FOREIGN TRADE UNIVERSITY MACROECONOMICS

FOREIGN TRADE UNIVERSITY MACROECONOMICS PRESENTATION REPORT *** BAD DEBT IN VIETNAM Group 7: Trương Thúy Hoa Nguyễn Thị Hoa Nguyễn Thị Hòa Bùi Lan Phương Vũ Thị Thu Thủy Đinh Thị Bích Hằng Phí Tiến Đại Bad debt in Vietnam Group Table of Contents I II BACKGROUND KNOWLEDGE OF BAD DEBT I.1 DEFINITION OF BAD DEBT I.2 CAUSES OF BAD DEBT IN THEORY I.3 OUTCOMES OF BAD DEBT IN THEORY BAD DEBT SITUATION IN VIETNAM II.1 FACTS AND FIRGURES II.2 CAUSES OF BAD DEBT IN VIETNAM a From the bank: b From the government: II.3 CONSEQUENCES OF BAD DEBT IN VN 11 a General impacts on Economic growth 11 b Impacts on some particular important sectors 11 II.4 BAD DEBT SETTLEMENT 14 a Lessons from Japan - a successful country in bad debt settlement 14 b Solutions proposed by famous economists and banking leaders 15 c Actions taken by The Government 16 REFERENCE 17 Bad debt in Vietnam Group I BACKGROUND KNOWLEDGE OF BAD DEBT In this part, we study about bad debt in theory, mostly based on Different models of bad debt restructuring written by Stefan Kawalec – Vice president of The Management Board, Commercial Union Polska, organized by the World Bank & the International Monetary Fund, 2002 Definition of bad debt Causes of bad debt in theory Outcomes of bad debt in theory I.1 DEFINITION OF BAD DEBT  According to Investopedia: Bad debt is “A debt that is not collectible and therefore worthless to the creditor This occurs after all attempts are made to collect on the debt” Bad debt is usually a product of the debtor going into bankruptcy or where the additional cost of pursuing the debt is more than the amount the creditor could collect”  According to Dr Stefan Kawalec: “Bad debt is a phenomenon of non-performing loan happening to the banks in market economy A significant bad debt problem exists when a high share of nonperforming assets threatens the liquidity and solvency of a sustainable part of the banking sector” Bad debt in Vietnam Group I.2 CAUSES OF BAD DEBT IN THEORY Dramatic changes in macroeconomic conditions External factors (of banks) Causes of bad debt Political interference Connected lending Internal factor(of banks) Bad management and supervision practice  Dramatic changes in macroeconomic conditions may include:  Recession  Change in price of assets  Unexpected change in interest rate environment  Change in value of currency  Political interference: Very often political interference in bank credit decisions has a significant contribution in creating and prolonging bad debt problems  Connected lending: Lending to companies owned by the bank or its managers or major shareholders is one of the causes of bank failures  Bad management and supervision practice:  Banks lack of understanding about enterprise  To get high profit, they break the law (lending amount surpasses the stipulated amount)  They lend money with too high profit that enterprises can hardly be able to pay, especially commercial banks It both enhances problems caused by external factors and leads to the emergence of other failures itself Bad debt in Vietnam Group I.3 OUTCOMES OF BAD DEBT IN THEORY a To lenders b To borrowers • Lenders have to face the risk of never getting back their assets •Profitability and liquidity reduces because nonperforming loan features as losses in a bank account •Interest rate on new loan may increase to compensate for the losses of non-performing loan •Misallocation of resources occurs as money is allocated to bankrupt customers instead of financing productive activities •Reputation is seriously affected when a debt collection agency gets involved •Sales revenue suffers as consumers feel that your business is unstable and untrustworthy •Expectation of suppilers & stakeholders is ruined as they can not see your ability to cover the debt •Employees may leave because they are afraid of not being paid Bad debt in Vietnam Group II BAD DEBT SITUATION IN VIETNAM II.1 FACTS AND FIRGURES Bad debts of Vietnam’s commercial banks rose sharply from 2011 to 2012 but has some signs to decrease since then The non-performing loan rate has decreased to 4.08% after increasing from 3.07% in the late 2011 to the peak of 4.86% in the late November of 2012 (Source: dtinews.vn) - Bad debt in the banking system has been estimated to be at VND120 trillion (USD5.72 billion) as of December 31, 2012, and continues to rise According to Dr Trinh Quang Anh, Director of the Vietnam Investment Development Group’s Research