The Resolution 42 of the National Assembly has positively impacted on the process of handling and recovering bad debts of banks, but there are still many obstacles that can make the process cannot be progressed.
After 5 years of absence, bad debt is likely to return
According to the mechanism of purchasing bad debts, Vietnam Asset Management Company (VAMC) issues special bonds to debt-selling credit institutions with a term of five years. If the bond matures but bad debt is not dealt with, it will return to the banks. From the time of debt selling of credit institutions to VAMC in 2015, the five-year period is about to pass.
By the end of 2018, an estimated 340 trillion dong of bad debt was bought back by VAMC with special bonds. However, by the beginning of April 2019, VAMC only handled 190 trillion dong, accounting for over 56 percent of the total bad debts bought by this organisation.
Among banks, Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) was an early bank to settle VAMC bonds from 2017. Next, Vietnam Technological and Commercial Joint-Stock Bank (Techcombank) settled more than 400 billion dong of VAMC bonds. Similarly, Asia Commercial Joint Stock Bank (ACB), Military Commercial Joint Stock Bank (MBBank), Vietnam International Commercial Joint Stock Bank (VIB) were banks that cleared debts sold to VAMC, bringing the bad debt ratio to about one percent of the bank’s total outstanding loans by the end of 2018. The remaining banks are trying to handle and promise to complete VAMC bonds in 2019 as Orient Commercial Joint Stock Bank (OCB), Vietnam Prosperity Joint-Stock Commercial Bank (VPBank), Nam A Commercial Joint Stock Bank (Nam A Bank), Vietnam Export Import Commercial Joint Stock Bank (Eximbank), etc.
However, according to statistics from 24 banks announced the auditing report in 2018, by the end of 2018, the total amount of special bonds of these banks amounted to 126.7 trillion dong, only 0.5 percent lower than the end of 2017.
In particular, Sai Gon Thuong Tin Commercial Joint Stock Bank (Sacombank) is the bank with the most bad debts at VAMC, amounting to 40.233 trillion dong, down 7.5 percent compared to the beginning of 2018. Followed by Sai Gon Joint Stock Commercial Bank (SCB) with more than 26.6 trillion dong of outstanding loans, up 10.6%, Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) with more than 14.1 trillion dong, down 36.8%.
Debt sale to VAMC is a major method of banks to be supported in the process of handling bad debts, and also a way to beautify the balance sheet. However, it does not mean that banks will escape the burden of these bad debts and still need to handle them. Bad debts are still able to return to banks if it has not been processed after five years (according to the term of special bonds). Moreover, although the debt has been sold, banks still have to continue to make provision at 20 percent per year for bonds’ par value within five years. Only the case that the bank has to restructure is allowed to make provision at 10 percent per year according to the ten-year bond term.
Leaders of banks said that although 2018 profit was relatively better than the previous years, a big part was spent to set up risk provisions in accordance with regulations, as well as ensure safety in its operations. So the profit of banks was not much. However, if bad debt was dealt with next year, this risk provision would be reversed into profit.
Requirement to increase risk provision
In fact, since the Resolution 42 of the National Assembly on piloting bad debt settlement (August 15, 2017), progress and efficiency have been improved. However, mortgages of bad debts are mostly real estate, often arise when buying and selling or paying taxes, resulting in slowdown in asset sales. Therefore, the process of dealing with bad debts has not been accelerated as expected and is becoming a burden for many banks. In order to handle bad debts, banks must first increase their reserves.
For example, OCB had to increase the provision expense more than 10 times over the same period to 397 billion dong in Q4/2018. Accumulated for the whole year of 2018, the bank’s risk provision expense increased by 3.7 times to 945 billion dong. Similarly, the provision of VAMC bonds of Sacombank as of the end of 2018 was 2.57 trillion dong, up 54 percent compared to June 30, 2017.
Meanwhile, Vietcombank and ACB continued to lead the system in terms of capacity to handle bad debts in the past year, with the provision rate of 150 percent to 160 percent higher than bad debts. With this provision, in the worst case, 100 percent of bad debts cannot be recovered, these two banks still have 50 percent to 60 percent left to be reversed.
The risk provisioning, or more specifically, the handling of bad debt and credit quality control had a great impact on the profitability of banks. Many banks had to spend more than half of their profits on risk provision costs over the past year.
Specifically, BIDV was the bank with the highest net profit from business activities last year, reaching more than 28.3 trillion dong, higher than Vietcombank (25.679 trillion dong). However, due to the largest risk provisioning expense in the system in 2018, amounting to over 18.8 trillion dong, it accounted for two third of the bank’s profit. Accordingly, the profit before tax after provision of BIDV was only over 9.4 trillion dong, far behind Vietcombank at 18.3 trillion dong, when Vietcombank only had to deduct more than 7.3 trillion dong for risk provisioning expenses.
MBBank, Tien Phong Commercial Joint Stock Bank (TPBank) and Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) were also highly ranked names in terms of capacity to deal with bad debts, the level of bad debt around 100 percent with the amount of reserves already equal to the loss if all bad debts could not be recovered. Techcombank and HCM City Development Joint Stock Commercial Bank (HDBank) showed remarkable ability to handle bad debts with a reserve ratio of approximately 70 percent to 90%.
Data from the National Financial Supervisory Commission showed that the value of bad debt handling in 2018 increased about 30 percent compared to 2017. The agency quoted reports from credit institutions saying that the non-performing loan (NPL) ratio decreased slightly compared to the end of 2017, at 2.4 percent (2017: 2.5%). However, credit risk provision for 2018 increased by 30.1 percent compared to the end of 2017. The ratio of provision for credit losses to bad debts improved to 78.2 percent (2017: 65.4%), but it did not include bad debts sold to VAMC.
The implementation of the National Assembly’s Resolution No. 42 on piloting bad debt settlement has now reached more than one third of the journey. The results have been quite positive, but there are still some problems that need to be solved for the Resolution 42 to promote higher efficiency, thereby speeding up and improving the efficiency of handling bad debts.
In fact, in the past time, banks increased the auction of collateral to recover debt, but many businesses failed because the initial price was too high. Typically, with the Saigon One Tower complex in the centre of HCM City, the auction offered by VAMC over 6.11 trillion dong to recover the principal and interest of over 7 trillion dong. However, nearly two years passed, this debt has not found a buyer. Or Sacombank sells a lot of real estate to deal with bad debts, including three large lots of land which are discounted by nearly 3 trillion dong, but still cannot sell.
In 2019, the target of the State Bank of Vietnam (SBV) was to strive to bring the bad debt ratio to below two percent; NPL ratio fell below five percent. SBV could increase inspection and strictly control the operation of credit institutions and support restructuring bad debts.
SBV is also seeking public comments for the draft Circular on buying, selling and handling bad debts of VAMC to replace Circular No.19/2013/TT-NHNN dated September 6, 2013 regulations on buying, selling and handling bad debts of VAMC. Scope of adjustment this Circular provides for the purchase, sale and handling of bad debts; the issuance, management and payment of of bonds for credit institutions selling debt according to the market value of VAMC.
This amendment is intended to provide clear regulations for organisations to carry out uniformly and properly. Accordingly, in addition to the provisions of Point c, Circular 19, VAMC should base on other provisions of the current law relating to each type of security asset and actually check the security property documents provided by the credit institution, determine the file suitable, etc.
