Bank bad debts forecast to remain under great pressure in 2024

A bank teller counts cash at a transaction office in Hanoi. (Photo: VNA)

Hanoi - Though the asset quality of banks in Vietnam will be temporarily under control until the end of 2023, experts said more attention should be paid to the issue in 2024 as bad debts are rising.

The experts made the recommendation because, while existing bad debts have not been resolved yet, new bad debts are estimated to surge when Circular 02/2023/TT-NHNN on debt restructuring and debt repayment postponement expires in June 2024.

According to statistics, most banks are facing rapidly increasing bad debt. Total bad debt at the end of the third quarter of 2023 of banks increased by 61 per cent compared to the end of the previous quarter to 196.75 trillion VND. If including bad debts sold to the Vietnam Asset Management Company (VAMC), the bad debt ratio of the entire banking system was 6.16 per cent.

Nguyen Manh Thuat from Southeast Asia Law Firm said it was necessary to reduce the bad debt rising pressure for banks in the near future.

The most important thing was to monitor cash flow to ensure it was used for the right purpose. In addition to having collateral assets, it was necessary to control the purpose of the loan to ensure capital safety, Thuat suggested.

Banks say about 70 per cent of assets, which are mortgaged at banks for loans, currently are real estate. The ratio at some banks is even up to 80-90 per cent. Therefore, real estate is often the asset that banks put up for sale the most to recover bad debts. However, the handling of bad debt is facing difficulties because the real estate market is frozen.

Nguyen Hung, General Director of TPBank, said the sale of mortgaged assets had been very difficult in recent times. It was tough for banks to sell many collaterals that were large-value real estate.

Dr Tran Duc Thuc from HCM City University warned that provisions for risky debts were still increasing. It meant, despite support, banks' bad debts were still increasing. It showed the economy was facing difficulties.

According to Thuc, many people predict that bad debt will increase in early 2024 when corporate bonds come to maturity. The sale of assets is facing difficulty so firms do not have money to pay bonds and bank loans. If banks do not consider an extension for existing debts, the debts will be transferred to a worse debt group.

Economist Nguyen Minh Phong believes that bad debts will still be under great pressure in 2024 as the debts are continuously increasing and create an overall quite large bad debt amount.

According to the Governor of the State Bank of Vietnam, Nguyen Thi Hong, the SBV will consider a proposal to extend Circular 02/2023/TT-NHNN on debt restructuring and debt repayment postponement until June 2025 to both give banks more time to deal with bad debts and support firms in accessing capital.

Falling interest rates likely in H2 On May 23, the SBV announced additional adjustments to a series of key interest rates, effective from May 25. This move marks the third round of reductions designed to boost the economy in less than three months. Interest rates are predicted to soften in the second half of the year, due to several factors in both the domestic and international markets.

How bad debts influence lending rates Last week the State Bank of Vietnam continued reducing diverse regulatory interest rates in a bid to help remove impediments for borrowers, as well as support credit institution efforts to drive down input costs, and from there be able to reduce lending rates.