Non-performing loans should not be bought with public funds

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A bank branch in Ho Chi Minh City. Vietnam is in the process of restructuring its banking sector. Photo: AFP

Vietnam should not use taxpayers' money to buy banks' bad debts, but establish a company involving both local and foreign investors to do it, economist Bui Kien Thanh tells Vietweek.

Vietweek: What do you think about the government's proposal to set up a firm to trade bad debts worth more than VND100 trillion (US$4.76 billion)?

Bui Kien Thanh: It is only an idea. The State Bank of Vietnam has not yet mapped out a specific plan for it. VND100 trillion is only a preliminary estimation of bad debt, which is equal to 3.6 percent of total outstanding loans. However, some international experts estimate Vietnam's non-performing loans could be 13 percent of the total outstanding loans.

They are current estimations. However, tens of thousands of firms have become bankrupt, and hundreds of thousands of others have faced difficult conditions. These firms could not repay their bank loans, raising the bad debt ratio possibly to 20 percent. At that time, the amount needed to trade the bad debts could increase to VND500 trillion, or nearly $25 billion.

The issue is how to deal with the huge non-performing loans, as $25 billion is equal to a fourth of Vietnam's gross domestic product. The non-performing loans should be resolved in some way.

Now banks are not allowed to lend to firms that default on loans. So the credit market could become frozen. This would hinder the development of the economy.

Firms cannot get credit since they have no assets to mortgage for new loans, or feasible projects, or the ability to absorb fresh credit, so cutting the loan interest rates to 10 percent or even lower is a vain move.

The central bank has said it will establish a firm to trade debts. It is necessary. However, it needs to study how to do it. We cannot use public funds to buy banks' bad debts. The government does not have enough money to buy non-performing loans of VND400-500 trillion since the budget itself only has VND300-400 trillion.

To find customers [to buy] their bad debts, banks have to offer real value. However, we do not yet have regulations on the issue.

Where can we find the huge funds required to buy the bad debts if not from the state budget?

Economist Bui Kien Thanh

There will be buyers if there are sellers. Frauds may occur if the state buys the distressed debts. For example, a bad debt may be worth VND100, but banks could bribe related staff so that they can sell it to the state at VND200. Thus, it is imperative for the state not to buy non-performing loans of banks.

The central bank is tasked with setting up a company to trade debts. However, the company should not be under the Ministry of Finance. The company should have funds mobilized from the private sector. According to [the government's] regulations, it is necessary to mobilize finances from all sources, including foreign, to buy the debts.

If we create a proper market for trading debts, and allow foreign organizations to be involved with the debt trading company set up by the central bank, we will not have to worry about shortage of funds to buy the debts. If investors see profits in trading non-performing loans, they will enter the business. Thus, we should find local and foreign investors and let them know this is a good business opportunity. Then they will enter the business.

What should be done to attract investors?

We have to assess the health of the debtors, the chances of getting back the loan money. The prices of distressed debts should be fixed based on the quality of the loans. The prices of loans that can be recovered will be different from those owed by firms on the verge of bankruptcy. So it is necessary to assess the real value of distressed loans.

The loan trading company should have long-term funds to trade bad debts over one year or more. Commercial banks cannot do it because they only have short-term funds mobilized from customers.

What is the experience of other countries in dealing with bad debts? How could it be used in Vietnam?

There are many ways of dealing with bad debts, but no country has such a huge non-performing loan ratio of over 10 percent like Vietnam. International banks obey the criteria on banking safety under BASEL III (a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk agreed upon by the members of the Basel Committee on Banking Supervision in 2010-2011), under which banks are not allowed to operate if their bad debt ratio exceeds 3 percent.

No country has lending interest rates of over 20 percent. At these rates, firms cannot earn enough to repay their loans.

In other countries, bad debt ratios are below 1 percent; 2 percent is considered high. Thus, they find it easy to deal with non-performing loans.

After seeing high bad debt ratios, China set up such a loan trading company. Its central bank has lent money to the firm.

In Vietnam, local investors can buy short-term bad debts of VND10-20 trillion or banks could hold them and then take them back later. Foreign investors with long-term funds can buy worse debts. They will pour more investment in lenders' delayed projects and then sell the projects to get back their money.

Banks have to suffer lower profits, and even losses, if some bad debts cannot be recouped or sold. In the coming years many banks may see losses. Many banks now have equity equaling only 10 percent of their outstanding loans.

Would buying distressed debts be inflationary since it will increase the money supply?

Inflation depends on credit growth, not on buying non-performing loans. High inflation occurs when credit growth is too hot. Now, our credit growth is below 1 percent, so there will be no inflationary pressure if the bad debts are not bought with money from the state budget, which would cause a strong inflow of money into the economy.

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