Vietnam can’t fix banking sector without credible bad debt figures

Experts say Vietnamese leaders are fooling themselves if they think they can ever heal the ailing banking sector without knowing exactly how much bad debt is being held in the country.The State Bank of Vietnam estimated bad debt at 4.65 percent outstanding loans last February, an improvement from the ratio of 8.82 percent late last year.

But bad debt figures have been the subject of controversy and a number of local experts and international institutions doubt the number and say it could be much higher.

Truong Thanh Duc, head of the Legal Department at the Vietnam Banks’ Association, urged that the only way to heal the debt-stricken banking system was to find out the actual amount of bad debt first.

The formation of the Vietnam Asset Management Company (VAMC) to buy bad debts late last month would be unnecessary if the bad debt figures were really that low, he said, arguing that the number could be around 11.5-20 percent if it includes restructured debts for state-owned companies Vinalines and Vinashin.

State-owned enterprises account for about 53 percent of the banking system’s bad debt. A few years ago Vinalines was reported to be mired in a debt of $2.1 billion, and the number at Vinashin was $4.5 billion.

Duc feared the figure could send a wrong message to the market and slow the country’s clearance of bad debts.

He said that the cleanup, as a result, may take up to 20 years instead of the 10-year period suggested by experts. He said banks should be honest about their bad debts and sell off the amount to VAMC.

The association’s general secretary Tran Thi Hong Hanh agreed, saying there would be no effective solutions if the figures fail to reflect how bad the situation is

“Longer time.. will lead to more losses,” she said.


Jon Sheehan, Capital Service’s managing director for Southeast Asia, said banks hide their bad debt levels in fear of losing their reputations and share value.


He feared that Vietnam would suffer the same fate of the Philippines which did not admit its 1997 debt crisis until five years later when its economy hit bottom.


Sheehan held up Thailand’s reaction to bad debts as an example of effective measures. The country acknowledged the problem in the early stages and asked the International Monetary Fund to step in. It completed the task in a time four years shorter than the Philippines.  


Help from foreign hands


State-owned VAMC plans to issue special bonds to about ten banks in exchange for as much as 10 trillion dong of non-performing loans in the next two months, its first move since establishment.


The firm’s director Nguyen Huu Thuy said his firm may also seek overseas funding for its operating capital. VAMC is expected to resolve VND70 trillion ($3.32 billion) this year.


But experts have doubted that the bank’s plan to issue bonds will work as it will only be a switch in the ownership of bad debts, and not a real cleanup.


However, Sheehan said so far this is the only solution, adding that often it takes a lot of money to clean up bad debts while the government’s funds are limited.


He said it was a pity that Vietnam lacks a specific framework to attract foreign investment.


In 1997 Thailand allowed foreign investors a ten-year ownership of bad-debt properties, he said. Then the country saw a huge amount of money flow into the sector, which ended up being a bad debt recovery and even an increase in real estate market values.


The Philippines made similar moves and also launched several policies like imposing taxes on debt sale.


Sheehan said he has a list of foreign investors who want to enter Vietnam with an investment of a few billion dollars, and among them are US investors who are greatly concerned about bad-debt properties and the lack of an investment framework.


As of last August, property-related loans accounted for 5 percent of bad debts.


He said undeveloped infrastructure was another disadvantage. As a result, the country will have to sell bad debts at a price many times lower than market values, he estimated.


Duc of the Vietnam Banks’ Association said the country still “closes the door” on the ownership of properties and shares by foreign investors.

“What gets [Vietnam] the most stuck is that we are struggling to find solutions within the banking system. It’s time we need a special policy to attract foreign investors for a change.”