Limitations and Causes

Some branches have collected more than the central plan such as the branches of the NHNo&PTNT Ha Tinh, Hai Phong, Bac Giang, Ha Nam, Quang Tri, Quang Nam, Lam Dong, Tay Ninh, Ba Ria-Vung Tau... However, there are also some branches that have collected very low debt, mainly for risky debts of state-owned enterprises that are operating at a loss or bankrupt such as the Saigon branch, Quang Binh branch, Can Tho branch, Long An branch...

However, the ratio of debt recovery after risk settlement calculated on the amount of debt settled by accumulated reserve funds has not improved significantly, which partly reflects the difficulty in recovering off-balance sheet bad debts because borrowers are no longer able to repay their debts and are forced to write them off.

The scale of bad debt did not increase as sharply as in the first months of 2012 thanks to the State Bank and the State Bank of Vietnam proactively and synchronously implementing many solutions to manage bad debt, in which the three main solutions with positive impacts are maintaining the debt group with restructured debts (according to Decision 780/QD-NHNN), setting aside and using DPRR to handle bad debt and selling bad debt to VAMC.

Despite many difficulties in business operations, the State Bank of Vietnam has still actively set aside DPRR to create a source for handling bad debts and has proactively handled and monitored the handled bad debts off-balance sheet. At the same time, VAMC has come into operation and purchased and sold debts of credit institutions, which has also contributed to reducing the scale of bad debts of the State Bank of Vietnam. Selling debts to VAMC to collect special bonds, only having to set aside 20% risk provisions instead of the rate of 50-100% for group 4,5 debts and when necessary, being able to discount at the State Bank in the recent past has helped the State Bank of Vietnam resolve many financial burdens.

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Bad debt management has been closely monitored by branches in the system. Problematic risky debts have been promptly transferred to bad debt and provisions have been made according to the prescribed provisioning ratio.

Information reporting is maintained regularly and is relatively accurate and timely, so the Board of Directors and General Director of Vietnam Bank for Agriculture and Rural Development always have a firm grasp of the provisioning and risk handling situation of the entire system. From there, there are positive and timely directive measures.

Aware of the role of provisioning, branches are increasingly responsible for setting up and handling risks. Therefore, the amount of risk provisioning increasingly reflects the debt quality of Vietnam Bank for Agriculture and Rural Development.

Through the work of synthesizing the results of classifying “Available” assets, setting up provisions, and handling risks, it can be seen that the work of setting up provisions and handling risks of branches and units in the entire system of the Vietnam Bank for Agriculture and Rural Development has become routine, and all branches and units pay attention to setting up provisions and handling risks. In the entire system, some branches set up large provisions in 2014 such as Da Nang branch (VND 368 billion); Bac Lieu branch (VND 554 billion); Hanoi branch (VND 244 billion)...

Fourth, the rate of increase in bad debt is controlled, the rate of increase in bad debt/credit growth rate tends to decrease.

The growth rate of bad debt in the period 2010-2014 decreased from 76.04% in 2010 to 23.18% in 2013, 3.27% in 2014, proving that the efforts of the entire system of Vietnam Bank for Agriculture and Rural Development have been rewarded. The sharp decrease in bad debt ratio, within the control of the bank, shows that bad debt management has had many positive effects. This assessment is further confirmed when considering the growth rate of bad debt/credit growth rate when this ratio decreased from 10.77% (2011) to 2.22% (2013) and 0.22% (2014), even in 2012 this ratio was at -2.99%. However, in the current situation at the Vietnam Bank for Agriculture and Rural Development, this trend needs to be considered more carefully when the situations of bad debt classification and risk prevention still contain many problems that need to be solved.

3.4.2. Limitations and causes

First, the bad debt ratio is still high.

Although the Vietnam Bank for Agriculture and Rural Development regularly improves and applies a series of measures to prevent and limit risks in lending activities, many new bad debts still arise, the bad debt ratio in the year is always much higher than the target bad debt ratio set by the Vietnam Bank for Agriculture and Rural Development, higher than the bad debt ratio recommended by the State Bank. This limitation greatly affects the brand and reputation of the Vietnam Bank for Agriculture and Rural Development.

Second, the identification, measurement and assessment of bad debt is inaccurate, not updated, and not in line with international practices, leading to bad debt not reflecting the true risk nature of the debt, and risk provisions are not fully made.

