Bad debt on the rise in Vietnam's banking sector

Local banks in Vietnam are struggling with bad debts that are likely to have negative impacts on their business performance and the country’s economic growth this year.

The combined bad debt at nine listed commercial banks rose to more than VND43 trillion ($1.9 billion) as of June this year, up 27 percent from the end of 2015, latest data from the banks shows.

Source: Banks' second quarter reports

A banking expert blamed higher bad debts on a decision made by the State Bank of Vietnam in 2012. Under the decision, banks were allowed to reclassify a large amount of their bad debts as normal debts by expanding the duration of payment for companies whose business prospects received a positive assessment from foreign financial institutions.

Thanks to the decision, the bad debt ratio in Vietnam’s commercial banks as of April 2013 stood at 4.67 percent of total loans, or $6.53 billion. That figure may have reached 11.5 percent of total loans, or $17.2 billion had it not been for the decision.

The decision was issued to contain rising bad debts and help promising local companies who were unable to pay their debts at the time to secure new bank loans.

However, when the decision expired in April last year, many non-performing loans became bad debts again, the expert said.

A man walks past the State Bank of Vietnam in Hanoi. Photo by Reuters

The other reason is that the Vietnam Asset Management Company (VAMC), which was established by the government to acquire bad debts from banks, was relatively quiet from January to June, the expert added.

The sharp rise in non-performing loans in just six months is a concern for banks because they will have to increase loan-loss provisions, which will pull down their profit this year. A loan-loss provision is an expense set aside as an allowance for bad loans.

More importantly, larger non-performing loans will pose challenges for economic growth as credit will be limited, according to the expert.

Vietnam's gross domestic product (GDP) growth in the first half fell to 5.52 percent from 6.32 percent in the same period last year. Efforts are being made to achieve the difficult GDP growth target of 6.7 percent for this year.