INTRODUCTION
Rationale
Joining the WTO marks a pivotal moment for Vietnam's economy, presenting significant opportunities alongside considerable challenges This international integration enhances the reputation and standing of Vietnam's banking system within the domestic financial market However, it also intensifies competitive pressures as regulations governing foreign financial institutions are relaxed.
To achieve sustainable development, Vietnam's commercial banking system must address existing weaknesses in technology, professional qualifications, management mechanisms, and supervision Since 2010, issues related to non-performing loans (NPLs) have become increasingly apparent, necessitating focused attention from 2011 onward The banks' risk management activities have failed to keep up with the rapid economic growth and credit expansion, leading to an increase in bad debts, deteriorating credit quality, and diminished banking efficiency.
The issue of non-performing loans (NPLs) is a significant challenge not only for Vietnamese economists but also for financial experts globally, leading to substantial profit losses and potential bankruptcies Urgent and effective measures are essential to manage and mitigate bad debts, ensuring a robust banking system and a resilient overall financial framework.
Understanding the critical need to mitigate the risks associated with non-performing loans (NPLs) in credit operations is essential for enhancing the stability of Vietnam's banking system This article explores the challenges posed by NPLs in Vietnam's commercial banking sector from 2010 to 2015 and presents viable solutions to address these issues effectively.
Objective
This research aims to analyze the issue of non-performing loans (NPLs) in Vietnam's commercial banks from 2010 to 2015 It evaluates the status of bad debts, identifies their causes, and examines the measures implemented by the government and banking system to manage them Additionally, the study explores the consequences of NPLs and proposes potential solutions to mitigate and prevent future occurrences.
2 hence, strengthening credit operations and banking businesses of Vietnam’s commercial banking system in the near future.
Research questions
The study should be able to answer a number of questions with a certain level of insight
- What are the causes of NPLs?
- How did NPLs progress during the period of 2010 to 2015 in Vietnam’s commercial banking system?
- What did the government and banks do to deal with this problem? To what extent was it effective? What were the remaining drawbacks?
- What are the possible solutions to handle NPLs?
Scope and limitations
This research focuses on the credit activities of Vietnam's commercial banking system, specifically analyzing various banks, including VietinBank (CTG), BIDV, Vietcombank (VCB), and others, to provide a comprehensive overview of the sector The selected banks represent different types of joint-stock commercial banks (JSCBs) and state-owned commercial banks (SOCBs), reflecting the diversity of Vietnam's banking landscape The study spans the period from 2010 to 2015, a critical time when non-performing loans (NPLs) became a significant concern in the industry.
Research methodology
This study employs a variety of research methods, including dialectical materialism and historical materialism, alongside synthesis, analysis, comparison, and statistical techniques Additionally, it utilizes diverse sources such as the Internet, printed books, newspapers, magazines, specialized journals, expert discussions, and previous research findings to enrich its analysis.
LITERATURE REVIEW
Commercial bank
Commercial bank are financial intermediaries which have an important position in the economy There are many different concepts of commercial banks:
Financial intermediaries, as explained by Frederic S Mishkin, primarily generate funds through checkable deposits, savings deposits, and time deposits They utilize these funds to provide various loans, including commercial, consumer, and mortgage loans, as well as to invest in government securities and municipal bonds.
According to Peter S Rose, “Commercial bank is type of bank which sells deposits and makes loans to businesses and individuals.”
1.1.2 Definition according to Vietnam law
Commercial banks play a crucial role in the economy as financial intermediaries and are classified as business enterprises within the financial sector As defined by the Credit Institutions Act No 20/2004/QH11, commercial banks engage in a wide range of banking services and related business activities.
"banking is monetary business and banking service with regular activity is receiving deposits, then use this money to provide credit and payment services."
Banks primarily operate on a monetary business model, offering essential banking services As the largest indirect capital channel, commercial banks act as a vital link between those in need of capital and those with surplus funds Their activities revolve around facilitating the trade of capital, often paying deposit rates that are lower than the interest charged on loans.
4 rates, and that difference is commercial banks' profits Operations of banks catering to all the needs of all classes people, business forms and other institutions in the society
Commercial banks have three basic roles
Commercial banks play a crucial role in enhancing the commodity economy by gathering and mobilizing temporarily idle capital from various sources, including economic organizations and individual savings, to create loan capital By utilizing these raised funds, banks provide essential capital to the economy, acting as credit intermediaries that not only mobilize idle resources but also direct surplus capital to areas in need This function stimulates overall capital regulation within society and accelerates business reproduction processes.
Commercial banks serve as essential credit intermediaries, connecting individuals with funds to deposit or lend with those seeking loans By facilitating this relationship, commercial banks ensure equitable benefits for all parties involved: depositors, the banks themselves, and borrowers.