Centre, said that the figure accounted for 4.2% of the total outstanding loans In his estimation the real figure may be closer to 18% of total outstanding loans if extensions and debt forgiving for enterprises such as Vietnam Shipbuilding Industry Group (Vinashin) and Vietnam National Shipping Lines (Vinalines) were taken into account This figure would equal 17% of the country's GDP last year Bad debt in Vietnam Group - While inspectors of the State Bank of Vietnam(SBV) released a double figure of more than 8.8% (equivalent to more that VND200 trillion) SBV governor Nguyen Van Binh said bad debt has been growing sharply since 20008 In the first ten months of 2012, the growing rate hit a record high of 66% - Fitch Ratings, an economist, estimated that Vietnam’s rate of bad debt had surpassed 10% of total outstanding loans So far, there have been a lot of figures It may come from the different calculation ways despite the announced standards to calculate bad debt, but the main reason is implicitly fishy things The lack of reliable data on bad debts is a worse problem than bad debts themselves Bad debt in Vietnam Group II.2 CAUSES OF BAD DEBT IN VIETNAM a From the bank  Real estate loans: The rise in bad debts mainly came from banks’ high proportion of real estate loans In many commercial banks, real estate projects accounted for 30-40% of their total outstanding loans and at some banks this figure was as high as 50% As property slumps, banks become more exposed to bad debts (Source: http://cafef.vn)  Credit policy Increase of bad debts is the fault of credit institutions However, the basic reason is loose credit policy, which aims to promote growth but has led to widespread public investments regardless of actual demand Bad debt in Vietnam Group  Lending interest rate The lending interest rates were pushed by commercial banks up to 20-25% per annum Unfavorable economic conditions along with skyrocketing interest rates forced 4700 enterprises into dissolve, cited a report by the Ministry of Planning and Investment (MPI), which worsened the situation and increased bad debts in banks Bad debts will become more obvious in the last quarter of the year when all enterprises have to try their utmost to repay their debts to banks The central bank thus was asked to implement tighter monetary policies, focus on controlling bad debts especially at commercial banks with high real estate debt exposure and find ways to pull down interest rates in line with easing inflation.” Bad debt in Vietnam Group (Source: ANZ)  Lending amount: it surpassed the permitted amount by the law The law of Vietnam has it that banks are entitled to lend up to 15% of owners’ equity to a borrower However, in purpose of gaining more profits, they may lend over that amount Habubank is an example in this case It lended over VND3000 billion (equivalent to 83% chartered capital) to Vinashin After Vinashin went bankrupt, the bad debt rate of Habubank occupied over 16%, then Habubank went bankrupt b From the government  Government’s administration: Sheer lack of supervision and lax management has created conditions for waste, red tape and corruption to flourish The State invests large amounts but cannot recover capital which then leads to increase of bad debts Bad debt in Vietnam Group  Economic policy: Vietnam’s economic policy is also to blame for increase of bad debts, as also does poor coordination between banks and businesses - State business towards budget deficit and loose credit policies State businesses play a decisive role in Vietnam’s economic policy and the budget deficit policy is used for promoting growth However, these businesses have operated as monopolies and ineffectively, which paved the way for State owned enterprises State businesses can easily get credit from commercial banks, have right to access unsecured loans or borrow as per directions of the Government; while private owned businesses have a tough time in accessing loans They also have excessive investments in other fields and hence maintain little focus on businesses Easy credit policy together with lax management in enterprises has led to catastrophic increase of liabilities According to a report that Minister of Finance Vuong Dinh Hue presented to the National Assembly, liabilities in 30 State groups and corporations have tripled At a 15 percent interest rate, businesses must earn a profit of more than 10 percent to break even If profits are less than 10 percent, they are