Vietnam Business Bailout: Government Buys Bad Debts

At the written question and answer session at the National Assembly, SBV Governor Nguyen Van Binh confirmed that rapid increase of bad debts in the midst of declining credit for the economy caused the ratio of bad debts to total outstanding loans to go up from 3.06 percent at the end of 2011 to 4.14 percent at the end of April 2012. Bad debts climbed 35 percent within just four months, or 8.6 percent a month. Specifically, the value of bad debts grew VND28 trillion in the four months period to reach VND108 trillion.

 

Poor performances of Vietnamese businesses in 2011 and four months of 2012 were attributed to rising nonperforming loans at banks. The slow recovery of the real estate market weakened repayment capacity of borrowers and thus worsened the settlement of collateral assets to clear bad debts.

 

Notably, bad debts also increased because of policy-directed lending which had no security assets, according to the SBV Governor. These debts will be settled by the State Budget in case lenders cannot take back their loans.

 

Whenever the bad debt issue is discussed or studied, the Debt and Asset Trading Corp (DATC) under the Ministry of Finance is always mentioned. But, its roles are not really appreciated as it does not have enough capacity to take on the problem with only VND2,481 billion of registered capital. Mr Pham Manh Thuong, Deputy General Director of DATC, told the press that instead of setting up a new debt trading company, the Government can absolutely hand the fund to DATC to do this. Since its establishment, DATC strictly abides by State guidance: Operating very cautiously and only accepting highly secured debts or a debt in bankrupt companies ordered by authorities.

 

In reality, debt trading companies affiliated to banks have been set up and operating quite some time. They usually purchase debts from each other, particularly ahead of a reporting period of the fiscal year. This method factually does not settle bad debts at banks, but polishes the sheet. Therefore, when the central bank suggested the formation of a new debt trading company to purchase debts, many were not happy with the suggestion. They feared this was a wasteful, time-consuming action while debts are on the rise.

 

Regarding the dogged determination to handle bad debts, Governor Nguyen Van Binh said bad debt settlement is one of important contents in the banking system restructuring scheme. The State advocates selling secured debts to DATC. Debts will be cleared by risk provision funds and security assets. Debts will be converted into contributed capital to previously indebted companies.

 

As regards unrecoverable bad debts without security assets loaned by the State orders, they will be settled by the State budget. The debts will be sold to non-credit companies, private debt trading companies, and debt trading companies run by commercial banks.

 

With respect to bad debts in the real estate sector, the State will consider buying those properties to serve social security purposes and administrative apparatuses.

Governor Nguyen Van Binh did not attend a face-to-face interpellation session at the National Assembly but he made a special report on bad debts. He said banks are unlikely to lower interest rates because they are now carrying costs to handle bad debts. He also represented his proposal for the formation of a debt trading company.

According to the Governor, they must bear the cost of processing loans so that banks cannot lower interest rates as desired. He also presented ideas before parliament trading company debt. This solution will be discussed in an upcoming meeting between the Prime Minister and scientists. The SBV was assigned to work out the project.

 

The public raised concerns over the outcome of this bad debt handling because they feared that this would help banks to have better balance sheets without solving the issue itself.

 

In the past, there was a not always a happy ending for debt restructuring. The Minh Phung - Epco case left Vietinbank VND11 trillion of debts. Huy Hoang Garment - Construction Co., Ltd, owned by Le Van Kiem, sank into unpaid debt. The Politburo decided to approve the scheme submitted by the Government and the SBV which allowed borrowers with secured assets to enjoy a three-year delay in debt payment. After the hard time, Mr Le Van Kiem becomes a well-known entrepreneur whose name is closely connected to Long Thanh Golf Investment and Trading Joint Stock Company, the owner of Long Thanh Golf Course, the most beautiful of its kind in Southeast Asia. This debt restructuring helped the State to avoid a loss of VND500 billion, supported businesses to continue growing, and helped borrowers avoid a miserable ending. Vietinbank also managed to handle the debt, although it took quite a long time to settle security assets.

 

This proved that bad debts do not necessarily mean loss or throwaway. If they are restructured and bought/sold, they can become good investments in the future.

The most important step for this is to evaluate and buy/sell debts in a transparent manner. Economist Le Dang Doanh said Vietnam should immediately set up a corporate debt purchasing fund. He said when companies are on the brink of collapse or have fallen into stagnation, it is urgent to have a fund to buy debts burdening companies which have good markets, possess advanced technologies, have large operating scales, and use large workforces. This will help businesses access bank loans to resume operations and generate jobs for workers. If they recover and develop after that, they may be listed on the stock exchange and the State can sell its stakes in those companies to take back capital.

 

Generally, all eyes are turning on the State, the State is the last resort for Vietnamese businesses for the time being.