Bad debt
432 | 401 | 303 | |
Bad debt ratio on total outstanding debt | 2.45% | 1.8% | 1.19% |
Maybe you are interested!
-
Current Status of Credit Risk Management at Vietnam Bank for Agriculture and Rural Development -
Current status of credit risk at Saigon Thuong Tin Commercial Joint Stock Bank, Lam Dong branch - 1 -
Current Status of Credit Risk Management for Individual Customers at Vietnam Technological and Commercial Joint Stock Bank - Thai Nguyen Branch -
General Comments on the Current Status of Credit Risk Management and Factors Affecting Credit Risk Management at Vpbank -
Current Status of Factors Affecting Credit Risk at Vietnamese Commercial Banks in the Period 2008 - 2016:
Source: Report of the 2004-2006 directors' conference of the State Bank of Vietnam
Thus, the ratio of medium and long-term bad debt of the State Bank of Vietnam over the three years 2004-2006 has gradually decreased, from 2.45% in 2004 to 1.8% in 2005 and 1.19% in 2006. Meanwhile, the bad debt ratio of the entire banking system by the end of 2006 was 4-5%. This is the result of the efforts of the State Bank of Vietnam in handling bad debt.
Table 10: Situation of pending debt of NHNT
Unit: billion VND
Target
2004 | 2005 | 2006 | |
Total outstanding debt of TDH | 17 635 | 22 274 | 25 459 |
TDH debt | 169 | 107 | 79 |
Debt write-off ratio on total outstanding debt | 0.96% | 0.48% | 0.31% |
Source: Annual Report 2004-2006
Debts awaiting settlement are mainly loans to state-owned enterprises. After considering that the enterprises need more time to collect and pay the Bank in full, the Bank allows the debt to be frozen for a certain period of time. After that period, the enterprise must pay off all debts to the Bank and during that period, the Bank will not charge interest to the enterprise.
Based on the table above, we can see that the pending debt of NHNT has also decreased over the past 3 years, in absolute value from 169 billion VND in 2004 to 79 billion VND in 2006, with the ratio of deferred debt to total outstanding debt decreasing from 0.96% in 2004 to 0.31% in 2006.
However, for commercial banks in general and commercial banks in particular, the debt that is frozen, which according to Decision 493/2005/QD-NHNN is a debt in Group 5 (debt with the possibility of losing capital), the possibility of capital recovery is very low. In fact, in lending, the proportion of loans to state-owned enterprises tends to decrease, moreover, commercial banks have transferred overdue debt according to Decision 493/2005/QD-NHNN, and at the same time transferred uncollected interest to monitor on off-balance sheet accounts, so the newly frozen debts are very small, most of the current frozen debts of commercial banks are debts left over from previous years, mainly loans under regimes and policies.
In 2006, the Bank also actively collected overdue debts, contributing to reducing the overdue rate and the debt suspension rate to the current low level. The Bank has collected all overdue principal debts such as Tai Trung Company with the amount of 700 million VND overdue principal and nearly 45 million VND overdue interest, Dai Hoang Son Company collected 100 million VND overdue, Nam Dinh Jute Company is still in the suspension period... Thus, in the coming time, the Bank needs to continue to have measures to thoroughly collect overdue debts, debt suspension, and at the same time have more active and effective measures to limit the occurrence of these debts.
2.2.2.3. Status of provisioning and use of credit risk reserves
Right from the concept of credit risk: "credit risk is the inherent potential loss created when granting credit to customers" has shown that credit risk is inherent, exists in parallel with loans, when deciding to grant credit to customers, any commercial bank determines that there may be risks and to be proactive in limiting the consequences that credit risk may cause, a measure currently being implemented by commercial banks is to set up risk provisions.
According to regulation 493/2005/QD-NHNN, risk reserve is the amount set aside to cover possible losses due to the Bank's customers not fulfilling their obligations as committed. Risk reserve is calculated based on the principal balance and accounted for in the Bank's operating expenses.
