Risks to the banking industry in the pandemic

Hoa Vu

The Covid-19 pandemic is evolving unpredictably with the development of new variants. As the main capital channel of the economy (accounting for nearly 50 percent of total social investment in 2020), since the pandemic outbreak, the banking industry has faced many challenges and risks.

BIDV Training and Research Institute recently issued a report on risks to the banking industry in the context of the Covid-19 pandemic. According to the reports, the main risks that face the banking industry include credit, market, operation, liquidity and others.

First, credit risk should be taken into account. Bad debt potentially arises due to businesses and people facing difficulties. The Covid-19 pandemic has had an impact on all economic sectors, with industrial production and service sectors (tourism, entertainment, transportation, retail, etc.) being most heavily affected.

A survey conducted by Vietnam Chamber of Commerce and Industry

(VCCI) showed that 87.2 percent of businesses in most industries are negatively affected by Covid-19, 65 percent of private enterprises and 62 percent of FDI enterprises experienced a decrease in revenue in 2020. The average revenue reduction of private enterprises was 36 percent and that of foreign invested enterprises was 34 percent. Micro, small and medium enterprises suffered a higher revenue decline than large businesses.

The risk of arising bad debt not only roots from corporate customers but also individuals. when the economy is deteriorated by Covid-19, the wave of job cuts spreads across industries such as aviation, tourism, retail, entertainment, catering, resulting in income decline of many people and failure to pay the due debt on time.

According to a survey by Vietnam Report (June 2021), 96.15 percent of experts and bank representatives said that one of the biggest challenges facing banks is the potential increase in bad debt due to the impact of the Covid-19 pandemic. The increase in bad debt poses pressure on the reversal of accrued interest and provisioning, thereby reducing banks’ profits. The rescheduling of debt repayment, exemption and reduction of interest and fees, and maintaining the debt classification aims to support customers affected by the Covid-19 pandemic. However they are potential bad debts for commercial banks in the long run.

Regarding market risk, during the Covid-19 period, similar to many countries in the world, Vietnam maintained a loose monetary policy, expanded the money supply, and reduced lending interest rates to support economic sectors.

In addition, administrative orders from regulators as well as calls from

organizations and associations were made to request banks to further reduce lending rates. Accordingly, the reduction of lending rates in the context of increasing inflationary pressure will put pressure on the business performance of banks. Data from the State Bank showed that, as of 14 June 2021, the amount of interest exemption and reduction for customers between 23 January 2020 and 14 June 2021 was VND18.2 trillion (USD795 million) (equivalent to 10 percent of the banking industry’s profits in 2020).

In the first half of 2021, BIDV launched credit packages at a preferential interest rate with a total scale of up to VND368 trillion (USD16.1 billion). The bank proactively reduced its income by VND2,500 billion (USD110 million) to support customers while this figure in 2020 was VND6,400 billion (USD280 million).

For operational risk, it is the risk of business interruption. Before the 4th wave of the Covid-19 outbreak took place, the banking system got used to, adapted to the change and significantly improved products and services, customer segments, distribution channels as well as adopting management models and methods that fit the new normal. However, the rapid spread of the pandemic caused the operational activities as well as the operating structure of all banks from the Head Office to branches and transaction offices to be affected and disrupted.

To maintain business continuity, the arrangement of personnel is the core. According to a survey of more than 1,300 human resources executives across the globe by KPMG on the Future of Human Resources 2020, 60 percent believe that the human resources function will rapidly become irrelevant if it doesn’t modernize its approach to understanding and planning for the future needs of the workforce.

The banking industry also faces liquidity risk in the context of Covid-19. when the economy is still facing difficulties due to the Covid-19 pandemic, liquidity risks may occur as follows: On the liquidity supply side: people and businesses may reduce their deposits in banks and switch to other investment channels with higher yields such as securities, real estate, digital currency. In addition, the difficult business situation of enterprises possibly triggers debt default, which hammers banks’ revenue/earnings in the coming period. The less developed market for buying and selling assets (mainly loans) may affect banks’ ability to convert less liquid assets to more liquid ones.

On the liquidity demand side: The Covid-19 pandemic may cause operational risk and reputational risk for banks, possibly leading to a bank run due to psychology. However, the probability of this happening is very low. Demand for credit grows rapidly, which requests short-term liquidity at these times. The liquidity of the banking industry since the outbreak has been stable, with no signs of a crunch due to the flexible management measures by the State Bank.

Other risks could be competition between banks with Fintech, Bigtech. In the long run, new players in the financial market such as Fintech, Bigtech will be key competitors for banks. In addition, network security, data risk would be a type of risk that banks need to pay special attention to during and after the pandemic. The Covid-19 pandemic has made the digital transformation process of the banking industry faster and stronger to meet the needs of customers, but it also poses more cyber risks.