VAMC revs up for bad debt challenge

What VAMC will do when it officially goes into operation?

We will immediately start buying bad debts based on regulations set out in Decree 53/2013/ND-CP on the establishment, organisation and operation of VAMC.

Basically, VAMC will purchase bad debts from credit organisations in two ways: It can buy bad loans at their book value by issuing special bonds, or at market value by using other sources.

VAMC can also work as a consultant, brokerage, financial investor, investor, stake buyer or underwrite an organisation, individual or enterprise that wants to borrow money from banks.

VAMC’s scope of activities will be quite broad and have a greater remit than any financial institution in Vietnam currently does.

However, we also expect that banks with qualified bad debt would be willing to co-operate with VAMC to address the problems of bad debts in order to clean out the financial market and eliminate risks in the banking system and promote credit growth.

Vietnam currently lacks a professional market to buy debts and a legal framework for this activity has not been completed. So how will VAMC evaluate these bad debts?

In fact, trading bad debt among credit institutions has been carried out in Vietnam for a long time. There are many valuation companies already doing this, such as VFS Price Valuation Company, IVC Vietnam Valuation Corporation and Saigon Valuation Company.

VAMC has also employed trained staff for this, which should provide good conditions for VAMC to develop in the long term.

Financial institutions that have bad debt rates of 3 per cent or more of their total outstanding loans will have to sell their bad debts to VAMC. So how many banks will be included on the list?

In fact, it is difficult to have an exact account of bad debts of credit institutions because of different criteria used by banks to classify such debts. We expect apart from the institutions with bad debt ratios of over 3 per cent to sell debts, even those with rates of less than 3 per cent will completely sell their bad debts to VAMC because our target is to stabilise the economy and strengthen credit growth.

Credit institutions themselves should acknowledge the benefits gained from selling their bad debts to VAMC. Firstly, they will transfer the bad debts off their balance sheets. According to Decree 53, the banks would need to make credit impairment provisions within five years. Thirdly, they can use special bonds issued by VAMC to obtain financing from the State Bank of Vietnam.

Banks will have to make provisions of up to 20 per cent annually for the bad debts they sell to VAMC, which could make them hesitant to sell bad debts to VAMC. What do you think about this matter?

It is true that such regulations on risk provision will affect profitability. However, credit institutions need to define the long term target which attempts to provide stability, so they should accept difficulties in the short term. Selling debts to VAMC will help credit institution to quickly lower their levels of bad debts and have enough time to settle these debts with VAMC’s support.

If the economy recovers quickly, banks will no longer make provisions for bad debts. However, in case of a slow economic recovery, the banks would have more time to make provision for debt.

On the other hand, banks can pledge special bonds to refinance loans from the central bank to lend to priority sectors, or sectors with the liquidity difficulties. I think this is one of the factors that make the banks want to sell their debts to VAMC.

It is said that the participation of foreign investors will accelerate the bad debt settlement process. What is your viewpoint on this matter?

According to experience from the US, South Korea and a number of East Asian countries, in order to push banking restructuring, VAMC must have strong financial resources, and support from special legislation from the National Assembly and the government.

Therefore, besides government funding, the participation of local and foreign investors is desirable as far as VAMC is concerned.