At the State Bank, debt classification and risk provisioning are carried out in accordance with regulation 493/2005/QD-NHNN. The situation of risk provisioning at the State Bank is as follows:
Table 11: Risk provisioning situation of Vietnam Joint Stock Commercial Bank over the years
Unit: billion VND
Year
provision risk management | Risk prevention risk/total outstanding debt | Overdue debt/total outstanding | |
2004 | 366 | 2.08% | 6.8% |
2005 | 548 | 2.46% | 3.1% |
2006 | 104 | 0.41% | 1.96% |
Source: Annual report 2003-2006 of Vietnam Bank for Industry and Trade
Pursuant to the provisions of Decision 493/2005/QD-NHNN dated April 22, 2005 of the Governor of the State Bank promulgating "Regulations on debt classification, provisioning and use of reserves to handle credit risks in banking activities of credit institutions", the provisioning of credit risk reserves at the State Bank was thoroughly implemented in 2005. As of December 31, 2006, the ratio of overdue debt in total outstanding debt was 1.96%, much lower than in 2005. Therefore, in 2006, the State Bank only had to set aside VND 104 billion for medium and long-term credit risk reserves, much lower than in 2005 (VND 548 billion). With such provisioning of risk reserves, the State Bank can use credit risk reserve funds to offset outstanding debts such as overdue bad debts and debts awaiting settlement. The subjects of settlement are outstanding debts with secured assets overdue from 721 days and debts with secured assets overdue for more than 721 days and debts without secured assets overdue for more than 361 days.
2.3. Achievements that NHNT has achieved in recent times
2.3.1. Measures that NHNT has implemented in the past
In today's increasingly competitive environment, to ensure safe and effective operations and enhance competitiveness, NHNT has taken a series of measures to gradually improve credit quality and minimize risks. Some of the following measures can be mentioned:
To ensure that risk management and capital preservation are carried out in the right direction and effectively, NHNT has established committees in charge of risk management according to international banking practices. Basically, the risk management organization model of NHNT is divided as follows:
Risk Management Committee (RMC): under the Board of Directors, established under Decision No. 455/QD-TCCB-DT dated September 21, 2001, is responsible for the overall development of risk management policies.
Asset/Liability Management Committee (ALCO): under the General Director, established under Decision No. 456/QD-TCCB-DT dated September 21, 2001. ALCO is responsible for risk monitoring.
Central Credit Council: Under the General Director, established under Decision 409/QD-NHNT dated March 29, 2002 with the aim of improving the quality of credit policy development, credit limit approval and risk management policy implementation for corporate customers.
Strictly implement asset mortgage: NHNT always takes the effectiveness of the project as the primary basis for loan approval. However, in medium and long-term lending with its inherent characteristics, to prevent unforeseen risks for the Bank and to bind the customer's responsibility in using the loan effectively, NHNT always requires
Our customers must have collateral, the assessment of the current status of the property, the necessary documents as well as the valuation when lending are all carried out strictly and reasonably. Thanks to that, the enterprise always tries to do good business to pay the debt to the Bank to avoid having to use the property to seize the debt.
Building a reasonable credit policy includes the following main contents:
- Expand lending to customer groups whose business activities are highly secure, and limit lending to customer groups whose business activities are highly risky and ineffective.
- Take advantage of credit development opportunities in areas with favorable economic environments, apply prudent lending policies in areas with uneven and unstable economic development.
- Expand lending to key economic sectors and products with stable consumer markets, and cautiously lend to products with many fluctuations in market and price.
NHNT has been building a credit risk management system in accordance with international practices including:
Develop and issue internal management tools and documents such as: credit limits for customers, delimitation of investment areas, establishment of credit councils, decentralization of authority in accordance with staff capacity, development of unified processes, development and implementation of internal credit rating systems, online reporting information, etc.
Inspection and supervision work is also emphasized in the organizational model with the active role of the Board of Directors, the independence of the internal control system, the management of functional departments at the Head Office, and the organizational model according to the recommendations of international consultants (ING Group - Hanoi).
The Bank has piloted the application of a new credit management method established on the principle of separating three functions in credit activities: business, risk management and operations, that is, forming a customer relations department, a risk management department, and a debt management department, to increase the efficiency of each stage while ensuring mutual supervision between stages through strict compliance with credit procedures.
Recruit and train a team of highly qualified credit officers with professional ethics.
