Debt restructuring ‘crust’ will bring ‘virtual’ profits to the banking industry in 2020

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On March 13, 2020, concerned about bad debts that will affect credit activities of banks and State-owned enterprises (SBV) issued Circular 01 providing regulations on credit institutions and expenditures foreign bank branch rescheduled loan repayment, exempted, reduced interest charges, and maintained the debt group to support customers affected by Covid-19 epidemic.

Circular 01 states that credit institutions and branches of foreign banks are allowed to keep the same group of debts as classified according to the State Bank’s regulations as of the latest time before January 23, 2020.

Then, in May, the State Bank again drafted a circular to collect comments, supplement regulations to allow credit institutions to apply the provisions of Circular 01 for disbursements from January 23, 2020 until before. April 25, 2020 and there is a schedule for repayment of principal and / or interest arising between January 23, 2020 and December 31, 2020.

This means that for disbursements after April 24, credit institutions and foreign bank branches need to base on the characteristics of customers to agree with customers on appropriate repayment schedule, keep the debt group in line with Circular 01.

However, recently, in conferences with enterprises in provinces and cities, Deputy Governor of the State Bank of Vietnam Dao Minh Tu said, “To provide maximum support for SBV enterprises, the Circular will be amended and supplemented. From 01 to the end of the period, the support period may be extended to the end of 2020 or longer depending on the evolution and impact of the Covid-19 epidemic “.

It can be seen that the SBV is making every effort to support businesses and the economy. However, in line with the requirement to restructure debts, to maintain the debt group for enterprises of the State Bank, the worry that “bad debts will be concealed” and the future consequences for the banking industry are not small.

A picture of bad faith dishonesty – virtual profit

One of the positive points that Circular 01 brought to the banking industry is to reduce the pressure of bad debts and reduce provisioning for credit institutions. However, TS. Nguyen Tri Hieu has the opposite view that Circular 01 is essentially just “sweeping all the garbage down into a beautiful carpet” rather than solving the real problem facing the banking system and economy.


TS Nguyen Tri Hieu, Banking and Finance expert

“NPLs are still growing day by day. However, Circular 01 allows bad debts and potential bad debts to be kept intact and concealed to become normal debts. This is very dangerous, causing banks subjective, neglecting debt recovery, “Mr. Hieu said.

Currently, many individuals and businesses are facing difficulties due to the effects of the Covid-19 epidemic but the bad debts that are supposed to be bad debts are kept in the group so that businesses can continue to borrow from banks.

“This does not solve the bad debt, but only paints the makeup on the bank’s assets, but the actual bad debt is still there, increasing the risk for the bank because the bad debt is not paid due attention”, Mr. Hieu noted.

Talking more about the impact of Circular 01/2020-NHNN, Mr. Hieu said that “Circular 01 is not good”.

“Circular 01 is only good at helping some businesses not to be converted into bad debts, businesses can continue to borrow money from banks. But pushing risks towards the bank.”

Accordingly, Mr. Hieu said that any prudent bank should have the necessary provisions for bad debts to be restructured. “The bank should have a backup book in addition to the book, a closed reserve to know the current cost of bad debt, how, not trust the balance sheet. Profit in 2020 has can only be virtual if not properly provision for bad debts “.

Mr. Hieu said that banking shareholders should soon be concerned about the profitability of the banking industry in 2020. “Because it’s very likely that these are just” virtual “numbers because there was no need to make provisions for debts that would have been bad debts.

“Although the NPL ratio may still be low, it is because many of the bad debts have been restructured, but the actual bad debt is still there, not lost, creating a misleading picture of profit,” said Hieu.

To deal with the above problems, Mr. Hieu gave up, banks need to be more cautious in lending. Debt restructuring is not a problem, banks should choose cases of diseases that cause great damage to both businesses and banks to restructure debt. The debt restructuring also needs a separate report for the bad debt management department to grasp and closely monitor the debts that should have become bad debts.

“Banks need to be cautious about both debt types, which are restructured debt and new loans. Especially, the bad debts are surrounded by debt restructuring.” , Mr. Hieu emphasized.