Bad Debt- Growing Pressures

According to many deputies, bad debt settlement is more and more active and the value of non-performing loans has declined. However, some pointed out that bad debt is yet to fall in nature, in fact it stays high and still poses a lot of risks, while bad debt handling is difficult because public asset sale procedures and VAMC’s debt handling capacity are limited.

 

Huynh Nghia, Head of Danang City National Assembly Delegation, noted that bad debts in the economy have been captured and just locked up by VAMC, and unsettled bad debts are becoming a burden on the economy.

 

Non-performing loans (NPL) in the banking system as of December 2014 were 4.83 percent. Governor Nguyen Van Binh of the State Bank of Vietnam (SBV) pledged to bring this figure to below 3 percent this year. However, in the first months of the year, bad debts tend to rise again, according to reports from commercial banks.

 

Until mid-May 2015, bad debt data were updated for January 2015 by the SBV. According to reports submitted by commercial banks to the SBV, the bad debt increased strongly in January 2015, from 3.25 percent in December 2014 to 3.49 percent. These data were based on reports from credit institutions whose bad debt ratios were usually lower than those calculated by the SBV Inspectorate. Bad debt data from the SBV Inspectorate have not been announced for any period in 2015. This development has raised doubts about the ability to reduce bad loans to below 3 percent as announced by the central bank. According to the first-quarter financial reports of listed banks, bad debts at banks are increasing. Vietcombank's bad debt climbed to 2.67 percent from 2.31 percent recorded at the start of the year. According to the latest report by the SBV HCM City Branch, as of March 31, 2015, the NPL ratio in Ho Chi Minh City was 5.53 percent, or VND60,883 billion, higher than 5.31 percent recorded at the end of 2014.

 

Another factor that may affect bad debt value is that the regulation on bad debt restructuring toward unchanged debt groups in line with Decision 780 was invalidated from April 1, 2015. If fully counted, bad debt ratios will certainly continue to rise.

 

Currently, the major solution by the SBV is to urge commercial banks to sell bad loans to VAMC. The SBV fixed rates of bad debts for each credit institution to sell to VAMC. According to general orientation, banks must sell a minimum of 75 percent of the amount assigned by the SBV as of June 30, 2015 and sell all the value set as of as of September 30, 2015.

 

Since its operations since late 2013, VAMC has acquired over VND152 trillion of bad debts (based on par value) for more than VND120 trillion (purchasing price). In early 2015, VAMC approved of buying VND17.4 trillion worth of bad debts for VND16.1 trillion, signed an agreement on issue of nearly VND10 trillion of special bonds. VAMC plans to buy more than VND40 trillion of bad debts in the first six months of 2014. If 60 percent of credit institutions sell bad loans on schedule, they will considerably help reduce the bad debt ratio to 3 percent.

 

The SBV affirmed in writing that VAMC was allowed to issue VND80 trillion of special bonds to buy back bad loans in 2015.

 

However, as NA Deputy Huynh Nghia said, though bad debts are being locked up by VAMC, it still lacks fundamental solutions to eliminate bad loans in the banking system. In reality, bad debts are just moving from one place to another in a determined period of time rather than radically wiped out. Banks temporarily have clean balance sheets after selling debts to VAMC. If bad debts are not solved completely but deposited at VAMC, no new capital will be channelled into the economy to support recovery and development.

 

Bad debt keeps rising when the SBV and commercial banks are trying to clear bad debts. It is six months to go for SBV Governor Nguyen Van Binh to realise his commitments to bad debt handling. This is a much more difficult task when financial and momentary markets are developing complicatedly and placing pressure on exchange rate, interest rates and inflationary return. Stabilising the currency value is the primary task of the central bank before the difficult job of settling bad debts.