Banks raise provisions in anticipation of bad debt

In the face of rising bad debt amid the ongoing COVID-19 pandemic, commercial banks have been forced to write up their loan loss provisions, according to industry sources.

Vietinbank was to increase its non-performing loan coverage ratio from 119% at the end of September to 169% for the rest of the year, with risk provisions from VND14 trillion (US$617 million) to VND17 trillion, said Vietinbank's Chairman of the Board Tran Minh Binh. 

The move was a result of rising non-performing loans due to the pandemic and designed to improve the bank's buffer for the year to come. "We have to stay vigilant and be prepared for 2022," he said. 

VietinBank's credit risk provisions increased to VND14 trillion by the end of September, a 22%, or VND2.5 trillion, increase from the same period last year. The bank has set aside VND5.5 trillion in provisions during the third quarter of 2021 as bad debt ratio reached 1.67%, the highest recorded in the last four quarters.

Vietcombank's provision cost has been reported to climb to over VND8 trillion during the first nine months of the year, a 33% increase from the same period last year. During the third quarter alone, the bank raised its provision by VND2.5 trillion, a 25% increase year-on-year. 

Vietcombank reported its bad debt has doubled since the beginning of the year from VND5.2 trillion to VND10.8 trillion (from 0.62% to 1.16%) resulting in a lot of pressure to allocate even more funds to its provisions. 

Meanwhile, BIDV has set aside VND7.5 trillion during the third quarter, a 35% increase year-on-year, raising its provisions to over VND23 trillion during the first nine months, a 44% increase year-on-year. 

The bank had the highest bad debt ratio among commercial banks at 1.61%, a slight decrease from 1.76% at the beginning of the year. 

The majority of commercial banks have all reported an increase in provision cost during the first three quarters of 2021: ACB VND2.8 trillion, VPBank VND13.6 trillion, LienVietPostBank VND887 billion and TPBank VND2.3 trillion. 

Current regulations dictate banks must maintain provision rates at 0% for standard debt (Group 1), 5% for special attention required debt (Group 2), 20% for subprime loans (Group 3), 50% for doubtful debt (Group 4) and 100% for potentially irrecoverable debt (Group 5). 

In addition, banks must also maintain 0.75% of total outstanding loans (excluding Group 5) in general provision.  
However, the State Bank of Vietnam's (SBV) recent directives aimed at providing businesses with COVID-19 financial relief have forced banks to set aside a larger amount than usual in provisions. 

"At this moment, I think that banks have built their own scenarios. Besides reducing interest rates to support people, the banks have also actively improved their financial capacity to ensure good operations in the future," said Nguyen Quoc Hung, General Secretary of the Vietnam Banking Association.

By the end of September, commercial banks have extended deadlines for over 270,000 customers with a total loan of over VND330 trillion with interest cuts, per the SBV's request, of VND12.2 trillion from July 15 to September 30.

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