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Economic Sector

Last updated: Tuesday, November 21, 2017

 

Uprooting Bad Debts and Cross-ownership

Posted: Tuesday, April 04, 2017


The State Bank of Vietnam (SBV) is collecting expert opinions on the first draft of the Law on Support of Credit Institution Restructure and Bad Debt Settlement.

The SBV will continue to study on the implementation of Basel II standards in Vietnam, enhance transparency towards international practices and actual performances of Vietnamese operations of credit institutions in Vietnam. The central bank aims to keep a non-performing loan ratio below 3 per cent of total outstanding loans by 2020, a rate deemed safe and sound for the banking sector.

Focus on bad debt and cross-ownership
According to the latest published data, the bad debt ratio of the Vietnamese banking system is about 2.8 per cent. If 3 per cent of debts sold to the Vietnam Asset Management Company (VAMC) is counted, the rate will be approximately 6 per cent. This shows that bad debts of the banking system needed to be tackled in the coming time remains quite huge.

According to the restructuring roadmap, with the second phase running from 2016 to 2020, the banking system will continue to deal with bad debts, improve capital efficiency and upgrade banking administration. Cross-ownership is expected to be tackled more drastically in 2017.

The SBV affirmed that it will continue to seriously tackle cross-ownership in the banking system, proven by its determinations to break away cross-ownership - one of the main causes of current bad debt outcome.

Bank cross-ownership is very complicated while divestment process is not quite simple. For example, Maritime Bank merges both Mekong Development Bank (MDBank) and Vinatex Finance Company in which the lender respectively holds 10 per cent and 11 per cent of stake. Maritime Bank also cut its stake in Military Commercial Joint Stock Bank (MBBank) to less than 5 per cent from 8.96 per cent. VietinBank reduced its interests at SaigonBank from 10.39 per cent to 4.91 per cent. SouthernBank and MHB were respectively admitted to Sacombank and BIDV to formalise the ownership status of the two major shareholders.

Eximbank has two major shareholders, Sumitomo Mitsui Banking Corporation and Vietcombank, with respective stakes of 15.13 per cent and 8.8 per cent. Shareholders owning less than 5 per cent of stake at Eximbank add up 76.81 per cent of stake. Meanwhile, Eximbank holds more than 9 per cent of interests at Sacombank.

According to banking experts, two conditions must be met to deal cross-ownership. First, weak, unrecoverable banks should be allowed to terminate operations. Second, with cross-ownership related to State-owned enterprises (SOEs), according to experts, as it is difficult to completely eliminate it, there is a need for a clear roadmap for SOE equitisation according to the market economy. If done thoroughly, banks will have conditions and opportunities to divest transparently and publicly.

The SBV said it will impose even stricter regulations on equity buyers and administer banks to limit risks, for example, major shareholders of a bank must prove a source of money for equity purchases.

Financial support for weak banks
The first draft of the Law on Support of Credit Institution Restructure and Bad Debt Settlement introduces four major measures, direct and indirect, to support of handling bad debts and capital source which weak commercial banks are allowed to apply one of them.

Weak banks are allowed to sell disqualified bad debts or secured bad debts legally distrained to VAMC. They may also be provided with refinance loans and special loans from the SBV according to their approved recovery plans. Or they may be allowed to be free from or reduce compulsory reserve ratios according to the approved recovery plans but cannot exceed special control durations. They can account gradually into costs for differences of debt selling prices/receivables/equity investments with their carrying amounts of the above items in line with their financial positions under the approved recovery plans but the duration cannot be more than 10 years.

In addition, weak banks may be supported with other measures according to their approved recovery plans.

According to the draft, weak credit institutions are also allowed to sell disqualified bad debts or secured bad debts being legally distrained to VAMC. They may be allowed to be free from or reduce compulsory reserve ratios according to the approved recovery plans but cannot exceed special control durations. Particularly, people's credit funds and weak microfinance institutions may borrow from the Deposit Insurance of Vietnam at an interest rate of 0 per cent according to their approved rehab plans but cannot exceed special control terms. According to the draft, weak credit institutions are also allowed to sell disqualified bad debts or secured bad debts being legally distrained to VAMC. They may be allowed to be free from or reduce compulsory reserve ratios according to the approved recovery plans but cannot exceed special control durations. Particularly, people's credit funds and weak microfinance institutions may borrow from the Deposit Insurance of Vietnam at an interest rate of 0 per cent according to their approved rehab plans but cannot exceed special control terms.

Financial companies and microfinance institutions, as proposed in the draft, are also entitled to SBV’s interest-free special loans according to their approved recovery plans but cannot exceed their special control terms. They can account gradually into costs for differences of debt selling prices/receivables/equity investments with their carrying amounts of the above items in line with their financial positions under the approved recovery plans but the duration cannot be more than 10 years.

Le Minh








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