Handling bad debt

VietNamNet Bridge – On the sidelines of the bad debt management training course co-organized by Business Development Institute (BDI) and Swiss Asia Banking School last Friday, Le Xuan Nghia, head of BDI, talked to local media about the bad debt handling process in Vietnam.

How will the bad debt handling process run after the Vietnam Asset Management Company (VAMC) was established?

BDI, bad debt, State budget, special bonds, central bank

Le Xuan Nghia.

Le Xuan Nghia: Vietnam basically is following the bad debt handling model using mixed financial sources from the State budget and the central bank. Bad debts in basic construction that the State has borrowed from enterprises, enterprises have borrowed from banks and those owed by State-owned enterprises will be settled by the Ministry of Finance. The remainder will be handled by VAMC under the central bank, risk reserve funds of commercial banks or refinancing of the central bank if needed (for example, for small commercial banks with low liquidity).

Therefore, Vietnam’s bad debt handling method basically is not much different from other countries. However, there may be technical differences depending on special conditions of Vietnam. For example, Decree No. 53/2013/ND_CP regulates that VAMC can buy bad debts of commercial banks at market value or book value. The central bank will also apply technical measures to deal with bad debt transacted at book value and paid by special bonds by forcing establishment of risk reserve funds at 20% each year.

Can you explain “buying bad debts at book value”?

Buying debts at book value will help speed up debt trading process, avoid indecision of the commercial banks, bargain and prevent further credit freeze. The asset management company will apply technical solutions to handle this practice by forcing establishment of risk reserve funds for special bonds as special discounts and to preserve its capital after five years. Special bonds are considered as main assets of commercial banks to mortgage for loans borrowed from the central bank via the open market operations (OMO). The central bank will decide specific refinancing levels compared to the par value of special bonds, the Government will decide refinancing rates based on special bonds in each period.

Can you share international experiences of handing bad debts in recent times?

The important matter in international experiences is where money comes from for handling bad debts. From this source, a country will set up a debt handling model. There are three basic choices for money sources.

The first is from a central bank, including required reserves, exceptional reserves and direct refinancing. With this source, a central bank can buy bad debts of commercial banks, give liquidity finance directly to banks to handle bad debts or via an asset management company belonging to the central bank. Sweden built up this model in 1992.

With this model, government will tackle bad debts and prevent inflation at the same time, so the process may last three to five years. Economic growth will be at an average level, the real estate market will also recover gradually depending on bad handling and credit boosting progress.

The second choice is the state budget, which is funded by selling State assets (assets of State-owned enterprises), taking out international loans and in the country by issuing government bonds. With this method, bad debts will be solved quickly in two or three years, inflation will be controlled better and high economic growth can be achieved in short term. The real estate market will also see a more sustainable recovery as credits will be speeded up and total demand will see stable recovery.

The third choice is mixed sources from both the central bank and the State budget. The method will harmonize results of the two models above and usually obtains political agreement. However, it will also demand more harmonious coordination between financial and monetary policies.

Most countries have applied the third model and fetched good results, especially the U.S. in the current financial crisis. Picking the mixed model is the result of political pressure from congresses, the bodies that control budget spending which is closely related to tax policies and government loans.

Source: SGGP

BDI, bad debt, State budget, special bonds, central bank
 
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