Increase in bad debts
Soon after the Covid-19 pandemic broke out, many forecast that NPL in banks might increase when businesses become negatively affected by the disease due to difficulties in production and operations. Since 13 July, all credit institutions (CIs) have restructured repayment terms for more than 272,000 customers with outstanding loans of almost VND 210,000 bn, as these debts were not transfered to debt groups, but NPL ratio in many banks still inched up.
According to the latest financial report for the second quarter of 2020, NPL ratio in Vietcombank increased from 0.79% to 0.83%. This is the ratio of bad debts to total outstanding loans, while in terms of absolute numbers, bad debts have increased significantly. Specifically, Group 3 debt increased to 58%, from nearly VND 687 bn to more than VND 1,086 bn; and Group 4 debt increased by 56% from about VND 587 bn to nearly VND 919 bn. In general, total bad debts in Vietcombank have increased by 11% in the last month.
At VietinBank, the ratio of bad debts to outstanding loans increased from 1.16% at the beginning of the year to 1.7% by the end of June. In absolute numbers, the total bad debts also increased by 48% compared to the beginning of the year. Although Group 5 debt dropped to 17% from VND 7,204 bn to VND 5,959 bn, Group 3 and Group 4 debt increased sharply. Specifically, Group 3 debt increased by 247%, from about VND 2,062 bn at the end of the year to VND 7,155 bn; and Group 4 debt increased by 84% from VND 1,546 bn to VND 2,853 bn.
The same happened at joint stock commercial banks. ACB recorded NPL ratio that increased slightly from 0.54% to 0.68% in the first two quarters of 2020. However, total bad debts as of 30 June increased by 32% to VND 1,918 bn. Group 3 debt increased by 48% to VND 348 bn; Group 4 debt increased by 64% to VND 510 bn; Group 5 debt increased by 17% to about VND 1,060 bn. VietBank recorded nearly VND 807 bn in the first two quarters, an increase of 50% compared to the beginning of the year. In particular, Group 3 debt increased by 72%, Group 4 debt increased by 26%, and Group 5 debt increased by 51%, pushing the ratio of bad debts to outstanding loans from 1.32% to 1.88%.
BAB's total NPL increased by 19% compared to the beginning of the year, bringing ratio of bad debts to outstanding loans from 0.69% to 0.8%. In particular, Group 4 debt and Group 5 debt increased by 66% and 35%, respectively. The total bad debt of TPBank increased by 20% compared to the beginning of the year, causing the bad debt ratio to increase from 1.29% to 1.47%. In particular, Group 3 debt and Group 4 debt increased by 47% and 22%, respectively. The amount of bad debt at VIB increased to VND 3,267 bn, up 29%, and the ratio of bad debt to outstanding loans increased from 1.96% to 2.3%.
Pandemic causing road block
After three years of implemention of Resolution 42 of the National Assembly for the restructuring of Credit Institutions dealing with bad debts for the 2016-2020 period, the NPL ratio decreased to 1.63%. While the process of dealing with bad debts was earlier on a positive track, it encountered a road block when the Covid-19 pandemic broke out at the beginning of 2020.
According to experts, although the financial crisis caused by the Covid-19 pandemic is different from any previous crisis, the present situation will certainly affect the credit quality of banks, reflected in the debt situation in many Commercial Banks. The State Bank of Vietnam has issued a policy allowing Commercial Banks to implement a structure of repayment terms, keeping the debt group for hundreds of thousands of customers.
At this time, the bad debt ratio is still low, but allowing bad debts and potential bad debts to be kept in the current status quo so that enterprises can continue to borrow capital is a risk for banks in the future, because the pandemic is still complicated and unpredictable.
Proactively measure risks
Sacombank increased its credit risk provision by 50% compared to last year, to more than VND 1,565 bn in the first two quarters of the year. TPBank's total credit risk provision at the end of the second quarter stood at VND 765.7 bn, upto 49.1% over the same period in 2019. VIB increased by 31.7% over the same period last year with more than VND 421 bn. Similarly, other banks have also added relatively strong credit risk provisions.
It is easy to understand this, because banks will be prepared to deal with bad situations in the medium term. According to a report by the State Bank of Vietnam in April 2020, the expected outstanding debts affected by the Covid-19 pandemic are around VND 2,000,000 bn, accounting for about 23% of total outstanding loans.
Dealing with bad debts is always a big challenge for most banks, especially small banks with old bad debts. Resolution 42 of the National Assembly resolved many issues but legal administrative procedures hindered the process of handling bad debts. Therefore, under the pressure of potential bad debts this year, most of the comments made recently say that this year banks will have to accept reduced profits, seriously set aside risk provisions, and tighten credit quality of new loans to avoid more bad debts.
That is the most practical solution to dealing with bad debts. However, if the Covid-19 pandemic continues to rage and disrupt businesses, banks will need to assess financial endurance and plan robustly for the future. Banks need to establish a specialized credit risk management department internally and review the criteria to measure credit risks in banking.
