Vietnam struggles as banks' bad debts refuse to go away

By Ngan Anh, Thanh Nien News

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A man on a bicycle rides past the State Bank of Vietnam in Hanoi. The central bank should allow the VAMC to sell bad debt at market prices, experts say. Photo: Bloomberg A man on a bicycle rides past the State Bank of Vietnam in Hanoi. The central bank should allow the VAMC to sell bad debt at market prices, experts say. Photo: Bloomberg


In a move to pare bad debts, banks are accelerating their sales to the Vietnam Asset Management Company (VAMC), but there is no ultimate resolution of the problem yet since the company is unable to find investors to whom it can resell the debts.
Eximbank sold bad debts worth more than VND1.5 trillion to the VAMC (US$68.2 million) in the first half of this year and Ocean Bank sold VND74 billion worth as they sought to hit the State Bank of Vietnam’s target of cutting bad debts to below 3 percent by September, a target previously set for the year end. Banks are now required to sell a minimum amount of bad debts fixed by the central bank by September 30.
Nguyen Hoang Minh, deputy director of central bank’s HCMC office, said city-based banks alone would have to sell another VND22 trillion worth bad debts to reduce the ratio to below 3 percent from nearly 5 percent in June.
When banks’ bad debts reduce, companies would have greater access to credit, he said.
Nguyen Quoc Hung, chairman of the VAMC, said banks registered to sell bad debts worth VND64 trillion in the first seven months of this years. It has agreed to buy VND59 trillion of it for VND54 trillion.
The target is quite feasible, he said.
The VAMC has helped banks rapidly cut their bad debt ratios caused by the real estate slump, unrestrained lending and costly investments by state firms in non-core areas.
Between September 2012 and December 2014 the central bank forced them to appraise VND311.1 trillion of their bad debts.
Around 44 percent was bought by the asset company, which was set up in July 2013 following a government mandate to reduce troubled loans.
But the problem is not being comprehensively addressed, economists warn. The VAMC buys bad debts using its own funds or issues special bonds to the banks in exchange. The bonds can be used to obtain refinance from the central bank. The company will, in theory, sell the debts to investors, both foreign and local.
If the debts are not sold by the time the bonds mature, the banks would have to swap them with the bad debts. Thus, banks would still play the decisive role in tacking their NPLs, an economist said.
Few investors have been willing to buy the debts: The VAMC has so far bought VND182 trillion worth but sold only VND9 trillion, news website Banking Times reported recently.
Economist Nguyen Tri Hieu said very few local investors have the financial wherewithal to buy such debts and prospective foreign buyers are concerned about the vague policies related to receivables in Vietnam.
The lack of regulations for bad debt trading procedures, and the settlement of secured assets have been hurdles."
-- Nguyen Tri Hieu, economist 
"Foreign investors are interested in Vietnam's receivables market since it has not yet been tapped. However, the lack of regulations for bad debt trading procedures, and the settlement of secured assets have been hurdles to their participation in the market."
Vietnam has not yet developed a market for trading receivables, he said.
Another barrier to foreign investors is that Vietnam does not have independent assessment agencies.
"Foreign investors will not participate in a market unless they know the assets' real value, the potential to resell the assets, and can understand clearly the bad debt trading procedures in Vietnam," Hieu added.
Nguyen Duc Kien, deputy chairman of the National Assembly’s Economic Committee, said few investors are willing to buy bad debts and collateral since the VAMC offers them at above market prices.
“If the VAMC sells such assets at lower prices, it will suffer losses,” he said, adding it did not dare create losses for the government.
The central bank should allow the VAMC to sell bad debt at market prices, or it would be unable to tackle the problem, he warned.
Industry changes
To effectively tackle bad debts, the central bank has set its sights on weak banks, approving eight mergers and acquisitions so far this year.
Several weak banks have been placed under special supervision -- like mid-sized lender DongA.
The SBV initially said it would appoint executives from BIDV, the country's largest partially private bank by assets, to the management to bring the bank back on track. But it later allowed the bank to nominate its own executives to replace those at the helm, who have been sacked.
The Ho Chi Minh-based lender, whose assets are valued at nearly VND90 trillion ($4.07 billion), has been one of the best-performing banks in Vietnam during its 23 years in business, and one of the pioneers of automated banking.
It was never part of the government’s restructure plan until its 2014 financial report showed a 96 percent drop in profits from the previous year to a mere VND35 billion ($1.58 million).
Some banks under such supervision, like Eximbank, have recovered and bounced back, while others like Oceanbank were eventually taken over by the central bank.
The SBV has agreed to increase the 2015 credit growth ceiling for some lenders in a bid to boost economic growth and steady the money market.
It allowed Vietcombank, the biggest lender by market value, and VietinBank to increase credit growth to 16 percent from their earlier 13 percent.
Average credit growth this year has been 7 percent, while deposits have increased by just 5 percent.
But the gap would not affect banks’ liquidity in the short term because their deposit mobilization has been much higher than lending in the past two years, Hieu said.
But the liquidity of the banking system would be threatened and bad debts could sharply rise if the situation prolongs, he warned.
The liquidity is no longer as high as it was in the recent past, which can be seen from banks’ falling demand for government bonds. Banks, which according to government data held more than 80 percent of its bonds as of late last year, have less cash on hand because of rising credit growth.
Vietnamese lenders expect to achieve credit growth of nearly 17 percent in 2015, faster than last year's 14.16 percent, as demand for credit shows signs of quickening from March, the central bank said.
Banks’ bad debts rose to 3.72 percent in June from 3.15 percent in May, according to the central bank.
Loans outstanding as of June end were worth VND4,282.6 trillion ($190.7 billion).

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