May 17 (Bloomberg) -- Vietnam plans to force the sale of non-performing loans to a soon-to-be established asset management company and clear up nearly $5 billion of bad debt, as the government steps up its banking overhaul efforts.
Lenders with bad-debt ratios of 3 percent and above will be required to comply, State Bank of Vietnam Chief Inspector Nguyen Huu Nghia said yesterday, citing a final proposal that is awaiting the prime minister’s review and approval.
“We will use our figures on the bad debt of each commercial bank, not the reported numbers from the banks,” Nghia told Bloomberg News in Hanoi.
Prime Minister Nguyen Tan Dung’s administration has missed an earlier deadline for the asset management firm that will tackle non-performing loans estimated by credit ratings companies and market participants at as much as 20 percent, according to JPMorgan Chase and Co. The economy last year expanded at its slowest pace since 1999, as elevated levels of bad debt crimped consumption and stifled business expansion.
The asset management company “is not a magic bullet, but it’s part of an array of weapons the government and SBV can use to try to address the bad debt problem,” said Tareq Muhmood, the Vietnam chief executive for Australia & New Zealand Banking Group Ltd. The firm “should give the banks breathing space, to give them time to build up profits over the next few years and use that to start writing off bad debt.”
The Ho Chi Minh City Stock Exchange’s VN Index dropped for the first time in three days, trimming 0.3 percent as of the morning break. Joint-Stock Commercial Bank for Foreign Trade of Vietnam, or Vietcombank, slid 2 percent, Saigon-Hanoi Commercial Bank fell 1.5 percent.
The asset management company will be set up this month, according to Cao Sy Kiem, member of the National Financial and Monetary Policy Advisory Council. It will resolve about 100 trillion dong ($4.8 billion) of bad debt, said Vu Viet Ngoan, chairman of the National Financial Supervisory Commission that advises the prime minister, citing a government estimate.
The bad-debt ratio at Vietnamese banks dropped to 6 percent of total outstanding loans as of Feb. 28, from “about 8 percent” last year, according to government estimates. Credit grew 2.1 percent in the first four months of the year, the government said yesterday, after a 9 percent pace in 2012, which the World Bank has said is “anemic.”
The asset management firm will “help businesses have greater access to bank lending,” Ngoan said. The monetary authority cut interest rates earlier this month, the eighth reduction since the start of 2012, as it tried to spur lending.
Vietnam Bank for Agriculture & Rural Development, or Agribank, the country’s largest lender by assets, had a bad-debt ratio of 6.1 percent as of the end of June 2012, State Bank of Vietnam Governor Nguyen Van Binh said last August.
Saigon-Hanoi Commercial Joint-Stock Bank, the seventh-largest listed lender, had a ratio of 8.8 percent as of the end of 2012, according to a statement on its website. The monetary authority has not disclosed bad-debt levels at lenders this year.
The asset company will have an initial registered capital of 500 billion dong and issue zero-coupon bonds in exchange for banks’ bad debt, Nghia said. The bonds will have a maturity of five years and lenders can use them as collateral to get refinancing funds from the central bank, said Kiem.
The asset company will use the book value of the bad loans, excluding loss provisions, as a method of valuing the bonds to be issued to lenders, according to Kiem, a former central bank governor. The banks will be required to set aside 20 percent of the value of the bonds every year until the bonds mature.
The asset management company “is a good step in accelerating the restructuring of banks,” said Deepak Mishra, the Hanoi-based lead economist for Vietnam at the World Bank. “Its effectiveness in solving the banking-sector problem will depend on the implementation mechanisms including the participation of banks with large non-performing assets and the transparency of its operation.”
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