Although it is an important step in bad debt management, the work of identifying and classifying bad debts has not been done well. Many debts that are difficult to recover and have large values are still in groups 1 and 2 and have not been included in the bad debt group.

to have appropriate handling measures. Phenomena such as missing information on financial reports, discrepancies in debt repayment terms between records on the system and paper records still occur commonly. This leads to debt handling departments not having enough basis to classify debts accurately. Banks do not have a mechanism to update customer information in a timely manner, and customer scoring systems do not create objective and reliable bases to accurately evaluate customers.

Therefore, it can be said that the current work of identifying and measuring bad debt at NHNo&PTNT is still a big problem when most banks have been approaching international practices.

Third, the activities of detecting, monitoring and preventing bad debt are not timely and effective, and the risk management model still has many shortcomings.

Although the control environment has been invested heavily by the Vietnam Bank for Agriculture and Rural Development, it has not yet created a healthy environment as a good foundation for the internal control system to operate effectively. Although organized according to the model of a corporation, the independence of the branches and subsidiaries of the bank is still relatively limited. Decentralization and delegation of authority between the Board of Directors and the General Director, between the Directors of the Departments at the headquarters and the Directors of the units have existed but are not clear and have not assigned specific responsibilities. Overlapping in management and operations between departments still occurs frequently. Therefore, in many cases, the delegated authority is not fully utilized or abused.

However, in reality, the internal control system of the Vietnam Bank for Agriculture and Rural Development is still weak in detecting and preventing fraud and errors in credit activities in particular and banking activities in general. Internal control is only meaningful in detection, not yet complete, and has not yet played a role in risk warning.

The credit risk management model of the Vietnam Bank for Agriculture and Rural Development according to the decentralized model still exists, with limitations such as non-objective control and limited transparency. Compared to the remarkable development of banking technology, the change in banking management at the Vietnam Bank for Agriculture and Rural Development in recent times is insignificant. While many other banks (BIDV, Vietinbank, Vietcombank, ACB, MB...) have made strong steps in applying international standards and practices in credit risk management, the credit risk management model of the Vietnam Bank for Agriculture and Rural Development has not changed much compared to many years ago and has revealed many limitations.

Credit activities still have many potential risks leading to the risk of bad debt arising and ineffective handling due to the high credit balance of the Vietnam Bank for Agriculture and Rural Development while credit quality is still limited.

Fourth, bad debt handling is slow, not really effective, and has not completely handled risks and losses.

- Regarding debt exploitation measures: In the recent past, the main debt exploitation measure has been debt restructuring, especially after Decision No. 780/QD-NHNN dated April 23, 2012 took effect. However, the reality shows that restructured debts are not really debts with good debt repayment capacity recovery, mainly solving immediate debt repayment difficulties, not closely assessing the situation of customers. In fact, at the Vietnam Bank for Agriculture and Rural Development, there is still a heavy mentality of restructuring to hide bad debts, clean up the balance sheet rather than to create opportunities to support businesses to restore debt repayment capacity. Because of this, restructured debts only temporarily escape the bad debt category, but the risk of becoming bad debts in the future is still high. Especially after Circular 09/2014/TT-NHNN was issued, the risk of increasing bad debt from restructured debts is still very high because restructured debts no longer have the opportunity to restructure, so if the debt cannot be paid, it will return to its original bad debt nature. Measures such as consulting and supporting debt collection for customers have a great impact on the efficiency of bad debt collection, but at the Vietnam Bank for Agriculture and Rural Development, they are not focused on.

- Regarding debt liquidation measures: Bad debt liquidation measures still have many problems and have not completely resolved bad debt.

For debt sales to VAMC, the debt must meet the following conditions: (i) the debt is secured by assets, of which no less than 65% of the total value of the secured assets is real estate, including real estate formed in the future; (ii) VAMC only buys debts from 1 billion VND or more for individuals, from 3 billion VND or more for organizations. Debts sold to VAMC can only be paid by special bonds, and the Vietnam Bank for Agriculture and Rural Development still has to set aside provisions. And after 5 years, if VAMC cannot handle it, it will return it to the bank. Meanwhile, at the Vietnam Bank for Agriculture and Rural Development, loans with collateral of over 65% are usually only available to real estate businesses. As for production and business enterprises, they invest in real estate but are often very frugal, they can rent land, so the amount of money in the collateral is very small. Enterprises mainly invest in factories, machinery, equipment lines... Therefore, with the regulation that 65% of collateral assets are real estate, it is very difficult to handle bad debt.

