Solutions for handling bad debts

(Baonghean) - Recently, the State Bank of Vietnam's (SBV) decision to acquire three joint-stock commercial banks – Vietnam Construction Bank (VNCB), Global Petroleum Bank (GP Bank), and Ocean Bank – for zero dong has attracted the attention of regulators, executives, experts, and the public. This indicates that the issue of bad bank debt needs to be resolved. Our reporter interviewed Dr. Truong Van Phuoc, Vice Chairman of the National Financial Supervision Committee, to understand his specific views on this matter.

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Enhancing the effectiveness of bad debt resolution

PV: Dr. Truong Van Phuoc, in your opinion, what are the origins and causes of bad debt?

Dr. Truong Van Phuoc:Vietnam is a small-scale economy with a low starting point. While it has experienced rapid and strong growth and achieved many successes, this growth has been unstable and primarily extensive, heavily reliant on increased investment capital. Meanwhile, the domestic financial market is still underdeveloped, with low capital efficiency and slow improvement. In Vietnam, the capital market is still nascent and has not kept pace with the growing capital needs of the economy; therefore, domestic capital supply primarily comes from banking sector credit.

Objective causes stem from external instability (the 2008 global economic crisis) and internal factors within the economy (the transition from a planned economy to a market economy). Rapid and unsustainable growth was due to a lack of focus on growth quality. Furthermore, a long period of loose monetary policy (2000-2007) followed by a sudden tightening from 2010, and the rapid growth in the number of credit institutions (CIs) while their management and operational capacity did not keep pace with this growth, contributed to the problem.

PV: In your opinion, how should we handle bad debts? What results have been achieved?

Dr. Truong Van Phuoc:Prior to our restructuring decision, the reported non-performing loan (NPL) ratio by credit institutions was 3.1% (in 2011), but in reality, it was around 17%. High NPLs not only negatively impact the financial market but also affect economic growth. It can be said that NPLs in Vietnam are handled using a unique method, different from the experience of many countries around the world. Timely handling of NPLs creates a favorable environment for banks and businesses to normalize credit relationships, allowing businesses to access loans while banks maintain profitability.

PV: In your opinion, what are the current obstacles in handling bad debts in Vietnam, and what are your recommendations?

Dr. Truong Van Phuoc:The current progress in handling non-performing loans depends heavily on resolving legal obstacles in the process of handling collateral assets. The ratio of risk provision to pre-tax profit and pre-provision profit has increased from 39% (2011) to 60% (August 2015). Despite facing many difficulties in the debt resolution process, the credit institution system still ensures profitability. Excluding three loss-making credit institutions, after-tax profit in 2014 was approximately VND 34 trillion, an increase of 5.3% compared to 2013 and 13.8% compared to 2012. It is noteworthy that the credit institution system continues to maintain and ensure its contribution obligations to the state budget.

To enhance the effectiveness of bad debt resolution, it is necessary to create a stable macroeconomic environment, sustainable economic growth, an environment for businesses to operate efficiently, reasonable credit growth, profitability for the credit institution system, and increased resources for bad debt resolution. In addition, it is necessary to quickly mobilize capital from collateral assets to return to the market a source of capital currently tied up due to bad debts.

In addition to implementing policies to further stabilize the macroeconomic economy and ensure sustainable growth, it is also necessary to create higher liquidity for handling collateral assets, especially real estate. Clearly, perfecting the legal framework for debt trading, leveraging capital from domestic and foreign investors to buy and sell collateral assets at market prices, and forming and developing a secondary debt trading market are urgent tasks and a requirement of the current reality of handling non-performing bank loans in Vietnam.

PV: Thank you very much, Doctor, for this interview.

Red River