Banks should tighten assessment controls of their corporate bonds investments - experts
Banks must tighten their assessment controls of corporate bond investments to avoid excessive risk and the misuse of funds raised by firms, experts said.
In early April, the Banking Supervision Agency, under the State Bank of Vietnam (SBV) conducted an inspection of corporate bond investment activities at seven banks, while the Ministry of Finance inspected one bank.
According to the SBV, by the end of 2021, there are 41 credit institutions holding VND274 trillion (US$11.7 billion) of corporate bonds, of which more than 75 per cent of them are held by ten major banks - Techcombank, MBBank, VPBank, TPBank, BIDV, Vietcombank, VietinBank, HDBank, ABBank and SeABank. At some banks, the value of corporate bonds exceeds 10 per cent of total assets.
Although the inspection results were not published, a SBV senior leader said in an interview with Vietnam Investment Review that a number of credit institutions failed to accurately assess bond issuance plans.
In particular, how companies planned to use the proceeds of corporate bond sales lacked clarity and transparency. Results from the inspection showed there are signs that firms have spent money from bond issuance for the wrong purposes, including cases where funds were used to repay bank loans, buy shares, lend, and transfer the money back to the issuers.
Economist Nguyen Xuan Nghia said that there is a phenomenon where capital raised from the issuance of bonds is circulated around to organisations and individuals that have relationships with each other or where the money is withdrawn in large quantities, causing the cash flow to be very complicated and difficult to determine the ultimate use of funds raised.
Pursuing growth and huge profits may have caused banks and other investors to overlook potential malfeasance in the corporate bond activities, Nghia added.
The violations also resulted from a lack of close attention by the board of directors, the executive board, and the leaders of units/divisions of some credit institutions in promptly correcting the shortcomings and mistakes internally. Inspection, control, and internal audits of credit institutions are not always effective, and internal regulations have not been regularly reviewed, updated, and completed, he added.
The issuers’ financial capacity can also be weak, including a high debt-to-equity ratio, no or low net revenue from main business activities, and undistributed profit in recent years, the SBV senior leader said.
"The determination of demand and term of bonds is not based on the actual bond issuance plans of the issuers," the officer said, adding that the monitoring, supervision, and collection of documents proving the purposes of the money raised from bond issuances by issuers are still a formality, but investors often fail to fully exercise the rights permitted by law to manage and supervise the use of funds raised from bond issuance.
Moreover, the valuation and management of collateral have not been strictly controlled due to professional limitations, while some borrowers have not fully followed the provisions of the law, the SBV and the regulations of the credit institutions in their loan relationship.
According to a VNDIRECT Securities Company analyst, credit institutions must increase their capacity for rating and appraising debt, particularly corporate bond investments, in order to reduce risks.
Accordingly, the expert suggested that credit institutions need to step up inspection and supervision of the issuers' use of capital to ensure that the capital is used for the right purposes, and strengthen risk management for corporate bond investments.
In addition, increasing the responsibility of credit institutions in the service provision agreements related to signed corporate bonds, implementing the responsibilities of the bondholders' representatives in accordance with regulations. In particular, exercise all the rights permitted by law to control and supervise to ensure that funds raised from the bond issuance are used for the right purposes stated in the plan of the issuer.