Handling Bad Debts Takes a Wrong Turn?

The bad debt number fluctuates from 4.47 per cent as of May 31 2012 according to reports by credit agencies to 8.6 per cent according to The State Bank of Vietnam. In March, during a Vietnam National Assembly session, Governor Nguyen Van Binh reported that the bad debt number might be higher than 10 per cent of outstanding debts.

 

This is not to mention a report by a foreign organization that bad debt number is higher than 10 percent.

 

This might be difficult to obtain an accurate bad debt number in Vietnam because of different categorization standards and the fact that banks deliberately falsify their financial statements without being detected by the laissez-faire regulators.

 

Mr Nguyen Huu Nghia – Acting Chief Inspector of the State Bank of Vietnam analyzed the problem, “Based on other countries’ circumstances, the common ground is that we do not have an international standard to categorize bad debt and set reserve requirements. Specific provisions differ from country to country. The standard system for bad debt categorization is either qualitative or quantitative”.

 

According to reports by the Government Inspectorate of Vietnam, which surveyed 1.01 million customers borrowing money of 57 credit agencies in Vietnam, representing 90.1 per cent of the total outstanding debts of these agencies, the bad debt number was VND202 trillion or 8.6 per cent of the outstanding debt as of March 31 2012. According to reports by credit agencies, however, the bad debt figure stood at VND 117 trillion as of May 31 2012.

 

Mr Nghia explained why the two numbers differ greatly from each other. According to him, through the remote monitoring system, the Inspectorate categorizes customer’s outstanding debts at different credit agencies as the most risky type of debt. If the customers borrows money from different credit agencies, their debts will be categorized as the more risky ones.

 

Another factor leading to the small bad debt number is the fact that credit agencies deliberately violated categorization and reserve requirement standards, did not report the true bad debt figure in order to reduce the amount of required reserve fund, making their financial statements look better etc.

 

Mr Nguyen Huu Nghia acknowledged this issue and admitted that banks’ contracts had not been thoroughly investigated and that banks had attempted to hide the true bad debt figures.

 

Commercial banks have currently set aside VND67 trillion as a reserve fund to handle bad debts. However, experts commented that this number is too small given the current bad debt situation.

 

While there is still no reliable statistics on bad debt in Vietnam, Second quarter’s financial statements of some commercial banks reveal that bad debt is increasing at an alarming rate. Compared to January 1 2012, Vietcombank’s bad debt increases from 2.03 to 3.47 per cent, Vietinbank’s increases from 0.74 to 2.45 per cent. The fifth, non-collectible and most risky type of debt surges nearly VND2 trillion. Navibank’s bad debt is VND 511 billion as of June 30, 45 per cent of which or VND 231 billion is non-collectible debt. Vietcombank and Navibank bad debt increases nearly 4 per cent, while Vietinbank’s figure is 3 per cent.

 

Being in the “big boss” league, Vietcombank’s 4 per cent bad debt is a worrisome figure. A noteworthy analysis reveals that for a long period of time, these “big bosses” have lent to state-owned enterprises and many projects according to instructions, therefore suffering from a huge amount of bad debt at the moment.

 

Among the state-owned enterprises and companies which account for the huge bad debt figure are Vinashin, Vinalines and many other corporations, all of them suffering from an enormous amount of outstanding debt, therefore the bank’s bad debt. The relationship between big banks originating from state-owned commercial banks and state-owned enterprises with long history and loads of outstanding debts is another point to take note. Many loan contracts should have been categorized as bad debts if not for employing “tricks”.

 

From this angle, a statistics reveals that 62 per cent of bad debt belongs to the G14 of big banks, while the “problematic” banks only hold 10 per cent. But many people still mistakenly think that weak banks hold the largest portion of bad debt. Therefore, handling of bad debt can take a wrong turn.