bn compared to nearly VND 16 bn in the same period last year.

Strengthening the provisions for risks in the coming quarters will still need to be maintained. In addition, for the provision of each loan, it is also necessary to make provision for the risk of each debt group.
The provision amounts have strongly strengthened from the first quarter of this year, meaning that banks are preparing to deal with an increase in bad debts in coming times. However, many forecasts say that by the end of the second quarter, the business results of commercial banks may be less positive because interest, fees and bad debt collection will decrease when banks have to increase preferential loans to help businesses rehibilitate. Therefore, finance experts recommend that strengthening the provision for risks in the coming quarters still needs to be maintained, in addition to the provision for each loan, it is also necessary to make provisions for the risk of each debt group. As such, banks will achieve high levels of bad debt coverage and have better conditions to deal with bad debts.

Under the present uncertain scenario, all banks have to accept a sharp decline, and face the fact that profits cannot be at the same level as they were in previous years. That is the right way for banks to approach the current Covid-19 situation. In the general context, the State should promptly implement major policies to promote appropriate fiscal and monetary policies to shorten the difficult phase for all businesses, in order to alleviate or lessen the risk of bad debts spiraling out of hand.

Thiên Minh

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