Banks want stricter loan classification rules delayed again

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A customer count money at a HDBank branch in Ho Chi Minh City

Commercial banks have asked the central bank to delay stricter rules on classifying and making provisions for bad debts, citing enterprises' difficulties in getting loans amid low credit growth.

The central bank instruction, Circular 2, scheduled to take effect from June 1, requires lenders to make more risk provisions for credit grants, including credit card debts, investment in unlisted corporate bonds and deposits at domestic and foreign banks - in addition to normal loans - to raise funds to clear their non-performing loans (NPL).

Economists said the rules could double the level of NPLs from the publicized ratio of 4.65 percent as of the end of last May.

Le Cong, general director of Military Bank, said: "It is unreasonable to apply the new rules in the next few months as the economy still has many difficulties and enterprises' health remains weak."

The rules will raise banks' costs, so they may have to increase their interest rates to offset the hike. Many firms cannot currently borrow capital because of high interest rates. Meanwhile, enterprises with major bad debts will find it hard to access loans due to banks' tightened lending.

"The rigid application of the rules may create more difficulties to firms, hindering their recovery. The central bank should consider a more suitable time to apply them, which would help the economy rebound sooner," he said.

Echoing Cong, Pham Huy Hung, chairman of the management board of VietinBank, said the central bank should delay the rule until the economy sees a recovery in 2015 or 2016. 

Nguyen Duc Huong, vice chairman of the management board at LienVietPostBank, said if the rules are applied from June, credit to firms will thin out, which would force many businesses into collapse.

"Enterprises cannot recover, and many big firms will go bankrupt, which may cause a much bigger consequences than in previous years," he said.

Vietnam has been enduring its biggest slowdown in growth since 1999. In 2013, gross domestic product increased only 5.42 percent due to falling domestic consumption. More than 67,000 firms had to suspend business, shutdown entirely, or go into bankruptcy in 2013.

Businesses could not access loans due to their existing debts, while lenders tightened lending rules for fear that bad debts would increase. Vietnam's lending growth slowed to 8.83 percent as of mid-December, 2013, from an average 29.5 percent annual rise from 2006 through 2011.

No more delays

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An economist who asked to go unnamed disagreed that the new rules would make the economy worse. Debts at firms will remain unchanged whether the rules are applied or not. The stricter rules only help reduce risks to the banking system.

"More delays could cause more difficulties for banks in the next 1-2 years," he said. The implementation of the tighter rules on bad-debt classification and risk provisions was initially set to take effect last June but was then delayed until June this year.

The economist said the banking system, to accelerate its restructuring process, should focus more on dealing with bad debts, which are a key factor stifling Vietnam's economic revival.

The country's banks are saddled with what is widely regarded as Asia's highest ratio of bad debt, largely due to the funding of state-owned firms and a frozen real estate market.

Bad debts could be solved by being sold to the state's asset firm, known as VAMC, he said. The central bank launched the company last July to buy bad debts from banks, a move touted as one of its biggest reforms but also widely seen as a band-aid fix for its ailing, credit-starved economy.

Economist Nguyen Tri Hieu said another delay, as proposed by analysts and banks, would drag the process on too long.

He said it was much better to let the government know the real bad debt situation in order to enable it to take proper measures.

The central bank says it will allow no more delays in the implementation of the rules. Dang Van Thao, the State Bank of Vietnam's deputy chief inspector, said the delay had played an "historic role" in helping banks and businesses in a tough time by giving the former more time for better preparations and enabling the latter to access loans.

But the central bank cannot postpone the implementation of Circular 2 any further, he said. Lenders would have to comply "thoroughly" with the rules from June 1, 2014, he said.

The central bank's deputy governor Nguyen Dong Tien said the banking system would likely fail to hit its targeted credit growth of 12 percent this year. The central bank has already set a target of 12-14 percent growth in loans for 2014.

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