Sorting out Bad Debt Mess

Tackling debts in the Vietnamese economy is now considered the most burning issue. Nonperforming loan is of special concern to the government, said Mr Le Xuan Nghia, member of the National Advisory Council for Monetary Policies. He said the Government should spend some billions of US dollars buying back bad debts incurred by enterprises to clean their balance sheets and unfreeze credit flows of the banking system.

 

The negative credit growth in the first four months of this year is an important indicator that exhibited difficulties facing businesses and the economy as a whole. Leader of a high-profiled bank which is granted a credit growth limit of 17 percent this year said his bank saw 5 percent slump in credit supply in the first four months of the year and this situation was likely to go on in the upcoming months. A leader of Eximbank capital disbursement is quite slow, even concessional loans for selective corporate borrowers operating in export-driven production and SMEs. He said his bank offered a rate lower than the current ceiling for qualified customers. However, it is difficult to find good customers in this context.

 

Why did capital absorption of businesses decline so seriously? The health of businesses weakened, failed to meet new borrowing conditions, or lacked security for new loans while old debts are still unpaid. As the market demand is contracting and sales are slowing, good-performing businesses do not want to borrow for production expansions.

 

While the health of businesses worsened, bad debts tend to increase, especially in real estate sector. Bad debt tackling is a prerequisite to restructure the banking system, unfreeze credit flows and spur credit growth. The central bank does not want an unexpected situation. When commercial banks have excess capital, they will take higher risks to lend businesses and accept lower rates to stimulate borrowing. This approach will help them realise business plans and secure dividends for their shareholders but it poses potential risk to the system stability.

 

The State Bank of Vietnam, or the central bank, has shown its determinations and system restructuring steps by supporting liquidity, classifying banks and allowing M&A deals.

 

Bad debt is considered the biggest problem of the economy today and a major challenge to the restructuring process. The central bank has made an important step to resolve this problem by allowing credit institutions to cross-purchase their debts.

 

In the Document No. 2871/NHNN-TD, the State Bank allows 14 largest commercial banks to trade debts. Accordingly, permitted banks trade debts borne to businesses and cross-debts of credit institutions.

 

This means that a bank can sell its bad loans to a different bank to clean its balance sheet. Selling bank will have money and have capital for lending while buying bank, despite short-term advantage, will enjoy a good profit in the future. Indebted businesses will not be urged by new debtors. Mechanisms of new debtors, which usually have stronger capacity than old debtors, are expected to ease the tragedy of indebted businesses which are sinking deeper in the ongoing crisis.

 

In addition to trading debts, credit institutions are also allowed to purchase debts of each other on the interbank market. This will make financial statements of banks look nicer.

 

Indeed, cross-debt trading by credit institutions is stipulated in a regulation to this effect issued in 2006 but credit institutions have until now not joined in this activity. This time, the central bank repeated this option to open the way for commercial banks to restructuring their bad debts. The rising number of bankrupt companies and the unrecovered real estate market are increasing bad debts in the economy to a worrying level, thus forcing the central bank to seek out solutions. Banks reportedly have excess money to lend but they do not find enough trustworthy customers. The debt trading policy will allow 14 leading commercial lenders to purchase debts in smaller banks being caught in unpaid loans, especially from real estate sector. New money will flow into small banks while big ones will have an opportunity to earn a thick margin from taking secured debts at good prices. Many moribund real estate projects promise high margin ratio in the future.

 

Allowing cross-bank debt trading is a wise action of the central bank in resolving bad debts in the system without causing fees. This is not a lifeline for small banks with a lot of bad debts but is also an opportunity for big banks to earn money. This is the price for banks and enterprises that place profit targets higher than risk management.

 

And, once this process is accelerated, capital flows will be widened and money will be poured on production and business activities. But, according to current regulations on debt classification and provisions, after old debts are restructured, all new debts in continuation of old debts will be classified as old debts. This means financial provisions will increase and of course lending rates will augment correspondingly. This is an additional financial pressure on both banks and borrowers.