Finance & Banking
Last updated: Tuesday, May 21, 2013
Bad Debts: Who Keeps?Posted: Saturday, June 16, 2012
Delivering a speech to the lawmaking National Assembly on June 8, Governor of the State Bank of Vietnam (SBV) Nguyen Van Binh said bad debts in the banking system increased from 6 percent to 10 percent, making capital costs expensive and hindering banks from loosening borrowing conditions. Now, banks are seeking to clear their outstanding debts to unfreeze credit flows. But, the primary problem is who will purchase those debts? And, what money will be use for this purpose rather than the State budget?
Deposit rate ceiling was lowered to 9 percent from 11 percent per annum from June 11, the fourth cut in less than three months. Market interest rates are also showing a marginal decline although they are not as fast as regulatory rates. Consecutive rate cuts coupled with loosened credit policy are facilitating banks to channel their capital into business sector but the outcome is out of expectations. Credit growth was minus 0.76 percent in the first five months of this year and showed no sign of rebound in the near term. In June, credit growth is forecast to keep sluggish. Given what has happened, it is unlikely for Vietnamese banks to realise the credit growth of 15 - 17 percent this year.
The current primary challenge for banks is to clear oversized debts which are impeding healthy functioning of the banking system. In late May, the central bank convened a meeting with 14 largest commercial banks in order to identify solutions to boost credit growth and solve bad debts. A lot of solutions were put forth at the G14 meeting, like lowering deposit and lending rates, funding fields of lending priority, setting up debt trading company, establishing a fund to lend low-income earners to buy houses, etc. The solution concerning the formation of Debt Trading Company caught special public attention.
At the end of 2011, nonperforming loans (NPLs) of the banking system accounted for 3.5 percent. Bad debts tend to rise quickly. According to financial statements released by nine listed banks, as of March 2012, their nonperforming loans reached 9 percent, with Habubank on the top list with 9.7 percent. And, according to the latest data informed by Governor Nguyen Van Binh at a speech delivered to lawmakers on June 8, bad debts in the banking system increased from 6 percent to 10 percent.
The SBV encourages commercial banks to cross-purchase bad debts. Accordingly, lenders will purchase debts from other ones and businesses.
The next solution is the SBV works with competent organs to set up National Debt Trading Company to clear bad debts worth VND100 trillion (US$5 billion) of the banking system. This company will help banks create certain liquidity and thus have more credits to lend.
This company is expected to have a registered capital of VND100 trillion. Its debt-purchasing mechanism will be more easygoing than that of Debt and Asset Trading Company administered by the Ministry of Finance. Its scope of operations is also larger and its operating objectives are not for profit.
Dr Cao Si Kiem, former SBV Governor, said this step must be taken carefully. It must be based on meticulous risk evaluation of every debt to avoid losses. Of course, it is necessary for the central bank to stand out to purchase and sell bad loans because it has many regulatory instruments.
Dr Vu Viet Ngoan, Chairman of the National Financial Oversight Committee, showed his support for this scheme. The establishment of this company can also help boost credit growth because it will clear bad debts off balance sheets of banks and enterprises. Then, businesses will be able to borrow loans and banks will have more room to provide credits. However, this is a method to handle bad loans, not completely eliminating bad debts out of the banking system
However, this scheme is also protested by many experts. The first and easy-to-see concern is where to take money to purchase bad debts?
To date, the formation of National Debt Trading Company is just a proposal. No one has mentioned the source of VND100 trillion (registered capital) and the operating paradigm. Its operational regulations must eliminate the group interest. Many will try to sell their debts at best prices, even by bribing. And, the job of settling those debts belongs to the Debt Trading Company and the Government.
It is predicted the sum of VND100 trillion will be sourced from the State Bank and the Government. The company may issue bonds to raise funds or ask commercial banks to contribute.
In some countries, the government stands out to purchase bad debts, settle them and complete restructuring the banking system in a few months. But, Vietnam is unable to take that strong measure because of its insufficient capability. A “technical issue” is it is impossible to buy bad debts at a 100 percent value while the laws ban selling national assets below book value. It is vital to change the laws before start clearing up bad loans.
According to experts, bad debts need to be classified and sold at different prices. Bad debts do not mean a loss of capital. In the world, many bad debt deals, with purchasing price equal to 10 - 20 percent of asset value, become good investments. According to the State Bank of Vietnam, the debt trading company will not operate for profit. However, many experts said the key principle is this company must be a real business which operates for profit. Who will buy a bad debt if it never brings an interest? If the investment is a loss, the State Budget will carry it and the final payer is our economy.