- For depositors: they profit from their temporarily idle capital thanks to the deposit rates paid by banks or their banks create utilities such as security or means of payment
- For lenders: the needs for their business or expense will be satisfied, less time will be spent to find convenient and legitimate places to borrow money
Banks generate profit by leveraging the gap between lending rates and deposit rates, as well as through brokerage commissions This profit model is fundamental to the existence and growth of commercial banks.
Today, it can be said that all social and economic relations are through monetary relations and mainly through the activities of the bank besides operation of non-bank institutions
To sum up, the intermediation role of commercial banks can (i) encourage individuals and institutions to save and to transfer those savings to those individuals and institutions
5 planning to invest to new projects; (ii) satisfy the need for liquidity; (iii) reduce risks and transaction costs
Commercial banks serve as crucial credit intermediaries, encouraging entrepreneurs to open deposit accounts By accepting customer deposits, banks facilitate payments for sales transactions, acting on the account owner's instructions to transfer funds to sellers or settle payments for goods and services In this capacity, banks function as financial "cashiers," enhancing cash flow efficiency and minimizing the physical cash in circulation Consequently, this reduces the costs associated with cash handling, including printing, counting, and storage.
The money multiplier effect is a result of credit creation in commercial banks When a bank receives a deposit amount A, its reserves increase, but it is only required to hold a fraction, calculated as r × A, to meet withdrawal demands The excess reserves, (A − r × A), can then be loaned out If the borrower deposits the full loan amount back into the bank, it further increases total reserves, allowing the bank to lend out another portion This process continues, leading to a total increase in the money supply that can be expressed as m × A, where m represents the money multiplier Conversely, a decrease in deposits triggers the same mechanism in reverse.
𝑟 + 𝑒 + 𝑐 r: required reserve ratio e: excess reserves ratio c: currency ratio
Other roles of commercial banks include risk management role, agency role, policy role, guarantor role…
1.3 Basic operations of commercial bank
This operation forms operating capital for banks Banks’ capital includes:
Charter capital is the essential initial capital required for a business to operate, exceeding the state's minimum statutory capital The capital contribution varies by bank type: private banks use capital for business operations, Joint Stock Commercial Banks (JSCBs) form their charter capital through share issuance, while State-Owned Commercial Banks (SOCBs) derive it from the state budget Regulations surrounding charter capital differ based on the bank's size and scope of activities This capital primarily funds real estate purchases, banking development, venture capital contributions, and acquiring shares in other banks Importantly, charter capital cannot be distributed as dividends or used to create welfare and bonus funds.
Bank funds encompass various reserves, including the charter capital reserves fund, which is allocated annually at 5% of profit after tax, as well as the investment and development fund, financial reserve fund, and unemployment benefits reserve fund Additionally, there are funds not derived from bank profits, such as capital depreciation of fixed assets, depreciation fund, and other regulatory funds.
Equity capital, though a small portion of a bank's total capital, is crucial as it serves as the foundation for business operations and determines the scale of commercial banks Additionally, it plays a vital role in assessing the adequacy ratio within the banking sector.
Deposit take up a large proportion of the total capital of banks Banks activities depend mainly on them Deposit sources of funds include transaction deposits and non-transaction deposits
Transaction deposits, also known as checkable deposits, allow depositors to withdraw funds at their discretion, encompassing all types of checking accounts While most checking accounts offer minimal or no interest, they primarily serve as payment tools, which now also encompass electronic banking services.
Checkable deposits were once a primary source of inexpensive funding for banks due to their low or nonexistent interest rates However, with the increasing ease of transferring funds between accounts, individuals are now moving their money into higher-yielding accounts and investments, accessing it as needed.
- Interest bearing transaction deposits: provides the accountholders with the facilities of payment services, safekeeping funds Interest payment is prohibited on this accounts
Non-interest bearing transaction deposits offer customers essential payment services, secure fund storage, and comprehensive recordkeeping for cheque transactions, while also providing interest to depositors.
Non-transaction deposits include savings accounts and time deposits, which are basically CDs
Savings accounts are classified as non-transaction deposits because they are not used for payment purposes, allowing them to offer higher interest rates Typically, these accounts are passbook savings accounts, where all transactions—deposits, withdrawals, and interest—are documented in a passbook Banks regularly update this passbook with essential information, making this account type ideal for depositors who conduct infrequent transactions and do not require monthly statements.
