However, if an enterprise does not show recovery, this support comes at a risk, affecting the process of reducing the bad debt ratio.
Bad debt increase
At the beginning of 2020, the State Bank of Vietnam issued Directive 01/CT-NHNN on the implementation of key tasks in the banking sector. In this, the NPL ratio on the balance sheet should come below 2%; the ratio of bad debts on the balance sheet of credit institutions, and bad debts sold to Vietnam Asset Management Company (VAMC), and debts that have implemented debt classification measures to be less than 3%.
However, as per the report to the National Assembly, by the end of the year, the State Bank of Vietnam stated that the sudden negative impact of the Covid-19 pandemic made the goal of reducing the overall bad debt ratio below the 3% mark to be moved to 2021. Specifically, data from the State Bank showed that in 2016, the on-balance bad debt ratio of the whole banking system was 2.46%, in 2017 it decreased to 1.99%, in 2018 it was 1.91%, in 2019 it was 1,63% and in 2020 it was 1.76%. If including debts sold to VAMC, but not yet resolved, and potential bad debts, in 2016 it was 10.58%, in 2017 it was 7.36%, in 2018 it was 5.85%, in 2019 it was 4.43%, and in 2020 it was 3.81%.
However, the transition plan to reduce the bad debt ratio to 3% this year is not expected to be completed due to the impact of the Covid-19 pandemic. In a recent forecast, Maybank Kim Eng. stated said that the bad debt ratio of the whole system will increase to 7%, based on a conservative estimate of loans in industries that are heavily affected by the Covid-19 pandemic such as transportation, tourism, and consumer finance.
On 29 September, at the discussion session on the socio-economic situation of the National Assembly Economic Committee, Mr. Nguyen Kim Anh, Deputy Governor of the State Bank of Vietnam, said that the State Bank had carefully planned and reported to the Government the situation that bad debt would increase sharply in the near future. The ratio of on-balance sheet bad debt and potential bad debt at the end of 2021 is expected at 7.1% to 7.7%. This is the expected result when banks have implemented debt restructuring and debt deferral according to Circulars 01, 03, and 14.
These figures are remarkable because previously in May, the State Bank had forecast that until the end of this year, on-balance sheet bad debt ratio and off-balance sheet bad debt ratio, unresolved debt sold to VAMC, and potential debt becoming bad debt of credit institutions, are estimated to move from 1.54% to 1.91% and from 3.43% to 3.84%. Looking at the data, we can see that in mid-2021, a negative signal about bad debt had also appeared, when some banks recorded a sharp increase in Group 4 and Group 5 debt. Compared to earlier, this time, the bad debt arising is a force majeure.
Monitor structural debt
Increasing bad debt requires solutions. This time, even though bad debts are rising, the solution is no different than before. The only difference is that the State Bank has a mechanism for credit institutions to extend the time for making risk provision, allowing banks to make additional deductions for three years to have resources to deal with bad debts, at least 30% in 2021, 60% annually in 2022 and 100% by 2023. In addition, the State Bank is also proposing to develop a Law on Bad Debt Handling based on Resolution 42 on piloting bad debt settlement of credit institutions to support the debt settlement mechanism.
Allowing provision within three years helps commercial banks reduce pressure to continue supporting the economy, but the bank will have to spend a lot of resources on this bad debt. According to estimates by Dr. Can Van Luc and the BIDV Training and Research Institute, with the implementation of the provisions of Circular 14, the profit of the banking industry in 2021 is estimated to decrease by VND 3,400 bn and must increase the DPRR by VND 70,000 bn, at the same time increase the pressure of additional provisioning for DPRR in the period 2021 to 2023.
The above figure puts great pressure, but in a recent document, the State Bank of Vietnam encourages banks to set aside 100% of the provision for DPRR, specifically, to make additional deductions for debts restructuring and maintaining the debt group as prescribed in Circular 01/2020/TT-NHNN in 2021. A few joint-stock commercial banks have fully made provision for the whole debt balance to be restructured, instead of stretching over a period of three 3 years.
However, this number is not much and is expected to be difficult to comply with on a large scale, because credit activities are currently taking place very slowly after the outbreak of the fourth wave of the Covid-19 pandemic. Many businesses are facing the risk of very large bad debts, and commercial banks cannot lend large amounts. Therefore, the ability to meet the provision of 100% of the amount of DPRR as encouraged by the State Bank of Vietnam is very difficult because it will erode on the bank's profit.
This fact shows that the management agency is very much concerned with the bad debt situation, and wants to accelerate the bad debt ratio to 3% as planned. Dr. Nguyen Tri Hieu said, that according to the data, the bad debt situation has improved, and some banks have a high Non Performing Loan (NPL) coverage ratio, while some banks reached 200% to 300%.
However, reality is not so positive, and the risk of bad debt still lurks, because the State Bank does not transfer debt groups. Risks will occur when banks only track debt on books, and not in reality. The policy of allowing debt repayment terms to be restructured and the debt group remain unchanged is good in the current context, but the nature of bad debt is still bad. If not handled effectively, bad debts will still prove to be very risky in the future.
