Handling bad debts in vietnamese commercial banks the real situation and solutions,graduation thesis

STATE BANK OF VIETNAM BANKING ACADEMY Foreign Language Faculty -***** - GRADUATION THESIS HANDLING BAD DEBTS IN VIETNAMESE COMMERCIAL BANKS: THE REAL SITUATION AND SOLUTIONS Student: Vu Thi Hong The Class: ATCB_ K12 Supervisor: Ngo Tung Anh (MA) Hanoi, 24 th May, 2013 Student V Graduation Thesis 2013 DEDICATION I dedicate this graduation thesis To my family And To the Hanoi Banking Academy Student Vu Thi Hong The_ATCBK12 Page Graduation Thesis 2013 ACKNOWLEDGMENT I would like to express my sincere thanks and appreciation to my supervisor, MA Ngo Tung Anh for his valuable advice and comments throughout the duration of this work I would also like to express my profound gratitude to my parents and my elder brother for their encouragement Finally, I would like to give my special thanks to Mr Pham Thanh Tuan for his supports during my internship in Ho Chi Minh City Development Joint Stock Commercial Bank Student Vu Thi Hong The_ATCBK12 Page Graduation Thesis 2013 ABSTRACT The thesis is aimed at representing theoretical background relating to non-performing loans (or bad debts) and bad debt management in Vietnamese commercial banks and analyzing the current situation of bad debts, simultaneously assessing the efforts of involved parties in handling bad debts over the past few years From the above analysis, the thesis tries to give specific solutions to deal with this problem The theory section mentions two main contents that are theoretical framework of bad debts and the theory of bad debt management in commercial banks The theory section not only clarifies the definition and causes of bad debts but also shows the methodology to manage bad debts effectively It also suggests that the cooperation between the government’s policies and commercial banks’ healthy credit policy should be the important factor to reduce bad debts From 2008 up to now, the volume of bad debts has continuously increased with a remarkable speed, which results in a great number of difficulties in the economy To deal with this problem, the government and the SBV have cooperated with commercial banks to implement many solutions in different aspects such as: making loan classification and loan loss provision, strengthening credit policy, and planning to establish a national asset management company However, these solutions have not yielded desirable results yet The thesis also suggests that only when the government, the SBV and commercial banks are fully aware of real causes of bad debts and courageously face with them and then have drastic solutions will bad debts be thoroughly addressed Student Vu Thi Hong The_ATCBK12 Page Graduation Thesis 2013 TABLE OF CONTENTS DEDICATION ACKNOWLEDGMENT ABSTRACT Error! Bookmark not defined LIST OF TABLES AND FIGURES LIST OF ABBREVIATIONS INTRODUCTION CHAPTER 1: THEORETICAL FRAMEWORK 11 1.1 Non-performing loans 11 1.1.1 Definition 11 1.1.2 The causes of non-performing loans 11 1.1.3 The signs to identify non-performing loans: 16 1.2 Theory of bad debt management in commercial banks 17 1.2.1 The concept of bad debt management 17 1.2.2 The objectives and the importance of bad debt management 17 1.2.3 The content and process of bad debt management (Figure 1.1) 18 CHAPTER 2: THE REAL SITUATION AND THE PROCESS OF HANDLING BAD DEBTS IN COMMERCIAL BANKS 30 2.1 Overview of Vietnam’s banking system 30 2.2 The increase of bad debts in commercial banks in recent years 34 2.3 The causes of the increasing bad debt rate 37 2.4 The government and banks’ efforts in handling bad debts in recent years ……………………………………………………………………………… 39 2.4.1 Loan classification and loan loss provision 40 2.4.2 Establishing Vietnam Asset Management Company (VAMC) 41 2.4.3 Strengthening commercial banks’ credit policies 42 2.5 Assessment 45 Student Vu Thi Hong The_ATCBK12 Page Graduation Thesis 2013 2.5.1 Achievements 45 2.5.2 Limitations 45 CHAPTER 3: SOLUTIONS TO HANDLE BAD DEBTS 47 3.1 Solutions from the government and the SBV 47 3.2 Solutions from commercial banks and enterprises 51 RECOMMENDATIONS 54 CONCLUSIONS 55 REFERENCE 57 ANNEX 59 Student Vu Thi Hong The_ATCBK12 Page Graduation Thesis 2013 LIST OF TABLES AND FIGURES LIST OF TABLES Table 1.1: Loan classification by the quantitative method………………………… 18 Table 1.2: Loan classification by the qualitative method…………………………….21 Table 1.3: Rate of specific provisions for debts………………………………………23 Table 2.1: The decrease of bad debts………………………………………………….38 Table 2.2: The Internal Credit Rating System of Vietcombank…………………… 40 LIST OF FIGURES Figure 1.1: The process of bad debt management…………………………………… 17 Figure 2.1: Proportion of credit institutions’ assets………………………………… 