Credit quality suffer from objective factors declining bad debt handling effectiveness

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Credit quality is affected by economic and financial uncertainties. Photo: ST

Bad debt and potential debt account for 6.16% of total outstanding debt

Recently, the Government sent a report to National Assembly delegates on the implementation of a number of resolutions of the 14th National Assembly on thematic supervision and questioning and the National Assembly's resolutions on thematic supervision and questioning from the beginning of the 15th term to the end of the 4th session for the banking sector.

In particular, regarding the situation of bad debt handling, from 2021 until now, credit institutions have actively improved asset quality and controlled credit quality control and bad debt settlement, especially apply measures such as debt collection speed up and risk provisions.

As a result, from 2012 to the end of July 2023, the entire system of credit institutions has handled 1,695.7 trillion VND of bad debt. Of which, a high level of 1,271.7 trillion VND was handled by credit institutions (accounting for 75% of the total bad debts handled), the rest number of 424 trillion VND was sold debt (including selling to the Credit Institutions Asset Management Company - VAMC and other organizations and individuals), accounting for 25% of the total bad debts handled.

In the first 7 months of 2023 alone, 128.8 trillion VND was collected from bad debt handle in the whole system, an increase of 46.3% over the same period last year.

The Government's report said that the credit quality of the credit institution system might continue to be under pressure from both domestic and overseas macroeconomic fluctuations, which negatively affected production activities and customer repayment ability.

In addition to handling bad debts on the balance sheet, the results of handling bad debts determined according to Resolution 42/2017/QH14 of the National Assembly on handling bad debts also achieved positive results.

Cumulatively from the effectiveness of time the Resolution (August 15, 2017) to the end of July 2023, the entire system has handled about 425.9 trillion VND of identified bad debt.

However, by the end of July 2023, the on-balance sheet bad debt ratio was 3.56%, higher than 2% at the end of 2022 and 1.69% at the end of 2020. On-balance sheet bad debt ratio, unprocessed bad debt sold to VAMC and potential debt of the credit institution system was 6.16% of the total outstanding debt.

Furthermore, the work of handling bad debts still faces many difficulties such as the incomplete legal framework related to restructuring credit institutions and handling bad debts and the shortage of preferential mechanisms and policies to encourage domestic and foreign investors to participate in handling collateral and bad debt trading. Moreover, difficulties of the real estate market, low liquidity also hinder the effectiveness of handling real estate collateral...

Therefore, one of the solutions emphasized by the Government in the coming time is to strengthen inspection and supervision of credit institutions' activities, paying attention to credit quality and bad debt handling to detect signs of potential risks and violations to take appropriate preventive and handling measures.

Market instability has affected credit quality

Report on monitoring the growth rate of outstanding loans and credit quality for potentially high-risk areas, as of the end of July 2023, the entire system had 40 credit institutions investing in corporate bonds with the total balance was 205.4 trillion VND, down 14.7% compared to the end of 2022 and down 11.6% compared to 2020. The proportion of corporate bond investment in total outstanding credit debt was small, accounting for 1 .67%, lower than 2.0% at the end of 2022.

By July 2023, credit for investment and securities trading accounted for 0.55%; Credit to the real estate sector increased by 4.99% compared to the end of 2022, accounting for 21.73% of the total outstanding credit balance of the entire system.

In addition to many implemented solutions to closely monitor outstanding loan growth and credit quality for potentially high-risk areas, the Government's report has raised many difficulties and obstacles in this work.

Accordingly, banking credit activities are associated with risks and bad debts are unavoidable. On the other hand, due to the characteristics of unsustainable growth and heavily dependent on investment capital, especially bank credit, the macro economy difficulties will affect businesses directly and leads to a major impact on the banking system.

The government believes that in liquidity recent times has been greatly affected by the fluctuation of the bond and real estate markets.

For example, businesses both have to borrow capital from credit institutions and issue corporate bonds. In cases of inability to repay debt/loss of liquidity occurs due to difficulties in mobilizing capital from the bond channel, there will be the shortage of cash to supplement working capital to serve production and business activities as well as creating revenue to repay debt.

In addition, businesses and individuals who invest in corporate bonds are not paid principal and interest as committed, affecting their revenue sources, lacking capital to continue investing in production, and affecting their financial situation in general and their loan repayments in particular.

The low liquidity real estate market also greatly influences the ability of credit institutions to handle real estate collateral to recover bad debts.

Therefore, the Government report stated that the instability of the capital market, specifically the bond market and real estate market, in recent times has affected the liquidity of the market, raising the level of capital mobilization, increasing lending interest rates, and has influenced on the ability and source of debt repayment of customers. Therefore, credit quality of the entire system is subject to hidden potential risks.