Economist sounds call for debt trading market

In light of the decree on the setup, organisation and management of the Vietnam Asset Management Corporation (VAMC) and other guidelines for the State Bank (SBV), debts can be purchased two ways. How do they work, and why these two?

The first way is buying bad debts from credit organisations at book value through a bond issue. This helps shift debt to the VAMC. This allows credit entities to clear their balance sheets quickly and thereby improve their liquidity, lending ability and helping them to concentrate on core activities. The bonds issued can be used to source lower-interest refinancing loans from the SBV.

This measure, however, does not put money but rather bonds in banks’ hands. Moreover, banks are still responsible for the debts and have to keep 20 per cent of the bond value in a provisional fund.

The second way is the VAMC can buy bad debts at market value. This is a radical solution for banks to settle their books and get cash fast. But this is a more difficult option as collateral valuation is a challenge since Vietnam does not have a debt trading market. This is needed to support the above, but also to facilitate the VAMC selling the bad debts it is buying.

How successful has the VAMC been in its first steps?

Without a debt trading market, the VAMC is very limited and it will be hard to buy debts under market value. For now, it will only buy bad debts through bond issues, a process already started with Agribank, SHB, SCB, and GPBank.

What are the most important factors in forming a debt trading market?

Naturally there needs to be buyers, sellers, and a decent legal framework to ensure performance. To attract foreign buyers, the legal framework needs to facilitate their participation by resolving issues such as the ceiling ownership rate in local businesses, particularly banks and their asset ownership rights in Vietnam.

Some are arguing it is a bad idea for Vietnam to sell debt to foreign companies, do you agree?

Bad debts are a costly problem, but world experience shows that the quicker we deal with them, the less the degree of loss. Vietnam’s economy is now open, so we have to play by the rules of the game, though if we play it well we can avoid greater than necessary losses.

What has the VAMC accomplished thus far?

While our $476 million in purchases so far is minimal compared to the overall bad debt figure, it shows that we are gaining momentum and there is life in the debt trading market. Our efforts have already received attention from the foreign investment community and removed obstacles to credit flows. The banking system’s health is improving.

Would you say the settlement of bad debts is moving slowly?

While formation and operations of the VAMC came later than expected, I don’t think this situation qualifies as late.