Banking industry to focus on bad debt handling targets in 2025

The non-performing loan (NPL) ratio of the banking system (excluding NPLs of weak commercial banks) is targeted to be below 3 per cent by the end of 2025. — Photo cafef.vn

The banking industry next year will have to focus on achieving important goals in restructuring the system of credit institutions associated with bad debt settlement in the 2021-25 period.

According to a project on restructuring the system of credit institutions, associated with bad debt settlement, approved by Prime Minister in 2022, the non-performing loan (NPL) ratio of the banking system (excluding NPLs of weak commercial banks) will be controlled at below 3 per cent by the end of 2025.

However, according to Deputy Chairman of the Vietnam Banks Association Nguyễn Quốc Hùng, credit institutions are facing potential bad debt risks in the context that Resolution No. 42/2017/QH14 expires this year.

That resolution piloted a programme that handled bad debt of credit institutions. The pilot resolution created conditions for credit institutions to effectively manage bad debts in the past years, especially collateral assets of real estate projects.

A lack of a completed legal framework related to restructuring credit institutions and handling bad debts will challenge credit institutions in settling bad debts.

The recovery of bad debts will be difficult since many borrowers haven’t cooperated with credit institutions to repay their debts. Some even intentionally did not service their debts, which has affected the process of restructuring and handling bad debts, Hùng said.

Hùng adds that the domestic and global macro-economic situation in 2025 still poses many potential risks that can affect production and business activities, and customers' ability to repay. The potential difficulties can cause bad debts to increase, putting pressure on the provisioning of handling bad debts, as well as the progress of handling collateral assets of bad debts of credit institutions.

A major risk that global analysts and investors are constantly talking about and anxiously watching is the scale and speed of policy changes expected under newly-elected President Donald Trump. Higher-than-expected tariffs and a more rapid implementation of US policies towards China and US' other major trading partners could exacerbate trade tensions and economic fragmentation.

In addition, increased geopolitical tensions can cause volatility in global commodity prices and financial markets.

Meanwhile, a further weakening of the Chinese real estate market could dampen the growth prospects of Asia's largest economy, affecting the rest of the region, including Việt Nam.

Financial reports of banks show that the reserve buffer of the banking sector has continued to narrow in 2024, with the average bad debt coverage ratio (LLCR) of the entire sector falling to 83 per cent, the lowest level in five years.

Of which, the group of three State-owned commercial banks (Vietcombank, BIDV and VietinBank) maintained an average LLCR of 148 per cent, the four largest joint stock commercial banks (Techcombank, VPBank, MBB and ACB) had an average LLCR of 66 per cent and the rate of the remaining banks was only 56 per cent.

According to the central bank’s regulations, commercial banks must set aside 100 per cent of provisions for restructured debts by December 31, 2024.

Experts said a thin reserve buffer limits debt handling capacity and increases provisioning pressure, especially in banks with high-risk customer bases and a high ratio of restructured debts to total outstanding debts.

Banks, which have a persified customer base, a solid reserve buffer and a moderate proportion of real estate loans and corporate bonds in total outstanding loans, will be best able to control credit costs and asset quality well.