Debt securitization to develop centralized debt trading market

	Potential risks of bad debts from consumer credit
	Foreign banks step up personal banking, increase M&A activity
	Banks continuously make capital divestment

Dr. Nguyen Thi Thuy Linh, Dean of Banking Faculty, University of Economics Ho Chi Minh City

A Customs Newspaper reporter had a talk with Dr. Nguyen Thi Thuy Linh (photo), Dean of Banking Faculty of University of Economics Ho Chi Minh City to clarify this issue.

What do you think about the current debt trading market in Vietnam?

Over time, the debt trading market in Vietnam has not developed as expected by investors. Accordingly, only bad debts were offered on the market, while credit institutions directly exchanged high-quality debts rather than development of a centralized market. Regarding bad debts traded in the debt trading market, there are currently only three main participants in the debt purchase: Vietnam Debt and Asset Trading Corporation (DATC) of the Ministry of Finance, Vietnam Asset Management Company (VAMC) and asset management companies (AMC) of commercial banks.

At present, the development of the debt trading market of Vietnam still meets many problems related to the legal procedures, the implementation process and the participants as well as goods traded on the market. The securitization of debt is a condition to develop the centralized debt trading market and to create high liquidity for this market and to attract investors with strong financial capacity to join the market. This facilitates the market to address the problem of dependence on mobilized capital of commercial banks, to reduce competitive pressure in periods of stressful liquidity and to facilitate the banks to effectively manage risks through increasing the initiative in assets restructuring in certain periods to adjust business strategies on the basis of movement of interest rates, exchange rates and market prices.

Could you please explain more about the debt securitization?

Debt securitization is understood as a process of financial restructuring whereby customer’s loans (such as home loans, consumer loans, commercial loans, etc.) are collateralized by a special organization (such as an investment bank) and sold to investors in the form of securities. Investors' income for these securities is the cash flow of their loans. The collateral of these securities is the collateral of collateralized loans, including real estate, receivables in economic contracts and other assets. Thus, this process will enable investors (organizations and individuals) to buy securities and participate in the financing process.

According to research in this field, securitization brings many benefits to the participants. One of these benefits is to reduce the issuer's credit risk by allocating and transferring (loans, customer debts) to other investors at reasonable prices. The active sale of debt to securitization companies helps commercial banks reduce interest rate risk as well as reduce pressure on raising equity to meet the minimum capital needs when the risk of list of assets increases unexpectedly. In addition, commercial banks are able to receive capital at a lower cost than their intrinsic risk level.

In addition, securitization contributes to attracting domestic and foreign investors, especially institutional investors. Securitization will provide diversified investment opportunities for investors through quality instruments, thereby raising the liquidity for the market. Cash flow from securitization will improve liquidity as well as contribute to increasing capital for next loans and raising the profitability of commercial banks.

In addition to the benefits mentioned above, what are potential risks of securitization, ma'am?

The actual implementation of securitization in many countries such as the United States or the Europe shows that the securitization can cause risks for banks. Because if banks easily sell their debts to the market, this means that they will be free in loans and loose in loan conditions to their customers. The securitization may transfer the liability for debt collection to other investors. Consequently, the process and evaluation of bank loans may lead to low-quality loans and substandard loans.

In addition, the objective of credit growth is also the condition that can lead to a series of risks. Lessons from the global financial crisis of 2007-2009 remain their validity in this case. Therefore, the evaluation and control of debt quality is the most important requirement for securitization. In addition, the classification and ranking of debts and the publicity and transparency of information to investors are the decisive factors for the success. Investors should have sufficient information about the quality and risk of the securities which they will buy on the market. Besides the legal corridors and synchronous support mechanisms, if the requirements for control and evaluation of quality of these debts are not carried out, the safety of the banking system shall be ensured upon the securitization.

With current conditions, can Vietnam possibly control such risks?

At present, the securitization of debts in Vietnam still faces a lot of difficulties because Vietnam has no legal corridor to support this process, especially the debts related to collaterals as real estate. In addition, the subjects allowed to participate, the rights of the subjects allowed to participate as well as the legal documents to form the market, the evaluation of the quality of debts, debt valuation, mechanisms to handle the difference between buying and selling prices and relevant tax policies are also in questions.

Upon securitization, specific regulation on assets or debts which are securitized is a requirement. In my opinion, Vietnam still needs a roadmap and must step by step improve the legal corridor and conditions to reach the next step in the implementation of securitization. If banks do not have a good preparation and have not assessed risks as well as publicized information on the market, they cannot implement the securitization.

Vietnam’s securities market attracts more foreign capital Macro-economic stability, positive economic growth, the government’s efforts to improve the investment environment, and the growing private ...

Banks are currently in the process of implementing Basel II. If successful, each asset item of the bank (especially the customer's debts) is also ranked and assessed on corresponding risk level. Accordingly, this will be the initial basis for establishing and implementing securitization of debts in Vietnam.

Thank you very much!