Surprisingly, despite the introduction of this new methodology, the bad debt ratio of banks has not decreased compared to the figures from 2020. In recent years, there has been an increase in credit risk provisions, which may be attributed to commercial banks redefining bad debts, creating additional risk provisions in compliance with Circular 11, or shifting debts from lower-risk categories to higher-risk ones, resulting in an elevated provisioning rate.
Persistent Growth in Bad Debt
According to Circular 02/2013/TT-NHNN, bad debt, also known as Non-Performing Loans (NPL), includes debts in groups 3, 4, and 5, encompassing both on-balance sheet and off-balance sheet commitments. However, Circular 11 has brought about a change in the definition of bad debt compared to Circular 02. It now specifies that "Bad debt is on-balance sheet bad debt, including debts in groups 3, 4, and 5."
As a result, from 2021 onwards, off-balance sheet commitments will no longer be categorized as bad debt. This alteration has led to a reduction in the calculated bad debt ratio within banks. The objective is to keep the ratio of bad debts on the balance sheet of the credit institution (CI) system, unsold bad debts held by Vietnam Asset Management Company (VAMC), and potential debts that have deteriorated into bad debts, all under 3% (excluding weaker commercial banks) by the end of 2025.
On June 8, 2022, the Government issued Decision 689/QD-TTg, approving the project "Restructuring the system of credit institutions associated with bad debt handling in the period 2021-2025." Decision 689 outlines various solutions to address bad debts, including debt quality assessment, adequate provisioning, and the need for relevant parties to coordinate efforts to recover debts and boost VAMC's capital.
State Bank data from the end of 2022 indicates that the on-balance sheet bad debt ratio for the entire system is at 2% of the total outstanding debt. However, the financial reports of commercial banks reveal that some banks still have bad debt ratios exceeding 3%, such as VietBank, BaoVietBank, and NCB. Several others exhibit bad debt ratios exceeding 2.5%, including ABBank, BVBank, PVcomBank, SHB, and PGB. Furthermore, some debts, while not classified as bad debts under current regulations, are at risk of transitioning into bad debts. This includes debts that have undergone restructuring but remain in the same debt category and investments in corporate bonds for the purpose of debt restructuring.
Despite the change in calculating total bad debt per Circular 11, the bad debt ratio of banks has not decreased. Specifically, the on-balance sheet bad debt ratio for the banking system was 1.9% in 2021, with a gross bad debt ratio of 7.3%, compared to 1.7% and 5.1%, respectively, in 2020. By the end of July 2023, the on-balance sheet bad debt ratio had increased to 3.56%, with a gross bad debt ratio of 6.16%. Currently, bad debt is projected to continue rising, particularly concerning potential bad debts as prescribed in Circular 01/2020/TT-NHNN (amended and supplemented) and Circular 02/2023.
Shifting Bad Debt from Low-Risk to High-Risk Categories?
For commercial banks, maintaining credit risk provisions according to regulations depends on outstanding loans, collateral assets, and debt classification. It has been observed that since 2021, the credit risk provision ratio at banks has been on the rise. Many commercial banks, however, have reduced their bad debt ratios but increased their risk provisions. This phenomenon could be attributed to banks not allocating sufficient risk provisions as required and beginning to redefine bad debts, setting aside additional risk provisions for guarantees in accordance with Circular 11. Additionally, while total bad debt has decreased, debts have been shifted from lower-risk categories to higher-risk ones, contributing to an increased provisioning ratio.
Banks are currently reviewing their processes and reevaluating debts to prevent the emergence of new bad debts. Nonetheless, they face several challenges due to a stagnant real estate market, difficulties for manufacturing enterprises in exporting, and a lack of demand. Some customers exploit dispute regulations to delay the resolution of bad debts, putting many banks at risk, particularly those with a significant proportion of real estate loans.
The Need for Policy Support
As of September, Vietnam's economic growth had reached its lowest level since 2011, standing at only 4.24%, compared to 8.85% in 2022. By the end of September, the outstanding debt to the economy exceeded VND 12,700,000 billion, a 6.92% increase compared to the end of 2022. It is expected that credit growth for the whole of 2023 will only rise by about 9%, indicating a sharp decline in the economy's capacity to absorb capital. The real estate market remains sluggish, the corporate bond market has yet to recover, and the corporate sector continues to grapple with a significant debt burden. These challenges pose difficulties in resolving bad debts within commercial banks.
To effectively control bad debt and alleviate the burden on businesses and commercial banks, there is a need to further refine the legal framework for handling bad debt. This should involve the creation of regulations to guide bad debt management. In the immediate future, commercial banks must maintain control over the quality of collateral and mortgage assets to prevent an increase in bad debts. Simultaneously, the government should implement additional policies to support businesses, facilitating conditions for banks to collaborate with businesses in overcoming difficulties, including ongoing support for interest rates and extending the time for maintaining the same debt group and debt classifications.
