Credit institutions in Vietnam had moved 548.5 trillion dong (roughly $25 billion) worth of non-performing loans (NPLs) off their balance sheets from late 2012 to the end of August 2016, helping bring down the bad debt
ratio in the banking system, according to data of the State Bank of Vietnam
Of the amount, banks have handled 57.2% worth bad loans on their own and sold the rest to the central bank-run Vietnam Asset Management Company (VAMC
) and other institutions.
Bad debt in the whole banking system dropped sharply to 2.62% of total credit as of the end of September 2016 from a two-digit figure four years earlier. The safety threshold for bad debt at Vietnamese banks is set at 3% of total lending.
After a decade of fast credit expansion that helped fuel the country’s economic growth, the Vietnamese central bank has been striving to clean up bad debt volumes and funnel loans to productive sectors.
Its bad debt bank, VAMC, was set up in July 2013 to purchase NPLs from banks. The firm issues special bonds in exchange, with which banks can use to ask for refinancing from the banking regulator.
Since its inception, VAMC has bought an estimated $11.25 billion worth of overdue loans and recouped 13.5% of the amount.
However, economists have assessed the way VAMC is currently coping with bad debt is not ideal as it just buys time for banks while soured loans remain on paper and wait to be sold off.
Truong Van Phuoc, vice chairman of the National Financial Supervisory Commission, even likened VAMC to “a fresh slice of ginseng that banks hold in their mouth while on the way to the hospital.”
Phuoc estimated local banks needed $25 billion to clean up bad loans, equivalent to 13% of the country’s 193.6 billion last year, in the coming five years.
The central bank should offer bad debt special bonds to foreign and domestic investors to raise funds for the handling of bad debt. Further, VAMC should buy debt at market value, not at book value, he suggested.
Market participants are still waiting for the formation of a debt market where investors can acquire debt freely.