How do commercial banks handle rising bad debts?

Trend of Soaring Bad Debts

The Credit Institution Law (Amendment) of 2024 formalized Resolution 42/2017/QH14's restrictions on bad debts, allowing credit institutions (CIs) to advance the process of bad debt handling and recovery more proactively and effectively. However, CIs' abilities to recover debts have changed significantly, as Resolution 42 no longer grants them the jurisdiction to confiscate secured assets.

Meanwhile, bad debts are significant and likely to rise more. Measures such as debt deferral and retaining the same debt group under the State Bank's Circular 02/2023/TT-NHNN are essentially temporary remedies that do not address the bad debt issue but only prolong the handling time.

As Circular 02 is prolonged, bad debts will be pushed to the future rather than settled, making the prospects for dealing with bad debts in the banking sector even more onerous.

By the conclusion of Q4/2023, the banking industry had seen a spike in loan growth, considerably lowering the bad debt ratio from 2.24% at the end of Q3 to 1.93%. As of March 25, 2024, the overall economy's credit growth is just 0.26%, and bad debts in the banking system are on the rise, indicating that bad debt difficulties are a significant issue.

According to the most recent statistics from WiGroup, Vietnam's banking system's bad debt percentage has above the 3% barrier, a concerning level when compared to past years. Notably, the coverage ratio for bad debts has fallen below 100%, indicating that banks are failing to provide adequate risk provisions for unrecoverable loans.

Bad debts are increasing in both small and major banks. This points to a deeper issue in the banking sector's risk management and asset quality, which requires immediate attention and intervention from regulatory organizations.

How Should Banks Behave?

Dr. Nguyen Quoc Hung, Vice Chairman of the Vietnam Bankers Association (VNBA), explains that in the setting of significant overdue payments, many commercial bank clients are uncooperative, complicating negotiation and debt resolution efforts. This encourages banks to rely on litigation to collect debts, which may be time-consuming and expensive.

On the other side, a few parties purposefully generate disagreements with third parties, including filing litigation, in order to prolong the process of handling secured assets. This not only complicates the debt recovery process, but it also results in large losses for banks when auctioning off assets.

From another perspective, we must ask: Why is Resolution 42 required to deal with bad debts, since the underlying problem of bad debt resolution is the authority to confiscate secured assets? Customers who are willing to mortgage assets for loans should surrender those assets if they are unable to repay the obligations, but this compels banks to demand recovery, which is not civilized.

"I feel that when the National Assembly passed Resolution 42, it was already a problem; no one wants a special rule for dealing with bad debts since it is a last resort." As a result, in civil relations, the creditor and borrower should be treated equally, transparently, and clearly, even when it comes to asset transfers. Banks must also demonstrate acceptable behavior. Previously, banks could simplify procedures, but now borrowers must follow the proper assessment process, complete procedures, and fulfill additional requirements before funds are disbursed. Avoid circumstances in which debts cannot be repaid and assets are not returned, resulting in bank losses. In actuality, this will result in harsher processes and restrictions in the future," Dr. Nguyen Quoc Hung stated.

According to a spokesman from the Banking Association, the first problem to address when dealing with bad debts is the borrower's knowledge. Second, if there is no provision for asset seizure under civil law, it cannot be incorporated in the Credit Institutions Act. If a borrower has secured assets but purposefully fails to repay the obligation, the situation should be handled under criminal law as asset theft, enhancing the borrower's feeling of responsibility.