Bad debts in the banking sector have been on the upward trend and which entity to be assigned to deal with such assets worth of tens of thousands of billions dong is still in dispute.
Early 31 May, the State Bank of Vietnam chaired a meeting with leading commercial banks – G14 group with a view to set up a debt trading company which is expected to purchase some 100 trillion dong bad debts.
According to the central bank, the whole sector’s bad debts as of late 2011 accounted for 3.5pct of the total outstanding debts. Yet, financial reports for quarter 1 2012 of listed commercial banks revealed the continuously increasing ratio. The figure as of March 2012 was found jumping over the beginning of the year at nine listed banks, particularly 9.7pct at Habubank. Therefore, given the negative credit growth of the industry, bad debts have been climbing dramatically over the recent times. Plenty of substandard debts have been put down as the principal root for blocked credit flows, according to many experts.
Earlier in the banking restructuring scheme approved by the prime minister, it was suggested that mortgage debts should be sold to the Debt and Asset Trading Company (DATC) under the Ministry of Finance. Besides, commercial banks themselves have already had their own asset management companies (AMC) to deal with bad debts.
However, the huge volume of current bad debts has posed concerns over capacity of both DATC whose charter capital is merely 2,481 billion dong and AMC.
“Barely could any firm could purchase all such bad debts at one time. Appropriate measures needs to be carried out for gradual acquisition. Presently, DATC is under negotiation to buy 5 trillion dong of bad debts of many banks particularly large ones”, said Pham Manh Thuong, deputy general director of DATC.
According to Nguyen Xuan Thanh, lecturer of Public Policy, Fulbright Economics Teaching Programme, DATC had better be financed by state budget for debt settlement. What is more, AMC has been merely involved in accounting-related transactions, taking hold of bad debts for better banks’ financial reports, said another expert.
Therefore, the proposal to set up a state-run debt trading firm has seen general consent. “Given the tremendous volume of bad debts and modest scale of DATC and AMC, debt settlement could hardly be properly addressed by these entities. As such, this state-run firm is expected handle such bad debts clearing banks’ balance of assets and making bank credit accessible to businesses”, said Dr Vu Viet Ngoan, Chair of the National Financial Supervisory Committee.
However, immediate settlement of all the existing bad debts may hardly come in one day or two. Clear operational regulations should be mapped out in order to hamper loss and drain of state assets. The state budget would suffer in the event of any likely incurred losses, Ngoan added.
Similarly, the crisis period between 1999 and 2001 witnessed China establishing banks which specialised in handling bad debts, known as “bad-banks”. Yet, bad debts could hardly be acquired at 100pct value, according Keith Pogson, CEO of Ernst and Young’s Asia Pacific Financial Services, an experienced expert who participated in China’s bank restructuring process. “What matters is Vietnam’s law does not allow national assets to be sold below the book value, which would present a challenge for tackling substandard debts”, he commented.
Another solution in which foreign banks may be allowed to purchase bad debts has also been considered. Yet, despite their interest in acquisition of local banks, these entities could not be unwilling to purchase such type of debts.
Regarding Vietnam’s bad debts, Keith Pogson urged investment banks’ presence in dealing with bad debts as these institutions would be aware of how to handle and evaluate such debts.