Curbing Bad Debt

Bank’s bad debt is the main topic that the Economic Committee of the Vietnam National Assembly (NA) mentioned in its report evaluating effectiveness of the NA’s Resolution regarding the socioeconomic plan of 2012 at the opening meeting on October 22.

 

According to results from the inspection of randomly selected customers of 56 credit agencies done by inspection authorities and the State Bank of Vietnam (SBV), as of June 30, 2012, bad debt in the credit agencies represented 8.82 percent the total outstanding debt, up 23.53 percent compared to the same period in 2011. The bad debt ratio reported by the credit agencies themselves, however, was only 4.49 percent.

 

Since the number was released by SBV’s Governor Nguyen Van Binh back in May 2012, followed by a press conference, these above statistics are the latest to date.

There are two notable conclusions based on the statistics.

 

Firstly, though having been accounted for, the discrepancy between the two numbers is still large, with the SBV’s number seen as more realistic. Secondly, the bad debt growth rate is noteworthy according to the latest data.

 

According to statistics from the SBV, as of late March 2012, the bad debt ratio was 8.6 percent. This percentage grew to 8.82 percent as of June 2012, slightly up 0.22 percent in the second quarter, when business’ operation still encountered many difficulties.

 

How should the trend be interpreted?

After a surge in the first quarter of 2012 compared to late 2011, bad debt growth rate has slowed considerably in the second quarter, leading to a possibility that the worst of bad debt has already passed.

 

SBV’s Chief Inspector Nguyen Huu Nghia shared, “The bad debt growth rate will slow down, the worst has been overcome and there will be improvement in the near future. In general, credit agencies currently have a much better reserve ratio.”

 

According to the official, there have been some positive factors affecting the handling of bad debt over the last few months.

 

Firstly, at the beginning of the second quarter of 2012, the SBV issued Decision 870/QĐ-NHNN, which effectively established a legal framework for credit agencies to restructure their debs. The focus was to help businesses who had the potential to recover but were facing temporary challenges. This has yielded positive results which will soon be publicised by the SBV.

 

Secondly, bad debt is related to the macroeconomic condition, and to be more specific, according to Mr Nghia, to the inventory level. Since the second quarter of 2012, despite being at a high level, the inventory ratio has seen a decreasing trend compared to the same period last year: up 34,9 percent as of March 1, up 32,1 percent as of April 1, up 29,4 percent as of May 1, up 26 percent as of June 1, up 21 percent as of July 1, up 20,8 percent as of August 1 and up 20,4 percent as of September 1.

 “One of the proposed solutions is to help businesses free up their inventory in order to improve their debt payback capability. This is among the goals that the SBV has recently striven towards,” Mr Nghia revealed.

 

In the report, the Economic Committee also proposed that from now until Tet holiday, the Government should focus on freeing up inventory and handling bad debt. “The bigger the inventory, the higher the amount of bad debt. Therefore, reducing inventory is both a short-term cure to support production and a long-term strategy to significantly reduce bad debt.”

 

Thirdly, after five consecutive reductions of interest rate and deposit rate ceiling, the lending rate keeps decreasing, which helps lighten the burden for businesses’ payment of outstanding debt as well as reduce pressure on the bad debt growth rate. The policy’s time lag has been reduced. Especially from July 15, with the initiative to reduce previous debts’ interest rate to 15 percent per year, there will be more positive impacts on the way.

 

 “However, whether or not we will see a lower bad debt number at the end of the year depends a great deal on the macroeconomic conditions, especially the inventory number. I think the least expensive way of handling bad debt at the moment is to reduce the inventory,” added Mr Nghia.

 

Regarding the above proposal, the Economic Committee also believes that inventory should be freed up at a faster rate, especially iron, steel, cement, construction materials, and apartments. At the same time, promotional sales should be encouraged to attract more customers. Besides, there is a need to expand the export market, especially agricultural and aqua-cultural products; encourage businesses to use one another’s products, especially raw materials for local production.

 

The Committee also requests the Government to review the bad debt scale, potential bad debt and bad debt restructuring process. State-owned commercial banks have to strictly comply to the goals set forth to share the burden with businesses; credit agencies should realise that helping businesses is equivalent to helping themselves

 

In 2013, according the Committee, there is a need to continue reducing bad debt while restructuring debt which is meant for business production and operation, especially construction businesses which have completed projects but have not yet received their money.