Time deposit account is where the depositor agrees to keep the money in until the CDs expire The bank compensates the depositor with a higher interest rate Although the
8 depositor can withdraw the money before the CDs expire, they can only earn little or no interest
1.3.1.3 Non-deposit sources of funds:
Non-performing loan
Business risks are inherently unpredictable and can be influenced by numerous unforeseen factors such as natural disasters, war, inflation, unemployment, and economic crises, all of which significantly impact market dynamics and product sales In the banking sector, risk-taking is crucial for profitability; thus, credit risk and bad debts are integral to bank operations When businesses encounter challenges and are unable to repay loans on time, it leads to overdue loans, highlighting the interconnected nature of risk and financial stability in banking.
A non-performing loan (NPL), often referred to as bad debt, is a loan for which the borrower has failed to make scheduled payments for at least a specified number of days Such loans are categorized as either in default or nearing default, significantly reducing the likelihood of full repayment If a borrower resumes payments on a non-performing loan, it is classified as a re-performing loan, even if the borrower has not fully settled all missed payments.
A weak credit relationship often stems from bad debts, which violate key credit principles such as timely payments and complete repayment This situation ultimately leads to a lack of trust in granting credit to customers.
Bad debts are an unavoidable challenge for commercial banks, but a high non-performing loan (NPL) ratio can severely disrupt banking operations, hindering the banks' ability to meet customer withdrawals In extreme cases, this can result in bank bankruptcy Consequently, effective credit risk management is crucial for the stability of the entire commercial banking system.
2.2 Loan classification and criteria for accessing NPLs
The determination of banks’ bad debts is based on loan classification According to the IMF and the World Bank, loans are divided into five groups
Table 2.1: Loan classification according to the IMF and the WB
A performing loan is defined as one where interest and principal payments are less than 90 days overdue, and there has been no refinancing, capitalization, or delay of interest payments for more than 90 days by agreement For a loan to be considered performing, all these conditions must be met, although the exact definition may vary based on the specific terms of the loan.
Special mention loans are performing loans that carry a significant risk of loss, categorizing them as classified loans, problem loans, or nonperforming assets Despite their status, they require the lowest provisioning of all classified loans, typically ranging from 5 to 10 percent.
Substandard loans are loans that are more than 90 days past due and in respect to which there is a substantial risk or loss Substandard loans attract a moderate provisioning requirement (e.g., 25 percent)
Doubtful loans are loans that are more than 90 days past due and in respect to which collection in full is improbable Doubtful loans attract a high provisioning requirement (e.g., 50 percent)
Loss loans refer to loans that are over 90 days overdue and considered uncollectible These loans typically require a full 100 percent provisioning, and according to local regulations, they should be written off.
The classification of debts is determined by qualitative and quantitative factors, as per the IMF and World Bank guidelines Each country must categorize bank debts into five distinct groups, with Non-Performing Loans (NPLs) falling within Groups 3, 4, and 5 Notably, Group 5 loans are considered the most detrimental to financial stability.
The Non-Performing Loan (NPL) ratio serves as a fundamental measure of a bank's credit quality, with high bad debt levels indicating challenges in capital recovery and an elevated risk of financial losses According to international standards, an acceptable NPL ratio is below 5%, while ratios exceeding 3% raise significant concerns regarding the bank's financial health.
Understanding the causes and origins of Non-Performing Loans (NPLs) is essential for effective management and control Generally, these causes can be categorized into specific groups for better analysis and strategy development.
Customers are the one to whose banks credit Therefore, causes from customers are the first to be considered The reasons that customers cause bad debts to banks were:
Improper use of loan funds can lead to significant financial risks, as customers may divert the money away from the intended business purposes outlined in their loan applications When loans are not utilized for productive endeavors, it can result in capital losses, ultimately diminishing the borrower's ability to repay the loan.
Some customers exploit legal loopholes for the fraudulent misappropriation of bank funds, showing no intention of repaying loans from the outset of their applications Additionally, these individuals often intentionally delay fulfilling their commitments outlined in the credit agreements.
Difficulties in cash flow or liquidity
Ineffective business management results in low operational efficiency, causing cash flow challenges and decreased debt solvency for enterprises Many businesses overextend by diversifying into too many sectors, leading to loan growth that surpasses their management capabilities Additionally, misjudgments regarding market demand can result in excessive imports, creating inventory buildup and capital stagnation, which ultimately leads to insolvency.
2.3.2.1 Adverse selection problems of banks
Bank lending decisions rely heavily on loan applications and external credit information, but customers often conceal important details, and banks may struggle to foresee certain risks As a result, banks might inadvertently select high-risk borrowers, leading to potential financial difficulties that make full loan repayment unlikely This issue arises from the inherent limitations in assessing a customer's true financial situation.
- Low quality of credit information: The bank's information resources are limited, lack of systems which provide accurate and complete credit information
The limited professional qualifications of credit staff hinder effective project evaluation for loans, as many credit officers struggle with analyzing financial statements This, combined with insufficient customer information, complicates the thorough assessment of a project's feasibility.
