Eliminate bad debts once and for all: experts

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Wiping out small banks should not be the goal of banking reform

A customer exits a branch of Joint-Stock Commercial Bank for Foreign Trade of Vietnam, or Vietcombank, in Hanoi. Bad debts at local banks are rising, raising concerns about the safety of the whole banking system.

With bad debt exposure rising among local banks, experts say it's high time the problem, which has been around for at least a decade, be dealt with firmly and finally.

Le Xuan Nghia, vice chairman of the National Financial Supervisory Committee, said the number one priority in the upcoming banking reform process should be to clean bad debts from the books of commercial banks.

The goal of the restructuring should not be to eliminate small banks, but to help all lenders operate safely, he said.

When Vietnam's banking system went through an overhaul during the 2001-2005 period, its total bad debt stood at VND23 trillion (US$1.09 billion), which Nghia said was already a large amount considering the size of the system back then. As the banks were unable to deal with the bad debts themselves, the government had to spend VND19 trillion from its budget to make the restructuring possible.

Now that the non-performing loans have grown, the burden could be much heavier, Nghia said.

While bad debts at banks are reportedly within safe limits, the total amount in the whole system has reached VND75 trillion, 47 percent of which are likely to be lost completely along with the principal. Nghia said these are preliminary statistics, and many doubtful debts could actually fall into the category of those unlikely to be collected.

Banking reform

The State Bank of Vietnam announced plans to restructure the country's banking system last month, a task that the government has identified as one of the priorities for the economy next year, together with reforms in public investment and state-owned enterprises.

According to the central bank, there has been fierce competition in the crowded sector, causing lenders to take high risks and putting the whole system at risk. The central bank particularly pointed out that many small banks do not have strong management and financial capabilities.

Saigon Securities Inc. said in a report late last month that with high competition and rising non-performing loans across the entire range of commercial banks, the State Bank is expected to focus mainly on stabilization of the financial market. It seems to be aiming at "protecting and supporting the whole financial system rather than individual financial institutions," the report said.

The company said the central bank may continue to apply stress test on the system to identify good from bad banks and assess how small lenders face trouble under internal shocks.

With bank assets deteriorating and non-performing loans accelerating, the State Bank may also establish a bad debt purchasing program and facilitate the restructuring of weak corporations to help them reschedule their debts.

"Historical evidence has shown that one of the key drivers for the recovery of the banking system is the recovery of non-performing loans," Saigon Securities Inc. said.

Large banks

The central bank has said non-performing loans in Vietnam's banking system could rise to 5 percent of outstanding loans by the end of this year, under a worst-case scenario. The ratio hit 3.21 percent at the end of August.

Nghia said Vietnam had made great efforts to bring down the bad debt ratio from 14.7 percent in 2001 to 5 percent in 2005. But after the restructuring ended, the ratio has not been controlled very well.

"It's necessary to focus on bad debts and the risk monitoring system to make sure the same situation won't happen again," he said. "Risk management practices at banks have to be reviewed to see whether they are effective."

The monitoring should be sustained even after the restructuring process is completed, he added.

Nghia rejected the notion that small banks are the only ones need reforming. "The bad debts at even the largest banks are worrisome."

Local media reported last week that major banks like Agribank, Vietcombank and Vietinbank have all reported rising bad debt levels compared to the end of last year. According to the state-owned Agribank, most of its bad debts were loans given to the real estate sector in 2008 and 2009.

Bankruptcy option

Nghia said commercial banks cannot depend on the government to bail them out this time.

Now that banks are stronger compared to the 2001-2005 period, they should dip into their own pockets when reorganizing their operations. Although the stock market is sluggish, banks can still raise some capital from the market to cover their expenses, Nghia told Thanh Nien.

"If they don't have enough money for immediate restructuring, they can take it slow while trying to collect debts at the same time," he said, adding that the process should not last longer than four years.

Nghia said bankruptcy has negative impacts on the economy and is best avoided, even if it may take a lot of money and energy to pursue other options to restructure banks.

Economist Vo Tri Thanh at the Central Institute for Economic Management, a government think-tank, agreed that letting banks fall should be the last resort.

"The restructuring will be painful for sure, but we have to go with the option with the least amount of pain," Thanh said, suggesting mergers and acquisitions be chosen over bankruptcy.

The central bank has been an advocate of mergers and acquisitions as well. It said it will introduce support mechanisms to ensure successful deals between credit institutions.

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