Another problem of the Vietnam Bank for Agriculture and Rural Development is that due to the nature of lending mainly to production households, the number of households borrowing from 1 billion VND or more is very small. Therefore, with the regulations of VAMC, the Vietnam Bank for Agriculture and Rural Development will find it difficult to handle bad debts of small production and business households. For the above reasons, the Vietnam Bank for Agriculture and Rural Development still faces many limitations in recovering bad debts.

In addition, the debts sold to VAMC of the State Bank of Vietnam are still jointly responsible; provisions must be made for bad debts sold and there is a risk of debt refund if VAMC cannot handle them after 5 years. Selling debts to VAMC at a price lower than the actual outstanding debt and if VAMC cannot handle them, they will be refunded to the bank after 5 years at the original purchase price, which will cause huge losses for the State Bank of Vietnam in the future. On the other hand, the bad debts of the State Bank of Vietnam sold to VAMC when auctioning also encountered many obstacles, some debts had to be auctioned up to 7 times before being implemented, costing a lot of money and time to handle the debt.

Handling through lawsuits and handling collateral still has many legal procedural problems, taking a lot of time and money. Many customers do not cooperate in handling assets to recover debt, intentionally prolonging the debt repayment period and asset handover time. For mortgaged assets that are large-scale, highly specialized factories (such as cement, textiles, seafood, etc.), handling assets to recover debt is difficult because there are no customers to buy due to the high value and specific nature of the assets. In addition, the valuation of assets before lending is inaccurate, leading to large losses when selling to recover debt.

On the other hand, the provisioning and risk handling work has not really become an effective backup tool in protecting against debts with the possibility of losing capital.

Due to inaccurate identification of bad debts and pressure from increasing costs, the risk provisioning of Vietnam Bank for Agriculture and Rural Development is ineffective, the provisioning ratio is low compared to bad debts, and the debt collection ratio after risk handling/total accumulated risk handling expenses is low.

Provisioning and risk handling of Vietnam Bank for Agriculture and Rural Development still have some shortcomings, the reasons are:

- The determination of outstanding debt for risk provisioning at branches is incomplete and not in accordance with the spirit of the State Bank due to insufficient attention to qualitative factors.

- Although the branches of the Vietnam Bank for Agriculture and Rural Development have paid close attention to the provisioning work, there are still some branches that do not perform it accurately and promptly... affecting the synthesis and general risk handling work of the entire system.

- At some branches, debt collection has not received proper attention and no drastic and active measures have been proposed, so bad debt remains high.

Fifth, bad debt is concentrated in Hanoi and Ho Chi Minh City, some branches have bad debt and high-risk debt balance.

Although the Vietnam Bank for Agriculture and Rural Development always sets the target of lending to rural areas, the bad debt of the system is mainly located in two big cities, Hanoi and Ho Chi Minh City, accounting for nearly 70% of the total bad debt of the whole system. This is a reality that the bank is facing and has to deal with its consequences for a long time. The bad debt in these two areas mainly lies in loans for corporations, state-owned enterprises and the real estate sector. In 2015, the risk of bad debt in these two areas is also quite high, concentrated in some branches in the area such as My Dinh (1,002 billion), So Giao Dich (484 billion), and Saigon. In 2014, there were over 80 branches with bad debt ratios above 5%, of which 27 branches had bad debt ratios above 10% such as Ho Chi Minh City Branch, Transaction Office... This ratio is very worrying for the entire NHNo&PTNT system. The possibility of capital loss at the branches is high, causing loss of assets, affecting the reputation of the Agribank brand.

In addition, by early 2015, some branches are expected to have high-risk debt such as Soc Trang (2,030 billion), Ha Tay (1,409 billion), Ca Mau (940 billion), Binh Thuan (573 billion), Lam Dong (556 billion), Dong Thap (459 billion).

Main causes:

Objective reasons

Firstly, the legal system and policy mechanisms related to bad debt handling activities of banks have been issued, creating a legal basis for commercial banks to proactively handle bad debt, but are still incomplete, lack consistency and do not cover all situations that may arise in reality .

