BAD DEBT CATEGORIES AND THEIR IMPACT ON THE BANKING SYSTEM

In the field of finance and banking, debt classification plays a crucial role in risk management and ensuring system stability. The State Bank of Vietnam has established specific regulations on debt classification, enabling financial institutions to accurately assess credit quality and implement appropriate handling measures. This article provides an overview of debt groups, from Group 1 to Group 5, along with insights into debt valuation and non-performing loan (NPL) resolution.

Classification of debt groups according to state bank regulations

According to Circular 02/2013/TT-NHNN issued by the SBV, debts are categorized into five main groups based on risk level and overdue duration:

• Group 1 - Standard debt: These are on-time loans that are expected to be fully recovered, including both principal and interest. How many days overdue is Group 1? The overdue period for this group is from 0 to under 10 days.
• Group 2 - Special mention debt: Includes loans overdue from 10 to under 30 days or those that have been restructured for the first time.
• Group 3 - Sub-standard debt: Consists of loans overdue from 30 to under 90 days or those that have been extended for the first time but remain overdue for less than 30 days.
• Group 4 - Doubtful debt: Includes loans overdue from 90 to under 180 days or those that have been extended for the first time but remain overdue from 30 to under 90 days.
• Group 5 - Bad debt: These are loans overdue for 180 days or more, loans that have been extended for the first time but remain overdue for 90 days or more, or those that have been extended for the second time.

This classification enables banks to accurately assess the risk level of each loan, allowing them to implement appropriate management and resolution strategies.

Non-performing loan groups and their impact on the banking system

Bad debt is generally classified into Groups 3, 4 and 5. The rise in bad debt can negatively affect banking operations and the economy. According to the State Bank of Vietnam, the on-balance-sheet bad debt ratio of the Vietnamese banking system increased to 2.1% by the end of 2024, compared to 1.9% in the previous year. The primary causes include the impact of the pandemic and the deteriorating repayment capacity of some businesses.

To control and minimize bad debt, banks must implement the following measures:

• Enhancing credit appraisal: Conduct thorough assessments of customers financial capabilities and credit history before granting loans.

• Strict loan monitoring: Closely track the use of borrowed funds and customers’ repayment ability to detect and address risks promptly.

• Effective bad debt management: Apply solutions such as debt restructuring, selling debts to asset management companies, or utilizing debt valuation services to determine the actual value and devise appropriate handling strategies.

Debt valuation and its role in bad debt resolution

Debt valuation is the process of assessing and determining the actual value of a debt based on factors such as the debtors repayment ability, the value of collateral and market conditions. Accurate debt valuation helps banks and financial institutions:

• Determine actual recovery value: Knowing the real value of a debt enables banks to make informed decisions regarding recovery, restructuring or selling the debt to third parties.

• Develop effective resolution strategies: Based on valuation results, banks can select the most optimal approach to minimize losses and improve asset quality.

• Enhance financial transparency: Accurate valuation ensures proper reflection of asset values and accounts receivable, maintaining the transparency and reliability of financial reports.

Indochina International Appraisal and Investment JSC (SunValue) is a leading professional appraisal company in Vietnam, offering debt valuation services for financial institutions, banks and investors. SunValues debt valuation services support the determination of the actual value of debts, particularly bad debts, for sale, management and financial risk control purposes.

With an experienced team of experts and a rigorous appraisal process, SunValue is committed to providing clients with accurate, transparent, and effective debt valuation services. This enables stakeholders to make informed decisions on debt transactions, management and financial planning.

Indochina International Appraisal and Investment JSC (SunValue)

• Address: Indochina International Appraisal System
• Hotline/Zalo: 081 519 8877
• Website: inavn.vn
• Email: contact@sunvalue.vn
• Facebook: Indochina International Appraisal and Investment

Conclusion

In summary, classifying debt groups helps financial institutions manage risks and implement appropriate solutions for loan management. Additionally, debt valuation plays a crucial role in determining the actual value of debts, facilitating effective and transparent debt resolution processes.