RESEARCH METHODOLOGY AND DATA ANALYSIS
Vietnam’s commercial banking system
In 1990, the Vietnamese government permitted the establishment of four state-owned commercial banks (SOCBs), which include the Bank for Foreign Trade of Vietnam (Vietcombank), Vietnam Bank for Agriculture and Rural Development (Agribank), Bank for Industry and Commerce (Incombank), and Bank for Investment and Development of Vietnam (BIDV) These banks quickly became dominant players in Vietnam's credit market.
In early 2007, 25 applications were submitted to the State Bank of Vietnam (SBV) for the establishment of new commercial banks, nearly matching the total number of existing banks in the country However, following Decision No 24/2007/QD-NHNN issued by the SBV in June 2007, the requirements for creating new banks became more stringent, significantly raising the minimum charter capital for joint-stock commercial banks from 70 billion VND to 1,000 billion VND.
Between 2011 and 2015, significant changes occurred in the banking system under Scheme 254, resulting in 8 mergers and acquisitions, 3 instances of banks being acquired for 0 dong, and 1 bank placed under special control This period saw the exit of 8 banks from the market, including MDBank, MHB, DaiABank, Ficombank, TinNghiaBank, Southern Bank, Western Bank, and Habubank The State Bank of Vietnam (SBV) maintains a charter capital of 113 trillion VND across 7 banks, including Agribank (100%), Oceanbank (100%), GP.Bank (100%), CBBank (100%), BIDV (95.28%), Vietcombank (71.11%), and VietinBank (64.46%) According to central bank data, the number of credit institutions has decreased by 17 over the past four years, leaving only 34 banks in operation today, down from 42, due to mergers, consolidations, and acquisitions.
1.2 Credit operation situation of Vietnam’s commercial banking system from
Commercial banks have adapted quickly to grab opportunities during the process of integration and utilize their competitive edge There are several highlights in credit
21 operations of Vietnam’s commercial banks
1.2.1 The continuing growth of credit operations
In 2010, credit growth reached 27.65%, with money supply contributing approximately 75% of the Prime Minister's approved target The total payment instruments increased by 23%, while cash rose by 15%, resulting in a cash flow proportion of around 14% of total payment instruments The head of the banking sector reported that VND credits grew by 25.34%, and foreign currency credits surged by 37.76%.
Total instruments of payment increased by 9.27% in 2011 Cash in circulation outside the banking system went up by 5.49% compared with the previous year
In 2012, monetary indicators reflected reasonable growth, with total payment instruments increasing by 20% and credit rising by 7%, aligning with the inflation control target of 6.81% Economic support growth reached 5.03% Additionally, prime, deposit, and lending rates experienced significant declines, with the reduction schedule progressing faster than anticipated, which was appropriate given the macroeconomic environment, currency development, and inflation situation.
In 2013, the State Bank of Vietnam (SBV) reduced operating interest rates by 2% per year and short-term lending rates for priority sectors by 3% per year This strategic adjustment, combined with effective money supply tools like open market operations and foreign currency purchases, facilitated credit growth that met the target of approximately 12% As a result, inflation was controlled at 6.04%, marking the lowest increase in a decade, while the total instruments of payment rose by 18.51%.
In 2014, the average lending rate of the commercial banking system fell to 9%, a decrease of 1.5% to 2% compared to the end of 2013, with lending rates declining by approximately 2% per year This reduction in interest rates was accompanied by government and State Bank of Vietnam (SBV) initiatives aimed at promoting credit and stimulating economic growth From 2011 to 2014, credit balances grew by 14.2%, 8.85%, 12.51%, and 12%, respectively, culminating in a total credit growth of 11.8% for the banking system as of December 19, 2014.
According to statistics by 21/12/2015 released by SBV, credit of the whole sector grew by 17.17% from the beginning of the year, higher than the same period from 2011 to 2014
Credit flows continued to be reasonably allocated towards the business sector, especially those in government priorities
From 2010 to 2015, the credit system maintained a secure and abundant liquidity, effectively supplying credit capital to the economy This stability in the currency market stemmed from a coordinated approach to money supply management, alongside measures to enhance liquidity for credit institutions, restructure assets, manage liquidity risks, and ensure overall system security.
1.2.2 Diversification and modernization of services and products
Commercial banks are increasingly prioritizing re-innovation by introducing a variety of products and services tailored to meet customer demands Key enhancements include improved personal account utilities, advanced card services, and expanded phone and internet banking options Notably, card payment services have surged in popularity, with the introduction of multi-utility card products and the widespread adoption of ATM card payments across numerous provinces and cities.
