Asset company begins to buy banks' bad debts

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Vietnam's new asset management company has signed its first contract with a bank to buy debts amid rising pressure to accelerate the restructuring of the banking system and revive the economy.

The Vietnam Asset Management Company will buy bad debts with a book value of VND2.5 trillion (US$118 million) from the Vietnam Bank for Agriculture & Rural Development, or Agribank -- the country's largest lender by assets -- Nguyen Quoc Hung, the company's vice chairman, said at the signing ceremony in Hanoi.

News website VnExpress quoted Hung as saying that the VAMC would pay VND1.7 trillion for the debt since Agribank had already provisioned nearly VND800 billion against bad debts. The "bad debt bank" will issue special bonds to the lender, who can use them to borrow from the central bank.

The VAMC is also preparing to buy non-performing loans from the Saigon Commercial Bank, Saigon-Hanoi Bank, and Petrolimex Group Bank, Hung said, adding that the company plans to buy at least VND30 trillion worth debts this year.

Prime Minister Nguyen Tan Dung is seeking to resolve almost $5 billion in bad debts that have crimped lending and slowed the economy, which faces its most severe slump in at least a decade.

The nation's banks have the highest level of bad debts among six Southeast Asian countries covered by Fitch Ratings, which said in a report September 30 that the industry "remains encumbered by substantial bad loans."

An Agribank spokesperson said the deal helped reduce the lender's non-performing loans by 7.56 percent. At the end of August the bank's outstanding loans were worth VND513 trillion.

Agribank had a bad-debts ratio of 6.1 percent as of June 2012, according to the State Bank of Vietnam. Lenders with bad debts of 3 percent or more will be required to sell them to the VAMC.

The company began operations in July with a registered capital of VND500 billion ($24 million) and will issue bonds to around 10 banks in exchange for bad debts, its CEO, Nguyen Huu Thuy, has said.

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Banks' bad debts stood at 7.8 percent of outstanding loans at the end of last year, according to the central bank.

Delayed structural reforms of banks and state companies could undermine investors' confidence and worsen the nation's growth prospects, the World Bank warned in a report July.

Despite policy rate cuts, lending growth was constrained by banks' impaired balance sheets, concerns over the financial health of borrowers, a sagging property market, and weak demand for credit.

In forming an entity to acquire loans from banks, Vietnam is emulating a model tested by neighbors from Malaysia to China, as it seeks to revive investor confidence.

The Ministry of Planning and Investment forecasts the economy to grow by 5.4 percent this year and 5.8 percent next year, which will mark three consecutive years of growth of less than 6 percent.

In a report this week the Asian Development Bank (ADB) said the success of the VAMC could depend on other supporting legislative and policy reforms not under the direct mandate of the central bank.

Inter-ministerial coordination

"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's Vietnam chief, said.

He said progress in resolving bad debts would improve business sentiments.

As this happens, policy stimulus, including the cuts in interest rates, could "gain traction in boosting credit and GDP growth," he added.

However, the ADB said it is concerned that its current capitalization may not be sufficient for the VAMC to deal with large amounts of NPL.

"It is unclear if the government will provide additional funding for the asset-management company or recapitalize state-owned commercial banks," the ADB report said.

The success of the program "also depends on strengthening the Bankruptcy Law and the legal framework for dealing with secured asset transactions, and establishing mechanisms to price and auction bad debts."

The ADB also expressed concern over delays in improving loan classification and provisioning standards, which "would have reduced risks to the banking system and improved investor sentiment."

The central bank decided earlier this year to delay until June 2014 the implementation of a policy requiring banks to improve loan classification and provisioning standards.

The new regulation, originally to have taken effect in June, will have more stringent standards for classifying loans as nonperforming and increase provisioning. It will also prevent borrowers with loans in arrears from getting new credit.

Shares in the country's top lenders have underperformed the benchmark stock index this year.

The Vietnam Joint-Stock Commercial Bank for Industry and Trade, or VietinBank, has lost 13 percent, and the Vietnam Export-Import Commercial Joint-Stock Bank, or Eximbank, has slid 10 percent this year.

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