Bad Debt Ratio by Economic Sector at Vbard (2007 -2011)

VBARD

Table 3.4: Bad debt ratio by economic sector at VBARD (2007 -2011)

Unit: %

Criteria

2007	2008	2009	2010	2011
Agriculture and forestry	4.43	3.85	4.46	4.1	3.9
Seafood	2.63	3.1	5.8	4.21	4.01
Coffee	3.2	3.5	3.3	3.8	3.3
Industrial	0.54	0.79	1.68	1.7	1.8
Trade in services	0.39	0.57	1.1	1.8	1.98
Consumer lending	0.5	0.7	0.3	1.08	1.53
Other	1.3	1.46	1.8	2.3	2.4

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Source: Compiled from VBARD's financial statements for the period 2007 - 2011 [26]

At VBARD, the bad debt ratio in the agriculture, forestry and fishery sectors is the highest. In particular, in 2009, the bad debt ratio of these two sectors was 4.46% and 5.8% respectively, far exceeding the average bad debt level of the loan portfolio. The reason is that at this stage, VBARD has implemented lending in the spirit of the government to provide timely support to enterprises operating in the rural sector. On the other hand, the impact of the global economic crisis and recession has caused many difficulties for enterprises, affecting their ability to repay bank loans.

In addition, the lending sector in the coffee industry also has a relatively high bad debt ratio, the bad debt ratio in the consumer lending sector at VBARD has also begun to increase sharply in recent years.

b . Bad debt by customer type

Vietinbank

It can be seen that in the period 2008 - 2011, at VietinBank, the bad debt ratio appeared more in loans to the state economy. These are always customers who account for a relatively large proportion of the total outstanding debt of Vietinbank Vietnam. However, in recent years, the bad debt ratio in loans to small and medium enterprises and private enterprises has also tended to increase corresponding to the increase in outstanding loans to this group.

Table 3.5: Bad debt ratio by economic sector at Vietinbank (2008 -2011)

Unit: %

Target

2008	2009	2010	2011
Loan for enterprises
Bad debt ratio/ Same type of outstanding debt	1.83	2.95	0.97	1.53
Bad debt ratio/Total outstanding debt	0.66	1.05	0.33	0.57
Loans to non-governmental enterprises
Bad debt ratio/ Same type of outstanding debt	0.56	1.18	0.43	0.74
Bad debt ratio/Total outstanding debt	0.36	0.76	0.29	0.45

Source: Compiled from Vietinbank's financial statements for the period 2008 - 2011 [26]VBARD

Table 3.6: Bad debt ratio by customer type at VBARD (2008 -2011)

Unit: billion VND, %

Criteria

2008	2009	2010	2011
Total bad debt	4,709	7,853	9,522	11,308
- Production households and individuals	2,686	4560	4106	3233
Business	2033	3293	5416	8075
Bad debt/Same type of debt
-Production households and individuals	2	3	2.2	1.5
-Business	1.7	2.34	3.1	3.7

Source: Compiled from VBARD's financial statements for the period 2008 - 2011 [26]

In VBARD's loan portfolio, loans to individual production households always account for over 50% of total outstanding loans, however, the bad debt ratio of this customer group has tended to decrease in recent years. Meanwhile, this ratio in the business group has increased.

3.2. Current status of bad debt management at Vietnamese commercial banks

3.2.1. Legal environment for bad debt management activities

In recent years, Vietnamese commercial banks have implemented bad debt management based on documents issued by the State Bank of Vietnam and the Vietnamese government. Banks have also added mechanisms and regulations towards standardizing business processes, especially credit mechanisms. In addition, the Vietnamese commercial banking system has also improved risk management and governance capabilities at the headquarters, increasing autonomy and self-responsibility in business operations for all branches.

