In the report on the banking industry 2019 released in January 2020, Saigon Securities Incorporation (SSI) unexpectedly mentioned about the bad debts of the new credit cycle.
Despite saying that the bad debts of the new credit cycle has not yet increased sharply, at least at the time of the report, SSI also warned that “a new phase of bad debt formation is coming back, due to the new bad debts from consumer loans, or the restructured bad debts which are now revaluated.”
About a month later, the somewhat random forecast of SSI suddenly became more and more topical. With the unpredictable spread of the Covid-19 epidemic, majority of domestic and global economic activities have been paralysed. The risk of a new bad debt cycle is becoming more visible.
Looking back at the old bad debt movements, the uptrend of bad debt ratio started to get hotter from the end of 2017 and became more serious since the end of 2011. The initial bad debt ratio was still announced in hesitation at 4.47 percent in May 2012, but under the great pressure from both domestic and foreign environment, the announced number was more factual, announced by the State Bank of Vietnam (SBV) at 8.82%. at that time, Fitch Ratings calculated that the bad debt ratio of Vietnam reached 17%, while Barclays said that the actual number could reach up to 20%.
After taking the chair, the SBV’s Governor Le Minh Hung did not hesitate to announce the actual bad debt ratio of the entire banking system. The number released at the end of 2016 was 10.08%. This double-digit level clearly showed that the calculations made by foreign organisations four years ago are completely valid.
In the following years, the bad debt ratio fell sharply, reaching 7.36 percent in 2017, 5.85 percent in 2018, and 4.84 percent as of August 2019.
However, the process of handling bad debts, which has taken up to eight years, has not yet lowered bad debt ratio to the safety threshold of three percent. It shows an extremely serious consequence of the old bad debt cycle.
One of the solutions to the problem of bad debt recommended by the management authority in the previous period was to merge weak banks and so far, the banks that carried out the mergers are still struggling with bad debts.
Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank) merged with Southern Joint Stock Commercial Bank (SouthernBank), Saigon Commercial Joint Stock Bank (SCB) merged with First Joint Stock Commercial Bank (Ficombank) and Vietnam Tin Nghia Commercial Joint Stock Bank (TinNghiaBank), Saigon Hanoi Commercial Joint Stock Bank (SHB) merged with Hanoi Building Commercial Joint Stock Bank (Habubank) are the typical cases.
Statistics in the end of 2019 showed that although the bad debt ratio (including on-balance sheet bad debts and off-balance sheet bad debts at Vietnam Asset Management Company (VAMC)) of Sacombank reached up to 10.88%. However, it should be acknowledged that since being chaired by Duong Cong Minh, Sacombank’s bad debt ratio has significantly decreased. On the contrary, it should be noted that the later the period, the more difficult it is to settle the outstanding bad debts, not to mention that the above bad debt ratio did not include the potential bad debts, and the pressure to withdraw accrued interests.
Similar to Sacombank’s case, the situation is not better for the case of SCB, although the bank’s bad debt ratio is lower than Sacombank’s, reaching 5.32%. the bank’s receivables and accrued interests are huge.
For SHB, in terms of statistics, year 2019 was a fairly successful year for the bank as its bad debt ratio was lowered from 4.95 percent in the end of 2018 to 3.29%.
However, it should be noted that the bank’s “Other assets” item also suddenly soared from 632 billion dong in the end of 2018 to 4.707 trillion dong at the end of 2019.
In fact, some banks still have bad debt ratio of over three percent. Although some banks have reduced bad debt ratios, their “Receivables from selling contracts with partners” sub-item skyrocketed. This incident took place in 2018, reflecting a risk of an un substantial bad debt decline.
For the cases where the bad debt ratio is higher than three percent, the most notable case is National Citizen Commercial Joint Stock Bank (NCB). After many years of restructuring, the bad debt ratio of the bank remains extremely high (the highest among banks in terms of on-balance sheet and off-balance sheet bad debts at VAMC, excluding zero-dong banks) and has fallen very slowly over the years.
The existence of the outstanding bad debts in the past years shows that the bad debt settlement will be much more difficult, because handling secured assets is already uneasy, not to mention the market situation is currently not positive, because banks have to use a lot of resources to support customers hit by the epidemic as well as the economic recession and will have less resources for the settlement of bad debts.
As forecasted by SSI, the risk of a new bad debt cycle partly comes from the bad debts which have been restructured and revalued.”
In addition to those debts, SSI also emphasized that consumer loans are also a focus in this new bad deb cycle. They are the sub-standard debts, unsecured, and are easy to be affected when economic recession happens, because the income of borrowers will fall, while banks/ finance companies do not own the secured assets.
Another type of unsecured credit which is not through banks and finance companies is peer-to-peer lending (P2P Lending). Although no units have announced the exact number, the scale of this type of lending is said to have reach dozens of trillion dong. Since these type of loans have low standards and are not guaranteed by any intermediate party, there is a possibility that they will become bad debts and it will be very difficult to be controlled at this point of time.
Apart from the outstanding bad debts over the years and the consumer loans, in general, the loans of businesses and individuals are also at the risk of bad debt rise in the context of an economic recession caused by the Covid-19. Although the ratio of bad debt arising is lower, the size of outstanding loans is high, and thus the impact should not be underestimated.
In particular, banks with risky lending structure, unbalanced lending structure, less provisioning resources, etc. will be affected more than other banks.
Although the recession is definitely happening, but no one can be sure of the level or whether it would lead to an economic crisis or not. If the recession level is low, it may only accelerate the bad debt accumulation, the new bad debt cycle will continue in the coming years and not be serious enough to cause a great impact on the economic development and vice versa.