Thoroughly recover and handle bad debts and outstanding debts by strengthening the supervision of business operations, using risk reserve funds to handle bad debts, transferring assets for debt collection to the debt management and asset exploitation company - a subsidiary of NHNT established on March 27, 2002, specializing in debt management and exploitation of assets securing loans.
The State Bank has classified debts and set up risk provisions according to Decision 493/2005/QD-NHNN.
Implement restructuring project
The Bank has developed a restructuring plan for the Bank for the period 2001-2005, which was approved by the Government in Decision No. 162/2001/QD-TTG dated October 23, 2001. The basic objectives of the restructuring plan include: improving financial capacity; expanding business activities; modernizing technology and developing new products; building a modern management model, especially in risk management and internal inspection and auditing.
2.3.2. Assessment of risk mitigation activities at NHNT VN
2.3.2.1. Achievements
In the past year, with efforts to limit credit risks, NHNT has achieved the following results:
The ratio of medium and long-term overdue debt to total medium and long-term credit balance has decreased compared to previous years, medium and long-term overdue debt accounts for only 1.96% of total medium and long-term debt balance. This is lower than the average medium and long-term overdue debt ratio of State-owned commercial banks at present of 4-5% and lower than the target set by the State Bank (3%).
The ratio of medium and long-term bad debt to total long-term debt also decreased, in 2006 this ratio was only 1.19%. Of which, debt pending settlement only accounted for 0.31% of total medium and long-term debt.
The above results were achieved thanks to the active and reasonable measures that NHNT has implemented in the past time:
Propose a reasonable credit policy. With the credit policy applied by the State Bank, the quality of the State Bank's medium and long-term loans is increasingly improved, thanks to which the total outstanding medium and long-term credit balance increases but the ratio of overdue debt to total outstanding medium and long-term debt decreases.
Successfully implemented the restructuring project.
Applying a new credit model with the establishment of a customer relations department, a risk management department, and a debt management department has contributed to improving credit quality and limiting credit risks, because a loan is carefully assessed, while limiting the situation of credit officers colluding with customers.
In 2006, despite many difficulties, the debt management and asset exploitation company completely handled 10 out of 11 assets that existed at the beginning of 2006 with a total amount of revenue reaching 140.5 billion VND.
Conducting debt classification and risk provisioning according to Decision 493/2005/QD-NHNN helps the Bank closely monitor each customer, thereby providing timely and appropriate measures to limit the occurrence of overdue debt.
Based on the internal credit rating system, credit officers can evaluate customers comprehensively and fully, and based on the credit score that customers achieve, make more accurate lending decisions, thereby contributing to improving credit quality and limiting credit risks.
2.3.2.2. Existing issues that need to be resolved
Besides the achievements in limiting credit risks, there are still shortcomings that NHNT needs to be resolved:
First, the ratio of bad debt to total outstanding debt is still high.
The above results are very good compared to the situation of the State Bank in previous years, the bad debt ratio of the State Bank has had many positive changes, much lower than previous years and lower than that of state-owned commercial banks. However, if compared to the bad debt ratio of the State Bank compared to joint-stock commercial banks and the group of joint-venture banks and branches of foreign banks, this ratio is still high, in 2006 the bad debt ratio of the total outstanding debt of the group of joint-stock commercial banks was 1-2% and the group of joint-venture banks and branches of foreign banks was 0.1%, while the bad debt ratio of the State Bank in medium and long-term lending in the past year was 3.06%. Moreover, that is the assessment according to Vietnam's decision, this ratio will be even higher if assessed according to international standards (according to the IMF's assessment, the bad debt of the State Bank may be up to 5-6%).
Second, the bad debt handling methods applied by the State Bank are still not the most thorough solution.
Currently, there are many ways to handle a bad debt arising in the balance sheet. Of which, the three most popular ways are (1) Selling the collateral or filing a lawsuit for bankruptcy to recover the loss, the loss will be used to handle the risk reserve fund; (2) Selling this debt to debt settlement companies (AMC), the loss will also be used to handle the risk reserve fund; (3) Using the risk reserve fund to transfer the entire debt off-balance sheet and then calculate later. With the first two ways, bad debt will be handled thoroughly, the banks