Few people know for certain the extent of the bad debts Vietnam’s banks are carrying but alarm bells can be heard.
Vietnamese bank bosses usually dodge questions about bad debts or only give a general answer rather than talk specifics. But the last two months have seen a shift in attitude, with bosses revealing to local media their bad debt ratios. Mr Tran Bac Ha, Chairman of the Bank for Investment and Development of Vietnam (BIDV), said that the bank’s bad debt ratio was 2.59 per cent and is estimated to be 3 to 4 per cent by the end of the year. More noteworthy, however, were his claims that bad debts in the entire banking system were around 7 to 8 per cent.
Mr Ha’s estimate is double the official figure from the State Bank of Vietnam (SBV), which put bad debts against total outstanding loans at 3.04 per cent. Another point of reference came from Fitch Ratings, with the global ratings agency saying in June that the bad debts of Vietnamese banks account for 13 per cent of all outstanding loans under international standards. Although the precise figure remains something of a mystery, it may well be higher than the official SBV figures.
Another yardstick is to look at the anecdotal evidence. Five banks - South East Asia Bank (SeaBank), An Binh Bank (ABBank), Vietnam Bank for Industry and Trade (VietinBank), Vietnam Export & Import Bank (Eximbank) and Vietnam Development Bank (VDB) - lent more than VND300 billion ($14.4 million) to the An Khang Seafood Processing Company, which then become insolvent. Only SeaBank and ABBank directly or indirectly got their money back, while the other three must face the fact that their loans have become bad debts.
Since the beginning of the year people have given greater focus to interest rates and the issue of bad debts has been neglected. But with the end of the year approaching bad debts will become clearer as enterprises struggle with the high interest rates. Moreover, given the difficult economic climate, it is will be difficult for many enterprises to settle their debts on time.
Root cause
Last month a number of banks announced their bad debt ratios, of which the Bank for Foreign Trade of Vietnam (Vietcombank) had 3.47 per cent in the first six months of the year while the Vietnam Bank for Agriculture and Rural Development (Agribank) had 6.67 per cent. Meanwhile, VietinBank claimed a ratio of 1.2 per cent at the end of August, despite its Vinashin debt being calculated at more than VND1,000 billion ($48 million).
Analysts estimate that a number of banks in Vietnam have a bad debt ratio against total outstanding loans of 2 to 2.5 per cent and the total in the country’s banking system are no less than VND100,000 billion ($4.8 billion) Although bad debts at some State-run banks are at high levels, bank bosses insist that everything is under control.
The bad debts come primarily from two sources. First of all, banks have been lending too much money to property developers for quite a long time. According to Mr Vo Tri Thanh, Deputy President of the Central Institute for Economic Management, the risk from bad debts is closely connected with the real estate market, as the banks often lend excessively during a market boom. “The health of commercial banks depends largely on whether real estate is peaking or falling,” he was quoted as saying.
Large banks often lend based on the quality of the borrower and any existing relationship they may have. Smaller banks, meanwhile, are more than willing to lend to real estate developers. This is evident in the high ratio of credit to the real estate sector, which is estimated at 30 to 40 per cent. While large banks can control their bad debt exposure by knowing its customers and establishing strict credit criteria that are enforced, the same can’t be said for the country’s smaller banks.
But large banks are often directed by the government to provide loans to State-owned enterprises (SOEs), which frequently don’t perform well and don’t have enough registered assets to back up their loans. Such loans have served to maintain the SOEs’ survival rather than make a profit and bad debts have inevitably followed. Analysts, therefore, warn that bad debts held by SOEs in Vietnam are a far bigger problem than initially estimated. “Even though bank credit to SOEs against total outstanding loans has fallen from around 70-80 per cent in the 1990s to 30-35 per cent at the moment, the figure is still high,” said Mr Thanh.
Possible solutions
There are two problems to address: how to prevent bad debts from occurring in the first place and what to do if preventative efforts fail. At the macro level, to prevent bad debts it is necessary to quickly improve risk management as well as supervision. An early warning system must also be established to outline different scenarios. This will help to deal with any problems in the banking sector and minimise bad debts due to financial risk.
Other possible solutions, according to experts, include merging small or weak banks into larger ones, especially so with there being too many banks in Vietnam compared to the size of the economy. According to Mr Le Xuan Nghia, Deputy President of the National Financial Supervisory Commission, the government is considering merging some small banks with high bad debt ratios into stronger banks. There are predictions of a new wave of mergers and acquisitions in the near future.
As bad debts head upwards there is a hint of relief, with financial institutions looking at taking on the debts. There is currently just one company working in the field: the Debt and Asset Trading Corporation under the Ministry of Finance. But as Vietnam has the potential for this type of investment fund, more and more are thinking that bad debts are worth investing in.
In the latest move, VietinBank plans to mobilise $100 million to establish an investment fund focusing its investment on banks’ bad debts. Mr Nguyen Anh Tuan, Managing Director of Vietinbank Capital, the investment arm of VietinBank, said that the company was in the process of contacting foreign investors to raise funds. “The good news is that foreign investors are interested in this type of fund, especially those from Hong Kong,” he said. “The fund will initially take over the non-performing loans of VietinBank.” It will carry out three investment methods. The first is to buy the collateral while the second is to cooperate with banks to press for debt payments. The third is to buy the debts with the aim of holding shares in otherwise sound businesses that are facing difficulties from the financial crisis.
• IDG Ventures Vietnam, Germany’s Rebate Networks and Russia’s Runet announced last month that they will invest $60 million into MJ, a new business group formed by four websites promoting e-commerce in Vietnam.
• VietinBank is the country’s first bank to establish a presence in Europe, with the opening of a branch in Frankfurt, Germany last month.
• The State Bank of Vietnam has recently permitted Korea Exchange Bank’s Hanoi branch to increase its chartered capital from $15 million to $67 million.
•An executive at Dong A Bank’s Tay Ninh branch has been fired for offering a deposit interest rate of 15.5 per cent a year, exceeding the central bank’s ceiling of 14 per cent a year.
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