However, though the process of dealing with bad debts has been favorable so far and the goal of bringing the total bad debt to less than 3% is quite attainable in 2020, the present Covid-19 epidemic situation will certainly put this process at risk.
Efforts in handling bad debts
After years of reeling under bad debts, there had been many positive signs in 2019, when by the end of the year, 22 commercial banks showed a slight fall in total bad debts from VND 80,300 bn to VND 79,780 bn. ACB, BacABank and Vietcombank brought the bad debt ratio to less than 1%; MSB decreased from 3.01% to 2.04%; SHB decreased from 2.4% to 1.83%; and VIB from 2.52% to 1.7%.
In the bad debt structure of these 22 commercial banks, doubtful debts (4th group) plummeted 18% while subprime loans (3rd group) and potentially irrecoverable debts (5th group) increased slightly by 3% and 6% over the previous year. At the same time, Kienlongbank, Vietcombank, VIB, Techcombank, TPBank, NamABank, OCB, Agribank, SeABank, MB and VPBank announced that they were no longer in debt at Vietnam Asset Management Company (VAMC).
In 2019, the provision expenses for credit losses also increased compared to the same period in 2018 to soon clean the balance sheet. Accordingly, the banking group has completed handling of outstanding debts, and the risk provision ratio to cover bad debts is maintained at 100%. Many banks in the restructuring group are also strengthening their risk provisions to increase LLR to 70% or 80%.
In general, the State Bank of Vietnam (SBV) said that by December 2019, the bad debt ratio of the whole system was estimated at 1.89%, fulfilling the goal of bringing the bad debt ratio to less than 2%. From 2012 to the end of December 2019, credit institutions were estimated to handle VND 1,064 mn of bad debts. Accumulated from 15 August 2017 to the end of December 2019, it is estimated that the whole system would handle VND 305,700 bn of bad debts, determined under Resolution 42, which excluded the use of risk provisions and the debt sale to VAMC through special bond issuance.
Thus, on an average, the whole system handles about VND 10,500 bn per month, VND 4,900 bn higher than in the period 2012-2017, before Resolution 42 was in effect. At the forum that took place in early 2020, Mr. Can Van Luc, chief economist at BIDV, assessed that the quality of loans was getting better, bad debt ratio decreased to 1.89%, and both potential bad debts and debt at VAMC were at 4.6%. Accordingly, the plan to bring bad debts to below 3% by 2020 is quite feasible.
Unexpected epidemic situation
The positive scenario in the current bad debt situation could be at risk now with the Covid-19 epidemic. According to Mr. Nguyen Quoc Hung, Head of Credit Department of Economic Industries, the impact of the disease has led to customers being unable to pay their debts on time, thereby increasing the ratio of overdue debts and bad debts. Currently, 23 credit institutions have reported to the State Bank of Vietnam that an estimated VND 926,000 bn of outstanding loans have been affected by the Covid-19 epidemic, accounting for 14.27% of the total of these 23 credit institutions, and accounting for about 11.3% of outstanding loans of the whole system.
The current Covid-19 epidemic is complicated and unpredictable. The sudden spurt in the epidemic across the globe is threatening many economies, including the Vietnamese economy. If the epidemic is not brought under control soon, many banks will be hit hard because NPLs will increase and the situation will become more worrisome and fragile.
According to banks, they can decide and apply the interest rate reduction immediately, but rescheduling of debt payment is still awaiting, for the SBV to issue specific instructions for implementation. The Deputy General Director of a joint stock commercial bank said that enterprises will still try to pay interest on time so as not to fall into the bad debt group, while waiting for the SBV to issue specific instructions. But if delay lasts longer, businesses will be exhausted because the current business situation is very bleak.
In addition, according to the draft, the total time for rescheduling does not exceed the initial credit extension period under the signed contract. Debts which have been rescheduled or maintained in the group of debts but customers still cannot pay upon maturity, or credit institutions assess customers unable to pay debts, will classify as debts, and use provisions to handle credit risks as prescribed. The epidemic is still complicated and its impact on business is expected to last even after it ends. Therefore, the risk of customers being unable to pay their debts on time is still a potential risk, despite debt restructuring.
Epidemic conditions are making bad debts worse. In 2014 and 2015, VAMC purchased the largest amount of debt from credit institutions of about VND 190.00 bn. This current epidemic situation has made the efforts to lower bad debts even worse. Excluding credit institutions approved for restructuring, the normal maturity date of VAMC bonds is five years, which means that 2020 is the time when many credit institutions must complete the withdrawal of all VAMC bonds. At the same time, they have to resolve the old debt problem and support customers to overcome this period of epidemic. This year is forecast to be a difficult year for the entire banking industry.