30 Figure 2.2: The rate of bad debts (2008-2012)……………………………………… 32 Figure 2.3: The rate of bad debts in some commercial banks in 2012……………… 33 Figure 2.4: The number of bad debts in some commercial banks in 2012……………33 Figure 2.5: The proportion of bad debts based on industry groups………………… 35 Student Vu Thi Hong The_ATCBK12 Page Graduation Thesis 2013 LIST OF ABBREVIATIONS Abbreviations Explanations SBV State Bank of Vietnam USD United States Dollar VND Vietnamese Dong NPL Non-performing Loans Decision 493 Decision No 493/2005/QD-NHNN by SBV Decision 18 Decision No 18/2007/QD-NHNN by SBV amended Decision No 493/2005/QD-NHNN Vietcombank Joint-Stock Commercial Bank for Foreign Trade of Vietnam Vietinbank Vietnam Bank for Industry and Trade BIDV Joint Stock Commercial Bank for Investment and Development of Vietnam SHB Saigon Hanoi Commercial Joint Stock Bank Baovietbank Bao Viet Joint Stock Commercial Bank Agribank Vietnam Bank for Agriculture and Rural Development GDP Gross Domestic Product SCBs State Commercial Banks US United States EU Europe Union VAMC Vietnam Assets Management Company AMCs Assets Management Companies ICRS Internal Credit Rating System Student Vu Thi Hong The_ATCBK12 Page Graduation Thesis 2013 INTRODUCTION Current problem statement Over the past few years, the economic crisis all over the world in general and in Vietnam in particular have been significantly affecting all economic entities in the economy, especially the banking industry The problem of bad debts or non-performing loans has continually constituted a great threat to credit institutions Although many efforts to tackle with bad debts have been made, only few of them yielded desirable results The volume of bad debts reduced moderately, which has caused a large number of disadvantages for the economy Therefore, a pressing problem now is how to deal with bad debts and make banking activities healthier That is the reason why I have decided to choose the topic: “Handling bad debts in Vietnamese commercial banks: the real situation and solutions” for my graduation thesis Aims of the study The study is aimed at clarifying the real situation of bad debts in commercial banks recently after presenting theoretical background of bad debts, critically analyzing attempts of the government and commercial banks in handling bad debts, thereby proposing solutions to deal with this issue Research questions What are non-performing loan and its causes? What should commercial banks to well manage non-performing loans? What is the real situation of bad debts now? What have commercial banks recently done to handle bad debts? How to reduce bad debts and improve bad debts management? Student Vu Thi Hong The_ATCBK12 Page Graduation Thesis 2013 Scope of the study The thesis focuses on studying the problem of bad debts and attempts of the government and commercial banks to deal with bad debts on both theoretical and practical aspects from 2008 up to now Methodology and Data of the study - Quantitative research method focuses on the collection and analysis of numerical data and statistics - Description based on secondary data: the thesis mainly uses data which are publicly announced on websites of the SBV and some commercial banks - Meta-analysis method: based on collected data, the thesis analyses and gives conclusions for the research work Structure of the thesis Introduction Chapter 1: Theoretical framework This chapter focuses on explaining the definition of bad debt, its causes, signs to identify bad debts, and the concept of bad debt management in commercial banks Chapter 2: The real situation and the process of handling bad debts in commercial banks This chapter mentions the situation of the continuous increase in bad debts of commercial banks and how commercial banks and other involved parties deal with this Chapter 3: Solutions to handle bad debts The main content of the chapter is proposing solutions accordance with real causes of bad debts to improve the situation Conclusion and recommendations Student Vu Thi Hong The_ATCBK12 Page 10 Graduation Thesis 2013 In the first place, the process of handling bad debts is quite slow For instance, the plan of establishing the Asset Management Company (VAMC) was proposed more than one year ago However, it has not been successfully complemented until now In addition, figures of NPLs have not been consistent and exact At the same time, figures of bad debts announced by the SBV, commercial banks and other institutions have a big different This is a hindrance to quickly and thoroughly handle bad debts Moreover, current solutions to cope with bad debts only solve immediate problems Other long term solutions such as measures to support enterprises, the policy of reducing interest