Commercial banks have increasingly focused on developing innovative credit sale products tailored to meet customer needs Popular offerings include installment loans, salary-based loans for workers, and household business lending with flexible daily or weekly interest payments Other notable products are overdraft credit cards and mortgage loans with terms extending up to 10 years Overall, these specialized loan products are designed to cater to the diverse requirements of customers effectively.
Despite advancements in the inspection and supervision of banking credit activities, the lack of stringent oversight has led to increased cases of banks exploiting legal loopholes, resulting in a lack of transparency in the lending process and associated charges.
1.3 Loan classification according to Vietnam’s regulations
In Vietnam, loan classifications was based on the Decision 493/2005/QD-NHNN, amended by Decision 18/2007/QD-NHNN After that, from 2013, Circular 02/2013/TT-NHNN and
Circular 09/2014/TT-NHNN has replaced Decision 493 and Decision 18, establishing guidelines for the classification of non-performing loans (NPLs) As outlined in Circular 02/2013/TT-NHNN, NPLs are categorized as debts falling under Group 3 (Sub-standard loans), Group 4 (Doubtful loans), and Group 5 (Loss loans), which can be determined and calculated according to Article 10 or Article 11.
Article 10, loan classification under quantitative method, is briefly presented as follows:
- Undue loans and determined by credit institutions as can be fully recoverable of principle and interest on time;
- Loans that overdue under 10 days and determined by credit institutions as can be fully recoverable of both overdue and remaining principle and interest
Group 2 (Special mentioned loans) includes:
- Loans overdue from 10 to 90 days;
Group 3 (Sub-standard loans) includes:
- Loans overdue from 91 to 180 days;
- Loans with waived or reduced interest due to customers’ inability to pay the full rate under the credit agreement
- Loans overdue from 181 to 360 days;
- First-time adjusted loans that overdue less than 90 days from the first adjusted date;
- First-time adjusted loans that overdue more than 90 days from the first adjusted date;
- Second-time adjusted loans that overdue less than 90 days from the second adjusted date;
- Third-time or more adjusted loans, either overdue or not;
- Frozen loans and pending loans
Article 11 is the loan classification under qualitative method Commercial banks implement this type of loan classification in 5 groups, based on the system of internal credit ratings and can only do so under the approval of SBV
Group 1 (Current loans) includes: Undue loans and determined by credit institutions as can be fully recoverable of principle and interest on time
Group 2 (Special mentioned loans) includes: Loans determined by credit institutions as can be fully recoverable of principle and interest but show signs of declining in ability to pay
Group 3 (Sub-standard loans) includes: Loans determined by credit institutions as cannot be recoverable of principle and interest when due with likeliness of principle and interest loss
Group 4 (Doubtful loans) includes: Loans determined by credit institutions as highly impaired
Group 5 (Loss loans) includes: Loans determined by credit institutions as irrecoverable
Loan classification regulations under Article 10 primarily focus on time, neglecting other critical factors such as the financial status and operational results of banks This oversight can result in inaccurate assessments of non-performing loans (NPLs), leading to insufficient loan reserves and a net income that does not accurately represent the bank's financial health Conversely, Article 11 indicates that the central bank is progressively implementing a simplified Basel II approach, linking the loan classification system with internal credit ratings However, it is essential to ensure that this implementation is conducted properly and rigorously.
The problems of NPLs in Vietnam’s commercial banking system from 2010 to
2.1 The NPLs situation and the effort in controlling NPLs of Vietnam’s commercial banking system from 2010 to 2015
NPLs in Vietnam's commercial banks were triggered a long time ago As soon as macro- economic situation started to deteriorate and business activities became stagnant, bad debts
25 bursted Based on calculated data, bad debts tent to develop since 2007, and they were of particular interest since the end of 2011
- In the period of 2008 - 2011, the credit growth rate was 26.56% on average, but the growth rate of bad loans was at the level of 51%
- Until the end of 2012, the central bank mainly focused on strengthening the banking system liquidity and financial operations for the settlement of bad debts
- In 2013, bad debts rose fast and became a real security threats to the banking system and national financial stability
- In 2014, bad debts settlement had a positive result thanks to the effort of the whole financial system thanks to the mean of selling debts to VAMC
- In 2015, the central bank and the entire financial system aimed for a bad debts target of below 3%
The period of 2010 to 2015 was a six-year journey for one purpose: to thoroughly tackle bad debts of credit institutions Specific details in each year are as follows:
As of now, the banking system's non-performing loan (NPL) ratio stands at 2.52%, translating to 58,000 billion VND, which, while an increase from 2.05% in 2009, remains manageable and not a significant threat to national financial stability Consequently, credit growth in 2010 sustained a robust rate of 27.65%, accompanied by a 23% rise in total payment instruments To address bad debts, banks are employing strategies such as writing off debts through prescribed provisions, selling collateral, and restructuring loans.
