Commercial banks and enterprises could negotiate to turn bad debts into stake in borrowers’ firms on the basis of either market value or book value. As such, at enterprises, bad debts would be written off so as to be changed into their chartered capital under banks’ ownership. At commercial banks, meanwhile, bad debt settlement would be finalised, yet the amount collected would be in the form of capital contribution to enterprises rather than cash.
Consequently, enterprises could access to new loans, which would thus rapidly facilitate capital flows.
Normally, bad debts if sold to debt trading firms would take several years even tens of years to be settled. Also, the current remedies such as provisioning, debt extension and loan rollover seemingly fail to bring about any significant improvement.
Notably, selling bad debts to debt trading companies would mean transfer of debt ownership whereas such debts remain. Enterprises will, therefore, be almost unable to take out new loans on huge losses and the absence of collateral that has already been in the hands of debt trading firms.
In addition, this cure is likely to save the currently tight state budget some 100 trillion dong that is projected to fund the future national debt trading firm. This new establishment would mean an enormous amount of money being put into circulation, which would in turn adversely hit inflation. In the meantime, debt securitisation would not either require such excessive volume of capital or hurt creditors (credit institutions) and debtors (enterprises).
Credit institutions which hold a 10 billion dong loan, for instance, could be reluctant to sell it at 3-5 billion dong. Likewise, enterprises would suffer losses due to transfer of debt ownership which would mean collateral being re-evaluated so as to be in line with selling prices. Each commercial bank will probably experience an estimate of at least 1 trillion dong should bad debt settlement be conducted by selling to debt trading firms.
Another positive consequence could be banks’ further participation into business restructuring. After becoming shareholders of debtors’ businesses, additional funding is likely to reach those enterprises and lenders could be more proactive in restructuring their debtors’ companies.
Unlike debt process at debt trading firms, debts and collateral would not need pricing, thus hindering potential conflicts between creditors and debtors.
However, debt securitisation should be simply applicable to loans that would not be swiftly recovered. Given enterprises of excessive inventories of finished goods that would stand a good chance of being completely released as in real estate firms, the cure may not efficiently work.