Moody’s Investors Service has hailed a scheme by the Vietnam Asset Management Company (VAMC) to make its first purchase of troubled loans from banks this year.
“This is credit positive for Vietnamese banks because a cash sale would effectively transfer all economic risks associated with a non-performing loan (NPL) to the VAMC and away from the banks,” the U.S. rating agency said in a report on Monday.
The planned cash purchase aims to accelerate the cleanup of Vietnam’s banking system in order to help boost lending to spur growth.
The State Bank of Vietnam
(SBV), the country’s central bank, currently requires all banks to transfer NPLs in excess of 3% of total loans to the VAMC. In return, banks receive VAMC bonds for the net amount of transferred NPLs.
However, the current VAMC bond exchange for NPLs is a mechanism that does not fully clean up bank balance sheets, says Moody’s.
According to the rating agency, a cash purchase scheme would directly reduce NPLs and add cash to the banks, improving loss absorption capacity. Bank profitability would also increase because cash from the sale can be channeled to new, performing loans.
Moody’s noted that the extent of the positive effect from the cash purchase scheme depends on VAMC’s capacity to buy NPLs from banks.
The VAMC’s current capacity to purchase NPLs for cash is two trillion dong ($93 million), which is the size of its capital base. Meanwhile, reported NPLs of Moody’s-rated banks are 30 trillion dong ($1.3 billion).
Banks with the largest percentage of special mention loans could benefit from VAMC’s cash purchase of NPLs, since these are loans that are most likely to become non-performing.
Among the rated banks, Vietnam Prosperity JS Commercial Bank (VPBank) and Bank for Investment and Development of Vietnam (BIDV) would benefit most. As of December 2015, special mention loans made up 5.8% of VPBank’s adjusted loans and 2.8% of BIDV’s adjusted loans.