EXUS Collections & Recovery Blog

Debt collections and retail banking in Vietnam

Posted by Dimitris Vassiliadis on Thu, Apr 11, 2019 @ 10:16 AM

Debt collections and retail banking in Vietnam

Vietnam finally emerged from the shadow of conflict and political tumult in 1976 when the Vietnam War fizzled to a close. But the war’s end didn’t bring much respite for the country’s fledgeling government.

Its new leadership faced an uphill battle to establish legitimacy while Vietnam’s economy had been shredded. The country’s banking sector remained inward-looking, and the four major banks were majority-owned by the State Bank of Vietnam (SBV).

While the major banks are still state-controlled in 2019, the Vietnamese economy is now dynamic, high-tech and growing handsomely. What changed? Since 1986, Vietnam has embarked on a bold programme of economic reform known as ‘Doi Moi’ (‘renovation’ in English).

The Doi Moi programme incorporates a swathe of economic reforms, from agriculture to infrastructure. At its core, it’s an ambitious package of economic liberalisation. Simply put, Doi Moi has been a raging success. Poverty has plunged, according to the World Bank, and Vietnam’s GDP has grown at least 5% per year since 2010, peaking at 6.8% in 2017. That kind of growth rivals China’s.

Vietnam is finally shaking off a long legacy of conquest and colonialism, and a blossoming economy means a banking sector that has burst into life in recent years. The signs for banks operating in Vietnam are promising - but there are, as always, a few caveats.

Non-performing loans are on their way down, as we’ll see later, but the implementation of Resolution 42 in 2017 makes settling bad debt an absolute priority. And as the country’s populace has become more affluent, personal debt has climbed to record levels.

There’s pressure from two sides: Government regulation of NPL ratios and a new thirst for consumer loans among the Vietnamese population. So what’s next for debt collections in this high-pressure environment?

Let’s take a look.

Progress hasn’t always been smooth

While Vietnam’s economy has experienced continued improvement, the fortunes of its nascent banking sector have been more mixed. Vietnam’s banking industry was beset by mismanagement and corruption, culminating in a banking crisis in 2012.

Banks had lent enormous sums of money to state-owned companies to fund expansion plans which often fell through. The crisis had major ramifications for banks and their collections teams. Bank chairmen were arrested and others resigned; bad debt increased; banks were left weakened and less willing to lend.

Following the crisis, however, the Vietnamese Central Bank has stepped in and wholly restructured the sector. It has set heady goals for financial institutions, the second phase of which ends in 2020. Most notably, the Central Bank expects lenders to keep “keep their bad-debt ratios below 3%” by the end of that year. The State Bank of Vietnam also wants 10 of the country’s commercial banks to meet minimum Basel II capital adequacy requirements.

The debt collections landscape today

Better regulation of the banking sector means debt and debt recovery have become more critical than ever. Dam Van Tuan, the executive director of ACB Bank, notes that Vietnamese banks are battling hard to meet capital requirements.

On the whole, Vietnam’s non-performing loan ratio is trending down. From a high of 4.67% in 2012, it dipped to 2.5% in 2019. The decline might not tell the whole story, however. There’s substantial conjecture over the actual level of NPLs. Vietnam hasn’t fully implemented IFRS 9 - the international accounting standard that determines how impaired loans are recognised.

Vietnam’s NPL ratio will likely rise once IFRS 9 is formally adopted, as opposed to just a few banks voluntarily applying the standard. The current NPL ratio, according to some estimates, may understate the problem by a factor of more than two when applying IFRS 9.

In Vietnam, household debt increased 50-fold between 2000 and 2016 as the economy boomed.

Meanwhile, household debt increased 50-fold between 2000 and 2016 as the economy boomed. And consumer lending is unlikely to slow down, either. All categories of credit have experienced double-digit growth rates according to Euromonitor, who forecast most lending types to “record double-digit [compound annual growth rates]” in terms of gross lending”.

In the background, the State Bank is doubling down on its NPL ratio focus. New draft regulations will block banks with undesirably high NPL ratios from making dividend payments. These rules will apply to credit institutions and not to the large state-owned commercial banks, meaning Tier II banks will be most directly affected.

Where to next for Vietnam’s banks?

With consumer debt climbing, debt portfolios are increasing in size and complexity.

Satisfying the State Bank’s capital requirements will require an efficient, tech-led debt recovery process. While NPL ratios have improved (assuming official figures show real trends), staying ahead of any future problems will remain critical. That means banks must implement collections strategies that don’t begin at delinquency.

Spotting the likelihood of borrower delinquency is vital for managing risk exposure and efficient collections. Software that uses scoring tools to rate risk and flag the possibility of delinquency allows banks to create warning lists for the highest risk customers.

Banks can also look at Vietnam’s booming smartphone usage as an opportunity for more effective debt collection. For a long time, the Vietnamese population were chronically underbanked, with only one in three possessing an account in 2014. E-wallets emerged as an alternative. MoMo, an online payment service, has 5 million users. Grab, Southeast Asia's Uber, has released its mobile payment solution GrabPay.

There’s a strong thirst among Vietnamese consumers for mobile-first financial products, and a solution like a mobile-friendly self-service portal is ideally situated to capitalise on the trend.

A growth story

Overall, Vietnam’s story is one of remarkable growth and renewal. NPL ratios are down, regulations are tighter and the economy is booming, but challenges remain.

Consumer debt is rising. And if IFRS 9 is formally implemented, the number of bad loans on their books might rise significantly. Smaller banks might find themselves struggling to meet the State Bank’s strict NPL and capital adequacy requirements.

What’s required now is not just tight control over bad debts. These bad loans need to be lowered, not only maintained at low levels. Technology can help, especially given the Vietnamese population’s thirst for digital-first solutions.

Interested to know more about the economic and debt picture in APAC? Check out our overview of the region’s various efforts.

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