If, before 2004, debt management and classification at Vietnamese commercial banks were carried out according to Decision No. 488/QD-NHNN, from 2005 to 2007, commercial banks carried out debt management and classification according to Decision No. 493/QD-NHNN. According to Decision 493, each customer can only belong to 1 of 5 debt groups, customers with restructured debt cannot be considered good customers. The calculation of the amount of DPRR that must be deducted excludes the value of collateral for the loan. By 2007, commercial banks continued to manage and classify debts according to Decision No. 18/2007/QD-NHNN dated April 25, 2007 on amending and supplementing a number of articles of the regulations on debt classification, provisioning and use of reserves to handle credit risks in banking activities of credit institutions, issued under Decision No. 493/2005/QD-NHNN.

Documents used by Vietnamese commercial banks in bad debt management activities:

- Decision No. 1627/2001/QD-NHNN dated December 31, 2001 of the Governor of the State Bank promulgating the lending regulations of credit institutions to customers and related amendments and supplements;

- Decision 127/2005/QD-NHNN dated February 3, 2005 on amending and supplementing a number of articles in the Regulations on lending by credit institutions to customers issued under Decision 1627 of the Governor of the State Bank.

- Decision No. 783/2005/QD-NHNN dated May 31, 2005 of the Governor of the State Bank of Vietnam on amending and supplementing Decision 127/2005/QD-NHNN on promulgating the Regulations on lending by commercial banks to customers. The amended contents of the regulations on debt restructuring are for commercial banks to consider and decide on the basis of their financial capacity and the results of assessing the customers' debt repayment capacity .

- Decision No. 457/2005/QD - NHNN dated April 19, 2005 on regulations on interest rates

safety assurance ratio in the operation of credit institutions

- Decision No. 493/2005/QD-NHNN dated April 22, 2005 of the State Bank regulating debt classification and provisioning for handling credit risks in the business activities of credit institutions;

- Decision No. 59/2006/QD-NHNN dated December 21, 2006 of the Governor of the State Bank promulgating the Regulations on debt purchase and sale of credit institutions and related amendments and supplements;

- Decree No. 163/ND-CP dated December 29, 2006 of the Government on insurance transactions

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- Decision 03/2007/QD-NHNN dated January 19, 2007 on amendments and supplements

Some articles of Decision 457/2005/QD-NHNN

- Decision No. 18/2007/QD-NHNN dated April 25, 2007 on amending and supplementing a number of articles of the regulations on debt classification, provisioning and use of reserves to handle credit risks in banking activities of credit institutions issued under Decision No. 493/2005/QD-NHNN;

- Circular No. 146/2007/TT-BTC dated December 6, 2007 of the Ministry of Finance guiding the implementation of Decree No. 109/2007/ND-CP dated June 26, 2007 of the Government;

- Circular 13/2010/TT – NHNN dated May 20, 2010 promulgating regulations on safety ratios in the operations of credit institutions.

- Circular 19/2010/TT – NHNN dated September 27, 2010 on amending a number of points of Circular 13.

The above decisions and circulars stipulate that commercial banks must develop internal policies on criteria for determining a customer and related customer groups. Including:

- Criteria for identifying a customer and a group of related customers

- Credit limits apply to a customer and a group of related customers

- Maximum loan limit and ratio in total outstanding credit for an industry or economic sector

- Asset maximization strategy and how to track the accounts

loan

- Regulations on criteria for classifying debt into 5 different groups

- Develop a policy on credit risk management, a model for monitoring credit risk, and effective methods for identifying and measuring credit risk, including ways to assess customers' ability to repay, credit contracts, collateral, debt collection ability, and bank debt management.

- The internal credit rating system must be appropriate to business operations; customer base as well as the risk nature of bank debts.

3.2.2. Current status of bad debt management at Vietnamese commercial banks

The current status of bad debt management of Vietnamese commercial banks is reflected in the following contents: Identification and classification - Measurement - Prevention - Handling.

