NPL landscape hinges on renewal of credit circular

Circular No.02/2023/TT-NHNN, initially issued in April 2023 and extended in June this year, is set to expire at the end of 2024. It stipulates that credit institutions may restructure loan repayment terms and maintain loan classifications to support customers facing difficulties in business operations or repaying loans for personal and consumption needs.

Banks are naturally seeking a further extension of the circular, especially in the context of the country recovering from the impact of Typhoon Yagi, restoring business operations, and promoting economic growth.

Nevertheless, extending the policy poses risks to the economy, as the true scale and ratio of non-performing loans (NPLs) could remain hidden due to deferred payments and unchanged loan classifications.

Q3 figures on NPLs present a complex financial landscape, raising the critical question of whether the circular should be extended beyond 2024.

“Extending Circular 02 gives banks more time to manage and resolve bad debts, while also easing difficulties for businesses in accessing capital and formulating appropriate debt repayment plans. When the economic situation improves, businesses will have the ability to service their debts,” said Dr. Nguyen Huu Huan, senior lecturer at the University of Economics in Ho Chi Minh City.

However, Huan also warned of the downsides, noting that the policy acts as a veil for NPLs. “The true scale and ratio of NPLs will remain hidden since payments are deferred and loan groups remain unchanged. If the State Bank of Vietnam (SBV) does not extend the circular by the end of this year, the ratio could increase significantly, possibly doubling or tripling the current figure if businesses still struggle with cash flow and have not improved their operational efficiency. This could cause a psychological shock to investors and the public, posing potential risks to the banking system,” he added.

However, this would also mean that the NPL figures banks report could worsen. Data published by the SBV on November 11 revealed that the on-balance sheet NPL ratio stood at 4.6 per cent by the end of September, the same as the end of 2023 but more than double the 2 per cent rate recorded in 2022.

Among the 28 listed banks, excluding NCB, the average NPL ratio has been steadily increasing – from 2.2 per cent at the end of 2023 to 2.4 per cent by the end of Q2, and 2.56 per cent by the end of Q3.

Some banks have seen sharper increases. For instance, BVBank’s NPL ratio rose from 3.3 per cent at the end of last year to 4.7 per cent by Q3. Similarly, OCB’s NPL ratio jumped to 4.1 per cent in Q3 from 2.65 per cent at the end of 2023, while VietBank reported an increase from 2.6 to 3.3 per cent during the same period.

Even large-scale banks have not been spared. MBBank and BIDV recorded significant increases in NPL ratios of 0.6 and 0.5 per cent, respectively, compared to the end of 2023.

SBV Governor Nguyen Thi Hong on November 11 attributed the deteriorating NPL situation to the prolonged impact of the 2020 pandemic.

“This has affected all sectors of society, reducing incomes and making it difficult for businesses and individuals to repay debts,” she said.

The SBV has proposed several solutions to address rising NPLs. For new loans, banks must conduct thorough assessments of borrowers’ repayment capacity to prevent the formation of new NPLs. Existing bad debts, meanwhile, require intensified recovery efforts through debt collection, collateral liquidation, and the development of debt trading markets.

When Circular 02 expires at the end of the year, NPLs could spike as deferred loans shift categories and are reflected in banks’ financial reports. Banks with significant Group 2 loans, such as VPBank, HDBank, and VIB, are particularly vulnerable and could face heightened challenges.

To mitigate these risks, banks have ramped up provisioning efforts, sacrificing profits to bolster their financial buffers. Among the 28 listed banks, 23 have increased provisioning in the first nine months of the year, with some raising provisions multiple times. However, provisioning alone may not be sufficient, as many banks’ loan loss reserve ratios (LLR) have continued to decline.

From a practical perspective, banks are advocating for targeted solutions. Do Thanh Son, deputy general director of VietinBank, supports extending Circular 02 to provide businesses with more time to recover and maintain loan classifications. He also recommended specific provisioning mechanisms for medium-term loans that have been restructured.

“For loans where the borrower has fully repaid their debt under the agreed terms, no additional provisioning should be required for the remaining portion, as the medium-term loan duration is still ongoing,” Son said.

Economic expert Dinh Trong Thinh added, “Clearly, this policy has its positives, so both businesses and banks are looking forward to debt extensions and deferments. However, to maximise the benefits of this policy, businesses must restructure themselves, use capital effectively, and set goals for repaying both principal and interest.”

The non-performing loan (NPL) ratio reached nearly 5 per cent at the end of May. Le Hoai An, a banking consultant and trainer at Integrated Financial Solutions, talked with VIR’s Hong Dung the assessment of NPLs in the first half of 2024.

Legal obstacles and inconsistencies prolonging the debt resolution process, lack of specific guidance on the entrusted handling of secured assets, and the low legal compliance of judgment debtors are the main factors affecting the recovery of non-performing loans and the clearance of credit flows by banks.