Vietnam bank bad debts down due to accounting, not economy

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Customers read listings at a real estate company in Ho Chi Minh City. High real estate inventory amid the economic downturn have given rise to non-performing loans in the banking system.

Banks' non-performing loans as a ratio of total lending may be down, but it is not a sign of economic recovery, merely the result of an accounting measure aimed at reducing bad debts on their balance sheets, analysts fear.

The actual bad debts have not fallen, while measures like establishing the Vietnam Asset Management Company (VAMC) have not yet been taken to deal with the issue.

The State Bank of Vietnam said on February 28 that non-performing loans were down to 6 percent from the 8.82 percent estimated last September.

Nguyen Huu Nghia, the central bank's chief inspector, has claimed the decrease in bad debts is due to banks' careful risk assessment before lending and efforts to make more risk provision.

But economist Nguyen Tri Hieu said: "I have not seen any reason for the decrease; just bigger risk provision is not enough."

"I have not seen any sign of economic recovery or improvement among businesses. So I don't see any reason for the bad debt to decrease.

Economist Le Dang Doanh said he does not see how banks could reduce their non-performing loans.

Banks could be using their reserves to eliminate bad debts from their balance sheets, he said.

"But real bad debts will not decrease. We need comprehensive measures to deal with the issue.

"In addition to cutting interest rate, we need to accelerate the restructure of the banking system and reduce firms' stockpiles of goods.

"Bad debts will not be reduced unless these issues are addressed."

The central bank last month cut interest rates after inflation slowed in March, the seventh cut since the start of 2012 as authorities struggle to spur lending.

In the first quarter GDP expanded by 4.89 percent year-on-year.

Bad debts are down also because some banks have reportedly allowed firms to borrow again to pay off overdue debts.

Short of clarity

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Bank bad debts remain serious challenge for Vietnam: ADB chief

Assessing the bad debts situation in Vietnam, Dominic Mellor, an Asian Development Bank economist, on Tuesday quoted independent analysts as saying NPLs could be in double figures if international accounting standards are used.

NPLs have proliferated because of rapid growth in lending for several years followed by a credit squeeze in 2011, the downturn in the economy and property market, and poor performances by some highly leveraged state enterprises, he said.

"There is a lack of clarity on the level of NPLs in Vietnam," Standard Chartered Bank said in a recent report.  

International rating agencies have said the true NPL level is hard to estimate, it said.

One reason for these varying estimates is the different accounting standards used to arrive at them, it explained.

"The lack of transparency in Vietnam's banking sector also plays a role, and cross holdings further reduce clarity.

"Almost every major economic entity has a stake in at least one bank, while big banks also have stakes in smaller banks.

"This makes recognizing and resolving NPLs more difficult."

Difficult to resolve

Mellor said the government approved in March reforms to strengthen the banking system through mergers, recapitalization, adoption of international prudential standards, and improvement in oversight.

"However, there has been little progress on recapitalizing banks or resolving NPLs," he said.

Meanwhile, Standard Chartered Bank does not expect a short-term resolution of NPLs.

"We think this process will occur in stages," it said.

But it said, based on the experience of crisis-hit countries, that Vietnam's NPLs should be manageable as long as they do not exceed 20 percent.

The establishment of the asset management company to buy up bad loans could help deal with the issue, but it will take at least until the end of April.

Vu Duc Dam, chairman of the Government Office, said the government has refused to approve its establishment since its brief not go far enough.

The central bank proposes to decree that banks have to keep bad debts at less than 3 percent by selling off the rest to the VAMC.

Even if the company is established, many analysts are unsure about its efficacy since its planned capital of VND500 billion ($23.8 million) is not enough to deal with the bad debts which are estimated at over VND100 trillion.

Mellor said: "Adequate funding will be critical to the success of this plan, as will a transparent process by which assets are priced and an insolvency system with improved capacity to manage the resolution of distressed assets."

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