unable to circulate income and lose payment ability The above businesses and several other State businesses have operated unprofitably for a very long time and now are unable to pay debts The Finance and Budget Committee of the National Assembly’s Standing Committee said that the bad debt rate in the State business sector has reached 70 - Real estate towards loose credit policy: Bad debt in Vietnam works in tandem with real estate Taking advantage of the State’s loose credit policy, businesses especially large ones have rushed to borrow for urban and industrial zone projects The high profit rate in the real estate sector has also caused residents to get bank loans This has led to supply exceeding demand Real estate prices have been exaggerated much higher than actual value Investors could not sell their properties by raising the real estate stock and bad debts combined Besides, 60 percent of mortgages at banks are real estate but the banks could not liquidate these properties when they needed, putting more bad debt burden on the economy 10 Bad debt in Vietnam Group II.3 CONSEQUENCES OF BAD DEBT IN VN a General impacts on Economic growth Massive bad debts has depressed the growth of Vietnam’s economy as a whole  GDP growth: The bad debt problem has contributed to the abrupt slowing down of Vietnam’s economy The government said the total bad debt in the banking system has hit US$13.3 billion or 11% of Gross Domestic Product in 2012 This contributed to GDP growth sliding to 4% in the first quarter of 2012 from an average of 7.7% from 2003 to 2008  Inflation: lax credit policies helped push inflation above 20% in 2011, one of the highest in Asia This recent situation proves an instability of Vietnamese economy The problem is that if the policies to rescue the Vietnam’s economy are made in the context when people's lives are difficult, the recovery will not come true, the growth will lead to high inflation In contrast, if we not handle bad debt, the economy will continue to limp along (Source: Stoxplus http://stoxplus.com) b Impacts on some particular important sectors  Banking - Liquidity and credit growth rate: The member of the board of directors in a joint stock bank has admitted that the bad debts have made banks exhausted Banks have difficulties in liquidity and are not able to decrease the interest rate, which leads to the fall in the credit growth rate Banks overwhelmed by the highest bad debts proportion of Asia consequently restrict loan, which causes liquidity trap in the consumer market of over 90 million people - Profit: In terms of profit, this year most of banks reduced 30-60% and moreover, a small number of overdue bank is no longer 40% profit Bad debt is unequally distributed in all banks And this reflects the ability of banks to operate the evaluation and approval of loan documents and loan control, as well as customer support 11 Bad debt in Vietnam Group  Investing - Business activities: The bad debt problem makes businesses lack capital to reinvest These businesses could not approach to the new resource of capital, which means the rise in retail sales by only 11.8%, the lowest over the past years As a result, these firms have to contract their business activity or stop producing and face with bankruptcy Over one hundred thousand domestic businesses closed down in 2011 and 2012 and more than thirteen thousand other ones had the same situation in some first months of 2013 - State-owned enterprises: Bad debts of state-Vietnam’s state-owned businesses are affected seriously The government believes its state-owned enterprises will be unable to repay as much as 20% to 30% of the US$19.8 billion they owe banks However, Vietnam relies heavily on inefficient state-owned firms to boost economic growth These firms control some 40% of the country's economic output (Source: thesaigontimes) 12 Bad debt in Vietnam Group  Real estate : This sector also suffered badly from bad debts - Some figures: Total bad debts arising from construction and real estate sectors were estimated to account for 75-80% of the whole banking system’s NPLs, the local newswire Saigon Tiep Thi on Nov 11 quoted Ly Xuan Hai, CEO of Asia Commercial Joint Stock Bank (ACB) - According to a report released by the Ministry of Construction, the real estate market faced difficulty in the first six months of 2012; house prices dropped in all market segments; deals steeply plunged Even, many projects had no deals at all Therefore, it holds no