Despite the obvious negative impact of the COVID-19 pandemic, the credit of the economy saw an increase of 13% in 2021 compared to the previous year. And that’s before we factor in the inevitable bad debts.
Bad debts in Vietnam rose by more than 8% in 2021 and that’s necessitated a bold shift in direction for Vietnamese banks.
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How did we get here?
Bad debt can be caused by many factors such as borrowers forgetting to pay their debts, falling into insolvency, or simply neglecting their financial duties. These are all situations that could have easily been exacerbated by the pandemic.
The sheer figures are not particularly encouraging. The absolute bad debt balance of 27 commercial banks at the end of Q3 last year reached around $4.9 billion. The NPL ratio of Vietnam, meanwhile, climbed to over 3% in 2021 from around 2.4% in 2018 (pre-pandemic). Household debt also surged throughout the pandemic, with loans to households by the four major state-owned lenders rising from 28% of total loans in 2013 to 46% in 2021.
NPLs in Vietnam
Non-performing loans have been a rising trend in Vietnam for almost a year now. In October 2021 the central bank said the bank’s total lending was up 5.48% from the end of 2020 and they were planning to respond by restructuring the system of credit institutions and how bad debt is handled.
Indeed, improving the NPL framework was marked as a key resolution for the banking sector with Vietnamese banks implementing loan forbearance measures to help businesses weather the COVID storm. The State Bank of Vietnam not only offered temporary payment relief but also relaxed regulations on what is actually classified as an NPL.
However, the NPL ratio is, of course, expected to increase once these relief measures are withdrawn. To mitigate this risk, Resolution 42 (the current NPL resolution framework in Vietnam) is currently under review. But when it expires in the third quarter of 2022, the country could be in for a pretty rude awakening.
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Where are we going?
The debt restructuring period represented by Resolution 42 is set to end on June 30, so it’s not until that date that we’ll get a complete picture of just how severe the bad debts of the banks in Vietnam really are.
Thankfully, Vietnam, and indeed the whole Southeast Asian region, has recent experience when it comes to coping with a crisis. The Asian financial crisis is less than 30 years old, after all. Hopefully, Vietnam will be able to learn from this experience and utilise strong preparation and timely action to prevent the accumulation of NPLs.
The State Bank of Vietnam (SBV) is also currently developing a legal framework on asset quality and bad debt handling in order to tighten asset quality management at banks and speed up the bad debt settlement process.
On a wider scale, Vietnam’s export trade looks to be improving dramatically, with an expected 7.9% growth in 2022 and 6.5% in 2023 if the demand for Vietnamese goods continues on course. As economic growth continues, NPLs will almost certainly decline but it’s not something that’s going to happen without a lot of work.
What must be done?
Lenders are at substantial risk right now. After any financial crisis, commercial banks are always the ones that suffer from the worst bad debts. The economic recovery packages designed to help businesses and individuals rebound from the pandemic could evolve into bad debt if left unchecked.
To ensure this doesn’t happen, bank loans need to follow existing legal regulations to avoid further lender risks. It would also be advisable to remain cautious about preferential interest rate programmes as these could distort market interest rates.
The government should really be reducing debt postponement packages and asking banks to set aside more provisions for risky loans. Some have already done just that, with ACB last year spending more than 3.33 trillion in Vietnamese dong provisioning for credit risks. But it’s going to be up to individual lenders to make changes too.
Aside from increasing their own provisions to identify bad debts, perhaps the most immediate thing that can be done is a greater investment in digital transformation. This will allow lenders to stay on top of their loans and give their debtors a greater degree of agency and autonomy over their debts.
Thankfully, Vietnam is a country that appears open to digital adoption. Recently, HD Bank and Thought Machine announced they were developing a “core banking solution” for the country which would “replace the current core banking solution and develop a new standard for the modern core banking technology in future.” This solution will include the Amazon Web Services cloud platform and will hopefully set a precedent in the country that all commercial lenders will follow.
It’s not a solution that’s going to solve all of the country’s NPL problems, of course, but it’s one piece of the puzzle that can easily be integrated, particularly given Vietnam’s commitment to digital transformation by 2030. The future looks deceptively bright for Vietnam as long as lenders are willing to move with the times.
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