Vietnam tightens valuations to clean up bad debt: Southeast Asia

Vietnam tightens valuations to clean up bad debt: Southeast Asia

Vietnam’s state asset management company will use its own valuations instead of inflated book values to buy bad debt from banks by the end of next month to accelerate a revamp of the financial system and revive lending.

The Vietnam Asset Management Company, or VAMC, has been buying bad debt at the book value determined by lenders, who priced the property backing the loans higher than current market rates. It plans to conduct a pilot purchase of bad debt using cheaper market valuations before year-end, Chairman Nguyen Quoc Hung said in an interview in Hanoi this week.

“The new method will speed up the process of cleaning up bad debt and encourage banks to lend more,” Hung said. “I’m confident that we can buy and sell bad debt faster next year since we’ve improved our methods with more than a year of experience.”

The Southeast Asian nation is stepping up efforts to resolve bad debt that has crimped lending to businesses and pushed economic growth below 6 percent for two straight years. Since the asset company was set up in July last year to help banks meet a government mandate to reduce troubled loans, the ratio of non-performing debt in the system has fallen to 5.4 percent from 17 percent in 2012, government data show.

The VAMC is assessing soured loans totaling 100 billion dong ($4.7 million) to 200 billion dong as part of the new proposal, and will determine prices based on its evaluation of the collateral, Hung said. It will begin purchases using the market-rate method by year-end and switch fully to this model in 2016, he said.

Property is the collateral for about 95 percent of soured loans bought by the VAMC, he said.

2015 Targets

“VAMC switching to market value will help quicken the whole process of buying and selling bad debt,” said Phan Thi Chinh, deputy chief executive at Bank for Investment and Development of Vietnam, the country’s third-largest bank by assets. “However, it has to come with a better payment method, perhaps by cash, rather than issuing special bonds to banks like they do now.”

VAMC now issues special bonds in return for the bad debt, which banks may use as collateral to secure funding from the central bank. The asset manager has bought about 97 trillion dong of bad debt to date, and aims to purchase 200 trillion dong in total by end-2015, Hung said. It will have sold about 4 trillion dong of these soured loans by year-end, he said.

The asset company aims to sell at least double the volume next year, Hung said, to help meet a government target for banks to cut their bad-debt ratio to 3 percent. Lenders that aren’t able to find buyers for their soured loans will be required to sell to the VAMC to meet that target by end-2015.

Cutting Rates

The benchmark VN Index rose 0.3 percent as of 9:51 a.m. in Ho Chi Minh City trading. It has gained almost 20 percent so far this year. The dong weakened about 0.1 percent to 21,310 against the U.S. dollar.

Vietnam’s gross domestic product rose 5.62 percent in the nine months through September from the same period a year earlier. The World Bank estimates expansion of 5.4 percent this year, slower than a government target of 5.8 percent.

While the central bank has cut its policy interest rates twice this year to encourage lending, credit growth was at 7.85 percent as of Oct. 24 from the end of 2013, compared with a goal of 12 percent to 14 percent for this year.

“If the central bank accelerates the pace of the debt cleanup, the economic recovery will be faster,” said Trinh Nguyen, a Hong Kong-based economist at HSBC Holdings Plc. While any measures to increase lending are helpful, “Vietnam will also have to strengthen its regulatory environment for investors’ confidence to rise.”

TPG Capital Management LP, Standard Chartered Plc and International Finance Corp. -- the investment arm of the World Bank -- have all expressed interest in purchasing distressed debt from VAMC, Hung said earlier. VinaCapital Asset Management Co. has also said it is keen, as Vietnam’s credit rating improves with Fitch Ratings upgrading the nation to BB- this month.

“We will have to wait and see how this unfolds as banks will likely be hesitant to sell at market value,” HSBC’s Nguyen said. “The concern is over whether the debt is recoverable.”

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