Banking expert Nguyễn Trí Hiếu

Though Việt Nam's banking industry expects to have many development opportunities in 2023, problems with liquidity, interest rates and bad debts are putting great pressure on the industry’s operations and require many drastic solutions.

Banking expert Nguyễn Trí Hiếu talks to the Vietnam News Agency about the issues.

The banking industry recorded high growth in many business indicators last year. What do you think about the prospects of the banking industry in 2023?

The banking industry is forecast to continue to grow strongly, especially in digital financial services. The application of technology in the banks’ operations will also be further promoted to create more convenience for customers.

However, the banking industry will also face many challenges, especially in controlling credit risks related to the downturn in the securities and real estate markets.

Moreover, high interest rates, rising inflation, slow growth and the ongoing crisis in the securities and real estate markets will directly affect the business performance of banks in the short, medium and long term.

Specifically, in the credit sector alone, the banking system holds a large amount of corporate bonds, estimated at VNĐ300 trillion, equivalent to about 18 per cent of the equity of the banking system.

In the context of global and domestic economic difficulties, what are the challenges that the Vietnamese banking industry is facing this year?

Uncertainties in the world economy, from the Russia-Ukraine war to tightened monetary policies in the US and EU countries, are adversely impacting significantly on Việt Nam's banking industry.

In the US, the US Federal Reserve (Fed) tends to continually raise interest rates due in March and May this year before it may stop raising the rates in the second half of 2023 if the US can lower its inflation rate from 7 per cent currently to 5-6 per cent in the coming months.

The Fed's interest rate is currently at 4.5-4.75 per cent, which is very high and has a strong impact on global financial markets, including Việt Nam. The VNĐ/USD exchange rate and domestic interest rate will continue to fluctuate in an unfavourable direction and further increase if the Fed continues to raise its interest rates.

For Vietnamese banks, the biggest concern now is liquidity and interest rates. Banks are facing a liquidity shortage due to bad debts, which makes loan cash flows not return to banks and therefore forces banks to mobilise capital at high interest rates to compensate for liquidity. High deposit rates push up high lending rates, which will affect the economy and business operations.

Asset quality of the banking industry is also raising concerns when bad debts tend to go up. How should the issue be viewed and what are the solutions to improve the quality of bank assets?

The credit quality of banks in the fourth quarter of 2022 showed their business results were not very positive. The banks’ bad debt ratio increased, evidenced by the fact that their provision ratio to total bad debts was very high with a coverage of up to 200-300 per cent at some banks.

The reason for the increase in bad debts during the period was due to the bank's reclassification of bad debts and overdue debts after Circular No. 14/2021/TT-NHNN on loan rescheduling for COVID-19 affected borrowers expired on June 30, 2022.

In 2023, the banks’ bad debts have worsened as businesses have continued facing many difficulties. According to the Vietnam Chamber of Commerce and Industry (VCCI), up to 51,000 enterprises ceased operation or dissolved in the first two months of 2023.

Meanwhile, the consumption demand is weak. Just going around supermarkets and shopping centres, we can see they lack the bustling scenes often seen in the first months of the year.

The quality of bank assets, or the quality of bank loans in other words, is a remarkable point in the banking health assessment system. To improve asset quality, banks should be transparent about bad debt numbers and information.

Banks can try to sell bad debts on the bad debt exchange that the Vietnam Asset Management Company (VAMC) has set up. However, in order for the bad debt market to operate strongly, it is necessary to amend regulations of transfering collateral and mortgaged assets.

In addition, Resolution No. 42/2017/QH14 of the National Assembly (NA) on piloting bad debt settlement of credit institutions, which will expire after December 31, 2023, needs to be amended or replaced with another NA Resolution to officially turn bad debt settlement regulations into a law. The new law will be supplemented with many new provisions to settle and recover bad debts more effectively.

Regulatory and inspection agencies should pay special attention to lending in real estate and securities businesses that are forecast to have the highest credit risk.

Under the context of high interest rates that cause capital costs to increase while the credit demand of the economy is weak, how will banks need to respond to the difficulties, especially in deploying preferential credit packages according to the Government’s directions?

In the difficult context, the implementation of credit packages, such as the VNĐ40 trillion package to support 2 per cent interest rates of loans according to the NA’s Resolution 43/2022/QH15 and the credit package for low-income people, should be strongly deployed to act as a lever to recover the dismal economy.

Most recently, commercial banks have agreed to reduce deposit interest rates since March 6 this year, of which four State-owned banks decreased the rate by 0.2 percentage point per year. Previously, private banks also decreased their rate by 0.5 percentage point per year for 6-12 month deposits from February 27. The consensus to reduce deposit interest rates has helped to cut input costs, thereby paving the way for lending interest rates decline to support firms and the economy, especially in the Government’s priority industries.

Though the deposit interest rate somewhat cools down, many banks are still listing the highest deposit interest rate of above 9 per cent per year. In the condition that inflation is controlled at 4 per cent, the deposit interest rate still needs to reduce further to some 6 per cent per year so that the lending interest rate is around 9 per cent per year.