surprise that real estate loans (together with bad debt in securities industry) account for the largest proportions in total bad debts of credit institutions in Vietnam (Source: SGT) 13 Bad debt in Vietnam Group II.4 BAD DEBT SETTLEMENT a Lessons from Japan - a successful country in bad debt settlement Japanese financial system began to face serious problems of bad debt since the 90s of the last century, which led to the bankruptcy of several credit funding & credit housing companies and banks Total debt remaining in the economy, from 200.000 billion yen in the early 80's, had soared to more than 300,000 - 500,000 billion yen in the mid-90s, exceeding the nominal GDP Although there was little improvement in the business cycle since the 90s, after that period, Japan continued to face economic slowdown, which meant bad debt continued to rise Because banks only focused on handling the amount of bad debt within their financial ability, bad debt was not radically handled, leading to equity losses for many years For this reason, the treatment of bad debt continued to be delayed while the bad debt problem was increasingly intertwined with complex issues of the economy and financial system By 2003, Japan had implemented emergency economic policies and completed the function of Resolving and Collecting debt Company (RCC) as well as established Industrial Reconstruction Agency (IRCJ) which promoted the reconstruction of funds into private enterprises to settle bad debt problems through debt trading activities As a result, bad debt had declined rapidly since the end of 3/2002, falling to about 12,000 billion yen at the end of 3/2007 (According to giaoduc.net) 14 Bad debt in Vietnam Group b Solutions proposed by famous economists and banking leaders  According to The Vietnam Association of Financial Investors (VAFI): - Securitization of bad debt is of great importance: Banks can convert overdue and bad debts into shares and shift their position from creditors to shareholders if their debtors can survive and develop after restructuring It not only saves businesses from bankruptcy but also preserves the capital source of commercial banks After holding shares, banks can find buyers for those equity assets quite easily - There is a need for increasing foreign ownership ratio at local banks to 40 percent and an individual foreign investor can hold up to 25 percent or 30 percent of stake These changes are of great significance in this context because they exert a pull on portfolio capital, particularly from strategic investors.VAFI assumes : “If this solution is introduced soon enough, banks will likely mobilize billions of US dollars within years" - Powerful foreign banks with good governance should be allowed to buy weak local lenders According to statistics, weak banks had poor governance and high bad debt ratios A bailout option will not help them become strong banks because their shareholders are weak at both corporate governance and financial viability This solution is quite popular in the world During the Asian financial crisis from 1996 to 2001, many Asian countries like Thailand, South Korea and Indonesia successfully used this solution to quickly recover their banking systems (According to VCCI News http://vccinews.com)  According to Dr Nguyen Xuan Nghia - member of the National Advisory Council for Monetary Policy: Dr Nguyen Xuan Nghia supports the establishment of Vietnam Asset Management Company (VAMC) VAMC, with estimated chartered capital of VND100 trillion, will buy debts from banks via bond issuance, meaning bad debts from banks will be transferred to VAMC Banks will have to extract provision worth 20% of the total value of bonds issued by VAMC After five years, debts will be replaced by provisions, which will directly affect profits of banks Regarding the question who will buy collateral from VAMC, he informed foreign investors had a really great demand They want to buy land in Vietnam, but most of them encounter legal obstacles He suggested laws should be revised to allow foreign investors to set up investment funds and finance companies, directly buy and sell assets, and purchase houses in Vietnam In the countries hit by the 1997-1998 crisis, 60% of bad debts had been bought by foreign investors and then, their situation got improved (According to VietnamNet) 15 Bad debt in Vietnam Group  According to Quach Manh Hao, deputy CEO of Military Bank Securities: Personally, Hao prefers a special financial