A view of a Maritime Bank branch in Ho Chi Minh City. Economists warn that a central bank plan to buy banks’ non-performing assets could bring back inflation
Economists say the central bank should be cautious with its plan to buy distressed debt from banks to avoid too fast an increase in money supply, which could again spark off high inflation.
The plan to establish a company under the management of the State Bank of Vietnam to trade bad debt worth some VND100 trillion (US$4.8 billion) was mooted after loans contracted in the first five months.
Though no further details have been announced, Le Xuan Nghia, former vice chairman of the National Financial Supervisory Council, said the news of the debt relief plan has cheered up the market.
The increasing bad debts have made banks hesitant to lend, stymieing credit expansion, and they would boost lending once the bad debt problem is resolved, he said.
Truong Van Phuoc, general director of Eximbank, said a system to trade distressed debts would enable banks to begin lending again.
“It will allow banks to offer new loans and lower interest rates,” he said.
The bad debt ratio of Vietnamese commercial banks rose to 3.6 percent from 3.2 percent at the beginning of year, State Bank Governor Nguyen Van Binh said on April 12. According to data compiled by Reuters, the ratio was 2.16 in 2010 and 2.03 percent in 2009.
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Fitch Ratings said in a March report that the actual bad debt figure could be higher, warning that asset quality is likely to deteriorate further. “Non-performing loans are significantly understated under the country’s accounting standards and could be three or four times higher,” the agency said.
Dau Tu, a newspaper published by the Ministry of Planning and Investment, Monday cited an annual report from the Vietnam Center for Economic and Policy Research as saying Vietnam’s bad debt ratio actually ranges between 8.25 percent and 14 percent of total loans, or between VND83.1 trillion and VND141.1 trillion. Most of the non-performing loans are related to real estate and stock markets.
Economist Nguyen Dinh Cung, who headed the research team that drew up the report, said banks may have engaged in risky lending, offering loans to weak firms at very high rates that they could not bear.
Le Dat Chi of the Ho Chi Minh City Economics University said the central bank should go slow with the plan.
The money supply will increase when the central bank buys bad debt, possibly compromising the task of controlling inflation, he said.
Besides, even if banks get rid of their bad debts, there is no guarantee they would increase lending as expected by the central bank, he pointed out.
Bankers are of course excited with the plan since they took unnecessary risks earlier and are still being rescued by the government, he added.
Economist Dinh The Hien said the central bank needs to explain what it would do with the distressed loans it buys.
It is also imperative to find out the causes of bad debts, and banks with poor lending practices have to take full responsibility for their bad debts, he added.
Vu Viet Ngoan, chairman of the National Financial Supervisory Council, was quoted by Dau Tu as saying there should not be high expectations for the new plan to set up a company to buy bad debt.
“The establishment of the company may help expand loans and reduce bad debt. However, this would be just one measure, and it would not be able to get rid of all the bad debts in the banking system.”
He said other countries may be able to buy distressed debts in just a few months. But Vietnam, due to its limited resources, would have to deal with the situation in a different way, he added without elaborating.
He estimated that loans contracted 0.76 percent in the first five months, saying “it is a certainty that the credit growth target of 15-17 percent for this year will not be achieved.”
While indicators six months ago suggested “a major issue” in Vietnamese banking sector, “now it looks like somehow they’ve managed that immediate risk,” World Bank Vietnam Country Director Victoria Kwakwa told Bloomberg in an interview at a conference in the central town of Dong Ha.
“I don’t think the risks are as elevated as they were before,” Kwakwa said. Sector is still vulnerable, she said, citing “several” weak banks and high levels of non-performing loans.