Bad Debt Settlement Is On Fire

Although it has been officially operating since July 26, the VAMC has just signed the first contracts to buy the first bad debts. The company has chartered capital of VND500 billion, with the objectives of handling with the bad debts of VND35,000-VND40,000 billion.

 

According to the contract signed between Agribank and the VAMC, the VAMC will buy 27 bad debts from 11 customers that are businesses; the principal value of the bad debts is VND2,534 billion, compared to the VND1,723 billion purchasing price. According to the VAMC, this difference is deducted from the reserve fund of Agribank. The VAMC settles the bad debts of Agribank by special bonds issued by the VAMC. Agribank could use such special bonds to refinance loans at the State Bank of Vietnam. The refinancing rate through this channel is pending approval by the Prime Minister; this rate is expected to be low to help the banks' refinancing.

 

Regardless of the value of acquisitions, the launch of the bad debt settlement contributes significantly to the overall development at this time. By selling the bad debts to the VAMC at this period, Agribank has reduced 7.56 percent of total bad debts of the entire system. Agribank will get rid of some frozen bad debts and continue to receive additional capital by bringing its bonds at the State Bank of Vietnam. The capital will be reinvested to the economy; this is not too hard because Agribank is known as a bank with a wide network across the country, even the remote areas, and its main borrowers are rural farmers.

 

Agribank is the bank with the most bad debts since then. With the sale of 7.56 percent of the bad debts of the VAMC, the total bad debt of Agribank is currently VND33,518 billion.

 

The outstanding loans of Agribank on August 30 were VND512,636 billion, which accounts for 6.35 percent of the total outstanding loans of the economy, but the bank's bad debts account for approximately 24 percent of total bad debts of the entire system. Compared to the end of 2012, Agribank's bad debt has increased to VND5,715 billion, a growth of 20 percent.

 

The VAMC's leaders said that Agribank was selected as the first bank with the recent acquisition of the bad debts because it is one of the members having the largest market share in the credit system, as well as the main financing channel for the agricultural and rural sector. Then VAMC will continue to buy bad debts contracted by other members as SCB, SHB, and PGBank. From now until the end of the year, as planned, to the end of 2013, the VAMC will use more than VND30 trillion to buy bad debts of the banks.

 

Bad debt is a serious problem of the economy, affecting the credit activities; banks cannot give loans, while businesses can not access new capital sources. The scale of the bad debts is officially figured as of the end August 2013, the balance sheet of the total bad debts of the entire banking system was VND142.27 trillion, accounting for 4.64 percent of total loans and up 20.15 percent compared to the end of 2012. "This growth rate is much lower than the 59.2 percent growth in the first 8 months of 2012," said Mr Nguyen Huu Nghia, Chief Inspector of the State Bank of Vietnam assessed.

 

The low growth of the bad debts does not mean the bad debts have been reduced. These bad loans are still being processed to guarantee a healthy banking system and create credit lines.

 

Fairly speaking, the entire banking system pays great attention to bad debts by controlling the growing bad debts through the debt recovery, debt restructuring, asset disposal and the provision of risks. The non-performing loan ratio has declined sharply in a number of banks, regardless of the cases of hiding bad debt or hesitating to recognize bad debt.

 

Despite the efforts of the VAMC, the goals of settling the targeted bad debts of VND40,000 billion are not comparable to the huge bad debts, which need for restructuring of the whole system. Under the scheme of "Handling the bad debts of the credit institutions" approved by the Prime Minister, one of the principles for handling the bad debts is to mobilize all social resources and to limit the use of the state budget. This means that all the economic types, including foreign investors, will play an important role to promote the processes of handling the bad debt and developing the real estate market, and trading the bad debts in the context of limited resources of the country.

 

There are also foreign investors who are interested in Vietnam's bad debts, which are considered an untapped market with great potential. The interest comes from some capital ventures, hedge funds and banks; however, this is started at very beginning stage. Despite the potential of handling bad debt, the legal framework is incomplete and becomes legal obstacles to foreign investors who will pour money into buying bad loans in the country.

 

Other obstacles to foreign investors come from other factors including the lack of transparency of the market. The reports on bad debts are not uniform or consistent. The official figures of credit institutions and other government agencies are often much lower than the figures of other organizations. The transparency of information is always an issue for the market.

 

Another obstacle is the cumbersome and time-consuming administrative procedures of Vietnam. The time-consuming processes of completing the portfolio and purchasing the assets make the investors hesitate to participate.

 

Such the obstacles, if not remedied, will cause the huge volume of bad debts in Vietnam, despite attracting foreign investment, to be less quickly handed to investors.