Non performing loans in vietnamese commercial banks,graduation thesis

THEORETICAL FRAMEWORK ABOUT COMMERCIAL

Overview about commercial banks

According to Frederic S Mishkin in “The Economics of Money, Banking and Financial Markets,” commercial banks serve as financial intermediaries by raising funds through checkable deposits, savings deposits, and time deposits These banks utilize the collected funds to extend various types of loans, including commercial, consumer, and mortgage loans, as well as to invest in U.S government securities and municipal bonds.

In Vietnam, a commercial bank is defined as a credit institution authorized to engage in a wide range of banking activities and related business operations These banking activities encompass monetary transactions and services, including regular operations such as accepting deposits, providing credit, and facilitating payment services through accounts.

To stay competitive and meet public demands, commercial banks have embraced various roles, which can be categorized into several key areas that focus on serving their customers effectively.

Student: Nguyen Thi Kim Dan – 16A7510034 7

The intermediation role of commercial banks is crucial for economic development, as they convert household savings into loans for businesses By facilitating investments in new buildings, equipment, and goods, these banks mobilize idle capital, meet liquidity needs, and minimize risks and transaction costs.

Commercial banks play a crucial role in financial intermediation by attracting entrepreneurs to open deposit accounts By accepting customer deposits, they facilitate payments for goods and services through methods like check issuance and electronic payment processing This function enhances the speed of capital circulation, minimizes the reliance on physical cash, and reduces costs associated with cash management, such as printing, counting, and storage expenses.

Commercial banks play a crucial role in offering risk protection services, helping customers financially prepare for potential losses related to property, individuals, and financial assets, as highlighted by Peter S Rose and Sylvia C Hudgins in their book "Bank Management and Financial Services," 7th edition.

Besides, commercial banks play other principal roles, such as agency role, policy role or guarantor role

Commercial banks are crucial in managing and supplying capital within the economy With advancements in economic and technological sectors, banking activities have become more diverse while still focusing on core operations.

Commercial banks play a crucial role in the economy through capital mobilization, which includes accepting deposits, issuing loans, and distributing valuable papers This fundamental operation not only enhances the quality of bank operations but also supports production development and economic growth As commercial banks expand their capital mobilization activities, they bolster their reputation, strengthen credit relationships with various economic sectors, and ultimately increase profitability.

This operation directly boosts banks' profitability, enhancing their prestige and competitiveness in the market Consequently, it is essential for banks to conduct thorough research to develop the most effective capital strategy.

Commercial banks primarily generate income through lending, with approximately 60% to 75% of their revenue stemming from this activity The effectiveness of a bank hinges on the execution of its credit plans, which are significantly influenced by its lending policies Loans can be classified based on their purpose, maturity, or repayment method.

Commercial banks engage in investment activities to meet the diverse needs of society In addition to lending, they allocate capital for two primary types of investments: securities trading and fixed asset investments.

Commercial banks engage in treasury operations to maximize profits, which remain their primary objective Given the inherent risks in banking, these institutions allocate a portion of their mobilized capital to safeguard their payment capabilities and comply with government-mandated reserve requirements.

Commercial banks offer a variety of payment options, such as checks, collection orders and credit cards Besides, commercial banks also conduct brokerage, trade

Nguyen Thi Kim Dan, a student from class 16A7510034, highlights the role of commercial banks in the securities market, where they serve as securities issuance agents for companies Additionally, these banks provide a range of entrusted services, including entrusted lending, investment, delivery, disbursement, and collection, enhancing their financial offerings.

Therefore, performing effectively these above operations will ensure the bank survive and develop healthily in the increasingly competitive environment.

Non-performing loans

According to Circular 02/2013/TT-NHNN issued by the Governor of the State Bank of Vietnam, non-performing loans, also known as bad debts, are categorized into three groups: group 3 (sub-standard), group 4 (doubtful), and group 5 (loss).

To determine NPLs, loan classification is compulsory Under Vietnam Law, Circular 02/2013/TT-NHNN allows credit institutions to apply both quantitative and qualitative methods to classify loans:

Table 1.1: Debt classification under quantitative method

- Current debts that being assessed as fully and timely recoverable, both principals and interests;

Debts that are overdue for less than 10 days are considered fully recoverable, including both overdue principal and interest, as well as remaining principal and interest that can be recovered in full and on time.

- Debts which are overdue for a period of between 10 days and 90 days;

- Debts which are restructured repayment term for the first time

- Debts which are extended repayment term for the first time;

- Debts which are exempted or reduced interests because customers are not sufficient capability to pay all interests under credit contracts;

- Debts which are fallen in one of the following cases:

+ Debts of customers or the guarantee party being organizations, individuals who are not subject to be extended credit by credit institutions, foreign banks’ branches as prescribed by law

Debts secured by stocks of credit institutions or their subsidiaries involve loans utilized to invest capital in other credit institutions In this arrangement, the lending credit institution obtains security in the form of stocks from the institution receiving the capital contribution.

Unsecured debts refer to loans that are not backed by collateral, particularly those extended with favorable terms or exceeding 5% of a financial institution's own capital These debts are subject to restrictions on credit extensions as mandated by law, especially for customers of foreign bank branches.