rate have not been effectively complemented Finally, the coordination among involved ministries and parties has not really close For example, while commercial banks need more favorable conditions to process collaterals, the Ministry of Justice has not loosened legal conditions on this issue Summary Chapter mainly focuses on studying following issues: Firstly, the chapter shows the overview of Vietnam’s banking system, the main risks that commercial banks face with in operating banking activities, and raised questions in banking system at present Student Vu Thi Hong The_ATCBK12 Page 46 Graduation Thesis 2013 Secondly, based on collected information, chapter clarifies the real situation of the upward trend of bad debts in Vietnam recently, and then represents practical causes of bad debts Finally, the chapter also analyzes the efforts of the government and commercial banks in addressing bad debts accompanied with critical assessment CHAPTER 3: SOLUTIONS TO HANDLE BAD DEBTS As mentioned in Chapter and Chapter 2, there are various causes of bad debts Based on those causes, the thesis tries to give corresponding solutions and specific solutions to improve bad debt issue in commercial banks at present 3.1 Solutions from the Government and the SBV Student Vu Thi Hong The_ATCBK12 Page 47 Graduation Thesis 2013 Restructuring the banking system Restructuring the banking system to eliminate weak banks, upgrade large scale banks with the aim to operate safely and effectively This process includes aspects: - Restructuring organization requires banks completely separate the lending activity under government’s policy to support priorities from the commercial nature of commercial banks’ business operation Commercial banks must perform well their business function according to principles of market - Restructuring financial field requires banks to raise chartered capital through some channels such as: mergence and acquisition, issuing additional shares, or eliminating weak banks Moreover, it is necessary to tackle with overdue debts in order to clean up financial aspect, then improving banks’ capacity of competing and confront risks Improving the legal system in banking operation Firstly, it is necessary to complete the law and regulations on loan classification Only by identifying clearly and exactly corporates’ debts could banks solve thoroughly bad debts Therefore, the current laws should have more explicit terms on loan classification; give consistent criteria to classify bad debts which shall be applied in all credit institutions; and combine both quantitative and qualitative methods in classification of bad debts Simultaneously, there should be a general standard for quantitative criteria; and specific regulations on the process, and the way to classify debts under quantitative method Besides, it is important to have a rule which is compulsory for all banks to strictly classify bad debts in accordance with regulations issued, prohibiting debt swap, debt restructuring to hide the real situation of bad debts Student Vu Thi Hong The_ATCBK12 Page 48 Graduation Thesis 2013 Secondly, the government should improve laws on processing collaterals to promote the process of handling bad debts With the aim to promptly solve problems arising in processing collaterals, involved ministries should as soon as possible issue circulars to deal with some obstructed points such as: seizing and storing collaterals, processing collaterals in case of status changed by the mortgagor or the third investor, transferring ownership or rights to use assets to buyers and transferees In addition, there should be legal framework on resolving dispute of collaterals if it arises so that the benefits of banks and other parties are ensured Abolishing the cross-ownership status among commercial banks Cross-ownership makes it difficult to exactly identify the debtor and the creditor in the system and who the real owner is Therefore, if cross-ownership situation currently existing in the banking system cannot be solved, the bad debt problem is difficult to tackle with The settlement of cross-ownership situation is a big problem, so thesis quotes some solutions of some economic specialists as follows: "The State Bank of Vietnam needs a legal framework to control the way of cash flow because all problems of commercial banks arise from it" said by Dr Tran Du Lich, a member of the National Monetary policy Advisory Council According to the Fulbright Economics Teaching Program, State Bank first need to modify the limit of ownership and credit disbursement related to major shareholders; eliminate legal loopholes so that individuals and organizations cannot control banks through several intermediary steps With the current shareholders (including both state and private), it should not allow them to hold a number of banks’ shares more than the allowing limit Student Vu Thi Hong The_ATCBK12 Page 49 Graduation Thesis 2013 "Vietnam government should have clear governance on the cross-ownership status; and banks must also disclose information transparently” said Tomoyuki Kimura, ADB director in Vietnam VAMC Promoting the plan of setting up VAMC as soon as possible and completing laws and regulations on debt trading of this company are two urgent duties In the process of settling bad debts, the role of VAMC is undeniable However, the legal framework for its operation is limited; leading the inefficiency of handling bad debts before On the other hand, with large scale of bad loans at present, that only VMAC involved in purchasing bad debts is not enough In addition, bad debts can also be seen as a "commodity" bringing profits for investors, and the world market for trading bad debts has been operating quite effectively Therefore, in order to better handle bad debts, the government should not only improve the legal framework for debts trading activities but also build a market in Vietnam where debts can be traded These include some of the following solutions: (i) Adding a regulation to allow VMAC to arrange loans on trust for debtors in order to facilitate the recovery of those enterprises (ii) Specifying the responsibilities of credit institutions in making information of debts in public and transparent Simultaneously, banks have to sell their bad debts; banks must see that selling bad debts to VAMC is a duty, not right of banks Only when bad debts are publicized and banks have responsibilities for selling debts to VAMC, could other companies make debt trading activities iii) Making policies to encourage investors to participate in the debt trading market, for example, offering tax incentives, allowing investors to have the right to participate in Student Vu Thi Hong The_ATCBK12 Page 50 Graduation Thesis 2013 controlling enterprises which have overdue debts in banks, simplifying procedures for processing collateral or liquidating business assets, and having mechanism to quickly solve the case of bankruptcy These factors are essential to help investors understand that they are encouraged and will benefit from participating in trading, and processing loans Thus, it stimulates the debt trading market in Vietnam to operate effectively 3.2 Solutions from commercial banks and enterprises Firstly, banks should improve their risk management capacity Improving risk management capacity of commercial banks is a major issue which should be built in long term However, the first important task in enhancing the capacity of credit risk management is quickly developing metrics for quantifying risks Based on that, commercial banks could make reasonable lending decisions and accurate loan classification Secondly, banks should raise awareness of credit officers about ethical, and professional attitude Facing with the situation of degraded professional etiquette of many credit officers, raising their awareness is necessary but not sufficient; there should be severe sanctions for whom breaking rules of professional ethics If so, banks could improve the sense of responsibility and professional ethics of credit officers Thirdly, there should be solutions for each group of bad debts Specifically: (i) For a group of bad debt arising due to inventory of borrowers can not be sold, the most effective solution is helping these companies to liquidate inventory by tax reduction or tax exemption so that companies may reduce prices and stimulate consumption Then inventory problem will be solved, which is the base for enterprises to recover production cycle Student Vu Thi Hong The_ATCBK12 Page 51 Graduation Thesis 2013 (ii) For loans which are evaluated as absolute loan loss (for example, in case of corporate goes bankruptcy, collateral is no longer valuable), it should clearly define the responsibilities of banks in this case Banks must accept losses, make provisions, or even use part of bank’s profits to offset the debts (iii)For loans guaranteed by collaterals, or loans being able to be recollected because borrowers have ability to recover if supported In this case the solution is combining between bad debt securitizing and bad debt trading It is widely known that for those debts guaranteed by collaterals, the sale of collaterals takes a lot of time without effectiveness The value of collaterals sharply decline compared to the value at time of making loans For example, some kinds of collaterals as vessels decrease approximately 50%, shares more than 60% - 70% If processing, banks often recollect a small part of loans In addition, commercial banks