Vietnam - Bad debts in interbank market soar

The unprecedented arrival of bad debts in the interbank market has been a growing concern among large commercial banks. In fact, the interbank market has not ever seen banks' insolvency in the recent years even when lending rates soared in 2008.

What matters is how to record these debts as normal bad debts incurred by individual and corporate customers are regulated by the central bank's Decision 493, according to the manager of Bank D.

Therefore, each bank has its own way to deal with this newly emerging type of debt. Classifying them as bad debts under Decision 493 could drive up the proportion of bad debt of the total outstanding loans, which would mean additional risk provisions.

Consequently, such debts would be recorded in long-term deposit accounts.

It is reported that at least five small HCM City-based commercial banks (T.,T., W., P. and N.) and two in the north (B. and G.) are presently among the biggest debtors in the interbank market, according to a source of the newswire Stock Investment.

Many commercial banks said that at first extension of debt payment date would be negotiated with debtors and the notice of a penalty of 150pct of the interest rate and request for additional collateral would come next. Should borrowers then fail to provide further mortgage, reporting documentation would then be submitted to the central bank.

That is not to mention those that are currently under this agency's surveillance, which means their money inflows and outflows being closely monitored.

As such, due deposits of the resident sector will be given the first priority to be settled, lengthening the extension for interbank debt repayment schedules.

Recently, many small commercial banks have joint hands with larger peers in strategic cooperation agreements, in which the latter pledged to provide liquidity assistance.

Still, many would consider it a marketing strategy among commercial banks as the support may have otherwise saved small banks from such default in the interbank market as presently.

Many creditors assumed debtors intentionally delayed making repayment for fear of no repeated borrowing. It is also believed that these borrowers could keep the loans so as to deposit in another credit institution for higher interest rates.

The recent times have seen the central bank's drastic efforts to inject capital via open market operations (OMO) which apparently fails to touch the interbank market. Currently,

large commercial banks are hesitant to loaning further in the interbank market even though smaller ones could take any lending rates.

What is noteworthy is surging deposit interest rates of uncommon foreign currencies such as euro, AUD, CAD which were previously mobilised at below 1pct p.a at foreign banks and a few local ones like Eximbank, VCB and ACB.

It stands to reason that these lenders that have been well known for providing overseas study loans and international payment services vie for such currencies. Yet, many commercial banks have also joined the race, driving up their mobilisation rates to as high as 3pct-4pct.

The world soaring interest rates of these unpopular foreign currencies have been put down to push up the domestic rates, said a manager of

Eximbank. However, it is the thirst for dong that makes them that tempting as they could be mortgaged at other lenders for dong loans. What is more, mobilisation rates of such currencies have yet been capped as for dong and US dollar.

Similarly, commercial banks have taken part in the race for mobilising gold at rocketing interest rates with a view to mortgage for interbank loans.

Thus, there emerge concerns over potential dong withdrawal and depositing in euro, AUD, CAD and gold instead.

Consequently, the competition for attracting foreign currencies and gold has clearly gone against the efforts to fight dollarisation.

VietBiz24

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