institution such as a bad debt managing bank which does not require to pumb VND100 trillion He says such a bank can be treated as a policy bank managing bad debts If we have already policy banks for the poor, this will be policy banks for the rich used-tobe And the bank can continue to operate as a normal bank if the bad debts are cleared, however, bad debts will always be and this special bank will always have job to do, Hao believes To sum up, Hao thinks the first think to now is to establish an unit to classify, evaluate, appraise, and valuate bad debts Then, banks have to clear themselves part of the bad debts and the rest will be transfered to the metioned special financial institution such as a bad debt management bank When bad debts are trading, it should be mark-to-the-market and banks and businesses should have priority to handle the debts before the special financial institution buys it (According to TalkVN – talkvietnam.com) c Actions taken by The Government Vietnam’s Government has signed the Decree to establish the Vietnam Asset Management Company (VAMC) after many recommendations and considerations The public is waiting to see how VAMC will deal with an immense amount of bad debts The Decree ratifying the establishment of VAMC was signed by Prime Minister Nguyen Tan Dung on May 21 and will go into effect from July The Decree stipulates that VAMC will buy bad debts of credit institutions based on their book value by specific bonds issued by the company Bad debts must fully satisfy five conditions to be bought by the VAMC, namely bad debts of credit institutions including those resulting from granting loans, buying corporate bonds, corporate bond commission, commission of granting loans and other activities in compliance with SBV’s regulations; asset - secured loans; bad debts, collaterals in compliance with law, and with legal records; bad debts with borrowers still available; and the amount of bad loans not lower than the amount required by the SBV After buying bad debts, VAMC provides solutions to support and reduce difficulties for enterprises that have debts sold to VAMC such as: adjusting repayment terms; reducing or exempting all overdue interest; investing, and providing capital to help enterprises deal with temporary financial problems These enterprises will be able to continue getting loans from credit institutions according to current regulations These solutions are expected to solve bad debts to help enterprises access new financial resources to recover production (According to VCCI News http://vccinews.com) 16 Bad debt in Vietnam Group REFERENCE  Hard-copy study:  “Different models of bad debt restructuring”, by Stefan Kawalec, Jan 2002  Online articles:  “Lessons for bad debt settlement”, by Giaoduc.net, May 2013, available on http://giaoduc.net.vn/Kinh-te  “Bad debt in Vietnam reaches alarming rates”, by Bich Diep – Dtinews, April 2013, available on http://www.dtinews.vn  “Vietnam economy review”, by Thegioisaigon, January 2013, available on http://english.thesaigontimes.vn  “Foreign investors needed for bad debt settlement”, by VietnamNet Bridge, July 2012, available on http://greetingvietnam.com/business  “Vietnam Asset Management Company: Expected to clean Battlefield of Bad debts”, by Vietnam Business Forum, May 2013, available on http://vccinews.com  “Bad debt on the rise – Banks to be blame”, by Thu Quynh, Oct 2012, available on http://businesstimes.com.vn  “BĐS chiếm lượng lớn nguồn vốn nợ xấu ngân hàng”, by Kieu Thuat, 2013, available on http://cafef.vn/thi-truong-dau-tu  “Quốc tế lo ngại rủi ro sau hai cú hạ trần lãi suất Việt Nam”, by Nguyen Tien Hien, 2012, available on http://www.satavina.com/News.aspx  “Vietnam bad debt settlement”, available on http://english.vietnamnet.vn   General websites:  Investopedia: http://www.investopedia.com  Blog Education: http://blog.jmandw.com 17 ... equity assets quite easily - There is a need for increasing foreign ownership ratio at local banks to 40 percent and an individual foreign investor can hold up to 25 percent or 30 percent of... he informed foreign investors had a really great demand They want to buy land in Vietnam, but most of them encounter legal obstacles He suggested laws should be revised to allow foreign investors... introduced soon enough, banks will likely mobilize billions of US dollars within years" - Powerful foreign banks with good governance should be allowed to buy weak local lenders According to statistics,