Banks accelerate handling of bad debts

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Banks take the responsibility

Up to now, Vietnam Asset Management Company (VAMC) has bought a total 25,689 (what is the unit here?) of bad debts from forty-two credit institutions, with the total outstanding loan value of VND284.2 trillion ($13.4 billion). It has issued roughly VND247.4 trillion ($11.7 billion) in bonds to buy these debts.

Most bad debts VAMC bought from credit institutions have collaterals of real estate or assets that the borrowers bought or created thanks to these loans, including real estate, factories, enterprises, industrial clusters, projects, and corporate bonds. Since 2013, VAMC has coordinated with credit institutions to recover VND50 trillion ($2.4 billion) debts by selling debts and collaterals, doing away with 17.6 per cent of total outstanding loans that it bought.

Although this rate is very low, chairman Nguyen Tien Dong said that the company plans to handle VND150 trillion ($7 billion) of bad debts, equivalent to 70 per cent of its purchased bad debt volume by 2020.

Currently, VAMC is considering changing its structure and operation mechanism to tackle non-performing loans (NPLs), not only for the banking sector but the whole economy. The main goal in dealing with NPLs is to recreate the resources, as well as reduce the costs of borrowing for the economy. If bad debts are not unfrozen, lending rates cannot be lowered and capital costs will be high.

According to Dong, in order for VAMC to promote its role, it must have real strength as well as operate transparently.

Over the years, despite its efforts, the amount settled compared to the debt volume collected by VAMC from commercial banks is still very small and the brunt of the responsibility remains with the banks. This has also been stressed by the State Bank of Vietnam (SBV)’s governor Le Minh Hung, who noted that in the current difficult situation, the handling of bad debts must mostly be done by banks. Banks have to increase risk provisions at the expense of profits and concurrently remove difficulties in handling collaterals to tackle current bad debts.

Banks’ lone struggle

Most major banks are going to adopt a plan of dealing with bad debts by themselves. By the end of last year, Vietcombank withdrew the whole debt volume it had sold to VAMC to settle them on its own. At ACB, the bank's leaders acknowledge that, despite some difficulties, especially related to the incomplete legal framework for debt handling, ACB will be determined to recover the loans related to the group of six companies (G6) of Nguyen Duc Kien and increase provisioning.

Specifically, ACB expects to end debt collection at the G6 in 2017, instead of 2018 set by the old roadmap, by setting aside additional provisions. Accordingly, ACB secured shareholders’ authorisation to increase provisions by VND800 billion ($38 million) in 2016and to adjust the new debt recovery schedule, with debt collection reaching VND3 and 2 trillion ($142 and 94.6 million) in 2016 and 2017, respectively.

ACB's bad debt ratio has sharply decreased from 1.3 per cent in 2015 to 0.9 per cent by the end of 2016- the lowest level since 2011. ACB said that it will continue to focus on bad debts handling through a variety of methods to get a "clean" balance sheet.

Among the hundreds of trillions of debt, there is a special debt volume produced by interbank lending. For many reasons, few banks pointed out this figure in public, though it points at significant "relationships" among banks.

Global Petroleum Joint Stock Bank (GP Bank) and Viet Nam Construction Bank (VNCB, now CBank) have two large debts at ACB. Regarding GPBank's VND772 billion ($36.5 million) debt, in addition to issuing bonds to swap part of the debt volume, ACB has received two real estate projects through its subsidiary to offset its debts, while the remainder will continue to be handled this year through takeover of other real estates owned by GP Bank.

The VND400 billion ($18.9 million) deposit at CBank, drawing a hefty overdue interest, has been reclassified into Group 5 - the NPLs where ACB may lose the principal. As approved by the SBV, each year, CBank will pay back one fifth of the deposit to ACB with the annual interest rate of 2 per cent. The payments are expected to be completed by September 30, 2020. As of December 31, 2016, ACB has made a provision of VND165.63 billion ($7.3 million) for this loan.

Apart from ACB, Saigon Commercial Joint Stock Bank (SCB) is also determined to deal with bad debts ahead of schedule.. Vo Tan Hoang Van, chief executive officer (CEO) of SCB, said that in 2016, the bank successfully tackled VND3 trillion ($142 million) of bad debts by provisioning and debts recovery. SCB targets to repeat this feat this year. Therefore, with the total bad debts sold to VAMC, SCB’s NPLs are expected to stand at more than VND10 trillion ($473 million). Van said that at this time, the only way to handle bad debts is increasing provisions and handling collaterals.

Although banks are determined to completely do away with bad debts, the barrier that has been repeatedly pointed out but remained fundamentally unresolved is the extensive procedures of the liquidation process. At the same time, Vietnam does not have an operational market for trading debt that foreign investors could join. Therefore, even after the real estate market recovered, transferring projects and collaterals still poses difficulties.

Silver lining

The majority of bad debts have collaterals. In case this is land, time can help solve many problems with occasional appreciation. On the other hand, many other asset categories, such as machinery, factories or even houses, will depreciate over time.

According to an expert from a foreign investment fund, currently only major banks with strong financial capacity make progress in handling bad debts through risk provisioning. On the other face of the coin are the tens of thousands of “bad debts” with worthless collaterals.

"Unlike in the United States, when a customer falls into bad debt, the bank can auction, list, blockade to recover debts as soon as possible. However, this is too difficult to implement in the handling and recovery of debts by Vietnamese banks. Domestic banks have to spend 20 per cent of the amount of debts they sold to VAMC for risk provisioning each year. Thus, after five years, the total risk provisioning deducted by the banks fully compensates for the bad debts and whether they can be actually recovered does not affect the operation of the bank," said the expert.

According to Le Anh Tuan, director and head of research at Dragon Capital, the huge bad debt volume that VAMC “gathered” from the banks over the years is not as hard to handle as it was two years ago. In fact, Vietnamese banks’ bad debts are mainly backed by real estate, while the real estate market has recovered quite impressively both in terms of liquidity and selling price. This has positively affected the bad debts volume of the banking sector.

With increasing real estate prices and good liquidity, banks can easily negotiate with customers to transfer, sell collaterals, and collect debts. This means that bad debts in some large joint stock banks have become "clean."

However, according to Tuan, bad debts of some small-sized banks are still a concern for the whole system and these banks need to speed up handling these.