Vietnam asset management company no panacea, warn economists

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Vietnam's banking crisis cannot be disappeared merely by setting up an asset management company, experts caution.

A floating dock owned by the debt-laden state-owned shipper Vinalines. Built in 1965, the dock was purchased for $9 million. Repair work then raised the cost to $26.3 million, around 70 percent of the price of a new dock. Vinalines and its subsidiaries have bank loans of more than $3 billion, which it admitted in April being faced with difficulty in repaying.

The government has approved the formation of an asset management company to buy bad debts from the ailing banking industry, but economists warn it would not be a magic bullet.

Following approval on May 18 after several delays the Vietnam Asset Management Corp (VAMC), a 100-percent state owned company managed by the State Bank of Vietnam (SBV), will become operational on July 9.

The company is aimed at reviving sluggish credit extension, which underpinned the slowdown of the nation's growth rate last year to the lowest since 1999. Banks' reluctance to lend may result in economic growth of less than 6 percent for a third straight year, Bloomberg quoted forecasts from the International Monetary Fund and the World Bank as saying.

The central bank said the VAMC would buy bad debts using its own funds or issue 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.

The VAMC will try and auction the NPLs to investors within five years.

The new entity could help resolve half of the NPLs in the banking system, Reuters quoted central bank deputy governor Dang Thanh Binh as saying last month.

Vu Viet Ngoan, chairman of the National Financial Supervisory Committee, estimated it would take over around VND100 trillion ($4.8 billion) worth bad debts from banks' books.

By the end of March NPLs had accounted for 4.51 percent of total loans according to information declared by the banks themselves, the government said in a report last month, without giving the central bank's estimate for the period. That compares with a central bank estimate of 7.8 percent at the end of last year. Credit grew about 2 percent in the first four months of the year, the government said last month.

Nguyen Duc Thanh, director of the Vietnam Center for Economic and Policy Research, said the VAMC, which would have an initial registered capital of VND500 billion (US$24 million), could only partially help fix the problem.

Banks could use the bonds to obtain refinancing from the central bank, which would improve their liquidity, he said.

The risk provision banks have to make for the bad debts they sell to the VAMC is only 20 percent per year, compared to 50 or even 100 percent otherwise, freeing up more liquidity.

But the VAMC does not exactly buy the loans from banks.
On maturity the banks would have to swap the bonds with the bad debts if the latter are not sold by then. They would also have to buy the bad debts not covered by bonds.

They are entitled to get monies raised by the VAMC by selling the loans.

"Thus, banks will still play the decisive role in tacking their NPLs," Thanh pointed out.

Other economists expressed concern about the long-term situation.

Nguyen Tri Hieu said a move that cleans up everyone's books is attractive for now but is just a very short-term solution, he warned.

 "How will the VAMC deal with bad debts since the debts have not been correctly declared?" he asked, raising an important point.

"Many banks have announced bad debts much lower than real figures due to worries about high risk provision 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 gathered independently at 8.82 percent.

The VAMC will buy NPLs only from lenders with bad debts of 3 percent and above.

"In fact, the move could help unnecessarily prolong the life of some weak banks, which could cause risks to the economy."
Le Xuan Nghia, monetary policy adviser to the prime minister, echoed Hieu'e views.

He wondered where the money to buy the bad debts would come from.

"Either the VAMC will use [taxpayers' money] or the central bank will print money. Either way is very risky."

Serves no purpose

Some banks said it would not be easy to deal with bad debts through the VAMC since it would only buy those backed by collateral.

The head of a Hanoi-based bank said banks could deal with such debts themselves and do not need the VAMC.

Banks find it hard to resolve bad debts not backed by collateral and those with collateral which are difficult to liquidate.

After selling the debts to the VAMC, banks would also have to transfer the assets, mainly land, factories, machinery, and equipment to it.

Loan defaulters would no longer have any assets to mortgage for new loans, and "will still find it hard to continue borrowing."

Besides, banks would be reluctant to lend to defaulting firms though they could have good business and production plans, he added.

Hieu said the most important task is to develop a debt market, which would help attract investors.

It is vital to draft regulations for assessment of debt and collateral and borrowers' payment ability, he added.

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