While Vietnam is enjoying higher GDP growth, the rise in bad debt in the banking system is cause for concern

A contrast between GDP growth and bad debt In the first nine months of 2024, Vietnam’s gross domestic product (GDP) grew by 6.82% over the same period last year, with growth in Q3 alone put at a robust 7.4%, way above 5.66% in Q1 and 6.93% in Q2. This was a steady economic recovery following the Covid-19 pandemic and amid global economic uncertainties. Reports also reveal improving economic indicators, especially from Q2 onward, with major sectors such as industrial production, particularly manufacturing and processing, foreign trade, and services contributing positively to overall growth. Private-sector investment is also gradually recovering, backed by Vietnam’s favorable economic outlook. This recovery theoretically supports businesses in enhancing their financial capacities, expanding operations, and positively impacting bank credit quality. It is because when businesses perform well, they have better capacity to pay debt, thus easing the pressure on the banking system. However, despite higher GDP growth, bad debt risks continue to increase. According to recent data from the State Bank of Vietnam (SBV), the bad debt ratio within the banking system was 4.75% by the end of July 2024, up from 4.55% at the end of 2023 and 2% at the end of 2022. Additionally, potential high-risk debt is also on the rise, while unsettled debts sold to the Vietnam Asset Management Company (VAMC) make the burden heavier. Including all sources of bad debt and problem debt mentioned above, the effective bad debt rate by the end of Q2-2024 reached 6.44%, with private joint-stock banks facing a particularly high ratio of 7.77%. Credit across the banking system surged by 13.78% in 2023, 6.1% in H1-2024, and 9% by September 30, 2024. However, this credit growth did not prevent the bad debt ratio from inching up, indicating a faster increase in bad debt. As the risk of new bad debt is increasing, how to handle existing bad debt is a tough challenge. The still-dormant real estate market makes it difficult to liquidate assets used as collateral for loans, such as land and properties. Notably, under the 2024 Law on Credit Institutions, the right of credit institutions to seize collateral has been significantly restricted compared to Resolution 42/2017 previously adopted by the National Assembly, making the settlement of bad debt even harder. Why the discrepancy? Despite better GDP growth, it is worth questioning if this growth is sustainable, as it seems largely driven by foreign direct investment (FDI) enterprises and foreign trade, instead of domestic companies. According to the General Statistics Office, the FDI sector accounted for over 72% of Vietnam’s export revenue in the first nine months of 2024, with manufacturing—representing over 80% of total FDI—leading the way. On the other hand, domestic businesses, especially small and medium-sized enterprises, are still struggling in difficult business conditions, including weak demand, high costs induced by expensive inputs and logistics, labor shortages, and financial strains. Notably, 163,800 companies withdrew from the market in the first nine months of 2024, a 21.5% increase against last year, with 18,200 firms shutting down each month on average. This reflects that despite GDP growth, many businesses are finding it tough to sustain operations. With a growing imbalance in economic growth, the disparity between FDI and domestic firms is getting wider. Most local enterprises rely on domestic bank loans, and sectors like real estate, construction, services, and retail are particularly vulnerable. Loans in these fields often face high risks of default, especially for bonds nearing maturity. Moreover, restructured debt—loans modified to support struggling businesses—has also turned bad as many companies have failed to recover as expected. Restructured debt now accounts for 2% of total outstanding loans, a figure that may rise further as many businesses with outstanding loans of VND165 trillion have taken yet another hit from typhoon Yagi. A representative of the State Bank of Vietnam (SBV) recently said that many loans that have been restructured under existing regulations constitute a sizeable amount. The SBV will closely monitor the trajectory of bad debt, especially restructured one. This issue requires banks to take timely coping measures in the coming time. Debt restructuring, while a temporary fix, also places substantial pressure on the banking system, affecting new credit supply as banks allocate resources to address old debt. Increased bad debt and restructured loans weaken banks’ financial health, reducing their ability to attract foreign investment and access international funding sources.