Vietnam to buy bad debt from banks to ease risk of collapse

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The nation has stepped up efforts to fix a banking system hobbled by bad debt after rapid credit growth in recent years fueled a trade deficit and Asia's fastest inflation.

Vietnam will buy bad debt from lenders under a plan approved by Prime Minister Nguyen Tan Dung this month, as the Southeast Asian nation seeks to prevent a collapse in the banking system.

The finance ministry will buy collateralized bad-debt from commercial banks to strengthen their balance sheets, under a plan to overhaul the industry by 2015 that was approved by Dung. Vietnam aims to cut bad-debt ratios at state-owned banks to below 3 percent by 2015, according to a statement posted on the government website on March 2.

"It sounds something like a bailout or at least putting things in place to allow them to bail out the banks if necessary," Marc Djandji, Ho Chi Minh City-based head of research at Viet Capital Securities Joint-Stock Company, said in a telephone interview Monday. "What they want is to avoid any type of banking system crisis."

Questions about the health of Vietnam's lenders are underpinning concerns over the stability of the country's economy, with the nation stepping up efforts to fix a banking system hobbled by bad debt. Rapid credit growth in recent years has fueled a trade deficit and Asia's fastest inflation, prompting depositors to favor short-term savings and crimping funding for long-term loans.

Vietnam's central bank said last week it's ready to force mergers among weak lenders, and Dung has ordered the authority to "solve" a shortage of funds after the credit crunch forced thousands of companies out of business.

Banking stocks rose

Shares of all five banks listed on the Ho Chi Minh City Stock Exchange rose on Monday, as the benchmark VN Index closed 4 percent higher. Joint-Stock Commercial Bank for Foreign Trade of Vietnam, known as Vietcombank (VCB), rose 4.8 percent to VND30,400, while Vietnam Joint-Stock Commercial Bank for Industry & Trade climbed by the maximum 5 percent daily limit to VND27,500.

"Restructuring, fixing and strengthening the banking system with the lowest cost will eliminate the risk of a collapse of the banking system" and ensure macroeconomic, social and political stability, Dung said in the statement.

The government said it may consider measures such as allowing greater foreign ownership in lenders defined as weak, and buying shares directly in such banks before selling the stakes to new investors. It also called for limitations on the distribution of dividends and lending growth at weaker banks, and for strict surveillance of lenders that receive government financial support.

Bad debt

Bad loans in Vietnam may exceed official forecasts by as much as three times, and bad debt may "rise sharply," according to U.K.-based Capital Economics. The Vietnam Association of Small and Medium-Sized Enterprises estimates about 150,000 companies failed or shut down operations due to financial difficulties last year, or about a third of the country's companies.

"The key question, which is still very unclear in Vietnam, is how they will define bad debt," said Alain Cany, the Ho Chi Minh City-based chairman of the European Chamber of Commerce in Vietnam. "The government is not rich enough to absorb too much."

Vietnam will "clean up" and strengthen banks' balance sheets by 2015, and classify commercial banks into three categories, according to the plan. The State Bank of Vietnam and the Ministry of Finance will be responsible for managing lenders' bad debt.

The idea of buying collateralized bad debt "doesn't necessarily mean they will buy it at 100 percent of face value," Cany said. "Maybe they will buy it based on the value of the collateral provided."

The country has 50 banks, including five state-owned banks and five wholly foreign-owned banks, according to the central bank's website. The five largest listed banks had total assets of almost $63 billion as of Sept. 30, according to the banks' financial statements to the stock exchanges.

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