Rescheduling Debts for Businesses

The central bank asked commercial lenders to proactively collaborate with borrowers to extricate repayment difficulties and consider new loans for applications deemed effective and repayable. According to the SBV, this opening approach aims to help borrowers to gradually revive, maintain and expand production and business activities, thus ensuring solvency and reducing nonperforming loan.

 

This information was not too surprising since SBV Governor Nguyen Van Binh, at a previous meeting with 14 commercial bank leaders, mentioned this content. He affirmed that current favourable conditions were good enough to reduce regulatory interest rates. There are two immediate issues: lowering interest rates and increasing lending but maintaining credit quality. At the request of Governor Nguyen Van Binh, commercial banks had to announce interest rate reductions and report the issue to the SBV Monetary Policy Department prior to April 12.

 

Other noteworthy contents were the exclusion of some fields out of the list of lending discouragement. Accordingly, credit restrictions on real estate and consumption were significantly lifted. The outstanding for loans and discount valuable papers for securities investment and trading, excluding loans for employees of State-owned enterprises to buy IPO shares when their companies are transformed into joint stock entities. Loan outstanding for real estate investment and trading, excluding loans used to build, repair, or buy houses for the purposes of residence or both residence and rent, and these loans will be repaid by customers’ non-salary income; loans used to build, repair or buy houses for rent or sale; loans used to develop real estate projects in urban areas. Personal loan outstanding excluding loans for building, repairing or purchasing houses to be repaid by borrowers’ salary and wages; for buying transport vehicles and family equipments, and paying for study and medical treatment at home. However, the SBV maintains the controlling limit of outstanding loans for discouraged sectors (securities, real estate, personal loan) below 16 percent of total outstanding loans.

 

Better banking liquidity than in late 2011 was the foundation for the State Bank’s quick reduction of key rates and easing of lending conditions in some fields. Operations on interbank market are more stable. Deposits have increased by 1.5 - 1.7 percent while credits fell 2.4 percent.

 

Economic statistics showed risks of production stagnation, bankruptcy or production contraction. Meanwhile, the real estate was still frozen, making bank loans on the brink of becoming bad debts. According to the SBV, apart from supporting businesses in the tough time, this is also a ‘buoy’ for banks to restructure nonperforming loans at the time of growing bad debts.

 

With respect to nonperforming loan, according to a report released by the Ministry of Construction, outstanding credit data showed unusual problems. Credits reduced in 2011. Loans for urban construction reached VND24,618 billion, down 13.08 percent from 2010; loans for house construction, repairing and purchase were VND54,285 billion, down 26.97 percent; and loans for real estate investment and trading valued VND38,875 billion, down 36.23 percent.

 

This seemed to be consistent with the central bank-backed policy of reducing credits for nonproduction fields. But, other data showed a different angle of view. Loans for building industrial parks and export processing zones were VND13,877 billion, up 5.74 percent over the end of 2010. Especially, loans for building, repairing and purchasing houses for sale or rent were VND23,453 billion, up 76.6 percent. Loans for constructing offices for lease were VND32,573 billion, up 20.81 percent. The query is why there was an extraordinary growth in the context of tightening credit for real estate. Was there any debt transformation or swap?

 

On paper, debt swap makes us feel that debts are repaid in time, bad debt or overdue debt ratio fall but in reality those loans do not get better. Debt swaps can be performed by a company for purposes of avoiding bankruptcy, reorganizing debts, or gaining a more favourable repayment schedule.

 

The SBV is aware of this issue better than anyone. On its notice, this agency required banks to enhance internal control and audit on credit quality to promptly to detect those customers in face of difficulty in repayment for risk avoidance and safe credit extension; and take strict measures to prevent bad debts and illegal actions to hide bad debts.

 

In the middle and end of 2011, local media ran a series of forecasts and guesses of land price slumps in the south. This information flow became more persuasive and believable as prices of apartments in Petro Landmark in District 2 and An Tien in Nha Be district (Ho Chi Minh City).

 

Like previous incident in late second quarter, there was no flight of real estate companies at the end of 2011. And, there was no bank seeking bailout for liquidity support because of bad debts.

 

In the end, the credit limits for nonmanufacturing fields at 22 percent (required to be reached by banks as of June 30, 2011) and 16 percent (December 31) were just symbolic concepts. In essence, debt swaps took place quietly and widely at both deadlines.