Handling bad debts: Need to change the way of management

We must not use taxpayer money to offset the weaknesses of enterprises and credit institutions. Photo: ST.

Changing the mechanisms

In a seminar on banking institutions held recently, Dr. Can Van Luc a banking and financial expert emphasized the need to thoroughly remove "bottlenecks" of bad debts. In particular, one of the problems was to add money to the Vietnam asset management company (VAMC). So, the question is where the money comes from that VAMC can use as "cash paid right after the goods are transferred" to buy and sell debts according to the market mechanism.

"In the last four years, the banking system has“sacrificed” much to dealwith bad debts, because the “pile of debt” from 2012 has been handled55% by the banking system themselves (the rest was sold to VAMC and under other methods) so, the profitof the banking system has been very low over the past few years, the lowest in the region, only 6% ROE"Mr Power said.

The draft of plan of restructuring the economy in the period 2016-2020 drafted by the Ministry of Planning and Investment commentedthat handling of bad debts isimportant, but there are still been many potential risks to the safety and efficient operation of credit institutions. The disposal of bad debtsthroughVAMC has still been slow due to various objective and subjectivereasons. Therefore, the goal by 2020,is that the proportion of bad debts will continue to be cut in a sustainable manner through the construction of the legal framework on the restructuring of credit institutions, and handling credit institutions that have manyshortcomings and bad debts. The intervention competency of the State, and responsibility of credit institutions will be promoted.

So, if, the goal is adopted by 2020 it will will help the banking - financial system of Vietnamto be more healthy and developsustainably. However, experts saythat to handle bad debts, the banking system still needs from 5,000-10,000 billion dong. This figure is so largethat the banks as well as VAMC will have difficulty managingthem. Therefore, the proposal is to usethe State budget to handle bad debts to help VAMC have "cash paid right after the goods are transferred".

In the draft of plan of restructuring the economy in2016-2020 drafted by the Ministry of Planning and Investment, related programs and projects mentioned in the plan of the State Bank of Vietnam (SBV) and the Ministry of Finance will submit adraft resolution "Research project of the possibilities to layout State budget resources to handle a portion of bad debts" to the National Assembly in 2017.

This problem has concerned many experts that usingtaxpayer money to handle the shortcomings and errors of the banks is reasonable and effective? Because VAMC has increased its charter capital to 2,000 billion VND to buy bad debts before, but the debts remained "dead" at VAMC and have beentreated thoroughly.

According to SBV, the bad debts ratio of the whole system is quite low now, 2.58% in June, 2016, however, the debts thathave actually been handled are still very modest due to the majority beingsold to VAMC. By the end of the month of June, 2016, VAMC handled only 32,400 billion of a total of 241,000 billion VND of bought bad debt, i.e.only 13.4%.

Should or shouldn’t?

Also talking about the use ofthe State budget to handle bad debts, according to Mr. Duong QuocAnh, Deputy Chairman of the Economic Committee of the National Assembly, the experience of some countries is that te credit institutions should be responsible for handlingbad debts, if they cannot handle by themselves, they will sell them to abad debt management agency of the State at the market price. Some countries, such as Thailand, South Korea gather all the bad debts, based on a special property assessment, and they will issue bonds, which are from the budget. "there have been many countries using the budget to handle bad debts," Mr.QuocAnh said.

However, Dr. Nguyen Tri Hieu– a banking and financial expert said that in the context that the budgetishaving many difficulties, the use of a large sum of money to handle bad debts is not fair, we must not use taxpayer money to offset the weaknesses of enterprises and credit institutions. Thus, bad debt trading should soon be carried out to allow investors both domestic and foreign to participate, the reason is handling bad debts does not necessarily need a lot of money but it is the method of implementation, findinga good solution, then the bad debt will be solved.

This is also the assessment of many experts when they saythat to handle bad debts, there is much work to do but not only adding money. Experts have said that if the use of budget funds to handle bad debts is notapproved, we shouldn’t give large sums to handle bad debts, we should use some mechanisms such as tax exemptions, exemptions for operating costs for enterprises having bad debtsand expenses for activities related to the payment of mortgaged property.

Moreover, Dr. Nguyen Tri Hieu said that thanks to the establishment of bad debt trading market, Vietnam will have more resources to provide for bad debts handling operations, especially from foreign financial institutions. In this way, bad debts will be sold at market prices, banks have to accept losses to clean the balance sheet. Besides, the debt settlement organization may apply the method of "definitive purchase" to be free to decide on the treatment of collateral, avoiding the constraints of ownership.

Overall, handling bad debts still mostly uses mechanisms, in a vicious circle moving from one place to another and so ithas not actually been effective. Therefore, the best option is still to find a reasonable mechanism that can solve the issueso that the capital also brings effectiveness, helpingbanking - financial markets to be healthy.