Debts provided to subsidiary and associate companies of credit institutions, or enterprises under their control, must not exceed the legal limit rates established by law.

+ Debts which have value exceeding limits of credit extension, unless being allowed to exceed limit, as prescribed by law;

+ Debts which violated provisions of law on credit extension, foreign exchange management and rates of safety assurance for credit institutions, foreign banks’ branches;

+ Debts which violated internal regulations on credit extension, loan management and policy on risk provisions of credit institutions, foreign banks’ branches

- Debts which are recovered under inspection conclusions

- Debts which are restructured repayment term for the first time but still overdue for a period of less than 90 days under that restructured repayment term;

- Debts which are restructured repayment term for the second time;

- Debts which must be recovered under inspection conclusions but fail to be repaid although recovery term was overdue from 60 days ago

- Debts which are overdue for a period of more than 360 days;

- Debts which are restructured repayment term for the first time but still overdue for a period of 90 days or more than under that first restructured repayment term;

- Debts which are restructured repayment term for the second time but still overdue under that second restructured repayment term;

- Debts which are restructured repayment term for the third time or later, whether debts are overdue or not;

- Debts which must be recovered under inspection conclusions but fail to be repaid although recovery term was overdue for more than 60 days;

The State Bank has designated certain customer debts of credit institutions for special control, particularly those involving foreign bank branches whose capital and assets are currently blocked.

Table 1.2: Debt classification under qualitative method

Debts which credit institutions, foreign banks’ branches assess that there is capability to recover fully and timely both of principals and interests

Credit institutions and foreign bank branches identify debts that have the potential for full recovery of both principal and interest; however, they also observe indicators suggesting that customers may be experiencing a decline in their ability to repay.

Credit institutions and foreign bank branches classify debts as unrecoverable when both the principal and interest are overdue These debts are evaluated as potential losses by these financial entities.

4 Doubtful loans Debts which are assessed by credit institutions, foreign banks’ branches to be high-potential losses

Debts which credit institutions, foreign banks’ branches assessed as irrecoverable and lost

Based on IMF and World Bank classification, countries have classified commercial banks' loans into 5 groups, and NPLs are loans belonging to groups 3, 4 and 5

The Non-Performing Loan (NPL) ratio is a crucial metric for assessing the credit quality of banks, indicating the proportion of non-performing loans per 100 dongs A higher NPL ratio signifies greater difficulty in recovering challenging loans, putting the bank's capital at risk of potential losses.

Analyzing the causes of Non-Performing Loans (NPLs) is crucial for developing effective management strategies NPLs typically emerge from various factors, including economic downturns, poor lending practices, and borrower financial instability Understanding these underlying reasons is essential for implementing appropriate solutions to mitigate risks associated with NPLs.

The economic environment plays a crucial role in shaping the financial potential of individuals, organizations, and enterprises An underdeveloped economy and disproportionate market competition can weaken financial stability Moreover, frequent changes in macroeconomic policies—such as interest rates, exchange rates, and import/export regulations—directly impact business operations, which in turn affects the quality of loans individuals and organizations secure from commercial banks.

The legal environment significantly contributes to non-performing loans (NPLs), as inadequate banking regulations can complicate property collateral disputes for authorities Furthermore, weak accounting and auditing regulations undermine the reliability of data used for loan appraisals, exacerbating the NPL issue.

Non-performing loans (NPLs) often arise from the inherent weaknesses in a customer's business The financial capacity of struggling businesses significantly influences their overall performance Additionally, inadequate management skills among business owners can lead to inefficient operations, further diminishing their ability to repay loans.

Customer morality plays a significant role in the financial sector, as some companies intentionally misreport financial data to mislead credit assessments and loan extensions, complicating loan recovery for banks Additionally, certain borrowers may engage in unethical behavior, taking excessive risks or exploiting legal loopholes to profit while lacking any intention of repaying borrowed funds.

Natural disasters, fires, and epidemics caused by changes in the natural environment have significantly impacted borrowers, particularly those with agricultural loans, resulting in an increase in non-performing loans (NPLs) This issue is largely beyond the control of both commercial banks and borrowers.

These reasons come from the commercial banks themselves This may be due to poor credit policies, lose supervision or weak workforce quality

Non-performing loans’ management

Effective management of Non-Performing Loans (NPLs) involves creating and implementing strategies and policies that promote safe and sustainable growth By enhancing measures to prevent the emergence of bad debts and focusing on the recovery of existing ones, commercial banks can boost revenue, lower costs, and enhance overall business performance.

NPLs will be a great hindrance of banking activities and the economy if they are not carefully considered

Commercial banks serve as vital financial intermediaries, distributing funds and offering banking services that promote investment and economic development Consequently, instability within these banks can negatively impact the banking system and the broader economy, leading to issues such as currency fluctuations, reduced production, and potential economic crises.

Non-performing loans (NPLs) in commercial banks lead to significant negative impacts, hindering their competitiveness in the global market Consequently, addressing NPLs is essential for banks to thrive amid globalization and ongoing development.

Effective management of bad debts is a shared responsibility among commercial banks, the State Bank of Vietnam (SBV), the government, and society The primary goal of managing non-performing loans (NPLs) is to develop and implement a customer policy that minimizes credit risk while simultaneously achieving the bank's profitability objectives.