3.2.2.1. Recognizing and classifying bad debt

 Identify bad debt

The concept of problem debt as defined by Vietnamese commercial banks includes:

(i ) Bad debt according to the debt classification regulations of the State Bank (Decision No. 493/2005/QD-NHNN dated April 22, 2005 and Decision No. 18/2007/QD-NHNN); These are debts in the last 3 groups (Groups 3, 4 and 5).

(ii) Debts handled by the DPRR fund are accounted for off-balance sheet;

(iii) Debts not classified as bad debt but showing signs of risk.

Debt recognition shows the proactive prevention of bad debts arising at banks. This creates a basis for banks to proactively manage debts in groups 1 and 2 but at risk of turning into bad debts, thereby having timely handling directions and minimizing the increase in bad debts. In addition, debts handled by DPRR and accounted for off-balance sheet are also identified as management objects along with two types of bad debts and bad debts. This is to ensure that debt handling is thorough, continuous, and fully collected.

Recognizing bad debt at Vietnamese commercial banks is mainly based on Article 6 of Decision 493, which means recognizing through overdue debt payment period (>90 days). Only a very few

Commercial banks recognize bad debt based on the customer's ability to repay, according to Article 7 of Decision 493. Specifically, bad debt is identified when it belongs to the following 3 debt groups:

Group 3 - Substandard debt includes debts that are assessed as not being able to fully recover both principal and interest when due. These debts are assessed as having the possibility of losing a part of the principal and interest.

Group 4 - Doubtful debt includes debts assessed as having a high probability of loss.

Group 5 - Potentially irrecoverable debt includes debts that are assessed as having no possibility of recovering capital. [17]

 Classification of bad debt

Currently, Vietnamese commercial banks have or are implementing the implementation of debt classification based on internal credit rating results. The purpose of the scoring is to assess the bank's credit risk, the risk of customers not being able to repay loans or the risk of the bank having to perform on behalf of customers' guarantee obligations to third parties.

Based on the rating results and the status of customers to classify into appropriate debt groups. Thereby, banks can detect bad debts for each customer, and clearly identify the cause of bad debts. The cause may be from the financial capacity of the customer or from other macro risks, then continue to assess the customer's ability to repay. In addition, when deciding to grant credit, banks also base on the results of the internal credit rating of the customer, so the debt classification is actually done right from the time of credit appraisal, not waiting until disbursement. You can refer to the debt classification method based on the results of internal credit rating at VCB in tables 3.7 and 3.8 below:

 Customers are regular businesses

Customers who have financial statements for 2 years since having revenue from production and business activities and currently have a credit relationship with VCB.

Table 3.7: Debt classification for regular corporate customers

Total points

Rating	Debt classification
From 94 to 100	AAA	Group 1
From 88 to under 94	AA+	Group 1
From 83 to under 88	AA	Group 1
From 78 to under 83	A+	Group 1
From 73 to under 78	A	Group 1
From 70 to under 73	BBB	Group 2
From 67 to under 70	BB+	Group 2
From 64 to under 67	BB	Group 2
From 62 to under 64	B+	Group 2
From 60 to under 62	B	Group 3
From 58 to under 60	CCC	Group 3
From 54 to under 58	CC+	Group 3
From 51 to under 54	CC	Group 3
From 48 to under 51	C+	Group 3
From 45 to under 48	C	Group 4
Under 45	D	Group 5

Source: Joint Stock Commercial Bank for Foreign Trade of Vietnam (2010), Policy on debt classification, provisioning and use of credit risk reserves [25]

 Customers are newly established businesses

Is a newly established enterprise; or has been operating but has not had financial statements for 2 years since having revenue from production and business activities; or units

Administrative and career units with income, no financial statements and currently have a credit relationship with VCB, with credit rating results.

Table 3.8: Debt classification for newly established business customers

Debt classification by debt status factors

Internal credit rating results

AA, AA+ AA, A+, A, BBB

BB+, BB, B+, B

CCC CC+ CC

C+, C

- On time or overdue less than 10 days

Group 1

Group 2

Group 3