IN-DEPTH GUIDE TO THE 5 BANK DEBT CLASSIFICATIONS IN VIETNAM

In a volatile economic environment, understanding the classification of bank debts is crucial for both borrowers and financial institutions. Debt classification helps banks assess credit risk and take appropriate action, while customers should be aware of their debt status to avoid falling into bad debt, which negatively impacts future borrowing capacity. This article provides a detailed overview of Vietnam’s 5 bank debt groups, the process of handling non-performing loans (NPLs) and effective solutions for banks in debt recovery.

What are the 5 bank debt groups? Classification by the state bank of vietnam

The 5 bank debt groups are categories used to classify loans based on the borrower’s repayment ability and level of risk. This classification is a key tool for assessing credit quality and directly influences a borrowers credit history, whether individual or corporate.

According to Circular No. 11/2021/TT-NHNN issued by the State Bank of Vietnam, the debt groups are defined as follows:

• Group 1 – Current debt: Loans that are either within the due date or less than 10 days overdue.

• Group 2 – Special mention debt: Loans overdue from 10 to 90 days.

• Group 3 – Substandard debt: Loans overdue from 91 to 180 days.

• Group 4 – Doubtful debt: Loans overdue from 181 to 360 days.

• Group 5 – Loss debt: Loans overdue for more than 360 days or deemed uncollectible.

Debts falling into Group 3 or higher are considered non-performing loans (NPLs). For instance, Group 2 debt occurs when repayment is late by 10 to 90 days. Although not yet classified as bad debt, it signals a warning. Therefore, maintaining timely repayments is essential to avoid slipping into substandard or doubtful debt groups.

What is outstanding debt and how does it affect debt classification?

Outstanding debt refers to the total amount a borrower owes to a bank at a given time, including both principal and interest. This figure reflects the borrower’s credit usage and serves as a critical metric for assessing financial capability.

When classifying debt, banks rely heavily on the outstanding balance to determine risk levels and applicable interest policies. High outstanding debt paired with weak repayment cash flow often leads to bad debt classification. Uncontrolled credit card spending and consumer loans can quickly escalate the debt burden.

Regularly checking outstanding debt and planning repayments are the best ways to avoid falling into Group 2 or lower categories.

Consequences of being classified as bad debt (Groups 3, 4, or 5)

Being categorized in any of the bad debt groups (3 to 5) carries serious consequences:

• Credit score impact: Non-performing loans are reported to the Credit Information Center (CIC), damaging the borrower’s credit rating.

• Loan access restrictions: Borrowing from the same or different financial institutions becomes highly restricted.

• Higher financial costs: If re-loans are granted, interest rates will typically be higher due to increased perceived risk.

• Investment & IPO setbacks: Companies looking to raise capital or go public will be significantly disadvantaged if their financial records include bad debts.

According to the State Bank of Vietnam, the total bad debt ratio in the banking system could reach up to 5% when including potential risk debt. Timely management and resolution of bad debts are thus essential.

How do banks handle non-performing loans?

To resolve bad debts effectively, banks commonly apply the following solutions:

• Debt restructuring: Adjusting repayment schedules, interest rates or loan terms to ease borrower pressure.

• Collateral recovery: Repossessing secured assets when borrowers default.

• Debt sales: Transferring bad debts to specialized debt buying or recovery companies to reduce credit risk and refocus on core operations.

• Legal action: Filing lawsuits to recover unpaid debts when necessary.

Additionally, enhancing risk management capabilities, employee training and adopting modern technology are vital strategies in bad debt resolution.

SunValue – Professional debt valuation services supporting efficient bank recovery

When Is debt valuation necessary?

Debt valuation is gaining popularity among banks and businesses for its role in ensuring transparency and professionalism in debt restructuring, resolution and M&A transactions:

• When transferring debt to recovery firms or asset management companies.

• When restructuring finances or determining a debt’s value before investment or acquisition deals.

• When resolving collateral assets associated with a loan.

• When preparing audited financial statements or loan applications requiring proof of financial standing.

Debt valuation clarifies the nature, fair market value and recovery potential of a loan, helping stakeholders make informed decisions.

SunValue’s comprehensive debt valuation services

Under growing pressure to resolve NPLs, SunValue – Indochina International Appraisal & Investment JSC stands as a trusted partner of major Vietnamese banks in valuing bad debts (Groups 3 - 5).

We provide end-to-end debt valuation services including:

• Appraisal of secured and unsecured loans.

• Legal and financial recovery analysis of collateral assets.

• Strategic advisory for debt resolution: sale, restructuring or write-off.

With a team of seasoned finance and banking professionals and a nationwide network, SunValue has supported major banks such as Agribank, VietinBank, Sacombank, VIB, SHB, MSB,... and others in hundreds of successful debt recovery cases.

Our commitment:

• Fast turnaround: Evaluation completed within 3 - 5 working days.

• Legally compliant reports: Clear, detailed and aligned with regulations.

• Value optimization: Maximizing recovery for financial institutions.

⋙ Contact us now for free consultation and detailed quote for each specific case.

Indochina International Appraisal & 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

Understanding Vietnam’s 5 debt groups is not only essential for credit risk management but also forms the basis for making sound financial decisions. In the face of rising bad debts, accurate debt valuation is the key for banks to proactively manage, resolve, and restructure distressed assets. For organizations seeking a specialized, reliable debt valuation partner, SunValue is your trusted choice – accompanying banks and businesses on the path to sustainable financial recovery.