In order to obtain a low rate of bad debt, commercial banks should focus on measures to prevent bad debt from occurring

Improving the quality of credit assessment:

Commercial banks must enhance their information and control systems by establishing an effective reporting framework to optimize market management Additionally, it is crucial for these banks to develop regulations that set minimum standards for risk management systems A thorough assessment of payment-related risk levels, coupled with the application of information technology, is essential for proposing and implementing solutions to mitigate non-performing loans (NPLs).

On 22 nd April, 2005, the SBV launched Decision 493/2005/QD-NHNN (The Decision

493) Now, it is replaced by Circular 02/2013 (effective from June 1 st , 2014)

Time to set up provision:

Within the first 15 working days of each quarter, credit institutions categorize debts and establish provisions for loan losses, using the balance from the last working day of the preceding quarter.

Loan classification serves as the foundation for establishing adequate loan loss provisions to mitigate credit losses for commercial banks These provisions are divided into two categories: specific provisions, which address particular loans at risk, and general provisions, which cover broader potential losses.

The amount of specific provision is calculated under the following formula:

In which: R: Amount of specific provision to be made

A: Outstanding principal of the debt

C: Deduction value of collateral assets r: Specific provision rate

Under both quantitative and qualitative methods, the specific provision rate for five debt groups is as follows:

Table 1.3: Specific provision rate for each group

General provision refers to the funds set aside to cover potential losses that are not specifically estimated during the classification of loans This provision is crucial for commercial banks that may encounter financial difficulties, ensuring they remain financially stable and can manage unforeseen risks effectively.

It is calculated at 0.75 per cent of balance of debts from group 1 to group 4

When NPLs arise, commercial banks must immediately have appropriate responses to reduce loss at minimum

Step 1: Assessing the ability to repay debts of customers

When customer does not pay debt at maturity, credit officer must contacts the customer immediately to determine the reason of non-payment then assess the ability

Nguyen Thi Kim Dan, a student from class 16A7510034, is focused on assessing the willingness of customers to repay their debts This evaluation aims to determine whether to restructure the loan and to appropriately reclassify the debt into the suitable category.

Step 2: Deciding measures to process bad debts

Redeemable loans refer to overdue loans where the borrower still possesses the ability and willingness to repay In such cases, credit officers assess the underlying reasons for the repayment delay and develop a comprehensive loan restructuring plan.

Irredeemable loans are loans that banks cannot collect; therefore, banks will take advantage of creditor’s rights to recover as maximum amount of debt as possible

 Selling debts: Banks can sell bad debts to VAMC by using special bonds

 Using loan loss provision: Specific provisions and the realization proceeds of collateral are used first to compensate for the loss General provisions are used as the last resort

 Selling collaterals: Banks definitely sell collateral to compensate for the loss

 Suing customers: This measure is often used when there is a dispute with collaterals and involved parties cannot reach an agreement, or in case customer has signs to cheat

Credit officers must monitor and control all customers’ activities regularly under the terms of agreed loan restructure plan

Credit officers collect the loans

THE REAL SITUATION OF NON-PERFORMING LOANS IN

Overview of Vietnam’s banking system

Since its establishment in 1990, Vietnam's banking industry has evolved significantly from a mono-banking system to an extensive network of banks and financial institutions Over the past 26 years, the country has made substantial strides in developing essential infrastructure to support a modern banking system and financial markets, aligning with international standards.

The State Bank of Vietnam (SBV) serves as the primary financial regulatory body, overseeing critical operations like liquidity support, monetary policy, and the management of foreign currency reserves Additionally, the SBV's decisions regarding foreign exchange rates and the issuance of banking licenses require approval or consultation from the Prime Minister.

As of the end of 2015, the State Bank of Vietnam (SBV) oversees a range of financial institutions, including one policy bank, the Vietnam Bank for Social Policies, and one development bank, the Vietnam Development Bank Additionally, the SBV supervises seven state-owned commercial banks, which include three joint-stock commercial banks—Vietnam Construction Bank, Global Petrolimex Bank, and Ocean Bank—that were acquired at zero dong The banking landscape also features five wholly-owned foreign banks and 28 joint-stock commercial banks, along with three joint-venture banks.

Student: Nguyen Thi Kim Dan – 16A7510034 24 venture banks, 50 branches of foreign banks, 16 financial companies and 11 financial leasing companies

The IMF, World Bank, and international donors, including the United States, are supporting Vietnam's financial reforms to stabilize and enhance the banking system These reforms concentrate on restructuring joint-stock banks, equitizing state-owned commercial banks (SOCBs), and improving regulatory frameworks for greater transparency Additionally, the State Bank of Vietnam (SBV) is strengthening its internal processes and enhancing inspections and supervision of banks under its authority.

In recent years, Vietnam’s commercial banking system has dealt with some following outstanding issues:

Vietnam's economy remains heavily reliant on its banking sector, and unresolved issues within this area pose a significant bottleneck that hinders economic growth and impacts employment, income, and social well-being Compared to regional counterparts, Vietnamese banks are relatively small, with outstanding loans totaling approximately $209 million in 2015.

