Finance & Banking
Last updated: Saturday, April 22, 2017
“Bright Side” of Bad DebtsPosted: Monday, April 16, 2012
“It can be said that the first stage - diagnosing the disease of the Vietnamese banking system - has been completed quite excellently, but the cost is rather high. The State Bank of Vietnam (SBV) has stayed on the positive position to accelerate the process of restructuring the credit institution system despite facing numerous difficulties and challenges,” said Dr Trinh Quang Anh, Economic Research Director of Maritime Bank, at the “Vietnam's economy in 2012: Strongly starting the process of economic restructuring” Forum held by the National Assembly Economic Committee in Da Nang City on April 8 and 9, 2012.
He noted that bad debt is a “helping” factor for quickening the banking system restructuring.
How much bad debt?
According to the Circular 35, as of June 15, 2012, nonperforming loan (NPL) ratio to the economy will be announced by the State Bank of Vietnam. Before this deadline, several independent research projects revealed noteworthy figures.
The international credit ratings firm Fitch Ratings said NPL ratio of Vietnamese commercial banks may be four times higher than the announced rate of 3.3 percent. The disparity is perhaps resulted from classification bases of Vietnam and the world.
The NPL rate of 3.3 percent equals to over VND90 trillion (US$4.3 billion).
This is also the value quoted by Dr Trinh Quang Anh on his argument papers. However, he noted that “We estimate that, if international standards are adopted, NPL ratio may reach at least 10 percent of total outstanding loans, or about US$10 billion, which is equal to nearly 10 percent of Vietnam's current GDP.”
Worryingly, if this ratio is compared with the adjusted owner’s equity in accordance with the current regulations plus credit risk provision funds, it will exceed 50 percent - an alarming level. Many credit institutions in fact have run out of capital (having negative CAR - capital adequacy ratio), or they lose the ability to make payments. But, their problem is given a more pleasing phrase: liquidity difficulty.
According to the Maritime Bank expert, total outstanding property loans are reported at some VND200 trillion, exclusive of loans in the investment form of corporate bonds and debt swaps. Loans for construction projects and property investments account for 90 percent. Given the continued lacklustre prospect of the property market, bad debts of this field may account for 60 percent of total NPL at banks.
Yet to reach final destination
Rising NPL places more pressure on liquidity. The health of banks weaken and they are easily forced into restructuring, especially when credit is tightened, said Dr Trinh Quang Anh, citing the current process of banking system restructuring.
He noted that system liquidity remains potentially vulnerable if bad debt problems are not solved soon enough. The recapping of deposit interest rates in September 2011 has pushed the banking system into a higher risk when liquidity strain has not been resolved. And, the unsettlement will certainly continue when the root of the problem, the low quality of bank assets, is potentially exacerbated. (Mainly due to exogenous factors: macroeconomic conditions have not improved steadily, the asset market continues to decline or freeze, production shows signs of stagnation.)
For weak banks, as bad debt burdens weigh up, liquidity becomes more oppressive when they face more difficulty in mobilising capital because of interest rate cap. This reality forces them to break the so-called ceiling. But, that is not the main and long-term path. They are forced to rely on another mobilisation market - interbank.
However, interbank bad debts rise. Security and mortgage conditions become stricter, sending the interbank market into the “freezing” state. Dr Trinh Quang Anh said interbank rates tend to decline significantly, but they do not correctly reflect the capital supply – demand, while the scope and scale of the market shrinks because banks restrict lending and recollect interbank loans, causing the transaction value to drop.
“Some banks fall short of liquidity since they cannot raise money on both markets. The last resort forces them to seek refinancing loans from the State Bank and accept its strict control conditions or restructuring requests.”
But, this may not be the last matter. Dr Trinh Quang Anh asked when weak banks are forced to accept restructuring, how much it will take and where the money will come from. And, what is the scenario for the entire system restructuring.
“Assuming the total cost for the restructuring of the credit institution system accounts for 15 - 20 percent of GDP and at least 60 percent of this amount must be in place in 2012 to clean balance sheets of credit institutions. So, there is a clear possibility that we need to seek support from international financial institutions like the IMF. Meanwhile, it is easy to witness the decline in the power in management and operation as well as the loss of market share to foreign investors.”