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How Covid-19 will affect bad debts of banks

How Covid-19 will affect bad debts of banks

Thursday 20, 02 2020
The banking sector is expected to suffer indirectly from the Covid-19, including the decreased credit growth rate and the increased bad debt risk.

The risk of bad debt increase

According to the review from banks, customers which suffer the most from the Covid-19 epidemic are companies operating in fields such as transportation, storage, accommodation, tourism, restaurant & food service, etc. Other victims of this epidemic include companies whose major export market is China (for example: agricultural and fisheries companies), as well as companies whose main materials are imported from China, etc.

Companies operating in these fields account for the majority of banks’ customers, thus making the risk of increasing bad debts to be inevitable. According to the estimation of VPBank, the total number of customers affected by the Covid-19 of this bank is up to 1,000, and this may increase if the disease develops complicatedly. Mr. Pham Toan Vuong, Vice-Director of Agribank, said that this bank had not estimated the number of affected customers and how much they suffered yet, but this disease certainly would affect the debt repayment cash flow of their customers.

Accordingly, the export of the agricultural goods of Vietnam to China would be severely be damaged, while in the loan structure of Agribank, agricultural loan accounted for 70%. This would also increase the bad debt risk of this bank.

However, it will be easier for Agribank to handle bad debt in this situation than for other banks, because of the Decree No. 116/NĐ-CP on 7th September 2018 (adjusted from the Decree No. 55/2015/NĐ-CP) regulating the debt structure supporting difficulties for agricultural companies. Correspondingly, in case of natural disaster and epidemic, customers would receive debt restructure without debt group transfer. However, for customers working in fields such as transportation and tourism, there has not been any regulation yet.

According to Mr. Pham Quang Dung, General Director of Vietcombank, it is estimated that this epidemic would damage half of the Vietnamese goods, thus affecting the ability to repay the debt of companies. However, current regulations on debt restructure are applicable to agriculture companies only.

Therefore, companies operating in other fields affected by the epidemic have a higher possibility of debt group transfer, which is disadvantageous not only for companies but also for banks. As a result, Vietcombank’s leaders suggested that there should be policies or directions from the SBV to ease banks in restructuring debt and supporting damaged companies.

Negative impact reduction


According to Dr. Can Van Luc, there are 3 main influences of the Covid-19 on the finance and banking sectors.

Firstly, there are bad debt potentials as negatively affected companies and business households would obviously lead to manufacturing business difficulties. Therefore, the SBV has directed credit organizations to investigate, review, and come up with assisting solutions.

Secondly, due to the complicated developments of the global economic situation, China and Vietnam will suffer, resulting in decreased total demand and credit demand compared to last year, which will reduce credit growth and affect bank’s revenue.

Thirdly, this epidemic will be a chance to promote cash-less payment.

Regarding bad debt risk, according to Dr. Can Van Luc, the current estimated affecting scale is not too serious; Moreover, the Government and the SBV have said that if the companies have to face difficulties, the debt will not be considered this year’s bad debt, but be considered restructuring debt. “Obviously, this is a potential long-term bad debt rather than an immediate solution need of the bad debt this year.” – this expert stated.

Dr. Nguyen Duc Do, Deputy Director of Institute of Economics - Finance (Academy of Finance), said that the economy is being adjusted cyclically, with some sector having slowing growth rate after a sharp increase, resulting in high inventory and causing companies to adjust production; the real estate sector and the credit growth rate have also been slowed down, etc.

Therefore, according to Nguyen Duc Do, even if the epidemic had not broken out, the potential of the banking sector would not look as bright as it was in 2019. As a result, the situation has been worsened as the disease broke out. In that context, the SBV has issued documents directing banks to increase assistance for customers affected by the epidemic, especially those working in fields such as agriculture, tourism, export, etc.

The SBV’s leaders have also announced that they are directing authorities to soon draft a mechanism to support bank loans to people affected by the disease, in addition to businesses in the agricultural sector.

Immediately after the bank's instructions, most of the banks have taken an active part by introducing policies to reduce interest rates and restructuring debts for customers affected by the Covid-19 epidemic.

​>> Vietnam’s banking industry 2020


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