Breaking bad debt: Vietnam tackles NPLs

New regulations should help the country clear up its non-performing loans, but the move has serious political and economic implications.

It’s roughly 10 years since work began on the Saigon One Tower, a 42-story skyscraper in downtown Ho Chi Minh City, and still it remains far from completed. The desolate site is a shell of steel bars and concrete walls – hardly the “new landmark gracing the city with its beauty” that was promised.

The Saigon One Tower project stalled in 2011, when the housing market crashed in Vietnam’s biggest city. That is until recently when Vietnam Asset Management Company (VAMC), a bad debt manager set up in 2013, seized ownership of the ill-fated project, the first repossession of collateral for non-performing assets under new legislation introduced in mid-August to help loosen the debt shackles holding the country back.

“Non-performing loans made to property projects have dragged on the development of Vietnam economically and politically,” said Duong Nguyen, a partner at EY. “Everyone (from business tycoons to government officials) has a cake in the property market.”

Nguyen, who has previously provided auditing services to the Vietnamese central bank, explained that the previous rules prohibited law enforcement agencies from expelling people from their houses even when they missed their mortgage payments.

The speedier repossession of collateral allowed by the new legal regime is a credit-positive step for Vietnamese banks, which continue to grapple with legacy asset-quality issues caused by the rapid credit growth and looser underwriting standards of the past decade, Moody’s said in an August 21 note.

VAMC, a unit of the State Bank of Vietnam central bank, is now trying to recoup money from the debtors, either by finding new buyers willing to pay a higher price for the assets seized or by increasing the value of businesses by restructuring them.

Pressure is mounting on the Vietnamese government to deliver on its promise to clean up the toxic debts in the country’s banking system after a sustained credit binge.

On average, the credit-to-GDP ratio expanded by 4.8% per year between 2000 and 2015, according to the IMF’s estimate. This drove up the Southeast Asia country’s debt-to-GDP ratio to 124% as of the end of 2016, exceeding the Asean-5 countries of Indonesia, Malaysia, the Philippines, Singapore, and Thailand.

The amount of bad debt stood at VND487 trillion ($21.4 billion), or about 8.86% of all outstanding loans, central bank data shows. It plans to cut the NPL ratio, among the highest in the region, to around 3% by 2020.


The government is also cracking down on dodgy and illicit lending activities between tycoons and banking executives, according to Nguyen.

She pointed to the arrest in 2014 of a banking executive of a privately held bank. It is alleged that the former chairman of Ocean Bank, Ha Van Tham, illegally approved loans worth $23 million in 2012, leading to the bank’s demise.

Tham is accused of approving loans to the Trung Dung real estate company without proper collateral.

Similar to China, the Vietnamese government has vowed to clean up the financial industry, which has been plagued by favouritism and dodgy loans, as part of a wider anti-corruption campaign.

In the short term at least, the current financial clampdown will give succor to the 99% of the society working modestly to create a better and fairer future. Speaking from China’s experience, uneven economic growth leads to more harm than good. The stability of the economy should depend on meritocracy, not by autocracy.

“A raft of scandals in the banking system will become the enduring test for the Vietnamese officials’ commitment to reform,” Nguyen said.

¬ Haymarket Media Limited. All rights reserved.
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