Solutions to Bad Debt Settlement

Accordingly, commercial banks need to actively increase provisioning for bad loans and accept lower profits. The increase in provisions will help commercial banks offset losses quickly, reduce corporate income tax, cut payrolls but increase internal financial capability.

 

In particular, the VAFI needs securitisation of bad debts. In case troubled companies have a history of good business governance but are now struggling to repay debt obligations due to worsening economic situation and incomplete investment projects, they may turn part of debts into medium-term bonds to enhance liquidity and help them return to growth path. Banks can convert overdue and bad debts into shares and shift their position from creditors to shareholders if their debtors can survive and develop after restructuring.

 

This method is a common practice in the world. In Vietnam, there are many successful cases. It not only saves businesses from bankruptcy but also preserves the capital source of commercial banks. After holding shares, banks can find buyers for those equity assets quite easily.

 

There is a need for increasing foreign ownership ratio at local banks to 40 percent and an individual foreign investor can hold up to 25 percent or 30 percent of stake. These changes are of great significance in this context because they exert a pull on portfolio capital, particularly from strategic investors. “If this solution is introduced soon enough, banks will likely mobilise billions of US dollars within 3 years," said the VAFI.

 

Besides, powerful foreign banks with good governance should be allowed to buy into weak local lenders. According to statistics, weak banks had poor governance and high bad debt ratios. A bailout option will not help them become strong banks because their shareholders are weak at both corporate governance and financial viability. This solution is quite popular in the world. During the Asian financial crisis from 1996 to 2001, many Asian countries like Thailand, South Korea and Indonesia successfully used this solution to quickly recover their banking systems.

 

According to the VAFI, Vietnam necessarily encourages strong banks to take over weak ones but this move requires financial support mechanisms from the central bank. The support is not for strong banks but for settlement of bad debts.

 

Besides, tax exemptions (e.g. value-added tax, corporate income tax, etc.) should be applied to debt trading activities to promote the formation and development of debt trading market. The VAFI analysed that the Ministry of Finance has to date had no official data concerning taxes from debt trading but there are a few debt trading activities in the banking system; thus, the collections are humble. Tax exemptions for debt sale and purchase will reduce losses from bad debts, encourage the involvement of private investors, and free burdens on the State Budget.

 

In the last three years, and particularly during this tough time, only a few companies are successful in selling corporate bonds. And, as a result, tax collection from this activity is insignificant. Exemption of corporate income tax for bond issue is as meaningful as deposit rate cut as it helps commercial banks mobilise long-term capital rather than short-term one as now while stepping up the process of securitising debts, accelerating the development of corporate bond market, and increasing the stability in capital mobilisation of commercial banking system.

 

On the other hand, at present, millions of people cannot afford to buy a house. If a house is sold for less than VND1 billion, the demand is really huge. So, if the State and real estate businesses meet the demand, this will not only enhance social security but also ice-break the property market when bad debts in the construction, material and real estate industries fall rapidly.

 

The VAFI said this problem is not hard to solve because it is quite easy to divide apartments into smaller pieces with a minimum usable area of 25 square metres and local authorities quicken the process of granting permits for house repairing and construction. This is a basic measure to remove difficulties against businesses while stimulating domestic consumption. At the same time, the Government should reduce 50 percent of VAT for real estate and construction material fields to bring down housing prices and stimulate sales. In return, the amount of taxes will increase because more successful deals will be reached.