Obstacles to bad debt settlement

The International Monetary Fund’s (IMF) Permanent Vietnam Representative, Sanjay Kalra, recommends stepping up the restructuring of the banking system at any cost.

Judging by recent developments related to major banks in the country, the State Bank of Vietnam (SBV) is considered capable of ensuring liquidity as it is prime for stable growth.

SOEs and banks in a bind

IMF Representative Sanjay Kalra is concerned about the lack of transparency in banking operations which he believes has led to instability and obstacles to further growth. Despite a credit growth boom, banks are faced with the rising bad debt ratios of State-owned enterprises (SOEs). The banking system is under heavy pressure from weak asset management and inadequate capital reserves, he says.

Many economists differ on the validity of bad debt figures only verified by management agencies and the banks themselves they think that commercial banks put bad debt ratios at 8 percent, but the real figure must be higher, Sanjay Kalra says.

As most bad debts are owed by SOEs and the real estate sector, he argues, bad debt ratios would rise higher if there were no drastic measures to intervene and push through banking reform.

SOEs have owed huge loans to the banks, and this means their bad debts can only be settled when they succeed in solving their own problems in the restructuring process. The first step is to show their real financial capacity through audited balance sheets and operation efficiency readings.

Some economists propose rearranging and merging weak banks. Others think the focus would be on establishing asset and debt management firms in conjunction wiowneth risk management measures.

It is urgent to inspect the real banking situation under a comprehensive strategy for bank restructuring.

Word Bank (WB) Vietnam Country Director, Victoria Kwakwa, says dealing with bad debts could be more time-consuming and costly if bank reform is slow-going. In some countries, spending on resolving financial issues accounts for 30–40 percent of GDP, she notes.

Drastic measures

SBV Governor Nguyen Van Binh has revealed a commercial bank restructuring plan for 2013, saying the central bank will do all it can to ensure the effective operation of the whole banking system.

In 2013, the SBV will focus on implementing the Prime Minister’s Decision 254/QD-TTg (signed in 2012) on restructuring credit organisations during the 2011–2015 period. It will continue adjusting monetary policy and using more effective tools to control inflation and stabilise the macroeconomy. The main focus will be on lowering interest rates for the benefit of long-term stable macroeconomic growth, Binh elaborates.

In addition, the SBV will impose strict controls on credit growth and offer businesses easier access to bank loans, especially for small and medium-sized enterprises (SMEs) and the agricultural, rural development, and support industries.