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1. What is bad debt?
Bad debt is a term referring to those difficult-to-collect debts where the borrower faces challenges in ensuring payments according to the terms committed in the credit contract. When the payment period exceeds 90 days, the borrower is considered to be experiencing bad debt. In this case, the ability to repay diminishes, and the risk of being unable or unwilling to repay the debt as agreed increases, potentially resulting in negative consequences such as a credit score decrease and impacting future borrowing capabilities.
The causes of bad debt can stem from unstable personal financial situations, job loss, sudden increases in expenses, or other issues that may reduce the ability to repay debts. Bad debt can significantly impact a borrower's credit record and may lead to consequences such as the loss of collateral, difficulties in borrowing in the future, and even the possibility of bankruptcy.
The banking industry and financial institutions often monitor and manage bad debt to ensure that risks are controlled and to maintain stability in the financial system.
2. Negative impacts of Bad Debt
2.1. For borrowers
Bad debt can create various negative impacts on borrowers and the financial system in general. Here are some common negative effects of bad debt:
Credit Score Loss: When a borrower has bad debt, their credit score often significantly decreases. This affects their ability to borrow in the future and may increase borrowing costs.
Difficulty in Borrowing: Individuals with a history of bad debt will face challenges when applying for loans at banks or financial institutions. Interest rates may be higher, and borrowing terms may be more stringent.
Loss of Collateral: If the debt is secured by assets such as real estate or a car, failure to repay the debt on time may result in the loss of those assets.
Risk of Bankruptcy: If bad debt is not resolved, borrowers may face the risk of bankruptcy. This not only creates personal issues but also impacts the global financial system.
Psychological Burden: The pressure and anxiety from bad debt can impose a psychological and emotional burden on the borrower. Stress and anxiety can affect the quality of life and personal relationships.
Bad debt not only creates individual problems but also affects the stability and security of the global financial system. Proper financial management and timely debt repayment are important to avoid these negative impacts.
2.2. For credit businesses
Bad debt can have a significant impact on credit businesses, especially financial institutions such as banks or credit unions. Here are some key impacts:
Reduced operational efficiency: Credit institutions may need to allocate substantial time and resources to manage and resolve bad debt instead of focusing on core business activities. This can decrease overall efficiency and profitability.
Increased cost of capital: As bad debt ratios increase, businesses may face higher capital costs when borrowing, especially if they have to increase security measures or increase interest rates to compensate for credit risk.
Diminished capital mobilization: Credit institutions may encounter difficulties in raising capital from the financial market when they have a history of bad debt. Investors and banks may become more disciplined in providing financial support.
Loss of reputation: If bad debt becomes widespread, credit institutions may lose credibility within the business community and among trading partners. This can impact their ability to attract new partners and customers.
Global financial system impact: If bad debt becomes excessive and is not carefully managed, it can pose systemic risks to the entire financial system. This has been observed in some international financial crises.
Credit institutions need to establish and maintain effective credit risk management policies to minimize the impact of bad debt and sustain their financial health over the long term.
3. Levels of bad debt
Bad debt is a phenomenon where the borrower cannot or is unable to fulfill the repayment commitments outlined in the credit contract, causing significant consequences not only for individuals but also impacting the financial system and society as a whole. Vietnam's financial regulatory body, the State Bank of Vietnam, has introduced a classification system for bad debt to assess the level of risk and recovery, as per Circular 02/2013/TT-NHNN (amended by Circular 09/2014/TT-NHNN).
This system divides debt into five groups, with each group representing a severity level of the debt situation.
3.1. Group 1 – Qualified debt
Includes debts within the due date and overdue debts less than 10 days. This is considered the debt group with a high likelihood of full recovery, causing no significant impact.
3.2. Group 2 – Debts needing attention
Includes overdue debts from 10-90 days and debts that have been rescheduled for the first time. This group indicates a high level of debt and requires stricter management.
3.3. Group 3 – Substandard debts
Includes various types of debts, such as overdue debts from 91-180 days and debts that have been extended for the first time. The risk level increases, requiring special attention.
3.4. Group 4 – Doubtful debts
Contains more serious types of debts, for example, overdue debts from 181-360 days and debts that have been rescheduled for the second time. This is a group that can cause significant issues if not resolved promptly.
3.5. Group 5 – Debts likely to lose capital
This is the most severe debt group, including overdue debts over 360 days and debts that have been restructured for the third time and beyond. This is a situation where debt has the potential to cause significant capital loss and impact the stability of the financial system.
In this context, bad debt is not only an individual issue but also a concern for the financial and economic community. The ripple effects from bad debt can create substantial shocks in the financial system, posing challenges to the stability and sustainable development of the economy.
4. Does Crypto have bad debt?
Bad debt in the cryptocurrency sector is not a mainstream concept like it is in the traditional financial system. Bad debt usually refers to borrowing money and not being able to repay it on time in the traditional financial system.
In the crypto market, discussions often revolve around different risks such as market risk, cybersecurity risk, or volatility risk. The association with borrowing and bad debt is not a significant part of the crypto market.
However, it is important to note that the crypto market can experience significant volatility and comes with various risks. Participants should have a clear understanding of these factors and make investment decisions carefully and consciously. Investors should stay informed about market developments to ensure the safety and optimal protection of their assets.
5. Effective ways to clear bad debts
You can take the following steps to eliminate bad debts and improve your credit status:
Repay debts: Identify and prioritize the repayment of bad and overdue debts. Contact your lenders to negotiate a repayment plan or request fee reductions if possible.
Negotiate with Lenders: If you encounter difficulties in repayment, reach out to your lenders to negotiate debt repayment terms. Discuss possibilities such as reducing interest rates, extending repayment periods, or even obtaining a discount for immediate payment.
Find a debt restructuring option: if the debt burden is too high and immediate repayment is not feasible, inquire with lenders about the possibility of restructuring the debt. Some banks may agree to accept partial payment and reduce the remaining debt.
Use a debt management service: Consider using debt management services for advice and assistance in negotiating with lenders. Experts can help you devise a reasonable repayment plan and alleviate financial pressure.
6. Conclusion
Through the effective strategies we have discussed, including timely payments, negotiation with lenders, debt restructuring, and financial management, borrowers can make informed decisions to alleviate financial burdens and embark on a journey towards positive financial well-being. Learning from experiences and understanding the root causes of bad debts helps borrowers build a stronger financial foundation. Maintaining a healthy financial plan and setting specific financial goals will aid borrowers in avoiding the pitfalls of bad debts in the future.
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