Renewed Concern about Bad Debt

The old bad debt has not been fully resolved, but the new bad debt tends to pile up due to the COVID-19 pandemic. This is now a big concern for the Vietnamese banking system.

The World Bank said in a recent report that Vietnam needs to watch for financial sector risks raised by the crisis. The widespread outbreak of the COVID-19 pandemic has caused many companies in big cities and industrial parks to close down their operations to prevent infections, thus wrecking their business performance. While new or restructured bank credit offers a welcome buffer to affected businesses, it also contributes to transferring the risk from the real economy to the financial sector. Therefore, the World Bank believed that the monetary authorities will need to be vigilant about the rising risks associated with nonperforming loans, especially in the banks that were already undercapitalized before the pandemic. It would be useful to adopt a resolution plan for nonperforming loans, and to develop a well-defined mechanism for dealing with weak and troubled banks, while continuing to recapitalize banks to meet Basel II requirements.

Bad debt keeps rising

In fact, although banks have accelerated the process of dealing with bad debts in recent years, they have not been able to resolve the issue completely. Nonperforming loans are likely to keep growing in some banks, especially the Debt Category 5 (banks are likely to lose their money).

Old nonperforming loans reached VND440.4 trillion (US$20 billion) as of December 31, 2020, down 4.29% from late 2019, according to data released by the State Bank of Vietnam (SBV). Accumulatively from August 15, 2017 to December 31, 2020, credit institutions handled VND331.87 trillion of bad debt as determined by Resolution 42. Up to now, the whole banking system still has about VND425.4 trillion of bad debt, accounting for more than 42% of the total outstanding loans determined under Resolution 42.

Meanwhile, according to financial reports released by nearly 30 leading commercial banks in Vietnam, their nonperforming loans as of June 30 were 4.5% higher than the end of 2020, or an increase of nearly VND124.898 trillion.

Banks with a high bad debt ratio in the first half of 2021 included ABBank (2.3%), PGBank (2.7%), Viet Capital (2.8%) and VPBank (3.4%).

Notably, large lenders reported sharp rises in Debt Category 5. Vietinbank saw this type of debt grow by 103% and account for over 80% of its total bad debt. Vietcombank witnessed a 19% growth in Category 5 bad debts, accounting for 75% of its total bad debt. MB had a very high growth of 145%, accounting for 50% of its total bad debt. Some commercial banks have smaller assets but debts classified into Category 4 and 5 accelerated: SHB saw Category 5 debts rise by 29%, HDBank by 31%, ABBank by 40% and NamABank by 100%. PGBank and Vietbank both had their Category 4 bad debts to rise by 100%.

According to experts, with the current complicated COVID-19 pandemic development, it will be very difficult for banks to keep their bad debt ratio below 3% as planned at the beginning of the year.

Hedging fund increases

According to Circular 03 of the State Bank of Vietnam on rescheduling debt repayment, exempting and reducing interest rates and fees, and keeping current debts in Debt Category unchanged to support customers affected by the COVID-19 pandemic, banks can opt for risk provisions equal to at least 30% in 2021 and set aside the remaining 70% in 2022 and 2023. It is a resource for banks to handle lending risks. Therefore, lenders with high provisioning rates for bad debts will have reciprocal funding to handle bad debts better.

Many banks chose to make most or all of provisions for overdue loans rather than apply it as stated in Circular 03. Many even had debt coverage ratio above 100%, even some with over 200-300%. This option may affect their profitability in the short term, but results in higher profitability in the long term.

Vietcombank is the first bank to complete provisioning for its loans without having to use three years as guided by Circular 03. The lender also has the highest bad debt coverage ratio of 352% (that is to say, for every VND100 of bad debt, it sets aside a coverage of VND352). VietinBank, Agribank and BIDV also increased their bad debt coverage ratios to 129%, 131% and 131%, respectively.

Some big private banks also had relatively high bad debt coverage ratios, such as Techcombank (259%), MB (236%), ACB (208%) and TPBank (144%).

Some small banks are also more cautious with bad debts when they sharply increase provisioning in the first half of 2021 as compared to the same period in 2020. But despite the sharp increase in provisioning, their bad debt coverage ratios remain very low, for example PGBank (33%), SeABank (44%), Viet Capital (44%), VietBank (53%) and Saigonbank (53%).

Some small banks are also more cautious with bad debts when they sharply increase provisioning in the first half of 2021 as compared to the same period in 2020. But despite the sharp increase in provisioning, their bad debt coverage ratios remain very low, for example PGBank (33%), SeABank (44%), Viet Capital (44%), VietBank (53%) and Saigonbank (53%).

Extending debt restructuring period for another six months

Before hardships faced by businesses and banks owing to the COVID-19 pandemic, on September 7, the State Bank of Vietnam officially issued Circular 14/2021/TT-NHNN amending and supplementing some articles of Circular 01/2020/TT-NHNN on rescheduling debt repayment, exempting and reducing interest rates and fees, and keeping the existing debt category unchanged to support borrowers affected by the COVID-19 pandemic.

Accordingly, debt restructuring will be applied to loans arising before August 1, 2021 from lending and financial leasing activities (instead of before June 10, 2020); outstanding loans subject to repayment of principal and interest from January 23, 2020 to June 30, 2022 (Circular 03 gave the time from January 23, 2020 to December 31, 2021).

Besides, repayment rescheduling will be extended by six months compared to Circular 03 till June 30, 2022.

Additionally, Circular 14 adds a case where the repayment term is rescheduled when the balance of the outstanding loan arises from June 10, 2020 to before August 1, 2021 and is overdue from July 17, 2021 to before September 7, 2021.

According to this circular, credit institutions and foreign bank branches shall decide on interest and fee exemption or reduction according to their internal regulations for outstanding debt balance arising before August 1 and repayment obligation to the principal or interest is due between January 23, 2020 and June 30, 2022, and customers are unable to repay such principal and interest on time as per their credit contract because their revenue and income fall due to the pandemic.

According to the SBV, extending the term for debt repayment rescheduling for another six months is based on the Government's vaccination plan and disease control scenario. In the first draft that consulted with SBV units, the Banking Inspection and Supervision Agency evaluated and proposed that changes to debt repayment term, interest and fee exemption and reduction and no change to Debt Category for debt balances arising from January 23, 2020 to June 30, 2022, are appropriate to better support businesses and people affected by the pandemic. Accordingly, customers affected by the COVID-19 pandemic will have an additional period of six months to restore production and business.

By Quynh Anh, Vietnam Business Forum