Why Vietnam's asset management company is not a silver bullet

Author: Ashley Lee | Published: 9 Jul 2013
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  • The Vietnam Asset Management Company (VAMC) is a state-owned company created to purchase the bad debt of Vietnamese banks. It came into operation on July 9;
  • The VAMC may help market participants, as well as the State Bank of Vietnam, to understand the extent of the ratio of non-performing loans in the market;
  • But the establishment of the VAMC has not been accompanied by meaningful structural changes related to banking sector transparency.

The Vietnam Asset Management Company (VAMC), a state-owned company created to purchase the bad debt of Vietnamese banks, has just come into operation. But the VAMC alone will not resolve the country’s banking crisis.

The VAMC will purchase bad debt and restructure those loans, and will issue zero-coupon five-year bonds in exchange for the banks’ bad debt. Lenders may use those bonds as collateral for refinancing funds from the central bank.

The VAMC provides a chance for investors, as well as the State Bank of Vietnam (SBV), to understand the ratio of non-performing loans in the market: a lack of transparency has made it difficult for market participants to gauge the bad debt.

For the VAMC to buy bad debt from Vietnamese banks, the banks must provide more information about the classification of its debt, clients and other information, said YKVN’s Truong Nhat Quang. Based on that information, it can cherry pick what it wants to buy.

Further Reading

NPLs complicate Vietnam restructures

Why Vietnam’s bank FDI proposal falls short

Why Vietnam bank merger could spark copycat deals

TheIndeed, in a Fitch Ratings article released today, the agency said that system-wide NPLs may be three to four times higher than reported by banks. It added that the ratio is greater than the understatement reported by the SBV, which was 8.8% at the end of September 2012. The banks have reported their NPL ratio is 4.9%.

VAMC limitations

But the VAMC has been criticised for the limitations on the loans it can purchase. On the SBV’s website, its requirements are listed as being bad debts as stipulated by SBV, being guaranteed assets, having legal documents, being existing customers and having a balance higher than the level set by SBV’s regulations.

The most criticised requirement is that the loans must have collateral. Truong said that VAMC is limited to buying debt that has collateral, but 99% of debt in Vietnam is backed with collateral.

Exceptions are also possible. Allen & Overy’s Tran Anh Duc said that VAMC conditions for NPL purchase include provisions that the loans must have security assets and the borrowers have to be operating as it is important for the bad debt to be recovered.

The government provides for exceptional circumstances, he added. If a condition is not met, government approval will be required to purchase the NPL and it will give further guidance.

Management questions

Rather than focusing on the VAMC’s limitations, most of lawyers’ questions relate to its day-to-day management.

It’s quite difficult for local banks to clear their books by transferring debt, so the VAMC is an option for local banks, Tran said. From the perspective of local banks, the VAMC will improve the banking system, although a question that remains is how it will be managed.

Another question is whether VAMC information will be used to facilitate mergers between banks. Although some deals have been seen in the market, there have so far been fewer than expected.

"People are still working on the operating rules of the VAMC, but it will depend on how the VAMC and the Central Bank push the banks to provide information," said Truong. "It may be too early to say whether information disclosures will help the due diligence process for bank mergers."

Structural changes

Although the establishment of the VAMC allows banks to offload bad debt from their balance sheets, Vietnam’s banking sector has not yet to see regulatory improvements regarding transparency or loan classification and accounting standards.

While a new cap for foreign investment into banks has been proposed, it has not yet been implemented. Increasing foreign investment in Vietnamese banks would introduce principles in line with international standards to the sector, but most foreign banks would prefer to take majority stakes.

Further, the Fitch report encouraged structural reforms to reduce the chances of a recurrence of asset quality problems. It added that the principal constraint on the sovereign B+ rating is the potential risk to macro-financial stability and public financings posed by the large and opaque banking sector.

Related links

NPLs complicate Vietnam restructures

Why Vietnam’s bank FDI proposal falls short

Why Vietnam bank merger could spark copycat deals




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