Bad debt settlement – key to bank restructuring

Over the past 20 years of Doi Moi (Renovation), the shortcomings of local commercial banks have been exposed, particularly through poor management, inadequate human resource training, weak liquidity, and rising bad debt ratio.

In 2013, the banking sector is set to reduce the bad debt ratio in commercial banks.

Two years ago, the State Bank of Vietnam (SBV) approved three M&A deals to improve the operations of several banks, including Ficombank, TinNghiaBank and Saigon Bank (SCB) and rearrange credit organizations in the process of economic reform.

Dr. Dao Duy Huan from the University of Finance says the restructuring of the banking sector is slow going due to snags in most newly-established commercial banks.

According to the latest statistics, Vietnam has more than 80 commercial banks, many of which operate inefficiently for lack of management skills and capital shortages. With a high ratio of outstanding debts they all find it difficult to avoid hidden risks.

Eximbank General Director Truong Van Phuoc is very concerned about a sharp fall in profit on account of their rising bad debts.

Phuoc’s view is shared by Pham Ngoc Hung, Vice Chairman of the Ho Chi Minh City Business Association, who says commercial banks still care too much about mobilizing capital by imposing high interest rates on loans and too little about settling bad debts in the process of bank restructuring.

According to SBV Governor Nguyen Van Binh, the bad debt ratio among commercial banks has reached 10 percent. Giant State-owned enterprises (SOEs) owe a huge amount of bad debts rising from their incentive policies for loan access.

Binh says bad debts are threatening national economic development. Even though some banks have lowered their interest rates, many businesses are still cash-strapped.

Economists have proposed new regulations on credit loan provision and bank operation control.

Dr. Le Tham Duong from the HCM City-based Bank University insists on applying international standards on bank operations. Modern standards will reduce bank profits from credit loans but increase those earned via service fees, he notes.

Under the SBV’s scheme, bank restructuring is necessary to provide fresh impetus for economic reform inherent in the ongoing growth model shift.

Economists have urged commercial banks and businesses to closely cooperate in the bank restructuring process by handling bad debts and simplifying loan access procedures in the first place.