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The changes in the criteriaBad debt ratio will spike on new bad debt classification method and the method for bad debt classification will surely make the bad debt ratio increase sharply.

A report by the State Bank of Vietnam showed that by September 30, 2012, the bad debt ratio had accounted for 8.82 percent of the total outstanding loans of the whole banking system, estimated at VND2,800 trillion.

Actual bad debts bigger than declared?

Economists believe that the actual bad debt ratio is much higher than the reported figure, while the remaining part of the bad debt iceberg still has been hidden. In principle, the bad debts would be set aside the balance sheet when banks make provisions against risks. This means that the bad debts would not be shown on the books, but they still would exist in reality.

In 2012, the State Bank of Vietnam allowed credit institutions slash the interest rates for loans, extend the debt payment and restructure the debts. As such, a part of the bad debts has been settled.

When restructuring the clients’ debts, the unpaid interests have been integrated into the principal debts. This has led to the increase in the outstanding loans of credit institutions, but in fact, the money has not yet come back to the institutions.

Commercial banks can also “make up” the books in different ways. One of the most popular methods applied is disbursing new loans to clients so that the clients can pay old debts.

The lending among the clients who have business relations with each other has also been a method favored by the clients to “upgrade” the status of their debts. With this method, the actual debts remain unchanged, but the debts do not appear on the books as bad debts.

Bad debt ratio will soar?

Analysts believe that the official bad debt ratio would be much higher in the future, when the new bad debt calculation method is applied.

Under the Circular No. 02 on debt classification and provisioning against bad debts, many kinds of debts, which are not listed as “bad debts” under the current regulations, would turn into bad debts if referring to the new regulation.

Previously, the loans mortgaged by credit institutions’ or the institutions’ subsidiaries’ shares were considered “safe loans”. However, with the new regulations, these would be listed as the third group bad debt (the fifth group debt is the worst, which is considered irrecoverable debt).

In fact, the increase in the bad debt ratio has been anticipated. Experts once warned that if Vietnam had applied international standards in classifying debts, it would see the bad debt problem more serious than initially thought.

It’ll take years to deal with bad debts

In principle, there are two ways of dealing with bad debts, either to increase the outstanding loans, which would allow to reduce the bad debt ratio, or reduce the bad debts.

However, a banking expert has pointed out that it is very difficult to increase the outstanding loans at this moment, when businesses hesitate to expand their business.

As for the latter solution, in order to reduce the bad debts, it’s necessary to clear the real estate inventories, because only when real estate developers can sell products, would they get money to pay bank debts. However, the real estate market remains very gloomy, while no one can say for sure when the market would recover.


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