Banking reforms are difficult and bad debt resolutions can only be achieved with strong coordination among Vietnamese ministries, the Asian Development Bank said in a report released on Wednesday.
The Update to ADB's flagship annual economic publication, Asian Development Outlook (ADO) 2013, was released on Wednesday and maintains the forecast for Vietnam's GDP growth at 5.2 percent for 2013. The update reported that gradual progress in dealing with non-performing loans (NPLs) was expected to slightly lift growth to 5.5 percent next year.
"Economic growth should benefit from some positive steps by the Government of Vietnam to address problems in the banking sector but reforms have generally been fitful and challenging," ADB said in the report.
The Update praised the formation of the Vietnam Asset Management Company (VAMC), or "bad debt bank", but noted that the success of VAMC could depend on other supporting legislative and policy reforms not under direct mandate of the central bank. The report also expressed concern over delays to the implementation of improved loan classification and provisioning standards.
"The creation of VAMC is very positive but its success could depend on strengthening the legislative framework for dealing with secured assets, which will require strong inter-ministerial coordination and collaboration," Tomoyuki Kimura, ADB Country Director for Vietnam, told a press conference while releasing the ADO Update.
"The implementation of improved loan classification and provisioning standards would have reduced risks to the banking system and improved investor sentiment," he said.
The State Bank of Vietnam has delayed until June 2014 the implementation of a policy directing commercial banks to raise standards on loan classification and provisioning. The new regulation, which was originally slated to take effect in June 2013, would require banks to classify more loans as nonperforming and to increase provisioning. It would also prevent enterprises with loans in arrears from accessing new credit.
Despite rate cuts, credit growth was constrained by banks' impaired balance sheets, concerns over the financial health of borrowers, a sagging property market, and weak credit demand. The ADO Update suggested progress on bad debt resolutions would support further cuts in interest rates, pumping more money into the production sector.
"Gradual progress in resolving NPLs will improve business sentiment," said Kimura. "As this happens, policy stimulus, including the cuts in interest rates this year, could gain traction in boosting credit and GDP growth."
The Update expects inflation to be 6.5 percent this year, lower than its previous forecast in ADO 2013 as food price inflation has decelerated more quickly than expected. The figure is projected to climb to 7.2 percent in 2014 due to monetary easing and increased liquidity.
Given that the central bank devalued the dong by one percent against the dollar in June, ADB forecasts it will continue to weaken the local currency by a further 2 percent to 3 percent by the end of this year.
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