The value of bad loans has surged to 85 trillion VND, representing 3.3% of the total loan portfolio Vietcombank reported the highest non-performing loan (NPL) ratio at 3.4%, followed by NVB and HBB, both at 2.8% In contrast, STB maintained the lowest NPL ratio at just 0.6%.
Figure 3.1: NPL ratio of some commercial banks in September 2010 and September 2011
Most of the listed banks had their NPL ratio experienced a rise compared with 2010 Notably, Loss loans elevated drastically
Table 3.1: Group 5 loans in some commercial banks in September 2011
30/9/2011 CTG VCB STB EIB ACB SHB HBB NVB Total Group 5 (Loss loans) 1,691 4,950 169 490 263 233 351 147 8,293
Group 2 debts of HBB accounted for 24% of total loans and that of Vietcombank amounted to 18.78% of total loans Although Group 2 debts are not included in the NPL ratio but if they overdue for more than 90 days or the clients have another debt which is moved into a higher risk groups, the debt will be restructured into bad debts A high Group 2 debt ratio is also a noteworthy signal
Figure 3.2: Loans structure of some commercial banks in September 2011
Total NPLs of 8 banks listed at 30/09/2011 was nearly 15,018 billion VND Total Group 5 debt amounted to 8293 billion VND
An analysis of banks' credit situations reveals that the deposit structure plays a crucial role Notably, only large commercial banks possess long-term deposits, while smaller banks largely lack 5-year deposits, relying instead on short-term deposits that typically range from 1 to 3 months.
Figure 3.3: Term of deposits of some commercial banks in September 2011
NVB deposits predominantly consist of short-term holdings, with 99.8% of them being under one year Among these, a significant 72.4% are for less than one month, while 22.4% range from one to three months Notably, there are no deposits with terms exceeding five years.
SHB was also in a similar situation with 99.85% of customer deposits are deposits of less than 1 year, 71.7% of which was deposits that less than 1 month
VietinBank, STB, EIB had relatively high percentage of medium-term deposits compared with other banks VietinBank’s rate on 5-year deposits and longer was the highest compared with other banks
Figure 3.4: Term of loans of some commercial banks in September 2011
Recent data indicates that medium and long-term loans surpass medium and long-term deposits, leading to increased liquidity risks for banks Additionally, there has been a significant rise in bad debts, particularly with loss loans reaching up to 8,293 billion VND.
Banks are facing significant liquidity challenges and a decline in business performance due to several factors: stringent monetary policies, the resurgence of long-standing bad debts, and the increasing prevalence of unprofitable enterprises.
The commercial banking system was significantly impacted in three key ways: it led to an increase in provisions for bad debts, a reduction in the rate of return on sales, and heightened liquidity, term, and banking system risks In response to these challenges, banks implemented various solutions in 2011, including tightening borrower appraisals, rescheduling or postponing debts, and adhering to lending regulations and conditions for state-owned enterprises (SOEs).
In 2012, the alarming rise in the bad debt ratio became evident, as non-performing loans (NPLs) surged by 51% from 2008 to 2011, despite an average credit growth rate of 26.56% during the same period This significant increase in bad debts raised concerns not only among commercial banks and the State Bank of Vietnam (SBV) but also attracted the attention of the National Assembly and the government.
In the first nine months of 2012, commercial banks in Vietnam experienced a significant increase in their non-performing loan (NPL) ratios Notably, Vietcombank's NPL ratio rose from 2% to 3.21%, while ACB saw an increase from 0.9% to 2.1% Similarly, STB's NPL ratio climbed from 0.57% to 1.4%, and NVB's ratio surged from 2.92% to 3.97%.
Certain banks have successfully controlled the increase in bad loans, with Techcombank's ratio rising slightly from 2.82% to 2.94%, and KienLongBank experiencing a minimal increase from 2.77% to 2.78% Notably, PGBank improved its performance by reducing its bad debt ratio from 3.06% to 2.96%.
Figure 3.5: NPL ratio of some commercial banks in 2011 and 2012
The most significant concern regarding bad debts is the increase in Group 5 loans, with BaoVietBank reporting the highest rate of these loans in its financial statements.
2.93%, followed by LienVietPostBank at 1.46%, Vietcombank at 1.42%, BIDV at 1.22%,
MB at 1.07% and KienLongBank at 1.36%
Loss loans rate of other banks was also approximately 1% of total outstanding customer loans: VietinBank at 0.86%, Techcombank at 0.99%, ACB at 0.81%, PGBank at 0.83%
Figure 3.6: The ratio of Group 5 loans and outstanding loans in September 2012
As of September 2012, BIDV reported the highest risk of capital loss with debts totaling 3,984.4 billion VND, followed by Vietcombank at 3,200 billion VND, VietinBank at 2,578 billion VND, and ACB at 829.1 billion VND.
