Efforts to avert a debt default

First steps

VAMC on October 1 signed a contract to buy VND2,450 billion in NPLs from the Bank for Agriculture and Rural Development (Agribank).

VAMC Vice Chairman Nguyen Quoc Hung said Agribank has been selected for it is a big credit organisation operating in agriculture and rural development – a key economic sector.

Agribank is the first Vietnamese credit organisation to sell their NPLs to VAMC

“The most important thing is Agribank is keen to restructure its loans,” said Hung. “It has already built up loan loss provisions to cushion the bank’s balance sheets, which is one of our criteria for selection.”

The fact is that several credit organisations do not want to sell their NPLs to VAMC for fear the move will affect their operations. They do not know how to plan provisions and to refinance their loans at the central bank.

The State Bank of Vietnam (SBV) and VAMC jointly hosted two conferences in Hanoi and HCM City to give instructions on NPL settlement.

As a result, VAMC has so far received requests from more than 10 credit organisations of which four have a NPL ratio of less than 3%.

A recent SBV document only requires commercial banks with a NLP rate of more than 3% to sell their debts to VAMC.

After Agribank, VAMC is scheduled to sign similar contracts with the Saigon Commercial Bank (SCB), Saigon-Hanoi Commercial Joint Stock Bank (SHB) and Petrolimex Group Commercial Joint Stock Bank (PG Bank) this week.

“We aim to buy VND30,000 worth of NPLs and issue between VND30,000-35,000 billion worth of special bonds by the end this year to support banks,” said Hung.

To ease banks’ difficulties, the central bank plans to offer a minimum interest rate of 2% for their bonds instead of the 7% refinancing rate at present. Banks can use the bonds to refinance their loans at the central bank.

The rate proposal has been submitted to the Prime Minister for approval.

One stone, three birds

VAMC’s NPL settlement could kill three birds with one stone, said Hung, explaining businesses are able to take out new loans, the banking system will become healthier, and the economy will be stimulated.

Commercial banks are burdened with NPLs owed by businesses (Photo:TNO)

After selling their debts, credit organisations have the chance to restructure themselves to secure safe operations and improve liquidity. They can use VAMC bonds to refinance 70% of their loans at the central bank to assist businesses.

An important thing is that credit organisations’ NPL ratio will fall, helping increase their trust locally and globally.

Businesses that default on their payments also benefit from the NPL settlement.  They will also have the chance to restructure operations, pay off debts, enjoy reduced interest rates, and access new loans.

In the face of the stagnant real estate market, the move will prevent developers from piling it high and selling it cheap. This means both businesses and banks still hold capital assets to maintain operations.

In an Asian Development Outlook Update released in Hanoi on October 2, the Asian Development Bank described the establishment of VAMC as ‘positive, saying progress in NPL resolution will result in increased flows to productive sectors of the economy.