Bad Debt Trading Company Formation: Controversial

 

At a conference recently organised by the Vietnam Association for Consumer Goods Development (VACOD), Dr Le Xuan Nghia, Former Vice Chairman of the National Financial Oversight Committee, said this move is necessary. Meanwhile, Mr Nguyen Duc Kien, Vice Chairman of National Assembly’s Commission on Economic Affairs, said the establishment of bad debt companies is liable to debt makers.

 

Dr Le Xuan Nghia said that the establishment of bad debt settlement company with a registered capital of VND20 trillion (nearly US$1 billion) is very important. Previously, Japan and Ireland used to encounter a similar situation like Vietnam now. According to experiences seen from these countries shows, the formation of bad debt trading company should not be delayed. Many experts have proposed the central bank to pump money for commercial banks to deal with the problem but this action is very risky because most small lenders are privately owned. It is quite sure that if money is given to them, it will be flowed into projects invested by their subsidiaries. Nationalisation plan is improbable because biggest banks are still State-owned and bad debts are primarily held by these lenders. “Therefore, the establishment of bad debt trading company is likely the best option to quickly resolve bad debt problem,” Nghia said.

 

He added that the formation of a bad debt trading company may need only VND10-20 trillion to deal with a total amount of US$4 billion required in reality. The next step is to choose the State Bank of Vietnam (SBV) or the Ministry of Finance (MoF) as the manager of the company. The payment of bad debts will be evenly divided by debt proportion and purchasing prices, based on debt classification. For example, debts categorised into Group 5 will be bought at about 10 percent of principal value, 20 percent of principal value for debts in Group 4 and 30 percent for debts in Group 3. “Bad debt trading company can accept such a solution as turning debts into equity, call for buyers of bad debts, auction debts or write off debts,” he explained.

 

He said this company is essentially a mechanism to resolve bad debt problems of the economy, not a profit-seeking business; thus, it can write off debts. "If we do not set up a debt trading company to deal with bad debts immediately, we may face a continuous decline from now till 2017-2018. We are extremely worried about this prospect. Japan had to spend 16 years to recover from a similar situation. According to Japanese ambassador, Vietnam should take action immediately because a delayed day of settling bad debts entails a period of stagnation,” Nghia said.

 

On the other side, Vice Chairman of National Assembly’s Committee on Economic Affairs, Nguyen Duc Kien, said we must determine who handle bad debts will apply treatment criteria. State management agencies will exercise its functions in accordance with the Banking Law like ensuring an individual loan on banks’ equity. For example, if a bank gives a loan for buying a 70-square metre apartment in a business district, it is quite simple because the liquidity in this segment is very high. But, it is a challenge for a loan to purchase a villa worth VND20 billion because of its low liquidity. Or, a garment company wants to borrow money but it does not have any order, it is a problem to grant a loan for this case because of insolvency. Thus, depending on borrower or loan, we will determine a debt is nonperforming or not.

 

Remarking on the establishment of bad debt trading company, Kien said it is necessary to attach the responsibility to bad debt makers and avoid using the State money to clear debts for banks. “We are building the market economy; thus, we must observe the rules of market economy. Whoever causes a problem must bear responsibility. Or in other word, he has to take his own asset to repay the debt. If he runs out assets and goes bankrupt, the State will purchase his debts to ensure the stability of the national financial system,” he stressed.