also face with another difficulty Although some kinds of equipment have great value, they are not easily liquidated If banks recover those assets with the purpose to use them for production, this plan is also infeasible The reason is that those specialized assets such as ships and machinery are often associated with a combination of other assets, so it cannot be separated to produce separately Besides, if collaterals are in dispute because they are used to guarantee many different loans, the sale becomes more complicated Hence, in this case debt securitizing and debt trading seem more reasonable because: (i) The debt securitizing may quickly and thoroughly have solved bad debt problem, enabling business borrowers to unfreeze funds and have opportunities to recover production (ii) Then banks may sell debts securitized those who clearly both understand debtors’ operation and have sufficient money and capacity to create more added value than banks can It would be reasonable if a company producing consumer goods acquired a Student Vu Thi Hong The_ATCBK12 Page 52 Graduation Thesis 2013 packaging manufacturing company, or a company manufacturing papers acquired a company specializing in manufacturing wood-pulp (iii) The solution to securitize loans then sell these securities not only unfreezes funds for enterprises but also writes off bad debts on banks’ financial statements and helps banks to recollect money Meanwhile, if banks only securitize bad debts, they may confront risks when enterprises cannot recover their production On the other hand, if banks skip the process of securitizing bad debts, and immediately sell debts, it takes a plenty of time to complete bad debt handling (iv)The combination of the two above-mentioned processes will bring benefits to three sides For the enterprises, they could recover their production, liquidate bad debts and balance the financial structure For banks, the bad debt problem is thoroughly solved in a short time For buyers of securitized debts, it is a good opportunity for them to acquire other companies which can support their activities with a cheap price However, to make this solution effective there should be the intervention of the state agencies For instance, the government may create an organizational market for this activity Besides, publicizing information of bad debt securities is really necessary so that buyers may approach these securities Law makers should set out compulsory regulations on bad debts and bad debt securities publicizing as well as strict sanctions so that the market for bad debt securities have opportunities to develop Finally state-owned enterprises (SOEs) should be restructured because they are considered as the group having the largest number of outstanding loans in banks This process should mainly focus on financial restructuring which is currently conducted by the project approved by the Government Thus, SOEs can improve their capacity Summary Student Vu Thi Hong The_ATCBK12 Page 53 Graduation Thesis 2013 The chapter proposes solutions to handle bad debts which come from not only the government and the SBV but also commercial banks themselves and enterprises Firstly, the government and the SBV should address macro-problems so as to create favorable conditions for commercial banks to process bad debts through some issues like restructuring the banking system, improving legal system, abolishing the crossownership status and establishing the VAMC Secondly, commercial banks themselves raise their own capacity to confront the problem by upgrading credit activity, and improving the mechanism of processing and managing bad debts Besides, restructuring enterprises and supporting them are also key solutions RECOMMENDATIONS To the government Student Vu Thi Hong The_ATCBK12 Page 54 Graduation Thesis 2013 To deal with the intermediate problem of bad debts, in the short run, the government should quickly found VAMC with a favorable working mechanism, complete legal framework on processing collaterals and have prompt actions to ice-break real estate market In order to completely eradicate bad debts, in a long run it is important to recover and promote the economy For this reason, it is recommended that the government should set up reasonable and effective macroeconomic policies, support domestic enterprises’ business operation, especially small and medium enterprises To the State Bank of Vietnam With the purpose to create favorable conditions for commercial banks to better perform their functions and handle bad debts, the thesis recommends the SBV to have close instructions to commercial banks in implementing the monetary policy, guide involved bureaus and departments to continue studying, modifying, and supplementing regulations