A worker decorates the sign of the Saigon Commercial Bank at a location formerly operated by Ficombank. The bank's bad debt level was believed to be high before it merged with Ficombank and Vietnam Tin Nghia late last year.
The central bank has asserted that the problem is under control, but economists are concerned that bad debts held by commercial banks are too high and could cause major problems to the banking system already beset by low liquidity and management quality issues.
The bad debt of the whole banking system stood at more VND85 trillion (over US$4 billion), or 3.4 percent of total loans as of last October, up from 2.2 percent in 2010, according to the State Bank of Vietnam. Up to 50 percent of the debts are in default.
"Bad debt has increased, and at a high speed recently, but it is under control," central bank governor Nguyen Van Binh said last month.
Some economists have said the increase in bad debts is due to the economic recession, high inflation, and low returns, which have affected the repayment ability of borrowers.
The problem has worsened with the government lowering its economic growth target to tackle macroeconomic imbalances, particularly high inflation that is hovering at around 20 percent. Measures to tighten credit through higher interest rates have made things particularly difficult for indebted companies.
Cao Sy Kiem, member of the National Financial and Monetary Policy Advisory Council, which advises the government, said bad debts increased rapidly in the last months of 2011 and may have risen to over 5 percent of total loans by the end of last year. However, the rate is still much lower than the 13 percent estimated by global rating agency Fitch Ratings, he said.
Kiem said the criteria used to classify bad debts in Vietnam are different from those in other countries. Internationally, a non-performing loan is one that is in default or close to being in default. Meanwhile, banks in Vietnam consider only overdue debts as non-performing loans.
Vu Thanh Tu Anh, director of research with the Fulbright Economics Teaching Program, said many new loans are taken out only to be used for repayment of previous loans and should be considered as bad debts, but they are not.
Referring to transparency in reports by commercial banks on non-performing loans, economist Bui Kien Thanh said, "The real bad debt figure may have risen to an alarming level, but this is not shown yet by officially-reported figures."
Thanh said it will be very dangerous to the banking system if bad debt really accounts for 13 percent of the total loans, as the non-performing loans may be higher than the chartered capital of banks.
Le Tham Duong of the Ho Chi Minh City Banking University said the safety level for bad debts of each country is different, depending on their situation. "Even if the bad debt level in our banks stands at just 5 percent, we should not think it is under control. The rate is too high amidst weak liquidity and low management quality."
Vietnam's financial sector consists of about a hundred banks state-owned, private or foreign bank branches. But most have limited capital and many face a substantial shortfall of cash, Duong said.
Some banks see much a higher bad debt ratio than the average rate of 5 percent. For example, it was 12.6 percent at the Saigon Commercial Bank before it was merged with two other small banks late last year, and that of the Vietnam Bank for Agriculture and Rural Development was 6.67 percent in 2011, he said.
"This is very dangerous, as the collapse of just one bank because of bad debts could cause a collapse of the whole banking system," Duong warned.
Anh of the Fulbright Economics Teaching Program said bad debts have now even appeared in the interbank market, building up risk and constraining liquidity, which has recently emerged as a big problem. Interest rates in the interbank market have risen to as high 35-40 percent, and has remained at such high levels for a long time, he said.
On the rise
Economists are concerned that bad debts could continue rising this year, with economy failing to show signs of good recovery.
Thanh said loans in the property sector account for 50-60 percent of the total loans of many commercial banks. In the current context of a frozen real estate market, it is difficult for lenders to collect the loans, and they may become bad debts.
Credit in the real estate sector has reduced, but bad debts have not, he said.
Duong said banks mainly receive short-term deposits of two or three months, while the loans they give are mostly long-term ones, increasing the risk of non-performing loans in the coming time.
To deal with the situation, experts have suggested that the central bank strengthen banking system reform.
"The merger and acquisition of weak banks is quite necessary. We should also apply international criteria in assessing bad debts," Anh said.
He said the central bank should take stricter measures in dealing with commercial banks with large bad debts in order to reduce risks to the whole banking system.
Vietnam could also increase the reserve funds set up to deal with bad debts, as the current reserves are not enough, he said. Each bank is now required to set aside a fund equal to 60 percent of their non-performing loans.
The country should spend a part of its budget surplus dealing with problems in the banking system, Anh said.
He also suggested that Vietnam should seek assistance from some international organizations that gained experience in restructuring banking systems, both central and commercial, in the economic crisis of 1997 and 1998.
The government has affirmed that it places high priority on banking sector reforms. Central bank governor Binh has said five to eight commercial banks would be restructured this year.