VietNamNet Bridge – The changes in the criteria and the method for bad debt
classification will surely make the bad debt ratio increase sharply.
A report by the State Bank of Vietnam showed that by September 30, 2012, the bad
debt ratio had accounted for 8.82 percent of the total outstanding loans of the
whole banking system, estimated at VND2,800 trillion.
Actual bad debts bigger than declared?
Economists believe that the actual bad debt ratio is much higher than the
reported figure, while the remaining part of the bad debt iceberg still has been
hidden. In principle, the bad debts would be set aside the balance sheet when
banks make provisions against risks. This means that the bad debts would not be
shown on the books, but they still would exist in reality.
In 2012, the State Bank of Vietnam allowed credit institutions slash the
interest rates for loans, extend the debt payment and restructure the debts. As
such, a part of the bad debts has been settled.
When restructuring the clients’ debts, the unpaid interests have been integrated
into the principal debts. This has led to the increase in the outstanding loans
of credit institutions, but in fact, the money has not yet come back to the
Commercial banks can also “make up” the books in different ways. One of the most
popular methods applied is disbursing new loans to clients so that the clients
can pay old debts.
The lending among the clients who have business relations with each other has
also been a method favored by the clients to “upgrade” the status of their
debts. With this method, the actual debts remain unchanged, but the debts do not
appear on the books as bad debts.
Bad debt ratio will soar?
Analysts believe that the official bad debt ratio would be much higher in the
future, when the new bad debt calculation method is applied.
Under the Circular No. 02 on debt classification and provisioning against bad
debts, many kinds of debts, which are not listed as “bad debts” under the
current regulations, would turn into bad debts if referring to the new
Previously, the loans mortgaged by credit institutions’ or the institutions’
subsidiaries’ shares were considered “safe loans”. However, with the new
regulations, these would be listed as the third group bad debt (the fifth group
debt is the worst, which is considered irrecoverable debt).
In fact, the increase in the bad debt ratio has been anticipated. Experts once
warned that if Vietnam had applied international standards in classifying debts,
it would see the bad debt problem more serious than initially thought.
It’ll take years to deal with bad debts
In principle, there are two ways of dealing with bad debts, either to increase
the outstanding loans, which would allow to reduce the bad debt ratio, or reduce
the bad debts.
However, a banking expert has pointed out that it is very difficult to increase
the outstanding loans at this moment, when businesses hesitate to expand their
As for the latter solution, in order to reduce the bad debts, it’s necessary to
clear the real estate inventories, because only when real estate developers can
sell products, would they get money to pay bank debts. However, the real estate
market remains very gloomy, while no one can say for sure when the market would