Chart 2.1: The total of outstanding loans of six countries in 2015

The total of outstanding loans

Vietnam's banking system plays a crucial role in providing both short-term and long-term capital to the economy As of the end of 2015, the market capitalization of Vietnam's stock market was only 33% of GDP, while outstanding loans in the banking sector reached 112% of GDP This heavy reliance on the banking sector for economic capital introduces significant risks to both the economy and the banking system.

Chart 2.2: %Outstanding loans/GDP of six countries in 2015

Total assets in the banking sector have experienced significant growth, although the balance sheet figures may be inflated due to varying growth rates among banks Recently, joint-stock banks have excelled in attracting private capital by selling equity stakes to foreign investors, including investment funds and financial institutions, as well as through the issuance of convertible bonds and additional shares While joint-stock banks are generally smaller than state-owned commercial banks (SOCBs), they demonstrate more efficient operations and professional management, effectively narrowing the performance gap.

According to statistics of the SBV (Table 2.1), the total assets of the entire system of credit institutions by the end of December 2016 increased 16.18 per cent over the

At the beginning of the year, total assets across various banking sectors exceeded 8.5 million billion dongs, with state-owned commercial banks (SOCBs) and joint-stock commercial banks seeing a significant increase of 16.89%, reaching 3,861,942 billion dongs and 3,422,829 billion dongs, respectively In contrast, joint-venture banks, foreign-owned banks, and branches of foreign banks experienced a more modest growth of 9.63%, totaling 828,322 billion dongs Furthermore, finance and leasing companies reported a remarkable asset growth of 30.20%, amounting to 114,370 billion dongs.

Table 2.1: Total assets in Vietnamese credit institutions

(As of 31/12/2016, growth rate as compared to end of last year)

Total Assets Amount Growth rate

Vietnam Bank for Social Policies 159,610 10.68

Joint venture, 100% foreign-owned banks, foreign banks' branches 828,322 9.63

The increasing cross-ownership among banks poses significant risks to the banking sector, prompting the State Bank of Vietnam (SBV) to implement a new regulation in February 2015 This rule mandates that domestic banks with cross-ownership either merge or divest their stakes, limiting a bank's shareholding to no more than 5 percent in a maximum of two other credit institutions Additionally, the SBV encourages larger banks to acquire weaker ones, anticipating a wave of mergers and acquisitions that will consolidate and strengthen Vietnam's banking sector in the medium term.

In August 2016, Vietnam's credit growth reached 18% compared to the same period the previous year, significantly outpacing the nominal GDP growth rate The World Bank advises the Vietnamese government to closely monitor this rapid credit expansion, as it may lead to increased debt mobilization and raise concerns regarding asset quality and the potential for bad debts.

In 2016, Vietnam experienced a significant rise in loan loss provisions, as reported by Vietnam Investment Review Financial statements from ten major Vietnamese banks, including BIDV, Vietinbank, and Vietcombank, revealed that 70% of these banks increased their loan loss provisions, totaling 27,751 billion dongs—a 13.93% increase from 2015 This surge can be attributed to the emergence of new bad debts amid challenging macroeconomic conditions and difficulties faced by enterprises in their production and business activities, along with many customers struggling to repay restructured loans.

Current analyses indicate that many commercial banks are functioning in a precarious and unstable environment, posing significant risks of collapse if macroeconomic conditions worsen The alarming increase in non-performing loans (NPLs) raises serious concerns Thus, it is crucial to implement effective and timely measures to safeguard the banking system.

2.2 The real situation of NPLs in Vietnamese commercial banks:

Despite the NPL ratio of the entire banking system dropping below 3 percent, the management of non-performing loans remains a critical concern for Vietnamese commercial banks.

Chart 2.3: NPL ratio of banking system in the period of 2012 – 2016

In recent years, the term "bad debts" has been frequently highlighted in the media, prompting the banking sector to take decisive action to reduce its occurrence Notably, the rate of non-performing loans (NPLs) has significantly decreased, dropping from over 17 percent in September 2012 to just 2.62 percent by March 2016.

The figure above (Chart 2.3) shows a decrease of NPL ratio in banking system during

From 2012 to 2016, the rate of bad debts in the banking sector began at 4.08 percent, amounting to 126,108 billion dongs in 2012, and slightly decreased to 3.79 percent, or 131,788 billion dongs, in 2013, with 15 banks releasing their financial reports during that period.

The government and SBV’s measures and banks’ efforts in handling non-

Non-performing loans (NPLs) in Vietnamese commercial banks have been a longstanding issue, exacerbated by a deteriorating macroeconomic environment and stagnant business activities Aggregate data indicates that these bad debts began to rise significantly in 2007, culminating in a serious challenge by the end of 2011.

In 2012, the non-performing loan (NPL) rate reached alarming levels, with an average credit growth rate of 26.56% from 2008 to 2011, while bad debts surged by 51% This escalating issue prompted discussions beyond commercial banks, capturing the attention of the National Assembly and the Government On January 3rd, significant measures were considered to address the growing concern of bad debts in the financial sector.

