No takers for bad debts

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Local investors lack capacity, foreign counterparts lack confidence, asset management company finds

 
 
Bricks of money on a bank teller's desk at a bank in Hanoi

Vietnam's new asset management company is finding it hard put to find investors to whom it can resell the bad debts that it buys from the ailing banking industry.

Very few local investors have the financial capacity needed to buy such debts and prospective foreign buyers are concerned about vague policies that could weaken their investment.

The Vietnam Asset Management Company (VAMC) has thus far bought VND6.5 trillion (US$309.5 million) worth of bad debts that have book value of VND7.8 trillion, from eight domestic joint stock banks.

Run by the central bank, the company opened in July as the government aimed to restructure bad debts that have crimped lending and further slowed the economy, which is facing its most severe slump in at least a decade. Lenders with bad debts of three percent or more are required to sell them to VAMC.

Economist Nguyen Tri Hieu said: "In theory, foreign investors are interested in Vietnam's bad debt market, as it has not yet been tapped. However, they will not participate now due to the lack of regulations on bad debt trading procedures, and the settlement of secured assets."

Another barrier to foreign investors is that foreigners are not allowed to own land in Vietnam. The regulation hinders them from getting mortgaged assets, mainly properties, when buying bad debts, Hieu said.

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Economist Bui Kien Thanh agreed with Hieu, adding that shortcomings in bad debt assessment were also a barrier in reselling bad debts. In principle, banks, when offering loans, evaluate mortgaged assets, mainly properties, below the market value. However, it is difficult to price them now since the property market is currently frozen.

Vietnam does not have independent assessment agencies yet.

"Foreign investors will not participate in the market unless they know the assets' real value, the potential to resell the assets, and can understand clearly the bad debt trading procedures in Vietnam," he added.

Nguyen Quoc Hung, VAMC's vice chairman, admitted that Vietnam is yet to have policies on selling bad debts to foreign investors.

"We have to learn how other countries have dealt with the issue. If foreign investors could participate, Vietnam can receive huge funds from them."

Pham Manh Thuong, deputy director of the Ministry of Finance's Debt and Asset Trading Company, said a number of foreign banks and funds have come to study the country's market for bad debts.

"I myself have held talks with some big investors who said they are ready to invest even billions of dollars in buying Vietnamese bad debt," he said.

But it is not an easy market for them, Thuong said. "We cannot expect the participation of foreign investors in the next 1-2 years, because there are too many barriers they cannot overcome, and we cannot remove them in one or two days."

Apart from the complex procedures and lack of certainty about cooperation from Vietnamese banks, their biggest problem is the lack of transparency on bad debts, he said.

Many banks have announced bad debts much lower than the real figures due to worries about having make high risk provisions and loss of prestige. Banks estimated their bad debts at 4.93 percent of loans as of September 2012, but the central bank put the ratio it calculated independently at 8.82 percent.

Many foreign companies want to buy Vietnam's bad debts but they need a clearer policy framework, said Karin Finkelston, vice president Asia Pacific for the International Finance Corporation, a private sector lending arm of the World Bank.

Setting up the VAMC is a good thing to rescue lenders, but the country should also develop a market mechanism to quickly resolve the debts, she said.

Not thoroughly been solved

The Asian Development Bank (ADB) has recently said it is concerned that VAMC's current capitalization may not be sufficient for it to deal with large amounts of non-performing loans (NPLs).

The VAMC has an initial registered capital of VND500 billion, while the NPLs (non-performing loans) in the banking system could total well over VND200 trillion.

Hung of VAMC admitted that the state, due to its thin budget, cannot pour more money to help the company by NPLs, but has to wait for investors to do it.

The VAMC buys bad debts using its own funds or issues five-year, zero-coupon "special" bonds to the banks in exchange. The bonds may be used to obtain refinancing loans from the central bank to boost lending and stimulate an economy that grew at just 5.03 percent last year.

Thus, banks will still play the decisive role in tacking their NPLs, an economist said.

The VAMC is expected to buy VND40-70 trillion worth bad debts this year. However, the biggest issue of finding out customers to resell the bad debts has not yet been resolved.

Hung said the company will sell the debts to both foreign and local investors, but not at any price, only for a profit.

If the debts are not sold by the time the bonds mature, the banks would have to swap those with the bad debts.

Hung said the company is mainly focusing on buying and categorizing bad debts at present, not reselling them.

"After categorizing, VAMC will join hands with banks and firms to deal with the debts."

Some 60-70 percent of NPLs that VAMC bought from banks are from real estate sector.

An economist said many NPLs are not eligible to be sold to VAMC, as it only buys those backed by collateral. Thus, banks can only sell a part of their bad debts to VAMC, and have not found a way to deal with the rest.

Bad debts had accounted for 4.58 percent of the total VND138.98 trillion in loans as of July, official news website Banking Times reported last month, based on reports released by the commercial banks themselves.

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