While banks continue to report impressive earnings, the rising levels of bad debt, particularly Group 5 debt (classified as potentially irrecoverable), pose significant risks. As a result, financial institutions are proactively setting aside provisions for risk mitigation while awaiting clearer government guidance on resolving outstanding bad debts.
Mounting Bad Debt and Provisioning Pressure
According to the 2024 financial reports of 27 listed banks, the total amount allocated for provisions against customer loans reached nearly VND 207.63 trillion, reflecting a 13% increase from 2023. Leading the pack, BIDV recorded the highest provisioning in the system at VND 38.82 trillion, followed by VietinBank at VND 36.66 trillion and Vietcombank at VND 31.18 trillion. Among joint-stock commercial banks, VPBank and MB allocated the highest provisions, amounting to VND 16.33 trillion and VND 11.61 trillion, respectively.
This surge in provisioning aligns with the sharp increase in bad debt. The total bad debt balance (including Group 3, 4, and 5 debts) across 27 listed banks rose by 17% in 2024, equating to an additional VND 32.62 trillion and bringing the total to VND 227.1 trillion. Particularly concerning is Group 5 debt, which soared to over VND 131 trillion—an increase of more than VND 39.5 trillion compared to 2023—now comprising nearly 58% of total bad debt. Several banks reported alarming spikes in irrecoverable debt, with Saigonbank witnessing a 72.4% increase, Bac A Bank up by 73.4%, Sacombank by 81.4%, Kienlongbank by 82%, BIDV by 55%, VietinBank by 49%, and Vietcombank by 30%.
Despite these efforts, provisioning pressures are unlikely to ease in 2025. With retail sales growth lagging at only 9.3% in 2024, a resurgence in consumption is expected in 2025. Given that credit growth is predominantly driven by the retail banking segment, bad debt levels may continue to rise, prompting banks to further increase their provisions to maintain a manageable bad debt ratio.
Seeking Solutions for a Growing Problem
As of December 31, 2024, the State Bank of Vietnam (SBV) reported that bad debt on commercial banks’ balance sheets had surpassed VND 733.9 trillion, marking a 3.4% increase from the previous year and accounting for 4.35% of total outstanding debt. The lingering impact of the COVID-19 pandemic remains a primary driver of this situation, exacerbated by continued economic difficulties and policy-driven restructuring of debt repayment schedules. The expiration of Circular 06/2024/TT-NHNN, which had allowed for debt restructuring and maintenance of previous classifications, has further pressured banks as restructured loans now need to be reclassified, contributing to an uptick in reported bad debt.
The increasing burden of bad debt necessitates higher provisioning, restricting banks’ ability to lower lending rates. Simultaneously, financial institutions are under pressure to sustain profit margins to ensure optimal net interest income, which is essential for building reserves against credit risks. In 2024, the total bad debt coverage ratio at listed banks stood at 91.4%, a decline of 3.6% from the previous year, highlighting the pressing need for effective debt resolution mechanisms.
Amid growing concerns, the Government Office recently issued Official Letter 1892/VPCP-KTTH, conveying the Prime Minister’s directive for the SBV to assess and address the sharp rise in Group 5 debt. The directive calls for proactive measures to manage and mitigate bad debt risks while improving overall credit quality to safeguard the stability of the banking system.
Recognizing the urgency of the issue, the Prime Minister has approved the SBV’s proposal to draft a revised Law on Credit Institutions, set to be presented to the National Assembly in 2024. A key aspect of this legislative effort is the incorporation of provisions from Resolution No. 42, which previously piloted mechanisms for handling bad debts. Notably, one critical measure under discussion is granting banks the authority to seize collateral assets more efficiently, a move that could significantly enhance debt recovery efforts. The proposed amendments are expected to be reviewed in the National Assembly’s regular session in May or, if delayed, in September.
While these legislative developments offer a positive outlook for the banking sector’s ability to manage bad debt, a more sustainable long-term approach is necessary. One fundamental solution is reducing the over-reliance on bank financing by diversifying capital sources. Currently, banks predominantly supply short-term credit backed by collateral, while medium- and long-term capital needs are insufficiently met through corporate bond markets.
According to Nguyễn Quang Thuân, CEO of FiinRating, Vietnam’s ambitious 8% economic growth target for 2025 requires approximately USD 160 billion in capital. However, the country faces a significant capital mobilization challenge. The stock market’s role in raising medium- and long-term capital remains limited, with equity issuances by listed firms generating less than USD 4 billion annually in 2024. Meanwhile, non-bank corporate bond issuances totaled only USD 6 billion, further highlighting the shortfall in capital availability.
Addressing these challenges requires a multi-faceted approach that includes strengthening the corporate bond market, improving transparency in financial reporting, and establishing clearer mechanisms for debt restructuring and recovery. If successfully implemented, these measures could alleviate the burden on the banking sector while fostering a more resilient financial system.
Vietnam’s banking industry is at a crossroads. While the sector remains profitable, the rapid escalation of bad debt—particularly in the irrecoverable Group 5 category—poses a significant risk to financial stability. As banks continue to increase provisions to mitigate these risks, the government’s intervention through legislative reforms will be crucial in providing a viable mechanism for bad debt resolution. In the long run, reducing dependency on bank-led financing and developing alternative capital markets will be key to sustaining economic growth and maintaining a healthy credit environment. With a clear roadmap and decisive policy actions, Vietnam can navigate its current financial challenges and emerge with a stronger, more resilient banking system.