2012, the Government issued Resolution 01/NQ-CP on major solutions to direct the implementation of socio-economic development plans and state budget estimates of

2012, and the project "Restructuring the system of credit institutions in the period of 2011-2015" under the Decision 254/QD-TTg was also promulgated

In fact, the SBV has drastically implemented under the project 254 by classifying the commercial bank system into three groups:

- Group 1: Commercial banks with healthy financial status to grow into the pillars of the system;

- Group 2: Small commercial banks with healthy finances status;

- Group 3: Commercial banks with difficult financial situation which are forced to restructure

By the end of 2012, the State Bank of Vietnam (SBV) prioritized enhancing liquidity and managing the banking system, optimizing financial operations, and restructuring organizations to effectively address bad debts.

In 2013, Vietnam experienced a significant increase in credit institutions, rising by 23.73% compared to the previous year During this period, the banking system faced a substantial threat from non-performing loans (NPLs), which jeopardized both financial security and national stability As NPLs surpassed the control of commercial banks, the Vietnamese government and the State Bank of Vietnam (SBV) implemented various solutions to address this issue Under Project 254, the SBV focused on enhancing the banking system's health by reinforcing capital adequacy regulations, tackling bad debts through the establishment of the Vietnam Asset Management Company (VAMC), and improving risk management practices.

Thereafter, decisions and circulars were promulgated:

On January 21, 2013, the State Bank of Vietnam (SBV) released Circular No 02/2013/TT-NHNN, which outlines the classification of assets, the levels and methods for establishing risk provisions, and the utilization of provisions to mitigate credit risks within credit institutions and foreign bank branches This circular aligns debt classification and loan loss provisions with Basel II standards, which are widely adopted by various countries globally.

- On May 18 th , 2013, the government issued Decree No.53/2013/ND-CP on the establishment, organization and operation of VAMC

On May 31, 2013, the Prime Minister approved the "Dealing with Bad Debts of Credit Institutions System" project through Decision 843/2013/QD-TTg This initiative emphasizes the urgent, decisive, and coordinated approach needed to address bad debts, integrating it into the broader economic restructuring program.

- On September 9 th , 2013, the SBV issued Circular 19/2013/TT-NHNN regulating the purchase, sale and disposal of bad debts of VAMC

In 2014, the management of bad debts showed positive progress, with credit institutions reporting a total of 162.2 trillion dongs in non-performing loans (NPLs) by the end of July, representing 4.11% of total outstanding loans Despite this, NPLs surged in the early months of the year due to an underdeveloped macroeconomic environment and challenges faced by businesses To address these issues, credit institutions implemented stricter debt classification standards, enhancing the accuracy of credit quality assessments and facilitating more effective bad debt resolution.

During this time, the SBV had implemented following measures to handle bad debts:

The State Bank of Vietnam (SBV) is permitting credit institutions to restructure debt repayment terms and maintain current debt classifications to alleviate financial pressures and support borrowers in their production and business activities However, the SBV is implementing stricter measures to ensure that credit institutions do not exploit debt restructuring as a means to conceal non-performing loans.

On March 18, 2014, the State Bank of Vietnam (SBV) issued Circular No 09/2014/TT-NHNN, amending Circular No 02/2013/TT-NHNN This circular allows credit institutions to restructure repayment terms and maintain existing debt classifications from March 20, 2014, to April 1, 2015, with the stipulation that each debt can only be restructured once.

- Credit institutions continued actively dealing with bad debts In the first seven months of 2014, credit institutions managed more than 40.8 trillion dongs of NPLs through:

+ Customers repaid loans: 14.3 trillion dongs;

+ Credit institution sold collateral for debt collection: 1.56 trillion dongs;

+ Credit institutions sold to VAMC: 14.49 trillion dongs;

+ Credit institution used loan loss provision: 8.3 trillion dongs

The Vietnam Asset Management Company (VAMC) has played a crucial role in reducing the bad debt ratio of credit institutions, particularly through its non-performing loan (NPL) purchases during the latter half of 2014 and early 2015 By acquiring NPLs using special bonds, VAMC has effectively assisted credit institutions that meet specific criteria From October 2013 to December 31, 2014, VAMC purchased outstanding loans totaling 133,555 billion dongs, with a total purchase price of 108.652 billion dongs from 39 credit institutions.

Chart 2.6: Results of bank’ bad debt purchase by VAMC

In 2015, the final year of the "Restructuring the System of Credit Institutions (2011-2015)" project, marked a pivotal moment for the "Handling Bad Debts of the Credit Institutions’ System" initiative The government and the State Bank of Vietnam (SBV) took decisive actions to address bad debts, a key contributor to macroeconomic instability in Vietnam.

To effectively address the issue of bad debts as outlined in the project "Handling Bad Debts of the Credit Institutions' System" associated with Decision No 843, it is crucial to implement solutions that aim to reduce the non-performing loan (NPL) ratio to below 3 percent by the end of the designated period.

In 2015, the State Bank of Vietnam (SBV) issued Directive 02/CT-NHNN on January 27, emphasizing the urgent need to address bad debts within credit institutions The directive mandated that the Vietnam Asset Management Company (VAMC) plan to acquire between 70 to 100 trillion dongs of bad debt for the year Additionally, credit institutions were required to resolve at least 60 percent of their bad debts by June 30, 2015, with a minimum of 75 percent of bad debts sold to VAMC in the first half of the year This initiative aimed to ensure that financial institutions prioritize the management and resolution of bad debts effectively.

