Clearing up Bad Debt Mess

A bad debt is an amount that is written off by the business as a loss to the business and classified as an expense because the debt owed to the business is unable to be collected, and all reasonable efforts have been exhausted to collect the amount owed.

 

Thus, the address and the causer of bad debt is the debtor. However, at the recent global financial crisis and economic recession in 2008, creditors (credit institutions) also abetted the cause of bad debt because of they provided subprime loans and their management capacity of the amount lent on cash flows, on liquidity, on value of security assets for the lending and on market development became too weak. In Vietnam, in addition to debtor and creditor, there are many other causes.

 

Capital markets are driven by administrative orders, usually in favour of State economic sectors. In fact, State-owned enterprises (SOEs) account for 40 percent of outstanding bank loans and use nearly 100 percent of public investment funded by the State Budget but they may contribute 70 percent of bad debts at banks. According to the Ministry of Finance, up to 30 out of 85 SOEs have debt to equity (D/E) ratio at 3 times. Seven of them have D/E ratio at above 10 times. This is a very, very high rate.

 

Most credit institutions have subsidiaries, associated companies, as well as cross-owned banks. Biggest debtors of banks are often interest groups. A majority of debts owed by “backyard” companies are related to hugely unsold real estate. According to the report by the National Financial Supervision Committee, the amount of debts owed by property projects at 10 banks with biggest loans for this sector was VND147 trillion, equal to 73 percent of outstanding property loans reported by credit institutions at the end of 2011. If compared to the revised value by the National Financial Supervisory Committee, this figure was 42 percent. Or in other word, if it was calculated on total property loans outstanding of VND348 trillion (12.8 percent of total outstanding loans) announced by the National Financial Supervisory Commission, the amount of outstanding property loans at 10 those banks would be VND254 trillion, not VND147 trillion. Also according to this report, bad debts arising from real estate loans were estimated at 36 percent. Hence, the amount of bad debts in this field alone was VND125.28 trillion (36 percent of VND348 trillion), or 46.4 percent of combined bad debts of the entire system. Remaining 53.6 percent of bad debts are set in other sectors, mostly in large and medium-sized enterprises and specially SOEs. It is essential to understand the nature of bad debts before dealing with them.

 

What the State needs to do now is to create a framework rules and mechanism for bad debt settlement, basing on the following principles, standpoints and solutions:

The overarching principle for nonperforming loan settlement is not to use the State money or print money to purchase debts for debtors no matter who they are: Person, entity or economic sector.

 

Resources for bad debt resolution must be mobilised on secondary markets. It is vital to create secondary markets to use non-monetary financial instruments, monetary instruments and non-physical means like space, time, experience and credibility, to create sources for handling bad loans while development must be maintained.

 

Debts must be classified for appropriate solutions. Credit institutions need to expedite bad debt settlement with both conventional and innovative solutions. For instance, creditors and debtors directly negotiate to reduce interest rates, reduce principals, extend maturity terms, seek guarantors for further loans. Banks should reclaim security assets based on their liquidity, consider converting debts into shares or bonds at indebted companies, write off debts for incapable borrowers, etc.

If debts are unable to be collected because of industry characteristics, huge values or failure of collection solutions, debtors can sell their debts to debt trading companies run by credit institutions. If bad debts arise from backyard relationships or shareholding relationships with lenders, the lenders and interest groups must be responsibility.

 

If such debts relate to national interests and depositors’ interests, bankruptcies need to be taken into consideration, depending on the degree of danger and causes.

Settling debts via debt trading companies is a very common mechanism in market economies where the State, the private or any other economic sectors are equal before the laws. Especially, assets and resources of owners are capitalised, classified or rated. The State Budget or the State Bank must follow market mechanism when they use their money. They only function as the ‘first aid’ station for companies or organisations when they are fraught with debts.