The second quarter (Q2) profit report of banks showed that up to this point, banks have seen the impacts of the Covid-19 pandemic. This is clearly shown by the decline in profits, partly due to the slow credit growth, while banks have had to increase provisions for risks of the bad debts and the potential debts from the borrowings of customers struggling by Covid-19.
After more than three months of epidemic control, the economy began to recover, the Covid-19 has returned to Vietnam for the second time. It can be considered as a strong “blow” on the economy and the banking industry is facing a high risk of bad debts because customers’ ability to repay debts has been affected by the Covid-19.
Although banks have been actively handling bad debts through auctions of secured assets. The assets offered for sale are fairly diverse, including real estate, machinery, manufacturing equipment, and automobiles, etc. However, the sale of bad debts is increasingly difficult, the number of buyers is modest despite sharp discounts. This fact leads to the situation that many assets being auctioned up to several dozen times still cannot be sold.
Banking and finance expert Nguyen Tri Hieu said that many businesses are facing difficulties and the impacts of the Covid-19 have started to tell on their business activities, particularly export and real estate businesses. If the disease outbreaks strongly in the near future, the impacts will be very unpredictable, and bad debts will rise very strongly.
According to analysis of Dr Can Van Luc Chief Economist of Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV), from the beginning of the year until now, bad debts and potential bad debts have been rising. The main reason is that the Covid-19 pandemic has had a negative impact on the repayment ability of businesses and households. From now until the end of the year, in the context of unpredictable epidemic, business and production activities of people and businesses continue to face difficulties, banks’ bad debts will continue to increase.
Dr Luc added that there are still many obstacles in dealing with bad debts under Resolution 42. That is the order of priority for payment when dealing with secured assets, the collaboration of enforcement agencies, especially the lack of drastic participation of local departments and agencies.
Notably, many customers have taken advantage of the Covid-19 pandemic to delay repayment and handover of liquidated assets to credit institutions, making the process of handling bad debts and secured assets to remain very difficult. Therefore, at this time, while the existing bad debts have not been completely resolved, the risk of new bad debt increase requires more drastic participation of police agencies and local authorities.
“The impact of the Covid-19 pandemic will negatively affect the bad debt settling process. This process can only be speeded up when the economy is operating normally and production and business activities resume. At that time, the borrowers’ repayment ability will be better. Then, the process of handling secured assets will be promoted, and the market for liquidating secured assets will be more vibrant with better liquidity. Currently, these activities are happening relatively slowly,” Dr Luc emphasised.
The expert also predicted that by the end of 2020, the on-balance sheet bad debt ratio will be about four percent, twice as much as the end of last year. The ratio of accumulated bad debts including on-balance sheet bad debts, bad debts sold to Vietnam Asset Management Company (VAMC) and other potential bad debts will be six percent of the total outstanding loans, 1.5 times higher than the end of 2019.
In 2021-2022, bad debts can still be recorded, because at that time, the Circular 01 of the State Bank of Vietnam (SBV) will no longer allow banks to keep the debt group, and that will immediately lead to a rise of bad debts.
