Normally, bad debts would be sold to a debt trading firm at prices that are part of their book value depending the loan quality and collateral value.
Commercial banks’ bad debts as of 31 March 2012 are estimated at 202 trillion dong with mortgaged assets worth of 135pct of the debt value, according to the central bank. Experts reckoned the discounted rate of 60pct pulling down the debt value to 80,800 billion dong. Given the provisions of 67300 billion dong as of 31 May, the remaining bad debt would be 134,700 billion dong. The actual amount of losses would then be 53900 billion dong which is merely rough estimate. As such, banking sector’s equity may drop to 343,540 billion dong from 397,440 billion dong in the previous year, a 13.56 percent decrease in capital value.
As a result, the industry may post net loss rather than profits of 49.69 billion dong one year ago pulling capital adequacy ratio (CAR) down to merely 6pct-7pct compared to the minimum requirement of 9pct. In all likelihood, many lenders would be forced to merge with other peers and even either to go bankrupt or need financial assistance due to insufficient capital.
In fact, many credit institutions are now owners of several enterprises, which would mean selling bad debts would hurt them both. What is more, such potential losses may incur considerable responsibility for managers of state-run commercial banks. Also, their huge loans together with losses would be disclosed.
As such, the bad debt handling process is likely to result in significant disorder in the financial and even political system. Commercial banks would be forced to take losses whereas businesses would be pushed either to go bankrupt or to adopt restructuring.
However creative this destruction may be, what matters is whether Vietnam is willing to take the consequences and to overcome barrier of interest groups.