For example, ownership rights, usage rights, transfer mechanisms, asset auctions, principles of asset valuation, auctions... On the other hand, some regulations and guidelines of the Government, the State Bank, Ministries and Branches on the above issues are not close to reality, and have

These requirements are difficult to implement or will take time to implement, slowing down the progress of bad debt settlement of commercial banks, reducing the autonomy and self-responsibility of commercial banks... These limitations have greatly affected the bad debt settlement of banks, contributing to reducing risks in credit activities.

(i) Regulations on debt classification in Vietnam are also different from international practices.

In Vietnam today, there are two basic criteria for debt classification, quantitative criteria. In which, quantitative criteria are based on the status of the debt, that is, the customer's history of principal and interest payments, so this method is used to classify when loans have been disbursed, and qualitative criteria are criteria used right from the time of approval of the application, including a system of 14 financial indicators, 40 non-financial indicators, each indicator has a different weight corresponding to each field, business line and at that time, qualitative criteria are more effective, helping commercial banks have a full basis to evaluate the potential and debt payment ability of customers more accurately and completely.

- According to Vietnam's regulations, in the past, most commercial banks have made provisions according to Article 6 of Decision 493 (except for 3 banks that have classified debts according to Article 7 of this Decision), that is, according to the quantitative approach, bad debts will be calculated to include loans that are overdue for 91 days or more and customers show signs of not paying interest and principal on time. According to international practice, bad debts include not only loans that are overdue for more than 90 days but also loans that show signs of depreciation (according to IAS 39), or calculate factors that may cause future loan losses (Basel II). In addition, when calculating FSIs, the IMF also includes replacement debts for old debts that have been listed as bad debts. This will lead to the bad debts of commercial banks calculated according to Vietnam's regulations being larger than if calculated according to international practice.

- For some Vietnamese commercial banks such as the Vietnam Bank for Agriculture and Rural Development, if the debt is classified according to Circular 02 of the State Bank of Vietnam on the classification of assets, provisioning levels, and methods of setting up provisions to handle risks in the operations of credit institutions and foreign bank branches, that is, according to the qualitative approach which is very close to international practice, the calculated bad debt is still not equal to the bad debt calculated according to international practice. The reason is that the classification of bad debt according to the qualitative approach will depend greatly on the operating experience, subjective assessment of the bank itself, and due to the standard internal credit rating system, which young Vietnamese commercial banks still cannot match.

In addition, the assessment of loan impairment or calculation of possible future losses according to international practice also requires Vietnamese commercial banks to have a unified risk management and asset valuation process to be consistent with debt classification according to international standards.

- There is no common standard for qualitative criteria, also known as the internal credit rating system of credit institutions. Moreover, the State Bank of Vietnam has quite general regulations, without clear instructions on the application of qualitative methods. On the other hand, the reliability of input databases from organizations, individuals, and enterprises for internal credit scoring is still very limited due to the habit of complying with the law as well as sanctions for accounting, statistics, auditing, etc., which are also inadequate. Therefore, debt classification according to Article 7 cannot be implemented as expected.

- Building an internal credit rating system for customers is difficult to implement comprehensively and requires a lot of time and effort.

Therefore, classifying debt by both quantitative and qualitative methods can push the current amount of bad debt to a higher level, leading to the phenomenon that credit institutions have to set up more provisions. In fact, there are still few credit institutions classifying debt by qualitative criteria or using both methods although this is a quite comprehensive criterion. Vietnam Bank for Agriculture and Rural Development is also not among the commercial banks that effectively classify debt by both methods.

- Challenges for the State Bank in improving its capacity to monitor and enforce regulations on debt classification, ensuring operational safety for the entire banking system.

The bad debt situation of the Vietnam Bank for Agriculture and Rural Development may actually be worse than reported and may be even higher in 2014 when many bad debts that have not been classified thanks to incentives from Decision 780/2012/QD-NHNN will be more accurately reflected in Circular 02/2013/TT-NHNN on asset classification, which will be applied from June 2014 with a stricter debt classification method. This will be a big challenge for the State Bank in the process of handling bad debts with the goal of bringing the bad debt ratio down to below 3% in 2015.

According to Decision 780/2012/QD-NHNN, for enterprises with prospects of recovering production but facing financial difficulties, when extending debt, it is allowed to keep the debt group of this enterprise, as classified according to regulations.

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