One of the key tasks of the banking system in 2019 is still focusing on handling bad debts.
On the first days of the New Year, the government issued Resolution 01/NQ-CP on the main tasks and solutions to carry out the socio-economic development plan. In particular, for the banking sector, the government required a solution to increase capital for commercial banks and commercial banks in which the state holds dominant shares. The target is to bring the on-balance sheet bad debt ratio to below two percent and the ratio of bad debts and debts which can potentially become bad debts (including the unsettled bad debts and bad debts sold to Vietnam Asset Management Company (VAMC) as well as the restructured debts which can potentially become bad debts) to below five percent.
Meanwhile, according to the National Financial Supervisory Committee (NFSC), reports of credit institutions (CIs) showed that by the end of 2018, the bad debt ratio slightly declined compared to the end of 2017 to 2.4 percent (2.5 percent in 2017). The provisions for credit risks increased by about 30.1 percent compared to the end of 2017.
The ratio of credit risk provisioning to bad debts improved to 78.2 percent (65.4 percent in 2017), but not including the bad debts sold to VAMC. Notably, the value of bad debts settled in 2018 increased by about 30 percent compared to 2017.
Pham Hong Hai, general director of HSBC Vietnam said that in 2018, the profitability and asset quality of banks have been greatly improved. The bad debt ratio has continuously declined throughout the years from the peak in 2012, partly coming from CIs’ sale of bad debts to VAMC.
In addition, the government has adopted policies to support the bad debt settlement process, including measures to facilitate both banks and VAMC in seizing secured assets when borrowers go bankrupt. This has increased the ability to recover the secured assets. In addition, the warming of real estate market in the past few years has also made it easier for banks to handle the assets secured by real estate.
However, financial experts assessed that the bad debt ratio of Vietnam is relatively higher than other countries in the region, as the bad debt is around 5.3 percent of the total outstanding loans and the ratio of risk provisioning to bad debts reaches 47 percent.
Notably, the speed of handling bad debts may gradually slow down when the economy is in the final stage of the growth cycle. The slowdown of real estate market is also an important highlight when most of the secured assets are real estate.
Meanwhile, many commercial banks, particularly those focusing on consumer finance sector, are recording the return of bad debts after a period of booming growth. The proportion of irrecoverable debts has increased sharply at some large-scaled banks.
On the other hand, year 2019 is the end of the five-year roadmap when the bad debts previously sold to VAMC will be returned to banks if they are not yet settled.
Up to now, only five banks in the system have cleared off all VAMC bonds, including Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank), Vietnam Technological and Commercial Joint Stock Bank (Techcombank), Military Commercial Joint Stock Bank (MB), and Asia Commercial Joint Stock Bank (ACB). Other banks have been making efforts and expect to settle all VAMC bonds in 2019, including Orient Commercial Joint Stock Bank (OCB), Vietnam Prosperity Commercial Joint Stock Bank (VPBank), Nam A Commercial Joint Stock Bank (NamABank), Export Import Commercial Joint Stock Bank (Eximbank), etc. However, this target is not easy to be completed, particularly for banks with high bad debt volume.
Among the notable names, Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank) is the one that managed to bring bad debt ratio to below three percent in 2018 and settled a huge amount of bad debts valued at nearly 20 trillion dong from the previous time. Nevertheless, the high-value secured assets that need to be settled still require the bank to make more efforts in 2019 in order to reduce the bad debt ratio to the lowest possible level.
Eximbank and Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV) are also in the process of accelerating the bad debt handling to soon settle the VAMC bonds in 2019. However, leaders of these banks admitted that the debt handing process is facing certain difficulties when the sale of secured assets takes a lot of time.
Dr Tran Du Lich, member of the government Economic Advisory Group said that the issuance of Resolution 42 has partly helped banks remove difficulties in selling secured assets, but it does not mean that the sale of secured assets which are real estate and the recovery of bad debts would be speeded up. The reason is that the sale of secured assets is still involved the court, thus it is costly and time consuming.
To accelerate the bad debt handing, according to Dr Lich, the market for buying and selling debts should be established. When this market operates excitingly with participation of investors, especially foreign ones, the process of dealing with bad debts can be much accelerated.
Meanwhile, Bao Viet Securities Company (BVSC) said that the risk of bad debt ratio increasing again in 2019 is insignificant. According to BVSC, the asset quality of banks is still good because the bad debt ratio of the debt group 2 has not shown signs of increase. In addition, banks now have better resource to handle bad debts, especially from the risk provisioning.
In addition, the risk of bad debts sold to VAMC returning to the balance sheets of banks is not high, although most of the debts sold to VAMC in 2014 and 2015 will mature in 2019 and 2020. The reason is that the majority of these bonds are located at restructuring banks, and they have more than five years to handle VAMC bonds.
