Banks pull the credit plug on indebted textile SOEs

06-Oct-2004 Intellasia | 04/OCT/2004 THOI BAO KINH TE VIETNAM PAGE 11 | 1:27 PM Print This Post

If state banks pull the lending plug to state owned textile enterprises they would have to shut down almost immediately. Therefore, these banks are forced to feed more credits or rollover existing loans to SOE textile firms to keep their heads above water hoping that such textile firms can repay their debts.
But some state run commercial banks in HCM City said that they had not totally turned their backs on SOE textile makers, however, they still live in the hope the indebted firms can repay debts so they feed in more smaller bridging loans to recoup the hundreds of billions of dong in loans that already have been rolled over two or three times.
A director of a state owned commercial bank in HCM City said that in the past two years, his bank had refused all borrowing applications by a Vinatex subsidiary. He added only when this SOE had repaid all outstanding debts worth about 15-16 billion dong would his bank consider new loans.
According to Nguyen Phuoc Thanh, director of Vietcombank-HCM City branch, total outstanding lending balance of textile SOEs amounted to over 300 billion dong. “We mainly finance textile subsidiaries of state textile corporations. We do not wish to extend loans for the garment industry because textile makers must spend large amounts for new machines and equipment which must be amortised which pushes up end-product textile prices, leaving difficulties in their exports. And we find that domestic products cannot compete with illegally imported textile products,” said Thanh.
In the eyes of state banks, the garment sector accounts for a big export ratio of the country and creates jobs for tens of thousands of workers, however, nearly all state-owned textile makers are undercapitalised. In the last five years, in an effort to speed up growth, gradually reducing imports by using more domestic materials for textile manufacturing, and reducing intensive labour aspects by automating systems employed in making textiles, textile makers have rushed to import modern machines and equipment.
Without going into whether the machinery imported by SOEs was the best equipment available regarding quality and price of imported machines, what is notable is that nearly all equipment import spending was paid for by bank loans. That is not out of the ordinary, but many SOE textile makers had the lack of foresight to use short-term bank loans to buy machinery that can only be considered medium- to long-term investments. This lead to a cash flow imbalance at the SOEs who then defaulted on bank interest and principal on the short-term loans.
The problem of textile firms defaulting on state commercial bank loans is derived from poor debt repayment management and the full extent of debt exposure is never properly known because the SOEs often have outstanding loans scattered among different state banks and if properly tallied, the NPLs would far exceed the SOEs’ equity. The true value of these SOEs’ assets is also never truly know because most have huge stockpiles of the textiles on the books which don’t reflect true market value due to sub-standard quality or becoming obsolete once fashion tastes change in foreign markets. “We are willing to lend to textile firms if markets can be found for their products,” said a director of a bank.
In fact, the government has applied many a measure to help SOE textile business resolve their financial problems such as considerably extending amortisation periods on machinery assets by up to 10 to 15 years. Other more obscure sleight of hand tricks that dilute debt exposure on the books is that some SOEs were allowed to convert US dollar loans into dong loans at preferential forex rates. As for bank loans, the government also adjusted lending interest rate from commercial interest rates into preferential interest rates at one-third of the commercial prime rate, or bank loan interest was written off or forgiven, and loans rolled over numerous times without any interest repayments.
These measures obviously are just exacerbating the situation. SOE textile firms must come up with their own comprehensive business, and in the short term, the government has to determine whether to sustain, equitise, sell or write off debt SOE textile makers. If the government intends to nurture the SOE textile firms, how will the huge textile products in stock be handled?. If the government decides to equitise SOE textile makers, a realistic mechanism to deal with debts is also needed.
In general, state commercial banks now have a policy of not injecting any more capital into textile SOEs that are technically insolvent. So if that is the case, it is only a matter of time before they go under or need massive bailouts from the government, again.

 


Category: Finance

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