Vice President of NFSC: the bad debt settlement needs $25b

15-Oct-2016 Intellasia | VnExpress | 6:00 AM Print This Post

Vice Chair of the National Financial Supervisory Commission (NFSC) Truong Van Phuoc, at the Conference on the economic restructuring challenges held by the Vietnam Institute of Economics on October 12th 2016, said that the settlement of bad debts currently requires specific measures and resources.

According to data until late June 2016, the bad debt ratio according to banks’ reports was about 2.58 percent. However, experts believed that this number will be much higher than reported if calculating based on international standards.

Phuoc commented that the bad debt settlement has mainly used technical measures, because the Vietnam Asset Management Company (VAMC) in the current context is yet to become an optimal solution for thoroughly handling bad debts.

The direct consequence is that the credit flows to the economy have been blocked, leading to the rise of real interest rate to around eight to nine percent per annum while the inflation rate remains just 0.5 to 0.6 percent. The profitability ratio of bank equity has fallen by three times, from 12 percent to only four percent. This has caused a very high cost of capital to the economy and led to a very heavy loss, said Phuoc.

This concern was shared by Dr Huynh The Du, Lecturer in Public Policy at the Fulbright Economics Teaching Programme. According to Dr Du, in the last 10 years, a huge volume of capital has been injected into the economy but mainly pouted in speculation and asset trading, causing market distort.

It is not surprising that although the interest rate level in the market is nearly 10 percent per annum, the people depositing idle capital into banks all receive much lower profit. Dr Du believed that the reason is that the asset speculation has taken place so easily. The capital has been poured into real estate and asset trading with the expectation for the boom of the financial market in the future, which could bring the speculators chances to get rich again. However, it has made the bad debt volume to grow in size. According to Dr Du, the current bad debt situation of banks is very difficult to be solved and the resources have not been used for real production and business activities.

Recognising this, the leader of the NFSC also revealed that even when the economy is growing well, there are approximately 60 to 70 trillion dong of new bad debts arising each year (about 1.25 percent). Meanwhile, he considered VAMC as just a temporary solution. Thus, it is a very worrying problem if the bad debt issue is not handled thoroughly.

According to Phuoc, about 25 billion US dollars are needed in order to tackle bad debts, and about 180 trillion dong are needed to handle the secured assets in banks in the next five years. In addition, banks need 40 trillion dong each year to provision for risks, which means about 150-200 trillion dong in five years. Phuoc said that this source of capital can be gathered from borrowers and customers sharing risks, in addition to the existing risk provisioning reserve of about 126 trillion dong.

Phuoc noted that the real source of capital can be raised from external source, without relying on the allocation of the budget. In addition, to successfully handle the restructuring process, the State Bank of Vietnam (SBV) also needs a Steering Committee at State level.

Moreover, the bad debt settlement should also use the capital mobilised from the population, through the issuance of a special type of bond for bad debts. The bad debt trading between VAMC and credit institutions must follow the actual prices of the market.

Meanwhile, according to Dr Du, the solution to freeze bad debts should not be further implemented, because it has not brought any success. Dr Du believed that tightening credit to force enterprises to do restructuring perhaps is the reasonable solution at this point of time.

 


Category: Finance, Vietnam

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