VietNamNet Bridge – Banks reported a continued rise in bad debt in the first five months of this year with potentially irrecoverable debt soaring by 36.5% compared to the end of 2012.

According to the report on the five-month banking sector performance announced by the State Bank of Vietnam last week, the bad debt spike slowed down to 4.65% at the end of May compared to 4.67% a month earlier thanks to an improvement in credit growth. By the end of May, local banks had reported total bad debt of around VND137.5 trillion.

However, debt in Group 5, which is classified as potentially irrecoverable, kept shooting up, threatening a number of lenders. As of May, Group 5 debt soared by around VND20.9 trillion, or 36.5%, against late last year and accounting for around 57.2% of the total bad debt.

In the end of last year, debt in this group made up 48.5% of the total loans that turned bad.

SBV said bad debt in the first five months showed an uptick in terms of scale, pace and ratio over late last year. Bad debt rose rapidly at lender banks and enterprises active in the sectors adversely affected by the economic slowdown such as manufacturing, trade, construction, transport and real estate.

The central bank said risk of a further bad debt surge was running high due to lack of consistent and strong measures, especially those designed to pull enterprises out of the doldrums and spur economic growth.

The report also warned of stronger negative impacts of bad debt on equity. Since 2012, an increase in bad debt has always been faster than that in risk provisions and equity has increased slowly, leading the ratio of post-provision bad debt to equity in the banking system to rise from 4.6% in the end of 2011 to 11.2% a year later and 12.8% by the end of May.

This problem has weakened the ability of many banks to counter risks.

Risk provisions have picked up also but at a much slower pace than bad debt. With bad debt moving up steadily month after month, risk provision funds amounted to VND71.7 trillion, up 11.7% against late last year.

If banks did not restructure debt in line with Decision No. 780, bad debt would snowball by over VND280 trillion, which forces banks to add VND14.4 trillion to their risk provision funds, the report said.

Explaining bigger debt in Group 5, Nguyen Phuoc Thanh, general director of Vietcombank, said some banks might have classified their debts into this group to raise their risk provisions, thereby easing pressure from this job at the end of this year. Currently, banks have to make 100% provisions for debt in Group 5.

Source: SGT