According to VNDirect Securities Company, bad debt is the current most worrying issue for the banking industry. VNDirect said that bad debt issue needs to be closely monitored because when bad debts increase rapidly, this can affect the economy and banks’ profits for many years. After the epidemic is over, the credit growth will gradually recover and Net Interest Margin (NIM) can be improved thanks to changes in lending and deposit structure, but bad debts can only be resolved quickly if banks are cautious in lending, debt classification and risk provisions.
The rate of bad debt formation depends on three main factors, according to VNDirect.
The first factor is the lending structure of corporate and individual segments. VNDirect said that banks are focusing on personal lending have more diverse customer base, so there is less credit risk than banks focusing on corporate lending.
The second factor is banks’ risk appetite. The bad debts of banks which have large outstanding loans to high-risk areas such as real estate and unsecured loans are forecasted to increase faster than other banks.
The last factor is the level of risk concentration. The high dependence on some large customers/ customer groups creates the risks of capital loss.
VNDirect assessed that the Covid-19 pandemic poses a risk of bad debt rise in consumer lending. Consumer finance companies provide unsecured loans and credit cards to the mass customer segment, while this segment has low-income and is heavily hit by the pandemic. The Covid-19 pandemic has caused small businesses and business households to temporarily close or narrow down operating scale, resulting in wage cuts and increase in job losses.
According to the Ministry of Labour, War Invalids and Social Affairs, the number of people applying for unemployment insurance in February 2020 increased by 70 percent over the same period to 47,000. Due to the affected income, VNDirect forecasted that bad debts will increase rapidly in consumer finance segment.
However, the bad debt rise in this segment will not extend to the whole sector due to the low penetration rate of the segment and currently only four banks are actively involved in consumer finance segment.
In addition, the government of Vietnam has taken a number of measures to help low-income people, including a 62 trillion dong support package for unemployed workers, lending with interest rate free for businesses with the purpose of paying wages, and for electricity cut of 10%.
VNDirect predicted that bad debts will rise significantly in consumer finance segment but will not pose risks for the whole sector. However, it will affect banks having large outstanding loans in this segment.
Regarding credit growth, VNDirect expected that the Covid-19 epidemic will be gradually controlled in Q2 of 2020, thereby the credit growth may increase again in Q2 and Q3 of 2020.
According to the securities company, the credit growth in 2020 will be 11%. With expected Gross Domestic Product (GDP) growth of five percent, the ratio of lending to GDP will increase from 110 percent in 2019 to 116 percent in 2020. The credit growth after the pandemic will be supported by factors such as interest rates and the rate of disbursement of public investment.
Specifically, the lower operating rates and ceiling rates reduce input costs, enabling banks to lower lending interest rates. In March 2020, the government of Vietnam lowered operating rates by 50 100 basis points. In April 2020, 20 banks (accounting for 75 percent of the system’s credit) has raised the size of low-interest credit packages designed to support customers affected by the pandemic. The reduction in lending rates encourages businesses borrow new loans to continue their business.
In addition, the acceleration of public investment will create jobs, thereby creating demand for credit. On March 20th 2020, the government allowed to convert all investment projects (eight projects) related to the North-South Expressway from public-private placement (PPP) to public investment, proposed the National Assembly for permission to begin construction in August 2020. The construction of the Ben Thanh An Suong metro line is expected to resume operation in October 2020. Promoting public investment will create jobs for both businesses and workers, leading to new credit needs, partly supporting credit growth.
As for the NIM, VNDirect forecasted that the Covid-19 epidemic will reduce NIM due to the lower reduction in asset yields than in capital costs.
The asset yields fall for two reasons. Firstly, banks reduce lending rates for new loans to boost lending in the context of low demand. Secondly, the exemption and reduction of interest rates for existing loans lead to the lower interest income, thereby lowering income from this activity.
