“Temporary issuance of 100 trillion dong that would be withdrawn from circulation after completing debt collection, should not be approved”, said MA. Nguyen Xuan Thanh, lecturer of Fulbright Economics Teaching Programme.
He underlined the importance of a debt trading company as proposed by the State Bank in the event of systematic bad debt problems. Should this firm be established, it will run parallel with Ministry of Finance’s Debt Asset Trading Company (DATC) which will deal with enterprises whereas the former will work with commercial banks.
It is important to define its operation model in which this company will be involved in debt trading or acting as trustees so as to transfer debts to other parties.
Thanh would highly of the former – that is to purchase debts and then make settlements. However, uncollectible debts that would be written off should not be obtained. Also, bad debt portfolio should be acquired at discounted prices. Korean’s debt trading firm that was set up to deal with financial crisis, for instance, purchased debts at an average of 46pct of debt value.
In addition, how obtained debts are processed should be clarified. In theory, there are two major methods including swift debt settlement and debt restructuring. Though both may prove effective, world experience shows that the coexistence of such measures would barely produce good results.
Debt trading firms which adopt instant processing method tend to be more successful than those which acquire and then restructure debts. The latter would face up to their limited capacity and imperfect legal framework whereas the former would not only cut down on commercial banks’ bad debts but also hardly hurt the state budget.
Funding for debt trading company depends on the banking system’s bad debt volume. Recently, the central bank reported bad debts totalling some 108 trillion dong which means this newly-born company’s capital of 100 trillion dong would be adequate. The initial amount would be supported by the state budget or via capitalisation in the event of insufficient funding from the state budget.
Notably, it is impossible to print 100 trillion dong so as to be withdrawn from circulation on debt collection, which could significantly expand money supply and ultimately trigger inflation.