Banks don’t want to sell bad debts?

Mar 28th at 13:17

28-03-2013 13:17:15+07:00

A lot of banks would try to conceal their bad debt situation and would not sell the bad debts to the VAMC, a company to be set up by the State to help banks escape from unrecovered debts.

Under the draft decree on the operation of VAMC, the Vietnam Asset Management Company, VAMC would buy banks’ bad debts and pay in bonds.
This is believed to be the best solution for the debt restructuring process. In paying in bonds, VAMC would not have to spend cash to buy debts, while banks would be able to escape from the bad debts which have been burdening their shoulders. If banks need capital, they can come to the State Bank of Vietnam with the bonds to ask for loans.

The draft decree also says that VAMC would buy debts at the prices equal to the book values. This has just been confirmed by the Governor of the State Bank Nguyen Van Binh at a conference on March 21 in Da Nang City.

However, VAMC’s operation mechanism is quite different from the one banks imagine. VAMC is a state owned institution, and it must preserve and develop the state’s capital. In other words, it must not take loss in the debt trade deals.

Therefore, the bonds to be issued by VAMC and paid by VAMC to the banks which sell bad debts, would be valid for five years only, at the interest rate of zero percent. This means that banks cannot sell their bad debts to VAMC definitely to forever escape from the debts. They would have only 5 years of getting free from the bad debts, and they will still have the responsibility of dealing the debts.

This means that though VAMC buys bad debts from banks, it will not take over the responsibility of dealing with the bad debts from banks.

Also under the draft decree, during the five years, the seller banks will have to make the provision of 20 percent for the bonds. If the bad debts cannot be sold after five years, VAMC would not bear any loss, because the banks would make 100 percent of provisions for the bonds after five years.

By that time, banks would get the bad debts back from VAMC. The bad debts would not be shown on the books, but banks would still have the right to collect debts from debtors.

Banks don’t want to sell debts?

Analysts say that commercial banks would get big benefits when selling debts to VAMC, because they can clear the debts in the asset balance sheet, while they will have more money for their operation. However, banks would also have to pay a heavy price in the deals.

Banks would have to make the provision of 20 percent for every debt to be sold, which means that the banks’ profit would decrease dramatically.

However, selling bad debts to VAMC is a must, because under the regulations to be issued, the banks with the bad debt ratios of over 3 percent would have to sell debts to the company.

Therefore, experts have every reason to think that many banks would hide their bad debts to avoid selling debts to VAMC.

“If they hide the bad debts, they would not have to make provisions against risks, and their profits would not decrease – a very important factor to satisfy their shareholders,” an expert said.

Meanwhile, if selling debts to VAMC and making provisions, the leadership of the banks may be forced to step down from their posts.