Coffee firm leaves banks with bags of bitter debt

A Binh Duong based coffee producer successfully took out $28.4 billion in loans on the same collateral

The Binh Duong-based coffee trader owed nearly VND600 billion ($28.4 million) as of June, having racked up debts with the Military Bank, VIB, OCB, Agribank, Maritime Bank, VietinBank and Techcombank.

The company had put up meagre collateral of just 3,000 tonnes of coffee in the company’s warehouse. As of this time, the coffee stockpile’s estimated value is a mere VND100 billion ($4.7 million), one-sixth of the total debt, according to the company’ representative.

Under current law, an asset can be used as collateral at more than one bank provided the asset is valuable enough to ensure all the debts. Once the borrower falls into insolvency, the collateral settlement will be based on the loan contract between bank and the company.

However, poor attention to detail by banks has meant disputes have arisen among creditors over the same collateral. Early this month, after reconciling the company could not repay its debts, staff of the owed banks rushed to the company’s warehouse in an attempt to seize the coffee.

Embarrassment for the banks ensued as after the tussle it became clear that many of the stockpiled coffee bags contained agricultural waste such as rice husks and leaves.

Nguyen Hoang Minh, deputy director of the central bank’s Ho Chi Minh City branch held a meeting to discuss the issue and collect information for a report to Ho Chi Minh City People’s Committee and the State Bank of Vietnam.

“Trying to increase credit growth, without ensuring quality, leads to unhealthy loans and consequences such as this,” emphasised Minh.

OCB so far has remained the only bank to have legally been entitled to reclaim the collateral based on a ruling by the People’s Court in District 4, Ho Chi Minh City on the 3,360 tonnes of coffee. The coffee was used as collateral for a VND93 billion ($4.4 million) loan Truong Ngan had borrowed at OCB.

The Military Bank also seized 625 tonnes of coffee which it claimed had been collateral, which was now guarded by the bank.

According to Tran Minh Hai, director of law firm Basico, OCB had succeeded in gaining possession of the collateral due to a carefully worded credit contract, which included the clear principal and interest, confirmation of the borrower and a record of the goods coming in and out the store under strict control of the bank.

In contrast, other banks had accepted collateral based on rotating inventories, which meant the company had taken control of the collateral and only had to retain the original value amount. “So the banks weren’t able to identify the exact physical items which made up the collateral for their loans,” said Hai.

According to a member of the National Financial and Monetary Policy Advisory Council, to control credit risk activities, banks must take control of both the quality and quantity of collateral assets. 

“However, many banks are too careless in terms of collateral. They just assign an employee to guard the warehouse. This race among commercial banks to gain credit market share, combined with a lack of control has led to greater risk of rising bad debts,” the council official added.

Such situations have occurred before. In late 2012, the market was shocked at Bianfishco’s debt of VND1.3 trillion ($61.8 million) at 10 commercial banks. Phuong Nam Food Processing Company also amassed debts of VND1.6 trillion ($7.5 million) at seven commercial banks and many other enterprises.