Vietnam's banking system needs $25 bln to clear off toxic debts

By VnExpress October 13, 2016 | 12:00 am PT

A woman withdraws money from an ATM of VP Bank in Hanoi, Vietnam September 30, 2016. Photo by Reuters/Kham

The country needs $25 billion to address bad debt, equivalent to 13 percent of the country’s gross domestic product in 2015, financial experts say.

Vietnam is forecast to need $25 billion to expedite clearing toxic debts off bank books, equivalent to 13 percent of the country’s gross domestic product of $193.6 billion last year, said Truong Van Phuoc, vice chairman of the National Financial Supervisory Commissions.

Phuoc was speaking at a workshop in Hanoi on Wednesday where experts discussed the challenges of restructuring Vietnam’s economy.

The Southeast Asian country started tackling non-performing loans in the banking system in 2013 when it set up a bad-debt bank, known as the Vietnam Asset Management Corp. (VAMC).

The VAMC since then has bought VND211 trillion ($9.4 billion) of bad debts to rescue banks from bankruptcy or recording net losses.

Initially, the VAMC was assigned to buy only non-performing loans taken out for real-estate mortgages worth VND200 trillion plus.

The senior official from the National Financial Supervisory Commission likened the VAMC to “a fresh slice of ginger that [debt-ridden] banks hold in their mouth while they are rushed to the hospital”.

He added that the $24 million starting capital at the VAMC seems too small to recapitalize the banking system.

The central bank-run VAMC plans to quadruple its registered capital to $90 million through additional funding and long-term borrowing from the public.

“We should turn to external sources and stop solely seeking funds from the state budget,” Phuoc said, suggesting the central bank offer “bad-debt special bonds” to investors to raise sufficient funds to tackle bad debts in the banking system.

He also highlighted the fact that the VAMC should buy debts at market value, not at book value.

The establishment of the VAMC is part the government’s efforts to restructure the crippled banking system. Troubled banks sell toxic debts to the VAMC at book value in exchange for “special bonds”, which they can use as collateral to get refinanced by the central bank.

“The way the VAMC is currently tackling bad debts is not ideal,” Phuoc continued.

Vietnam needs $25 billion to address bad debt, said Truong Van Phuoc, vice chairman of the National Financial Supervisory Commissions. Photo by VnExpress.

Bad debts have been a burden on Vietnam’s economic growth since 2012 when total bad debts, mostly in the real estate sector, reached VND280 trillion ($12.5 billion), equivalent to 11 percent of gross domestic product.

Bad debts in the banking system have markedly slowed the economy because they suppress credit growth and raise interest rates.

“Higher credit costs make the economy suffer,” said the vice chairman of the National Financial Supervisory Commission, implying that even though those costs are incurred by banks, most companies in Vietnam that remain heavily dependent on banks to access capital feel a significant impact.

Bad debts in the banking system as of August 31 were reported at 2.66 percent of total outstanding loans, according to the central bank.

But economists cast doubt on the figure, saying that in fact it could be much higher.

The central bank aims to bring down bad debts in the banking system to below 3 percent of total outstanding loans this year, said the central bank’s deputy governor, Nguyen Thi Hong, at a parliament meeting last week.

Dr. Huynh The Du, lecturer at the U.S.-sponsored Fulbright Economics Teaching Program, said over the past 10 years, banks in Vietnam have pumped a huge pile of cash into the real estate sector, creating a series of asset bubbles and distorting the allocation of funds to production and business.

“Now it will be difficult to clear all the bad debts from the banks' books, and more importantly, banks have failed to channel funds towards manufacturing and business,” said Dr. Du.

> Vietnam government borrowing hits $16 billion in Jan-Sep

> Vietnam banks see 2016 credit growth up 20 percent on year