MB was 629.4 billion VND; of Techcombank was 610.8 billion VND…
Since the end of 2011, Group 5 loans in banks have experienced significant growth, with the exception of KienLongBank, which saw a decline of nearly 4% LienVietPostBank reported a staggering 53-fold increase in loss loans, rising from 4.48 billion VND to 243.8 billion VND Similarly, BaoVietBank's loss loans surged more than six times, escalating from 23.5 billion VND to over 140 billion VND.
170 billion VND) Some creditors also had a sharp leap compared with 2011 of Group 5 debts: Techcombank - 1.7 times; ACB - nearly 1.8 times; Sacombank - more than 1.5 times, VietinBank – 1.82 times, Vietcombank - more than 41%; MB - 33.5%; NVB - 79%
On May 31, 2012, credit institutions reported bad debts totaling 117.723 billion VND, which represented 4.47% of total loans In response, the government enacted Resolution No 01/NQ-CP to outline key strategies for implementing socio-economic development plans and estimating the state budget for 2012.
RECOMMENDATIONS AND CONCLUSION
The necessity of controlling NPLs
The global financial crisis, originating in the United States, has led to significant challenges for economies worldwide, primarily due to issues within the banking system, particularly bad debt This bad debt severely impacts the quality of banks and extends its effects beyond the banking sector, influencing businesses and the broader economy Therefore, it is crucial for individuals and stakeholders to closely monitor banks' bad debts due to their extensive repercussions.
A bank with a high ratio of non-performing loans (NPLs) risks capital loss and default, undermining market efficiency and hindering macroeconomic policy implementation Weak banks burden the economy by damaging essential micro channels for growth and negatively affecting the budget and exchange rate system Addressing bad debts is crucial for revitalizing the economy in the aftermath of a crisis, as NPLs significantly impact all economic sectors.
Joining the WTO exposes Vietnam's banking system to competition from 100% foreign-owned commercial banks, posing significant challenges for domestic banks with limited financial capacity, outdated technology, and management practices While the largest domestic banks hold assets under 15 billion VND and capital below 550 million USD, foreign giants like Citibank, HSBC, and ANZ boast trillions in assets and advanced banking technology With foreign banks achieving low non-performing loan (NPL) ratios of under 1% and extensive nationwide networks, it is crucial for domestic banks to enhance their business operations and actively work on minimizing bad debts.
To effectively reduce bad debts in banks, a synchronized approach is essential, involving not just the banking sector but the broader economy The resolution of this issue hinges on coordinated efforts from the State Bank of Vietnam (SBV), commercial banks, borrowers, and a comprehensive legal framework, alongside a supportive economic environment.
Recommendations to control NPLs
2.1.1 Renovating and modernizing the credit information system
To enhance efficiency, banks must innovate and modernize their systems for collecting and processing customer and administrative information This ensures that bank managers and credit officers can swiftly access reliable and up-to-date information Moving forward, it is essential to consolidate and develop a comprehensive credit information system that integrates credit information centers, information departments at bank branches, and customer information departments at other credit institutions.
To enhance the decision-making processes of commercial banks, the government should implement specific mechanisms and regulations for establishing private credit centers or professional credit rating agencies.
In various countries, public Credit Information Centers (CICs) are established by central banks primarily to oversee commercial banks, while private CICs are created by credit institutions to facilitate the sharing of credit information for business security Public CICs focus on collecting data related to large-value loans that could affect the economy, gathering information solely from financial institutions supervised by the State Bank of Vietnam (SBV) Consequently, non-bank financial entities like leasing and finance companies are often excluded from this data collection Additionally, public CICs provide only current information, lacking detailed payment histories of borrowers.
Private Credit Information Centers (CICs) gather extensive data on loans from state-owned enterprises (SOEs) and individuals, encompassing not only large loans but also borrowers' payment histories and additional services like credit application processing and scoring systems This collaboration between public and private CICs enhances credit activities, fostering equality and facilitating access to loans for micro-lenders Furthermore, sharing credit information helps banks reduce the proportion of bad loans and lower lending costs, ultimately leading to increased profitability Credit rating institutions also play a vital role by providing company rankings, which assist banks in making informed credit decisions.
2.1.2 Tightening the financial discipline for SOCBs and SOEs
State-owned commercial banks (SOCBs) continue to prioritize state-owned enterprises (SOEs), while the government's efforts to support these banks introduce inherent credit risks The presence of moral hazard among the government, SOCBs, and SOEs hampers the resolution of bad debts To break the cycle of accumulating bad debts, it is crucial for the government to enforce strict fiscal discipline on both the State Bank of Vietnam (SBV) and SOEs.
