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Indebted banks may receive State support

Released at: 10:21, 10/04/2017

Indebted banks may receive State support

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Draft SBV law allows use of State funds to settle bad debts.

by Duy Anh

Weak credit institutions that were compulsorily acquired may receive funding from the government to increase their charter capital with zero long-term interest rates.

The State Bank of Vietnam (SBV)’s draft law on supporting credit institutions to restructure and resolve bad debts, which is now seeking public opinion, is the first law to officially legalize the use of State funds to settle bad debts - a topic that has been controversial over recent months.

“It’s the same as taking from the poor to give to the rich,” said Mr. Truong Van Phuoc, Vice Chairman of the National Financial Supervisory Commission (NFSC). “Bad debt settlement is imperative as bad loans pose challenges to the economy, pushing lending rates to 9-10 per cent per annum though inflation stays at 5-6 per cent.”

Vietnam needs an estimated $25 billion for bad debt settlement in the next five years. The amount includes $10 billion to deal with bad debts bought by the Vietnam Asset Management Company (VAMC). The remaining $15 billion will be used by banks for asset liquidation and risk provisions.

The use of State funds to settle bad debt runs counter to the five-year financial plan to 2020, which was approved by the National Assembly (NA) in November last year. “State funds are not to be used for restructuring State-owned enterprises (SOEs), settling bad debts of State-owned commercial banks, increasing charter capital at credit institutions, or buying stakes in international financial institutions,” the associated NA resolution stated.

In 2015, the central bank found itself shoring up ailing institutions three times, turning VNCB, GPBank, and Ocean Bank into wholly State-owned entities in a move to negate any concern over the health of other banks.

One point in the draft laws that may trigger conflicts of interest is that those involved in the restructuring process of weak credit institutions do not have any legal responsibility for the result of the process. They include central bank executives, members of the special supervisory board, and State-owned bank executives who were appointed by the central bank to assist weak credit institutions during the restructuring process.

Senior executives from State-owned banks have become leaders of these distressed banks, with Vietinbank executives appointed to manage Ocean Bank and GPBank, while Vietcombank Deputy CEO Nguyen Van Tuan joined VNCB in March 2015. 

Other than receiving zero long-term lending rates from the government, banks that were acquired compulsorily will also be able to take out special loans from the central bank also with zero per cent interest rates, and receive deposits or borrow from assisting banks. For example, VNCB can borrow from Vietcombank at zero per cent interest rates.  

The draft law also proposes bankruptcy as an option for weak credit institutions. “The government will decide the special lending rate upon the request of the central bank to pay depositors the remaining amount of their deposits (after they receive compensation from the deposit insurance system),” the draft law stated.

Including bad debts managed by VAMC, the bad debt ratio in the banking system likely stands at around 8.86 per cent; three times higher than reported, the SBV’s latest figures reveal.

As at the end of 2016, the ratio of bad loans on balance sheets, those bought by VAMC from banks, and loans that may turn sour had reached 8.86 per cent of all outstanding loans, given the difficulties in dealing with assets used as collateral for bank loans and settling bad debts. On September 30, 2012, bad debts were put at 17.21 per cent.

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