Mar 31, 2013

Vietnam - Debt issue held up to the light

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A long-awaited draft decree addressing bank bad debts is under the microscope.

In light of the government’s draft decree on the Vietnam Asset Management Company (VAMC), the VAMC will buy banks’ non-performing loans (NPLs) or bad debts and pay in bonds.

In this way, VAMC does not need to use cash for buying bad debts while banks, instead of carrying bad debts, could possess valuable papers to discount with the State Bank of Vietnam (SBV).

Under the draft, VAMC will buy banks’ bad debts at 100 per cent of their book value as said by SBV chief Nguyen Van Binh during a Danang city meeting on the implementation of monetary and banking solutions in 2013.

Since VAMC’s operation in principle is to preserve and develop state capital, it must not incur losses. Therefore, in light of the draft decree the bonds VAMC pays for banks’ bad debts will remain valid in five years only with a zero per cent interest rate.

Besides, the draft decree also read that during these five years banks would need to make provision tantamount to 20 per cent of bonds’ value every year.

This means after five years if VAMC failed to sell bad debts, it would lose nothing since banks had to provision 100 per cent the bond value.

Banks, if getting back their bad debts, would still maintain the right to demand payment of the debts.

It is proven that selling bad debts to VAMC would help banks ‘clean’ their balance sheets whereas banks would have a sum to feed operations. Industry insiders, however, assumed not many banks wanted to go this way.

“If banks sold the VAMC their bad debts, they would need to provision huge money amounts which could annoy shareholders and take a hit on their profits,” said a senior economic expert.

In late February 2013, the SBV announced bad debt rate had gone down to 6 per cent of total loan balances. Senior expert Nguyen Tri Hieu, however, assumed this might be bad debt figure best case scenario.

In fact, the NPL rate including unscheduled debts was put at 17.2 per cent as of September 2012, according to the SBV. In this present context of continuing economic hardships not many firms could get rid of bad debts through debt rescheduling.

Besides, the portion of bad debt cleared through mortgaged asset liquidation and loan loss provisioning, was not big also.

Thuy Lien |

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