Bad debts stand at 10pct of 2011 GDP, on the rise: cbank

Bad debts stand at 10pct of 2011 GDP, on the rise: cbank

Vietnam’s total bad debts as of June 2012 are estimated to be worth around 10 percent of the country’s gross domestic product (GDP) in 2011 and are rising, said the head of the State Bank of Vietnam (SBV).

SBV Governor Nguyen Van Binh recently told the latest National Assembly (NA) meeting the current total bad debts at Vietnamese banks have been estimated to have surged to some VND256 trillion ($12.2 billion), up dramatically from 6 percent as of last year and less than 3 percent in 2008.

Bad debt in Vietnam's banking system rose to 4.14 percent of total loans as of April, up from 3.06 percent at the end of 2011, according to a recent written report by SBV for the national congress quoted by Vneconomy.

The monthly growth rate of those non-performing loans (NPLs) is 8.6 percent, Vneconomy added.

The total NPL at banks stood at VND108.6 trillion ($5.18 billion) at the end of April, Vneconomy reported.

Bad debts represented 3.6 percent of total outstanding loans, versus 3.2 percent at the beginning of the year, said Binh at a press conference held in Hanoi on April 11.

Past forecasts

The newly released figures are equivalent to previous forecasts by foreign institutions on bad debts in the banking system in Vietnam.

Pham Hong Hai, Head of Global Markets, HSBC Bank (Vietnam) Ltd, told Dau Tu Chung Khoan newspaper in late April that some local commercial banks did not publicize the real figures of their bad debts.

Tackling this issue requires transparency in quantifying bad debts and consistency in loan classification practices, he said.

However, international organizations warned that the actual figure may climb up to 12-13 percent.

The NA economic committee said late last month that the NPL ratio might be higher, as the data of Fitch Ratings showed that the bad debt ratio of Vietnam in 2011 was as much as 13 percent, in accordance with international accounting standards.

“The ratio could be higher if calculated on the international standards,” Thoi Bao Kinh Te Sai Gonnewspaper quoted Deepak Mishra, chief economist of the World Bank in Vietnam, as saying.

The economist declined to give comment on bad debts, but advised Vietnam to take into account thewarning of Fitch Ratings.

Vietnamese experts also agreed that the ratio of bad debts might be higher than the official data.

According to a recent report, “Facing the challenges of economic restructuring”, compiled by the Vietnam Center for Economic and Policy Research (VEPR), the bad debt ratio is estimated to be 3-4 times higher than the figures given by the central bank.

Quach Manh Hao, one of the report’s authors, said bad debts must be 8.25-14 percent over the total assets.

Such a figure is calculated based on the data of 41 commercial banks, with the liabilities of Vinashin, Vinalines and similar state-run groups already excluded, Hao said.

Proposed solutions

The SBV should impose penalties, such as limiting credit growth, restricting network expansion, or raising the required reserve ratio for banks which deliberately keep their real NPL figures under cover, Pham Hong Hai said.

The country should also open more ‘room’ for the private economic sector and foreign banks to participate in dealing with weak credit institutions, he added.

According to the HSBC executive, governments have to spend on average 13 percent of their GDP to restructure their respective financial systems; yet the figure may be much higher or lower in specific cases, he said.

The International Monetary Fund (IMF) earlier estimated that the nation may need to spend 5 percent of its GDP, or about $5-6 billion, to restructure the domestic banking sector.

The IMF projected that Vietnam can grow credits by a maximum of 14 percent this year, lower than the country’s target of 15-17 percent.

SBV governor Binh recently told the NA that the government is planning to create a national asset-management companywith capital of VND100 trillion ($4.8 billion) to deal with the problem.

Feasibility

The experiences in tackling the same issues of the US, China and Japan may be beneficial for Vietnam in establishing the VND100 trillion debt trading company, Nguyen Tri Hieu, a banking expert with experience in the US, told newswire Vnexpress.

The closure of feeble credit institutions has also been proposed by some experts.
The American financial crisis 2008 was triggered by the collapse of the housing bubble, which is, to some extent, similar to Vietnam’s current situation.

The Federal Reserve (FED) had some $700 billion pumped into the market with an aim of purchasing commercial banks’ bad debts, improve feeble entities’ weak liquidity, and most importantly to acquire banks’ preferred shares.

The three above measures could fit with the local conditions, Hieu said. He estimated that around $7 billion, or some VND140 trillion, would be required for purchasing bad debts.

Another example is China, which saw substandard debts at many commercial banks surge above 40 percent in late 1999 and early 2000.

Four asset management companies assigned with exclusive rights were then set up in an attempt to deal with the substandard debts, worth 670 billion RMB (US$105 billion at current exchange rates).

Moreover, some 40 billion RMB from the 1998 budget was earmarked to write off state-owned enterprises’ debts and to refinance commercial banks by issuing government bonds.

With many similarities, Vietnam should, therefore, consult China’s drastic measures, Hieu said.

The early 2000s saw Japan suffering from thousands of yen in bad debts for a similar reason as the housing bubble in America in 2008.

Japan at first pumped liquidity into large banks and established a range of investment funds to purchase bad debts, which failed to bring about much change.

After further attempts, Japan eventually had their banks nationalized and feeble banks with huge bad debts collapsed.

Nguyen Tri Hieu, however, doubted the usefulness of this measure, which should only be applied to those issues of great importance to the economy.

However Pham Thanh Quang, general director of Debt and Asset Trading Corp (DATC) under the Ministry of Finance, told Tien Phong newspaper that it would take only VND20 trillion to purchase banks’ bad debts, rather than 100 trillion dong as proposed by the Governor.

The initial capital should be around VND20 trillion in order to purchase those debts of great urgency.

TUOITRENEWS