VAMC buys $40 million in bad debts from three banks

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Staff count money at a bank in Hanoi

The Vietnam Asset Management Co (VAMC) has bought VND840 billion (US$39.8 million) worth of bad debts in three domestic joint stock banks, the company announced.

The Saigon Commercial Bank (SCB), Saigon-Hanoi Bank (SHB), and Petrolimex Group Bank (PG Bank) followed the lead of the Vietnam Bank for Agriculture & Rural Development (Agribank), which had earlier sold bad debts with a book value of VND2.5 trillion (US$118 million) to VAMC.

VAMC, run by the central bank,  said it will issue special bonds worth VND840 billion to the three lenders for the bad debts, which have a book value of more than VND1.15 trillion. Those bonds can be used to borrow from the State Bank of Vietnam for a ratio of up to 70 percent.

The "bad debt bank" opened in July as the government aims to overhaul an estimated VND140 trillion in bad debts that have crimped lending and slowed the economy, which is facing its most severe slump in at least a decade. Lenders with bad debts of 3 percent or more are required to sell them to the VAMC.

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

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Lenders were reluctant to work with VAMC at first because "they didn't understand the regulations and mechanisms" for selling debts, said Nguyen Quoc Hung, the company's vice chairman. They became more "enthusiastic" after their concerns were addressed and clarified.

VAMC gives priority to buying bad debts from commercial banks with government capital, banks required by the central bank to restructure, and those with bad debts of 3 percent or more. Hung said company staff are working "overtime and on weekends" to assess new debt selling plans by "more than 10" credit institutions, some of which have bad debts of less than 3 percent.

A Tuoi Tre newspaper report quoted Trinh Van Tuan, chairman of Phuong Dong Bank (OCB), as saying that the VAMC originally planned to only buy debts backed by property. Banks were therefore driven away, realizing that they could easily deal with such debts without the VAMC and that not all bad debts had property collateral.

However, it later loosened its conditions on property collateral so that "selling debts to the VAMC now makes sense," Tuan said.

Tuoi Tre quoted Pham Huu Phu, Chairman of Sacombank, as saying that the lender plans to sell bad debts worth about VND1 trillion, most of which are loans to buy property and stocks. Sacombank's bad-debts ratio stands at 2.8 percent, according to Phu.

Do Minh Toan, chief executive officer of Asia Commercial Bank (ACB), which has a bad-debt ratio of 2.9 percent, also told Tuoi Tre the bank is considering selling VND1.5 trillion in bad debts to the VAMC.

Nguyen Van Le, CEO of SHB, said selling non-performing loans helps banks "make the balance sheet look better"¦ and creates capital for new loans to businesses. Meanwhile, businesses have more time to pay back debts and to recover."

Sources from banks also said that selling bad debts is a good move in preparation for the implementation of a policy requiring banks to improve loan classification and provisioning standards, which is slated to come into effect in June 2014 after several delays.

A Moody's report this week argued that unless the VAMC is allowed to make real purchases and sales of assets and direct a stable flow of capital to banks, it can only bring positive impacts to the weakest banks in the system.

VND30 trillion

Leaders from the bad debt firm said they plan to sign contracts to buy more than VND1 trillion in bad debts from one or two other banks this week.

Hung said the firm plans to buy debts worth a total of VND10 trillion by the end of this month, and at least VND30 trillion by the end of this year.

Agribank, which has the highest value of bad debts, is expected to sell at least VND5 trillion in bad debts this year.

An Agribank spokesperson said the first bad debt 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-debt ratio of 6.1 percent as of June 2012, according to the State Bank of Vietnam.

Selling non-performing loans can also benefit those businesses that owed the bad debts, Hung said. Banks may then make new loans to those firms if their business plan is deemed feasible and profitable.

Most banks, however, remain cautious about this issue.

Le, the CEO of SHB, told Tuoi Tre that banks and the VAMC could sit down to assess the debtors' recovery prospects and business plan to see if they are qualified for new loans.

However, since the debtors still have to pay the old debts, banks will have to be very careful in assessing, and making decisions on a case by case basis, Le said.

Foreign investors

Sameer Goyal, Country Sector Coordinator for Financial and Private Sector Development of the World Bank in Vietnam, suggested the government ponder allowing foreign investors to purchase debts, especially those of real estate and securities companies, since non-performing loans in the banking system could total well over VND200 trillion.

According to a report on the financial news website cafeF.vn, Le Xuan Nghia, a financial expert, told a conference in Hanoi on October 9 that many foreign investors, including Blackstone Group, Deutsche Bank Capital were "lining up" to buy back bad debts from the VAMC.

Nghia was quoted as saying that the investors were most concerned about the procedures for buying debts. "I asked 16 groups of investors interested in the [debt] market in Vietnam"¦ what they want the most is that the debt selling/buying procedures be really fast," Nghia said.

World Bank's Goyal said foreigners are hesitant since they don't have access to asset information nor know how to buy them.

Hung of the VAMC also said the company has been approached by foreign investors, but it has not considered any transactions with them yet.

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