Doubt has been expressed as to whether the Vietnam Asset Management Company is handling non-performing loans properly or simply taking them off the books of banks to improve the appearance of the banking sector
Recovery is the ultimate aim of any efforts to handle non-performing loans (NPLs). Normally, asset management companies (AMCs) buy a bank’s NPLs and then work to identify the best way to recover the sum. Handling loans, though, is extremely complex and can take years to complete. Abundant financial resources are a necessary element of such efforts and usually come from the State budget or offshore funding.
The Vietnam Asset Management Company (VAMC) has exactly the same function of buying and selling NPLs as any other AMC around the world. Nevertheless, the government’s Decree No 53/2013 on the setting up of VAMC was different, as it allowed bond issuances for raising capital. As no State budget funds are required, the method was hailed by some as innovative while others were not so generous.
Good or bad?
Buying at “market value” has not been a top priority for VAMC over the past year, with charter capital of VND500 billion ($23.5 million), not to mention the incomplete framework Decree No 53 failing to adequately define what “market value” means, with the value of an NPL being ultimately determined between the VAMC and the bank and the latter likely to be seeking the best deal possible.
VAMC exchanges its special-class, non-interest-bearing bonds for NPLs in accordance with the carrying value of the debt (the principal amount excluding the bank’s risk reserve). However, as its name implies, the special bond offers no yield and lenders are required to set aside a reserve that cover 20 per cent of the bonds’ value. Upon maturity or if the reserve sufficiently covers the NPL over the years when VAMC fails to handle the bad debt, the banks must buy back the loan using the exact same bond of VAMC.
In return, the bank can only use the bonds to apply for refinancing loans from the State Bank of Vietnam (SBV) for up to 70 per cent of their face value. More critically, in order to be approved for loans, at least 60 per cent of the bad debt’s value has to be backed by real estate, making for highly restrictive eligibility. For financial institutions that meet such requirements, the interest rates on the refinancing loans will be decided upon by the Prime Minister.
While VAMC’s settlement capacity is by no means certain, such an opaque interest rate makes bonds even less attractive. Financial institutions with low NPL ratios or those that can conceal their ratio will definitely not sell their bad debts to VAMC. More importantly, the interest rate will have a significant impact on banks. If the rate is set too low then a bank may rather invest refinancing funds in a low-risk portfolio than continue lending to small and medium-sized enterprises (SMEs), and could possibly see their NPL ratio rise again later. Conversely, if the rate is too high, refinancing funds would be less likely to boost credit growth.
Bypassing later movements, the key to handling NPLs under this method is that it allows financial institutions to use VAMC’s bonds as deposits to borrow from the SBV and re-lend to enterprises. “Selling NPLs to VAMC helps banks to prolong the bad debt handling process by at least five years,” Mr Bui Kien Thanh, a senior economist, emphasised. “Enterprises must survive so that the economy can recover, but if the economy fails to recover there is no way banks can escape their bad debts.”
Not using “real money” to handle NPLs is indeed innovative. It helps buy time until the economy improves and enterprises earn profits and settle their loans. Nevertheless, if the economy does not get back on track as expected, the solution creates even greater risks. “VAMC are buying bad debts at book value, and this is not ‘actual’ but more like ‘nominal’ handling,” said Mr Do Thien Anh Tuan, Lecturer at the Fulbright Economics Teaching Program. “The banking system may look healthier for now, but the NPLs are still there.”
VAMC bought over VND39,000 billion ($1.83 billion) worth of NPLs in its first five months of operations and has handled more than VND200 billion ($10 million) so far. Its effectiveness, though, is not easy to measure. The book value of potentially irrecoverable debts (so-called “Group 5”) from the ten largest banks has been estimated by some experts to have reached nearly $1 billion from $800 million and roughly $520 million at the end of 2013 and 2012, respectively. Such rapid escalation may be on account of accelerating defaults, while many blame inconsistent reporting standards.
The economy-wide-ratio of NPLs to assets was put at 3.63 per cent by the SBV in late December last year and central bank leaders are expecting approximately 3 or 4 per cent by the end of 2015. Foreign analysts, however, don’t believe it will be so sunny for Vietnam. Analysts from Moody’s Investors Service Singapore estimate that problem assets in the system will comprise at least 15 per cent of total assets, significantly above the 4.7 per cent NPL ratio reported by the SBV last October.
The SBV, however, claims that their figures are more trustworthy and have a stronger legal basis. Market information, research, and assessment by other credit agencies and organisations, it believes, should only be treated as a reference. The SBV also emphasised that debt restructuring measures under Decision No 780/QD-NHNN have proved meaningful for businesses as they can continue to access bank loans at reasonable interest rates. “If we calculate carefully, including bad debts restructured under Decision No 780, the NPL ratio is only about 9 per cent at maximum,” according to a senior official at the SBV who preferred to remain anonymous. “The establishment and operation of VAMC is a notable move by the government and the SBV in facilitating the tackling of NPLs.”
It can’t be denied, however, that the NPL ratio would not be under 10 per cent if international accounting standards were to be applied. Like Moody’s, Fitch came up with something pretty similar to 15 per cent. The SBV applies different accounting standards and has its own reasons for doing so. Vietnam’s banking system may look better under such a practice but the risks are beyond dispute. “It also poses potential risks of rising bad debts if the macro-economic situation, business conditions, and the real estate market recover more slowly than expected,” the SBV admitted in a press release.
In January last year the SBV issued a circular requiring banks update their debt-reporting standards. The central bank then unexpectedly announced on March 6 this year that the deadline had been extended for six months and banks would not have to update their accounting standards until early 2015 rather that in June this year. This was viewed by The Economist Intelligence Unit as a worrying indicator that Vietnam’s financial regulator is buying time by tactically delaying the disclosure of the size of the problem.
The root cause of NPLs has primarily been the bursting of the real estate bubble. Authorities expect the economy to recover but housing demand may not climb fast enough to contribute. Recent policies have not appeared to be overly helpful in attracting new foreign as well as domestic capital to support banks that are underperforming. Vietnam’s financial sector is facing significant risks and reports from domestic institutions may make it appear much better but insiders are aware of the actual picture.
Consequently, the financial sector will continue to affect economic growth this year and possibly if not probably next year as well. Credit may stagnate, as risk-adverse financial institutions prefer to keep their money in the vault rather than transform it into new NPLs. Under such circumstances, the VAMC has a key role to play but it may be insufficient to boost economic growth.