Vietnam - Bad debts must be publicized

by lexie Sun Dec 11, 2011 2:33 pm

December 10, 2011

Bad debts must be publicized

The bad debt ratio of Vietnamese banks accounts for 13 percent of the total outstanding debts. According to economists, it is essential to identify the bad debt ratio of each bank in order to effectively restructure the banking system.

The hidden figure of bad debts

Bad debts are a thorny issue for any banking system, says Dr. Nguyen Thi Mui from the Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank) as she voices concern for the increasing bad debt ratio in the current domestic banking market, which is experiencing the negative impacts of banks' unsafe capital adequacy and liquidity.

Dr. Mui forecasts that local banks will face more difficulties in meeting the Basel III global regulatory standards on bank capital adequacy and liquidity by 2013.

According to analysis by Professor Dr. Nguyen Van Hieu, also from Vietinbank, the bad debt ratio of State-owned commercial banks saw an increase of 66.18 percent in 2011, while the figure for joint stock commercial banks was 44.29 percent, and foreign-invested banks, 59.23 percent, in comparison with last year. In addition, a large volume of bank capital is invested in business bonds. These are factors that could threaten the effective operation of credit organizations, he says.

According to the State Bank of Vietnam (SBV), the bad debt ratio is still at a safe level and is being kept under control. However, it will be a matter of concern if bad debt in the real estate sector continues to rise.

So far, only eight banks have announced financial reports revealing and detailing bad debt figures. Economists are stressing the need to make public the bad debts of all banks before restructuring the banking system.

Pham Xuan Hoan, a senior official from the Ministry of Finance, says that Vietnam lacks a strategic vision and long-term plans, which has led to the ineffective operation of commercial banks. His view is shared by Dr. Ha Thi Sau from the Banking Academy of Vietnam, who underlines that, for many years, the SBV failed to implement measures to handle risky credit activities, but instead asked banks to rapidly increase their capital. It seems that State management agencies pay too much attention to a bank's charter capital and not enough on other important factors, Dr Sau elaborates.

Drawing up solutions

According to the European Chamber of Commerce in Vietnam (EuroCham), Vietnam should focus on the quality of the banks, not the quantity. Dr. Matthias Duhn from EuroCham says that a bank’s charter capital should not be fixed at VND 5,000 billion in 2012 or VND 10,000 billion in 2015. Instead, he says, it is necessary to use tools and initiatives to encourage the merging of ineffective banks.

Dr. Mui from Vietinbank affirms that bank restructuring is a must under the guidelines of State management agencies. However, banks heading towards bankruptcy require careful consideration and the SBV or deposit insurance funds should provide the capital to protect the interests of customers.

The Vietinbank expert also reveals that some larger commercial banks have provided financial assistance to smaller ones. State management agencies need to monitor this situation to prevent large banks from interfering too much in the activities of other banks, which could result in reducing the capacity of smaller banks and weakening the financial power of the entire banking system in the future, she stresses.

Many economists also suggest creating a specific detailed roadmap for restructuring the Vietnamese banking system. Businesses and individuals should be provided with updated information on banks’ activities, as well as the roadmap, and the interests of consumers must be ensured under any circumstances, they note.

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