Nearly two years after its establishment, VAMC continued to struggle with bad debt, primarily due to its relatively small charter capital compared to the significant amount of bad debts Economic experts noted that the debt purchase mechanism relied heavily on administrative measures rather than market-oriented solutions In response to these challenges, Decree 34/2015/ND-CP was issued on March 31, 2015, amending and supplementing certain articles of Decree 53/2013/ND-CP from May.

Table 2.3: Comparison between Decree 53 and Decree 34

Charter capital 500 billion dongs 2,000 billion dongs

The purchasing form of special bonds By book value By book value and market value

The purpose of special bonds Refinancing at the SBV Refinancing and joining the open market

Maximum term of special bonds 5 years 10 years

Provision 20%/year Under the instruction of the SBV

Organizations, individuals and non-resident people

By June 2015, financial statements from 12 joint-stock commercial banks revealed a significant 46% reduction in profits due to increased provision expenses, which rose by 20% annually as banks sold bad debts in exchange for special bonds from VAMC As of July 2015, VAMC had approved 59 trillion dongs at original cost out of 64 trillion dongs received from credit institutions, purchasing these debts for 54 trillion dongs Within seven months, VAMC successfully managed to recover 6.513 trillion dongs through the sale of collateral and bad debts.

Assessment

In the process of handling bad debts, efforts of the government, commercial banks and involved parties reached the following achievements

- Organizing suitable debt management meeting the demands for handling bad debt

The handling of non-performing loans (NPLs) is systematically defined, outlining the responsibilities of all parties involved in managing bad debts Bank leadership conducts regular analyses to assess the impact of NPLs on business performance The risk management committee, alongside the NPL management team led by senior executives, closely monitors departmental activities Comprehensive quarterly reports are generated, detailing management outcomes, existing challenges, causal analyses, and proposed solutions for effective bad debt management.

- Following the international standard of credit risk management

The lending mechanism and pre-lending assessment are rigorously implemented, with each loan being managed by a dedicated credit officer and requiring approval from the Credit Department Manager prior to any loan decision Furthermore, the State Bank of Vietnam (SBV) oversees these processes to ensure compliance and accountability.

Student: Nguyen Thi Kim Dan – 16A7510034 49 has gradually applied Basel II method in aligning debt classification with internal credit rating system

- Developing and applying the internal credit rating system in risk measurement

The implementation of an international standard credit rating system is essential for Vietnamese commercial banks to streamline credit procedures and enhance overall credit quality This system enables banks to conduct thorough and systematic evaluations of their clients, investment projects, and credit analyses, fostering a more reliable financial environment.

- Enhancing controlling and checking activities

The implementation of this model has provided commercial banks with a systematic approach to risk assessment, enabling them to take timely actions to mitigate bad debts This mechanism also mandates continuous improvement in the quality of internal inspections, the transparency of financial statements, and the effectiveness of risk management As a result, there has been a notable decline in the growth rate of non-performing loans (NPLs) and the NPL ratio over the past five years.

VAMC is a specialized one-member limited company fully owned by the state, operating under the management, inspection, and supervision of the State Bank of Vietnam (SBV) The company's charter capital is entirely state-owned.

VAMC's mission involves acquiring and managing bad debts, tailoring its approach to the unique characteristics of each debt portfolio and its objectives during different periods To date, VAMC has successfully assisted credit institutions in alleviating the burden of bad debts, enabling them to focus on new credit activities.

- Improving significantly credit capacity of bank officers

Banks gradually retrained and constantly cared for living standards of staff, creating mechanism, motivation and good working environment in order to stimulate the strength of human resources

Circular 08/2016/TT-NHNN was introduced to enhance the resolution of non-performing loans (NPLs) by amending certain articles of Circular 19/2013/TT-NHNN; however, the outcomes have been modest While the amendments are a step in the right direction, they are unlikely to make a substantial difference in addressing NPL issues due to the persistence of underlying problems.

(1) VAMC has not been fully empowered to dispose NPL and collaterals;

(2) VAMC’s equity is too small to buy NPLs at market price or actually solve the NPL that it had bought by special bonds;

(3) Some regulations on ownership of real estate assets restricts potential investors

The decline in non-performing loans (NPL) sold to the Vietnam Asset Management Company (VAMC) was not indicative of improved asset quality among banks; rather, it stemmed from banks no longer facing pressure to offload NPLs once their NPL ratio fell below 3% From early 2016 to late October 2016, VAMC acquired only 26,739 billion dongs in NPLs, which was merely a quarter of the volume purchased in 2015 This shift in NPL sales was viewed as unfavorable for banks.

(1) VAMC’s modest ability to resolve bad debt; (2) High provision pressure on banks after selling NPL; (3) Banks still have to keep their responsibility for bad debts sold

As of the end of Q3, VAMC has successfully recovered 14.5% of the total debts acquired through special bonds Additionally, banks have made provisions for 34% of these debts However, 51.5% of the total, amounting to 135 trillion dongs, remains unresolved and is still held by VAMC without an effective solution.

The regulations governing the State Bank of Vietnam's (SBV) authority over weak credit institutions are inadequate The Law on Credit Institutions 2010 grants the SBV the power to directly purchase compulsory shares, with the Prime Minister overseeing this process However, the implementation of these regulations has faced significant opposition, complicating the SBV's efforts Furthermore, the law does not empower the SBV to mandate the compulsory dissolution of struggling credit institutions.

