Vietnam's resolve to clean up its banking system will be tested by how the government executes plans to set up a debt asset management company this month that will take over bad loans from lenders.
The company will be established before the end of the month and will be managed by the central bank, Le Xuan Nghia, a member of the National Financial and Monetary Policy Advisory Council, said in a telephone interview yesterday. The firm will issue bonds to finance the acquisition of debt from lenders, said Nghia, who didn't provide a value.
"Everything depends on the implementation," said Alain Cany, Ho Chi Minh City-based co-chairman of the Vietnam Business Forum Consortium. "If they are serious about finding ways to capitalize this asset management company, and they describe what banks will have to do and what they will receive in exchange and how the government will mobilize funds, that would be great news and may get banks lending again."
Vietnam's government is under pressure to tackle bad debt at banks that curbed domestic consumption and dragged economic growth to a 13-year low in 2012, with Prime Minister Nguyen Tan Dung announcing last week a steering committee to restructure banks by 2015. The Southeast Asian nation would be emulating neighbors including Malaysia and China in setting up entities to acquire loans from struggling lenders.
To help rescue banks hurt by the 1997-98 Asian financial crisis, Malaysia formed a state-run bad-loan management company that sold bonds to help fund the purchase of bad loans from lenders as defaults rose. China created several funds including China Cinda Asset Management Co. to buy bad debt from banks as part of efforts to clean up a 1990s bad-loan crisis.
Ho Chi Minh City Stock Exchange's benchmark VN Index rallied for a third day, gaining 1 percent to the highest close since Feb. 20. Saigon Thuong Tin Commercial Joint-Stock Bank, known as Sacombank, climbed for the first time in five days, adding 1.4 percent, the most in a week.
Dung in February approved a master plan to revamp the economy, and the central bank last week said it will monitor troubled lenders, with the option of asking them to submit restructuring plans or forcing them to merge with other banks.
The government is "very likely" to approve before March 23 a decree to establish the debt management company, Thoi Bao Kinh Te Vietnam newspaper reported today, citing central bank Governor Nguyen Van Binh. Vietnam plans to resolve about half the banking system's bad debt this year, according to the paper. Binh also urged commercial lenders to reduce lending rates to below 13 percent, according to a posting on the government's website today.
"The debt asset management company will help clean up banks' balance sheets and that will definitely spur banks' lending to fuel the economy," Nghia said. "The Politburo has already approved it, and preparation work is almost finished."
The World Bank said in December the health of Vietnam's lenders is a growing concern, citing their deteriorating asset quality and slow progress in restructuring. A resolution of the situation faces many challenges, said Vishnu Varathan, a Singapore-based Mizuho Corporate Bank economist.
"The central bank is trying to get a sense of the scale and pervasiveness of the bad debt," said Varathan. "Publicly, there doesn't appear to be a consensus yet on what the numbers are. Without that, you're just taking steps in the dark."
The bad-debt ratio at Vietnam's banks dropped to 6 percent of total outstanding loans as of Feb. 28, from "about 8 percent" last year, Vu Duc Dam, Chairman of the Government Office, told reporters last month. The government said last year it aims to lower the ratio to below 3 percent by 2015.
Fitch Ratings said in October that it believes the ratio of non-performing loans is higher than 10 percent and could worsen, "given the downside risks." It estimates the cost of recapitalization of banks may reach 10 percent of the country's 2012 gross domestic product.
Vietnam's bank lending dropped 0.28 percent in the January- to-February period from the end of last year, according to a posting on the government's website this week.
The proposed debt management company is an important first step toward reviving investor confidence in Vietnam, said Pham Ngoc Bich, managing director of institutional sales at Saigon Securities Inc.
"This is very positive information for the market, as investors have been waiting for it for a very long time," Bich said. "It will help strengthen the banking system and once the financial system is strong, it will support the economy."
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