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Economic Sector

Last updated: Monday, July 24, 2017

 

VND130 Trillion of Debt Needs Settling Annually

Posted: Monday, June 26, 2017


The Resolution on bad debt settlement discussed by the law-making National Assembly of Vietnam drew wide-spread public attention. Controversy was aroused over the use of resources to tackle bad debts and use the State Budget.

According to Governor of the State Bank of Vietnam (SBV) Le Minh Hung, the conservative estimate of bad debt accounted for about 17 per cent of outstanding loans in September 2012, which was even higher if taking audited figures into account. By the end of 2016, bad debts on the balance sheets of credit institutions were less than 3 per cent. But, if unsettled bad debts sold to Vietnam Asset Management Company (VAMC) and high-risk debts were included, the rate was about 10.08 per cent of total outstanding loans. Specifically, debts incurred by non-State enterprises, State-owned enterprises (SOEs), individual business households and foreign-invested companies accounted for nearly 64 per cent, 6.3 per cent, 21 per cent, and more than 1 per cent of total outstanding loans, respectively.

The SBV reviewed outcomes and assessed achievements, causes, shortcomings and a settlement scheme submitted to the Government and the Politburo for consideration. Based on that scheme, the SBV submitted to the Government a draft resolution on dealing with bad debts credit institution restructuring.

According to SBV Governor Le Minh Hung, global economic instability, prolonged lacklustre property market and an average of over 63,000 corporate bankruptcies and dissolutions resulted in huge bad debts in the banking system. Unstable macro policies affected corporate performances and debt repayment capacity of enterprises. Insufficient debt settlement mechanism gave rise to little change in bad debt settlement.

According to the Economic Commission of the National Assembly, it is necessary to define the scope of bad debts and recommend the deadline for determination of bad debts to be tackledwithin the scope of the resolution: The bad debt ratio in balance sheets and unsettled bad debts sold to VAMC was 5.8 per cent as of December 31, 2016. Regarding latent debts that may become nonperforming loans (accounting for 4.26 per cent), most of which was rescheduled maturity/repayment terms by credit institutions in the 2011 - 2015 period, the Commission suggested assigning the State Bank of Vietnam to take necessary measures to review and direct credit institutions to recollect loans and, in case these debts become NPLs, they will be allowed to apply this resolution to handle bad debts.

The determination of bad debt terms according to the resolution is being submitted to the Government. Bad debts, regardless of being any form and time of being, must be settled thoroughly, according to some experts.

In order to deal with bad debts, banks support the right to seize security assets. Regarding the purpose of the resolution, according to VietinBank Chairman Nguyen Van Thang, the core is adopting mechanisms for seizing and disposing of assets to secure debts. At present, mechanisms and markets for debt trading are existent but incomplete because of serious shortage of ‘goods’, particularly valuable ‘goods’ linked to real estate owing to the lack of legal conditions for transaction. In addition, market participants as buyers are limited due to eligibility requirements.

Critics argued that the right to seize security property should not be provided because civil laws deem a civil transaction as an agreement which shall be handled by the court unless otherwise provided by the law. Determining the right of seizure of credit institutions without going through the judicial order and procedure may affect citizenship. Thus, seizure should be only made upon court orders.

According to the Governor of the State Bank of Vietnam, bad debts are always latent. On average, new bad debts emerge tantamount to 1.3 - 1.5 per cent of total outstanding loans each year in the economy. Given the average credit growth of 16 per cent a year, new bad debts in the next five years (2017 - 2022) was estimated at VND350 trillion. Resolution 24 of the National Assembly stated that the bad debt ratio will be brought to less than 3 per cent by 2020. In order to achieve this goal, as much as VND640 trillion of NPLs must be cleared in the next five years, or VND130 trillion each year.

Bao Chau

 








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