VAMC and credit institutions are unable to proactively collect property from owners who disagree or oppose the process, which can lead to prolonged disputes Additionally, the Civil Code 2015 and Decree 163/2006/ND-CP present challenges in managing the assets of credit institutions Consequently, urgent solutions are required to effectively address non-performing loans (NPLs) and enhance the financial stability of Vietnamese commercial banks.

SOLUTIONS TO HANDLE NON-PERFORMING LOANS

Solutions to the government and the SBV

The State Bank of Vietnam (SBV) must persist in restructuring the banking system to enhance its health and eliminate weaker banks This restructuring process focuses on stabilizing the financial system while safeguarding the interests of depositors across all credit institutions.

The restructuring program of credit institutions needs to be based on four principles:

To effectively address bad debt, it is crucial for the State Bank of Vietnam (SBV), the Ministry of Finance, and the government to establish long-term mechanisms and policies that support commercial banks in managing and mitigating these financial challenges.

(2) Completely dealing with weak banks and banks bought 0 dong

To enhance stability within the Vietnamese banking system, it is essential for the government to thoughtfully reorganize governance and risk management in alignment with international standards Developing a strategic roadmap that takes into account the financial and management capabilities of the banking sector will be crucial in mitigating future risks and ensuring a robust financial environment.

(4) Maintaining stable liquidity on the basis of strict implementation of liquidity safety’s criteria in medium and long-term loans, real estate loans and foreign exchange status

Improving the legal system in banking operations

Firstly, the government should create a consolidated legal environment for purchasing activities and NPLs’ disposal The government should aggregate regulations into a common legal document on debt trading

The government, along with the State Bank of Vietnam (SBV) and the Ministry of Finance, must develop and uphold a robust financial system characterized by clear standards, regulations, auditing practices, settlement procedures, accounting guidelines, and effective governance frameworks Furthermore, it is essential to define the key objectives that will empower the financial system to effectively perform its functions while optimizing the speed and cost of capital.

To enhance banking system resilience against high-risk threats like crises or bankruptcy, the government must enforce stricter regulations prioritizing system security It is essential to rigorously review and reassess regulations concerning bank safety ratios, debt classification, and risk provisioning to ensure robust financial stability.

Handling cross-ownership status among commercial banks

In order to deal with cross-ownership status, there must be two conditions:

Weak banks that cannot recover will cease operations, necessitating strict enforcement of criteria and regulations on cross-ownership Although complete termination of operations is unlikely for all banks, the State Bank of Vietnam (SBV) will implement periodic warnings and follow-up measures to ensure compliance and stability in the banking sector.

To foster a market economy, the government must establish a clear roadmap for the equitization of state-owned enterprises, as completely eliminating cross-ownership is challenging A thorough approach will enable banks to divest in a transparent and public manner, promoting greater financial accountability and market integrity.

The State Bank of Vietnam (SBV) must establish stringent regulations for share purchasers and investors involved in bank management to mitigate risks By adopting these measures, the banking system will strengthen, attracting more customers to deposit in commercial banks.

In addressing bad debts, state budgets play a crucial role in providing financial support to credit institutions and the economy For instance, during the 2008-2009 financial crisis, the Federal Reserve allocated $700 billion to American credit institutions to manage bad debts Similarly, the Bank of England invested £500 billion to ensure liquidity and address bad debt issues.

To mitigate potential difficulties and prevent bankruptcy, credit institutions must address high-risk provisions Consequently, it may be an opportune moment for the state budget to provide assistance to banks, ensuring they can maintain their crucial role in the economy.

VAMC plays a crucial role among the six primary strategies for managing bad debts It is essential for the government and the State Bank of Vietnam (SBV) to enhance the framework and processes for addressing non-performing loans (NPLs) through VAMC.

The government should swiftly establish additional branches of VAMC in major cities like Ho Chi Minh City and Da Nang, along with representative offices in key areas to enhance trading operations These branches and offices must be designed to be streamlined, dynamic, and efficient to facilitate better service delivery.

The government and the State Bank of Vietnam (SBV) must persist in addressing challenges related to bad debt trading and enhancing the management of collateral assets for the Vietnam Asset Management Company (VAMC) Additionally, it is crucial for the government to empower VAMC by expanding its rights, particularly in key areas that facilitate effective debt recovery.

(1) Allowing VAMC to seize security assets

According to the Civil Code 2015, if a property holder refuses to relinquish the property, the secured party can seek a court resolution, complicating VAMC's efforts to effectively manage bad debts.

The government needs to establish clear guidelines for situations where property owners refuse to relinquish their assets to designated parties Consequently, the Vietnam Asset Management Company (VAMC) should have the authority to seize secured assets if there is a pre-existing agreement regarding property seizure within the security contract Additionally, it is essential to outline the supporting responsibilities of the relevant authorities in these cases.

