The deadline for the dual goal of enhancing safety and improving efficiency in operation of the banking system of Vietnam is approaching. Many banks have entered a sprint with difficulties and challenges, but some banks have actively taken one step ahead.
For the 8th session of the National Assembly (NA) starting from October 21st, the government Office said that the prime minister has assigned government members to prepare a number of reports and bills.
In the field of banking and finance, the Governor of the State Bank of Vietnam (SBV) was assigned to prepare a report on the bad debt settlement results of credit institutions (CIs). A specific report has been sent to the NA.
Prior to this session of the NA, the SBV has held a press conference to provide basic information on the bad debt situation of the system
Nguyen Trong Du, deputy Chief Inspector of the SBV’s Banking Inspection and Supervision Department, said that in the last two years, since the NA’s Resolution 42/2017/QH14 on piloting the bad debt settlement was issued, the entire system has handled a large amount of bad debts with positive assessments.
Specifically, from August 15th 2017 (when Resolution 42 took effect) to the end of June 2019, the CI system handled 224.7 trillion dong of bad debts determined under Resolution 42 (not including the use of risk provisions). Thereby, the on-balance sheet bad debt ratio by the end of June 2019 was 1.9 percent.
“It can be said that the credit quality has been improved with the synchronous implementation of measures to handle and percent newly arising bad debts,” said Du at the press conference.
The on-balance sheet bad debt ratio of the system of 1.9 percent by the end of June 2019 is a big step up from the three percent level recorded in the previous years.
However, in addition to the on-balance sheet bad debts, there were debts which were sold to Vietnam Asset Management Company (VAMC) and debts which may potentially become bad debts. In general, the bad debt ratio calculated based on total bad debts, the outstanding debts at VAMC and potential bad debts by the end of August 2019 was 4.8 percent. This is still a great pressure.
This pressure is also approaching, or in other words, Vietnamese CIs are running at a full speed to carry out the Governor’s directive set earlier this year, which is to bring the overall bad debt ratio to less than three percent in 2020.
Year 2020 is also a year for another big task. From January 1st 2020, the whole CI system will start implementing Circular 41 of the SBV to officially applying Basel II standards.
With the requirement to reduce the overall bad debt ratio to less than three percent, implementing Circular 41 and Basel II standards is considered a dual goal of the system at the present time, when the deadline and pressure are very close.
Strengths and advantages for banks that have gone ahead
At the starting point of the restructuring process (2011-2012), the burden and pressure of dealing with bad debts was challenging as the bad debt ratio reached over 17 percent. Many large and small banks at that time recorded on-balance sheet bad debt ratio from five to eight percent.
There is a notable point, which is that the bad debt ratio in the first phase of the restructuring was high in some banks, as a result of the mergers and consolidations. For example, when Saigon Hanoi Commercial Joint Stock Bank (SHB) merged with Hanoi Building Commercial Joint Stock Bank (Habubank), its initial bad debt ratio increased to approximately eight percent. After merging with Dai A Commercial Joint Stock Bank (DaiABank), the bad debt ratio of HCM City Development Commercial Joint Stock Bank was above three percent. The merger of Southern Joint Stock Commercial Bank (Southern Bank) into Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank) also resulted in a huge bad debt burden.
It took nearly five years for the entire banking system to lower the on-balance sheet bad debt ratio to below three percent in the end of the third quarter of 2015, with major contribution of VAMC. However, in such long process, some banks made strong impression.
For example, in the group of state-owned banks, Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank) is the first member to bring bad debt ratio to one percent, with the highest level of credit risk provisioning.
In the group of private joint stock banks, HDBank is the fastest and most impressive case to quickly reduce bad debt ratio to nearly one percent from three percent in just a few years. The bank is currently among banks with the lowest bad debt ratio in the system. By dealing with bad debts and strictly controlling newly arising bad debts, the bank has less burden to accelerate.
In fact, at Vietcombank, after thoroughly settling bad debts, the bank’s profit has continuously created new recorded and is leading the system. For HDBank, the growth rate is increasing rapidly after the merger with DaiABank and the impressive bad debt settlement in just one year. Similarly, some other members such as Military Commercial Joint Stock Bank (MBBank), Vietnam Technological and Commercial Joint Stock Bank (Techcombank), Asia Commercial Joint Stock Bank (ACB), etc., are seeing strong profit growth after the bad debt issue has basically been dealt.
From a different perspective, the bad debt settlement and risk control in the period from 2011 until now is considered a purification process for Vietnam’s banking system. Members with strengths and effective strategy and governance have taken the leading position and gained advantages in business development.
More importantly, after overcoming the bad debt settlement challenge, those members have become stronger to reach the dual goal mentioned in the above, which is to apply Basel II in operational safety. The above names such as Vietcombank, MBBank, HDBank, ACB, Techcombank, etc. have one after another reached the goal before the deadline. Overall, 11 members of the banking system has been approved by the SBV to apply Basel II standards.
Nevertheless, that is just a very small number compared to the whole system. Accordingly, the difficulties and challenges in both handling bad debts and applying Basel II still exist at many commercial banks, when there is only one more quarter to go until the deadline in 2020.
