Rising bad debts is one of the biggest challenges for banks in the coming time

Bad debts in most banks are on the rise

According to the report, Vietnam is among the countries with a very high GDP-to-credit ratio, and lending interest income is an important income. However, this is coupled with significant system risks. The first-quarter financial statements of 28 leading banks in Vietnam showed that seven banks had a non-performing loan (NPL) ratio on the balance sheet above the threshold of 3%. Their total NPL grew by over 23% from the end of 2022 to more than VBD172 trillion. In the first quarter, their NPL ratio rose 1.93%, higher than the pre-pandemic level.

According to data from their first-quarter financial statements, subprime loans increased at banks. Care-needed loans (Group 2) rose by 43% year on year. The ratio of outstanding loans in Groups 2-5 to total outstanding increased sharply from 3.4% in the fourth quarter of 2022 to 4.4% in the first quarter of 2023.

According to their consolidated financial statements of the first quarter of 2023, the National Citizen Bank (NCB) saw its NPL ratio continue to increase sharply. Its Group 1 debt fell 10.3% from the beginning of the year to VND32,778 billion, and its Group 2 debt (debt that needs attention) climbed 51% to VND3,953.6 billion. Meanwhile, Group 3 debt (substandard debt) jumped 147.4% to VND2,542.5 billion; Group 4 debt (doubtful debt) soared 18.7% to VND5,043.5 billion; and Group 5 debt (capital likely to be lost) increased 3.1% to nearly VND3,383 billion. As a result, NCB’s total bad debt was nearly VND10,969 billion, up 28.2% from the beginning of the year and its on-balance sheet bad debt ratio was 23%.

Orient Commercial Joint Stock Bank (OCB) witnessed a 51% growth in NPL to more than VND4,000 billion in the first quarter of 2023. Its Group 3, Group 4 and Group 5 debts grew by 54%, 55%, and 49%, respectively. The ratio of bad debt to total outstanding loans rose from 2.2% to 3.3%.

Asia Commercial Bank (ACB)'s bad debt (from Group 3 to Group 5) soared by 31.5% to VND4,000 billion in the first quarter of 2023, raising its bad debt ratio from 0.74% at the end of 2022 to 0.97% at the end of March 2023. Vietnam International Commercial Joint Stock Bank (VIB)'s bad debt balance was VND8,347 billion as of March 31, 2023, up by 47% from the end of 2022. Its bad debt also grew from 2.45% to 3.64%.

At Tien Phong Bank (TPBank), bad debt surged 84% from VND1,357 billion to nearly VND2,500 billion in the first quarter of 2023. Specifically, Group 3 debt increased from VND385 billion to nearly VND1,200 billion. Group 4 and Group 5 debts rose 64% and 6%, respectively. This lifted the ratio of bad debt to total outstanding loans at TPBank to 1.45% from 0.84% at the end of 2022.

Similarly, some other banks also saw an increased bad debt ratio. At Eximbank, its bad debt expanded by nearly 30% to VND3,047 billion in the first quarter of 2023, boosting the bad debt ratio to 2.3% from 1.8%, and the provision for customer loans increased by 7%. At Military Commercial Joint Stock Bank (MB), bad debt was VND8,452 billion, up 68% over the end of 2022, bringing its bad debt ratio from more than 1% to nearly 1.76%.

Among State-owned banks, BIDV saw its on-balance sheet bad debt expand more than 40% to VND24,730 billion in the first quarter of 2023. Its Group 3, Group 4 and Group 5 debts increased by 127%, 59%, and 13%, respectively. The ratio of NPL to total outstanding loans rose from 1.19% to 1.59%.

By the end of the first quarter of 2023, bad debt at Vietcombank increased by more than 27% from the end of 2022 to VND9,942 billion. Its ratio of NPL to total outstanding loans rose from 0.68% to 0.85%.

According to Vietnam Report, special risks exist and increase due to the freezing of the real estate market, which accounts for 21% of the credit balance of the banking system, excluding about 4% of outstanding bonds owned outside the credit system. Therefore, this year’s target for banks is not simply credit growth but selective credit growth, prioritized risk management, and balanced asset quality.

Seeking solutions to bad debt settlement

Dr. Can Van Luc, Chief Economist at BIDV, stated that although the Government, the State Bank of Vietnam and central agencies have actively and drastically introduced business support policies (including fiscal policy on extension, postponement and reduction of taxes and fees), the bad debt of the banking system may increase in 2023. Especially when the applicable deadline of Resolution 42/2017/QH14 on pilot NPL settlement can be extended to the end of 2023 only, the legalization of regulations on the settlement of bad debts and related collateral under the amended Law on Credit Institutions is essential to create a sustainable legal corridor for bad debt settlement and operation safety for credit institutions.

At a workshop on NPL settlement in the draft Law on Credit Institutions (amended), Mr. Nguyen Quoc Hung, General Secretary of the Vietnam Banks Association (VNBA), admitted that the current NPL status at credit institutions is worrying. Banks are facing many difficulties and challenges in operation although they have significantly slashed interest rates following the SBV’s decision on regulatory policy rate cuts. Asset quality has diminished; controlling bad debts at commercial banks is difficult; the settlement of collateral assets and debt recovery is challenging; the legal corridor for debt settlement is inconsistent; and the application of legal provisions is sometimes controversial.

Seizing collateral is the responsibility of borrowers and lenders. Currently, lenders are at a disadvantage because they do not have the right to seize collateral but it is settled in court. In some cases, borrowers intentionally do not pay back their debt, but there are now no regulations on how to handle it. In practice, customers and borrowers do not pay the debt although they have money and secured assets.

Therefore, it is necessary to create a precedent in court in the absence of persons who intentionally delay and evade debt repayment or apply streamlined measures at court to reduce the time to initiate lawsuits and quickly handle debt recollection results. The Supreme People’s Court coordinates with the Supreme People’s Procuracy and the Ministry of Public Security to soon issue detailed guidance documents on the return of collateral as evidence in criminal cases.

"Mr. Le Thanh Quy Ngoc, Director of Risk Management at OCB, stated that handling NPL and collateral is a regular and continuous requirement of credit institutions and the banking industry as a whole in addition to developing credit scale and loan products. Recent domestic and global socioeconomic data are also posing new challenges to NPL settlement in the banking industry. Therefore, it is necessary to be more active from authorities at all levels to remove difficulties and obstacles and create a legal framework to support effective and substantive bad debt settlement for credit institutions and meet expectations of the society and the country.

In addition, Mr. Huynh Thanh Phong, Director of Risk Management at Nam A Commercial Joint Stock Bank, emphasized that it is essential to expand the scope of application not only for bad debts but also for Group 2 debts which will be prematurely recovered by banks to reduce risks. At the same time, it is necessary to specify debt settlement measures and procedures in the draft law, and provide further guidance on the implementation of measures to receive security assets to substitute debt repayment obligations and convert the debt into contributed capital. This will enable credit institutions to actively choose effective implementation and settlement methods for their own.