"Alleviating" the fear of non-performing loans

The SBV issued Circular 02/2023 on April 23, 2023, to help credit institutions in reviewing and rescheduling principal/interest payments or retaining debt groups for clients.

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While companies can alleviate the strain of loan repayment, banks can relieve both the risk of non-performing loans and the burden of risk provisioning.

Risks of bad debt transferred to the future

The SBV issued Circular 02/2023 on April 23, 2023, to help credit institutions in reviewing and rescheduling principal/interest payments or retaining debt groups for clients who are (1) experiencing liquidity challenges to run enterprises and (2) losing demand for consumer loans.

Although Circular 02 is seen as a boon for both firms and banks, it is not a "magic wand" because the largest challenge for enterprises is now managing cash flow to repay loans. Circular 02 has no impact other than to postpone the danger of non-performing loans.

Dr. Can Van Luc, a member of the National Financial and Monetary Policy Advisory Council, also stated that Circular 02 helps credit institutions keep problematic loans off their balance sheets. However, Circular 02 is only effective until the middle of 2024, so what happens after that will be heavily dependent on firms' capacity to recover and increase their production and operations. If firms do not recover, the risks of non-performing loans will rise in the future.

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Not too ominous

Many analysts predict that the risk of non-performing loans will rise when Circular 02 expires, however this is not too concerning for the following reasons:

First, Circular 02 relieves enterprises of the burden of repaying interest and principal, even without changing bad debt groups, allowing them to acquire fresh loans to sustain production and business while waiting for possibilities to recover and flourish. Businesses will have cash on hand to repay loans as output resumes.

Second, the State Bank of Vietnam anticipated this possibility, thus Circular 02 states that debts can only be restructured if the client is determined by credit institutions to be capable of repaying the principal and/or interest on time. Simultaneously, a strategy must be in place to re-evaluate customers' debt repayment capabilities following non-performing loans restructuring; monitor, review, manage, and oversee the rescheduling of debt payback conditions; and maintain the debt group intact...

Third, depending to the nature of the loan, Circular 02 requires credit institutions to make extra provisions of at least 50% in 2023 and 100% in 2024. This rule ensures that credit institutions have adequate resources to deal with delinquent loans.

In particular, the banking system's present risk management is far superior to that of the past. While the capital adequacy ratio (CAR) improved, so did the bad debt coverage ratio and debt settlement activities.