To enhance financial stability, the Government must strengthen the banking supervision system by improving early warning mechanisms and updating technical standards for loan loss provisions Additionally, accelerating the restructuring of the banking sector and facilitating the equitization process alongside stock market listings is essential for fostering a more resilient financial environment.
2.1.3 Enhancing the role of the VAMC in handling bad debts
To enhance the effectiveness of the State Bank of Vietnam (SBV) in managing bad debts, it is essential to develop the Vietnam Asset Management Company (VAMC) into a specialized tool VAMC should be equipped with adequate financial resources, skilled personnel, robust management practices, and advanced technology to mitigate risks and stimulate credit growth within the economy.
Enhancing the legal framework for the Vietnam Asset Management Company (VAMC) is essential to empower its capability in asset seizure, foreclosure, and the sale of security assets for debt recovery, as well as participating in governance and loan restructuring The State Bank of Vietnam (SBV) should also focus on increasing VAMC's charter capital to enhance its capacity to purchase bad loans through market mechanisms Furthermore, effective coordination with relevant agencies and authorized organizations is crucial for VAMC and borrowers to finalize procedures and legal documentation concerning bad loans and the assets securing these loans.
2.1.4 Accelerating the process of finalizing legal documents
The increasing focus on legal documentation for property ownership has highlighted significant challenges for owners, who often face complex procedures and delays from authorities Selling foreclosed collateral becomes particularly difficult due to insufficient legal documentation, hindering debt recovery efforts Additionally, the lack of proper collateral settlement poses a significant obstacle for banks in their operations.
To enhance the efficiency of selling collateral for settling bad debts, it is crucial to allow banks to independently sell assets, particularly when customer cooperation is lacking and authorities are not providing adequate support Streamlining and expediting the finalization of legal documents will create more favorable conditions for commercial banks in this process.
2.1.5 Establishing more specific regulations on loan classification and provision
Many credit institutions utilizing quantitative methods maintain a non-performing loan (NPL) ratio below 3% Despite this, banks lack an internal credit ranking system to effectively classify debt management and assess credit quality Consequently, the current debt classification outcomes may not accurately represent the true debt status of organizations.
To enhance credit quality assessments, it is essential to establish a unified method that integrates internal credit rankings with real-time evaluations of customers' repayment capacities A clear guideline for the evaluation process and standardized customer ratings is necessary for consistent application These criteria and ratings should be developed based on statistical analyses, survey data from various banks, and validated through mathematical modeling.
Banks must establish internal regulations for credit quality management and policy, ensuring effective oversight from appraisal to disbursement and collateral management It is essential for banks to implement risk prevention strategies that address provisioning and the sale of collateral Additionally, a clear framework for decentralization, along with defined roles and responsibilities for all departments and personnel involved in the credit process, should be prioritized to enhance operational efficiency and accountability.
To maintain consistency in customer service, it is essential that similar customers are managed at the same level throughout the entire process, including evaluation, approval, credit granting, credit records, review processes, ratings, loan classification, provisioning, and the utilization of provisions for risk management.
2.1.6 Completing the surveillance activities of SBV to commercial banks
The monitoring activities still has many issues to be further researched to complete:
To enhance the effectiveness of surveillance activities, the Banking Supervision Agency is restructuring its functions and duties to implement a comprehensive four-stage cycle: licensing, promulgating regulations, monitoring, and enforcing penalties, including license revocation This approach aims to ensure consistency and improve the overall efficiency of banking supervision.
Conclusion
The banking industry is inherently risky, making the analysis of risks in banking operations, particularly in credit activities, a crucial and complex endeavor.
Through the research process, the following conclusions can be drawn out from the paper:
Commercial banks operate by borrowing and lending, with their lending activities being a primary source of non-performing loans (NPLs), a common risk in credit operations Bad debts adversely affect customers, banks, and the overall economy, making the prevention and management of these debts a critical priority.
Between 2010 and 2015, Vietnam's commercial banking system faced a significant challenge with non-performing loans (NPLs) Recognizing the severity of this issue, Vietnam's commercial banks, in collaboration with the State Bank of Vietnam (SBV), implemented various micro and macroeconomic policies to address the problem Although the measures were somewhat limited due to several factors, there was a noticeable improvement in the resolution of NPLs during this period.
To establish a robust financial system, it is crucial to limit non-performing loans (NPLs) This article outlines several strategies aimed at enhancing the capacity to manage and control bad debts within credit activities.
Despite existing barriers in time and access to information, as well as limitations in professional understanding, this study acknowledges potential deficiencies The issue of Non-Performing Loans (NPLs) is broad, and only a few aspects can be addressed within this research Further investigation is essential for a comprehensive understanding of the topic.
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