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Bad debt ratio and the ‘achievement’ disease
The State Bank of Vietnam asked commercial banks to begin applying the internal credit rating scheme and the debt classification system in accordance with international standards as of June 2008. However, to date, only the Bank for Investment and Development of Vietnam (BIDV) has officially applied the new method of debt classification.
What standards for debt classification?
According to the currently applied Decision No 493, credit institutions classify debts and put provision funds aside in accordance with either Article 6 or Article 7 of the decision. The two methods may lead to different results for bad debt.
According to Le Ngoc Quynh, head of the committee for building up the debt classification system under BIDV, banks prefer classifying debts in accordance with Article 6, because this method gives more beautiful figures.
Meanwhile, Quynh said the debt classifying method stipulated in Article 7 sets much stricter requirements. This is the core classifying method that international banks and institutions are using. It allows banks to get a more accurate assessment about their clients and the banks’ credit quality.
That explains why, when promulgating Decision 493, the State Bank asked commercial banks to gradually apply the new method of debt classifying. However, it seems that banks do not want to apply the new method.
The ‘achievement’ disease
To date, most banks still classify debts in accordance with Article 6. And international institutions believe that the bad debt ratios of many banks may be higher than the ratios officially announced by banks calculated based on the method stipulated in Article 6.
According to Ernst & Young, classifying debts per Article 7 results in a bad debt ratio 2-3 times higher than that calculated per Article 6. If banks used this method they would have to put more money aside for security, meaning that the banks’ profit would decrease.
Most banks have announced beautiful figures about bad debt, at 1-3% of total outstanding loans.
BIDV, when it began classifying debts in accordance with Article 7, had a bad debt ratio of 31%. It took the bank two years to reduce the figure. Now the bank’s bad debt ratio is 2.77%, within the safety line of 5% in accordance with international practice, and the bank has a provision fund of VND3,500bil.
Vo Tan Hoang Van, Deputy General Director of Ernst & Young, said debt classification in accordance with new standards may create new high bad debt ratios, but banks will get long-term benefits from this. The new standards for debt classification give more honest figures about bad debts, thus helping bank management boards create more suitable business strategies.
Besides BIDV, other banks are also trying to build up their internal credit ranking systems. Military Bank has been running the system on a trial basis since March 2008. ACB has signed a consultancy agreement with Ernst & Young on completing the internal credit rating system. Viet A and MHB are building up systems for themselves.
However, the number of banks applying the new debt classification system proves to be too small if compared to the total number of 40 operational banks.
Vietnamese banks will have to apply international standards in classifying debts sooner or later. Governor of the State Bank of Vietnam Nguyen Van Giau said that the central bank has been urging banks to apply new standards in debt classification. However, no exact deadline for this has been set.
VNN
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