(2) Stopping distrainment of the mortgaged assets at VAMC

Solutions to the commercial banks

Dealing with bad debts, strengthening financial capacity, managing and reducing operational costs are central issues which should be set for Vietnamese commercial banks

Vietnamese commercial banks need to proactively create and implement restructuring plans aimed at managing bad debts for the 2016-2020 period These plans should align with the guidelines, objectives, and strategies outlined in the banking industry's restructuring scheme for credit institutions during this timeframe.

In 2017, Vietnamese commercial banks must implement a strategic plan to address bad debts and potential bad debts, including balance bad debts, debts sold to the Vietnam Asset Management Company (VAMC), restructured debts, and corporate bonds, on a quarterly basis Despite the non-performing loan (NPL) ratio falling below the permitted maximum, it is crucial for these banks to strive for a zero NPL rate.

To enhance governance and reduce risks, Vietnamese commercial banks must strengthen their organizational models and improve internal control and audit systems This includes a thorough review and strict adherence to internal regulations regarding staff rotation, particularly in leadership roles and critical areas such as budgeting, credit management, payment processing, capital mobilization, foreign exchange trading, and information technology.

Banks need to enhance their financial capacity and liquidity while restructuring assets and capital sources to minimize the gap between capital maturity and usage Additionally, it is crucial to increase the proportion of stable capital to ensure long-term financial health.

Vietnamese commercial banks must adhere to the guidelines and decisions from the State Inspection Agency and the State Audit Agency Furthermore, they should proactively implement measures to prevent, identify, and address violations, misconduct, and corruption within their management structure.

Vietnamese commercial banks must proactively address bad debts by implementing effective solutions, including aggressive debt collection, trading of debts, and securing assets They should initiate loans for borrowers and utilize provisions to manage risks, thereby supporting customers in overcoming challenges and fostering business development Furthermore, enhancing the resolution of bad debts through market mechanisms, particularly in collaboration with the Vietnam Asset Management Company (VAMC), is essential.

Reducing operating costs and effectively utilizing resources to manage bad debt is crucial for banks Institutions with high levels of bad debt that fail to establish adequate risk provisions as mandated by law, or exhibit low business efficiency, must implement strict controls to mitigate these issues.

Student: Nguyen Thi Kim Dan – 16A7510034 58 management costs, operating costs, especially the costs of advertisement, promotion, and customer care

Vietnamese commercial banks must manage credit growth rates in alignment with their scale, capital structure, and risk management capabilities They should enforce stringent controls on credit risk to maintain high credit quality and minimize bad debts Additionally, it is essential to adhere to the credit growth targets set by the State Bank of Vietnam (SBV) and prioritize lending in production and key sectors as directed by the government.

Banks are required to adhere to legal regulations regarding credit extension and loan security, particularly by implementing secured ratios as outlined in Circular 36 and Circular 06.

Vietnamese commercial banks must adopt innovative strategies to manage non-performing loans (NPLs) and enhance credit quality It is essential to strengthen their capabilities in credit assessment, appraisal, and risk management Furthermore, banks should consistently review and monitor borrowers, promptly reporting any challenges or recommendations to the State Bank of Vietnam (SBV) for appropriate action.

In today's banking sector, the inherent risks make it crucial for Vietnamese commercial banks to conduct thorough risk assessments The persistent challenge of managing bad debt ratios necessitates proactive measures to control their growth and mitigate their unpredictable effects on both the banking system and the broader economy.

Despite a decline in the bad debt ratio of Vietnam's banking system over the past five years, the management of non-performing loans remains a significant concern This thesis aims to analyze the current state of non-performing loans in Vietnamese commercial banks and suggest potential solutions Through extensive research and data collection from various sources, the thesis accomplishes several key objectives.

The article outlines the definition, roles, and primary functions of commercial banks while providing a clear explanation of non-performing loans (bad debts), including their causes and consequences This foundational information equips readers with a comprehensive understanding of non-performing loans and their impact on the banking sector.

Secondly, the thesis also provided theory of bad debt’s management in commercial banks The objectives, the importance and the process of non-performing loan’s management are also mentioned

Thirdly, the thesis focused on analyzing and assessing the real situation of bad debt ratio in Vietnamese commercial banks in the period of 2012 – 2016

The article examines the causes of non-performing loans in Vietnam, highlighting the measures taken by the government and the State Bank of Vietnam, as well as the initiatives of Vietnamese commercial banks It also evaluates the successes and shortcomings of these solutions.

Finally, the thesis suggested some solutions to handle non-performing loans

Generally, the thesis has researched some basic aspects of non-performing loans Thereafter, readers will understand some fundamental issue of bad debt and its negative impacts

In conclusion, non-performing loan in Vietnamese commercial banks is a conundrum

To effectively tackle the issue of bad debts, it is essential for all stakeholders to actively engage in seeking viable solutions By collaborating with citizens and other members, Vietnamese commercial banks can improve their financial health and keep the non-performing loan ratio under control, preventing further increases in the future.

Tiêu đề	Non – Performing Loans In Vietnamese Commercial Banks
Tác giả	Nguyen Thi Kim Dan
Người hướng dẫn	Mrs. Can Thuy Lien (M.A)
Trường học	Banking Academy of Vietnam
Chuyên ngành	Foreign Languages
Thể loại	Graduation Thesis
Năm xuất bản	2017
Thành phố	Hanoi

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Số trang	74
Dung lượng	899,76 KB