Debt acquisition market needed for bad credit loans


Resolution 42/2017/QH14 has been a crucial legal regulation for enabling creditors or Credit Institutions (CI) to deal with bad debts and guarantee assets that have existed for years.

Illustrative photo.

Illustrative photo.

Two years after the decree was introduced, CIs have indicated a positive response by effectively coping with nearly VND 236,800 billion.

Speaking with Saigon Investment, Dr. Tran Du Lich, member of National Financial and Monetary Policy Advisory Council, believes that Resolution 42 has only created a mechanism that helps CIs handle guarantee assets, but has not successfully resolved the problems of bad debts. Therefore, it is essential to have a satisfactory debt acquisition market.

JOURNALIST: - What do you think about the process of dealing with bad debts since the introduction of Resolution 42?

Dr. TRAN DU LICH: - The mid-2019 figures show the bad debts in the system at 1.9%. The debts, which have been sold to Vietnam Asset Management Company (VAMC) and have not been dealt with, plus the debts which are likely to become bad debts are less than 5%. This figure in late 2016 was more than 10% and reflects a positive trend.

It should be understood that bad debts can never be totally resolved because they are under CIs. Debtors are sometimes very unlikely to pay debts and creditors must always have standby risk prevention funds. The current debt rate ensures security for the system and does not cause problems for liquidity; and it also makes it possible for banks to increase profits, instead of creating risk prevention funds for bad debts.

It should also be noted that the National Assembly took prompt action by introducing Resolution 42 to pave the way for coping with loan-guarantee assets. CIs, especially VAMC, have resolved debts in accordance with Resolution 42 in an effort to facilitate liquidity for bad debts through acquisitions.

This, however, is just a temporary solution. A debt acquisition market should be established to basically resolve all the problems of bad debts. This market must have elements that will have significant impact on both demand and supply; and identify barriers and blockades in the market. Therefore, Resolution 42 has resulted in positive effects, but we should not think that it will help resolve all the problems in connection with bad debts.

- Will the banks be able to do away with all the high-value bad debts before Resolution 42 expires or before the buying force fades?

- At the moment, the bad debt barriers have been basically removed, and capital flows again. And now whether to continue to sell the guarantee assets depends heavily on the market, because the assets mortgaged at the banks vary widely, most of them being real property. Some assets can be legally traded while others cannot, while some other assets are semi products, plants or factories which are unlikely to sell easily.

Resolution 42 currently improves liquidity for the banks, facilitates settlement of assets and promotes capitalization of the mortgaged assets, particularly assisting VAMC in selling the assets. When Resolution 42 expires, the activities of liquidation of assets, acquisition of debts and settlement of bad debts will become normal activities of the banks again. Therefore, I believe that the current applicable legal regulations can still facilitate the settlement of assets even after Resolution 42 expires.

- What do you think about the role of VAMC in coping with debts, compared with the expectations when VAMC was established?

- I think VAMC was established to deal with the concerned situations and it has successfully fulfilled some responsibilities, such as accepting debts to make it possible for the banks to continue their operations, because some banks failed to solve their problems before VAMC came into existence.

Yet it is time to reconsider the role and organization so that VAMC and debt acquisition institutions can participate in the debt acquisition market in accordance with the market rules, enabling VAMC to really play its role as an asset management or debt acquisition company.

VAMC previously helped protect assets, and also made it possible for the banks to get rid of part of their bad debts so that they could operate their credit services normally. To help VAMC work better, however, it is necessary to have cash to buy and sell assets as a debt acquisition institution, instead of just protecting and managing them for concerned banks.

To achieve such a goal, VAMC must have sufficient charter capital. It is imperative to increase its charter capital so that VAMC will become financially powerful enough to carry out acquisition plans and play a pivotal role in the debt acquisition market in the future. When VAMC was established, I warned that its capital was too small.

The State Bank of Vietnam (SBV), as the owner of VAMC, has proposed to the Prime Minister that VAMC’s charter capital must be increased to VND5,000 bn this year and VND10,000 bn by next year. In addition to an increase in capital, it is vital to facilitate the outputs. Therefore, it will be crucial to review and revise some current applicable regulations to pave the way for successful acquisition of debts.

- VAMC and the 20 Asset Management Companies (AMCs) of the banks are working for the establishment of AMC Club and have proposed to SBV that a bad debt trading floor be built. This is a positive sign, but when do you think Vietnam will have a workable debt acquisition market?

- Firstly, a workable debt acquisition market must have financially strong companies held by banking and non-banking financial institutions. Their assets in the market must come from transparent sources and must be transferrable. The biggest difficulty now is that some assets in connection with land property have not met the requirements to be transferred, or they cannot be transferred to foreign institutions. That is one of the obstacles that hinder the development of the debt acquisition market. Relevant laws and legal regulations should be introduced to facilitate the transfer and acquisition of mortgaged assets.

Secondly, it is a barrier when state-owned AMCs are afraid of risks. For example, a piece of property which was previously valued at 100 dong is now sold for only 30 dong. That is a loss and it hampers acquisition. That means market elements have not been created, so it is necessary to develop an effective mechanism for the market. Only then will there be an appropriate debt acquisition market. In such a market, most of the debt acquisition companies must be in the private sector. If those companies are affiliates of state-owned commercial banks or VAMC is involved in the activities, the process will still be controlled by state-owned institutions, seriously hindering growth. So it is obvious that acquisition is going on, but it will take many more years for relevant legal regulations to be introduced and a debt acquisition market to really apply international practices here in Vietnam.

- Deputy Prime Minister Vuong Dinh Hue has asked SBV to develop an appropriate plan to cope with bad debts in badly managed projects. What is your opinion about this matter?

- I suppose this is a way of internal management at state-run projects, especially at hindered projects. Those problems require proper directives because such projects are connected to state-owned property, state-owned companies and state-funded commercial banks. For such a directive, the Government must report the situation to the National Assembly, similar to the Government’s report to the National Assembly about the problems of unpaid taxes. Previously, there were times when we had to deal with public debts in the first and second stages, and it may happen again. However, I don’t think the State should assume all the responsibilities. Instead, such problems should be settled in the market, and should even be resolved in the form of debt acquisition.

It should be further noted that most of the debts from 2012 have been guaranteed by the concerned funds. The banks can earn more if such debts can be sold. In fact, there are cases in which the banks do not want to sell such debts, or hesitate or fail to sell them. Such banks do not dare to sell bad debts because they are afraid to take responsibility for the losses. For instance, a debt can be sold for just 30 dong, but it was valued at 100 dong. Again, it is necessary to introduce a legal regulation on this matter.

Additionally, there may be some credit fraud at a few projects, and some institutions might as well list their bad debts in their property balance reports. CIs have risk prevention funds, but they do not dare to sell their bad debts because they are afraid to take responsibility for the losses. These problems seriously affect the settlement of bad debts at poorly managed projects.

- Thank you very much.

Translated by Nguyễn Gia

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