Vietnam is accelerating the cleanup of its financial system to help boost lending in an economy threatened by a crippling drought and lower oil revenue.
The Vietnam Asset Management Company, set up to buy the bad debt of banks, will make its first cash purchase of non-performing loans this year, Nguyen Quoc Hung, chairman of the agency also known as VAMC, said in an interview Tuesday in Hanoi. The purchase “will help lay out steps to quicken the bad debt resolution process.”
VAMC currently issues special bonds in return for the bad debt, which banks may use as collateral to secure funding from the central bank. Paying cash to clear the debt will give banks funds to speed up lending.
“This is a major step,” said Alan Pham, chief economist at VinaCapital Group Ltd. in Ho Chi Minh City. “The net effect is to resolve the bad debt instead of moving it around. Once you pay the market price and you pay in cash, the debt is extinguished.”
Vietnam has done much to clean up its banking industry since 2012 when a lending spree and weak controls led to a surge in bad debts, the arrest of bank executives and a plunge in stocks. Non-performing loans stood at 17 percent at the time. The government created VAMC in 2013 to remove the bad debt from lenders.
The state agency also plans to resolve about 30 trillion dong ($1.3 billion) of bad loans this year by selling debt and collateral, Hung said. VAMC has recouped about 8 trillion dong so far this year, he said.
“This is going to help banks that need liquidity and to offload their bad debt,” said Trinh Nguyen, a senior economist at Natixis Asia Ltd. in Hong Kong. “We really have to wait and see what is the size of this.”
VAMC, which is lacking in resources, will probably need financial support from the government or organizations such as the International Monetary Fund to address all of the bad debt in the country’s banking system, Pham said.
VAMC has received offers from about 10 banks to sell as much as 17 trillion dong of bad loans so far this year, according to Hung. The company is working with lenders to re-evaluate the debt for pricing, he said.
The benchmark VN Index is poised for a second day of gains today, rising 0.5 percent as of 10:54 a.m. in Ho Chi Minh City trading.
Banks have crimped lending to businesses because of bad debt, a situation the government wants to reverse as it seeks to spur economic growth to 6.7 percent this year. The economy expanded 5.5 percent in the first quarter, the slowest pace since June 2014.
The central bank is aiming to curb non-performing loans to below 3 percent of total lending. Governor Le Minh Hung in April allowed VAMC to buy and sell bad debt at market prices, according to its website.
The World Bank said in a report in April that progress has been slow in consolidating the banking industry. The government’s target of reducing the number of commercial banks to as little as 15 by 2017 from 34 currently remains “challenging,” it said.
International Monetary Fund Managing Director Christine Lagarde said in a March interview that the banking system needs to be made “stronger, better and more capitalized with less stressed assets” so that lenders can help spur the economy.