Banks seem to be more cautious with bad debts

05-Nov-2020 Intellasia | Nha Dau tu | 6:02 AM Print This Post

Statistics of banks’ Q3 financial statements showed that bad debt increased sharply in the first nine months of the year, both in absolute numbers and in the bad debt ratio. This was considered understandable when credit growth was low, while businesses and people affected by the Covid-19 epidemic had faced many business and production difficulties.

However, one of the noteworthy information was that the group-five bad debts (debts with the possibility of losing 100 percent of capital) in many banks increased sharply, sometimes three times to four times higher than at the end of 2019. Along with that, interest and fees receivable on the nine-month bank account balance sheet did not increase significantly or even decreased. This was very different from the results of the banking industry in the past few years.

To clarify the current situation of bad debts and the bank’s business results in the first nine months of 2020, Nguyen Tri Hieu had shared some opinions on this issue.

How did Hieu evaluate banks’ bad debt situation in the first nine months of the year?

The sharp increase in banks’ bad debt in the first nine months of 2020 was not surprising. Since the beginning of the year, the Vietnamese economy, as well as the world, had been heavily affected by the epidemic. Many businesses had struggled, especially industries related to tourism, services, resorts, aviation, and transportation. In fact, the bad debt had increased sharply, not only in Vietnam but also in the world.

Right since the beginning of the year, the State Bank of Vietnam (SBV) had issued Circular No. 01 allowing commercial banks not to change debt groups. However, in fact, banks could also only work within a specific limit because not transferring debt groups, not setting up provisions would lead to two significant risks. One was the inability to control bad debts. Second was that it was not until the bad debt was improved that banks could avoid damage.

Therefore, allowing the banks not to transfer debt groups so that they did not have to make provisions was not necessarily suitable for banks. Of course, in the short term, this was beneficial for the bank’s profits and for customers to continue to borrow. However, bad debts still had to be paid first and foremost.

Along with the sharp increase in bad debt, especially group-five debt, in the balance sheet of banks, the accrued interest and fee increased slightly, did not increase or even decreased. What was Hieu’s opinion about that?

Interest accrual was a double-edged sword for banks. Because when the accrued interest was not collected but only accounted as a profit, the accrued interest had to eventually be withdrawn. This made bank profits look better, but it was not substantial. Therefore, banks needed to consider this revenue very carefully.

The increase in bad debt and the decrease in accrued interest was also logical. When banks correctly accounted for bad debts, the accrued interest must be withdrawn. Usually, if the interest income fell, group-five debt would increase strongly.

Could it be said that banks had been more cautious with bad debt?

It was exactly like that. The non-performing loans (NPL) surged, and accrued interest only increased slightly or decreased in the first nine months, showing that banks were more cautious in recording accrued interest, bringing bad debts to their right groups. This was good for the bank.

When did Hieu think the bad debt would show up?

NPL would really showed their true nature by 2021. The expert thought that this year the banking industry’s profit would still be high because the bad debt had not been fully disclosed. However, the situation would have gotten worse by 2021.

One of the recent information given by SBV’s representative was that NPL in the first nine months had increased partly due to technical factors, what was Hieu’s comment on this opinion?

That was also true. When the bad debt balance increased but the total outstanding debt did not increase, the NPL increase was understandable. However, in fact, the bad debt situation was much worse than in 2019 and would continue to increase in 2021.


Category: Finance, Vietnam

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