on loan classification, loan loss provision, and processing collaterals to reduce bad debts in banking operation In addition, the SBV should intensify monitoring and supervising activities on credit activity of commercial banks in order to early identify mistakes, and then have promptly corrective actions There should be also strict punishments for those banks that break the requirements and regulations CONCLUSIONS In the process of restructuring banking system, handling bad debts is one of the key tasks to make banking activity healthier This is a prompt duty due to the fact that Student Vu Thi Hong The_ATCBK12 Page 55 Graduation Thesis 2013 banking system is the heart of the economy; the weakness of banking system is followed by many negative impacts to other fields in the economy, especially in the context of globalization It is the truth that banking activity comes hand in hand with risks Therefore, bad debts are inevitable fact in credit activity of commercial banks However, the increase in bad debts with remarkable growth rate is really a concerning problem The initial aims of the thesis is to analyze and assess the real situation of bad debts and the process of handling bad debts of Vietnam’s government and commercial banks, then propose some effective solutions After doing research work, collecting information and data from various sources, and analyzing the thesis completes some following tasks: Firstly, the thesis clearly clarified the definition of bad debt (non-performing loan) and its causes It is foundation for everyone to have a comprehensive view of bad debts Secondly, the thesis also mentioned a detailed theory of process of bad debt management in commercial banks, identified factors impacting this process Based on that, commercial banks have specific policies to reduce bad debts Thirdly, the thesis focused on analyzing and assessing the situation of increasing bad debts in Vietnamese commercial banks during 2008 – 2012 and early 2013 Fourthly, the attempts which have been done recently by involved entities and commercial banks to deal with bad debts are also critically analyzed in Chapter In addition, the thesis shows the achievements and limitations of this process Fifthly, the thesis has suggested some solutions to improve above issues In general, the thesis has resolved all basic aspects of bad debts From that, readers have a full awareness of bad debts and its influence on the economy so that they are Student Vu Thi Hong The_ATCBK12 Page 56 Graduation Thesis 2013 able to courageously confront the real situation without evasion of sensitive causes Only by that way can bad debts be thoroughly handled However, bad debt is related to many other complicated issues such as macroeconomic policies, legal framework or internal existing problems of commercial banks themselves which require further research work Therefore, within a short time and with limited knowledge of bad debts, the author could not fulfil all relating issues and inevitably have shortcomings in doing the thesis Thus, the author hopes to receive feedbacks and advice from readers to complete the thesis REFERENCES Books and Document Peter S Rose, and Sylvia C Hudgins 2008 Bank Management and Financial Services (seventh edition) New York: McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc State bank of Vietnam 2005 Decision No 493/2005/QD-NHNN Student Vu Thi Hong The_ATCBK12 Page 57 Graduation Thesis 2013 State Bank of Vietnam 2007 Decision No 18/2007/QD-NHNN by SBV amended Decision No 493/2005/QD-NHNN Newspaper articles Nguyen Thanh Tu, and Nguyen Thi Hong Nhung “Thuc trang no xau cua cac TCTD tai Vietnam: nguyen nhan va mot so giai phap tu chinh sach phap luat” Luat Tai Chinh, March 2013 Web 05 April 2013 Nguyen Thi Mui “Thuc trang no xau cua Vietnam va giai phap thao go” Tap Chi Tai Chinh, November 2012 Web 05 April 2013 < http://www.tapchitaichinh.vn/Traodoi-Binh-luan/Thuc-trang-no-xau-tai-cac-ngan-hang-Viet-Nam-va-giai-phap-thaogo/16290.tctc> To Anh Duong “He thong ngan hang Vietnam boi canh tai cau truc kinh te” Tap Chi Cong San, February 2013 Web 21 April 2013 < http://www.tapchicongsan.org.vn/Home/kinh-te-thi-truong-XHCN/2013/20370/Hethong-ngan-hang-Viet-Nam-trong-boi-canh-tai-co-cau.aspx> Useful Websites State Bank of Vietnam: www.sbv.gov.vn Ministry of Finance: www.mof.gov.vn Student Vu Thi Hong The_ATCBK12 Page 58 Graduation Thesis 2013 ANNEX Bessis, J 2002 Risk management in Banking England: John Wiley & Sons Ltd Lucia, R.D.D, and Peters, J 1998 Commercial Bank Management Australia: Thomson Professional Information Asia Pacific Ltd Sathye, M., Bartle, J., Vincent, M., and Boffey, R 2003 Credit Ananlysis & Lending Management Australia: John Wiley & Sons Ltd Student Vu Thi Hong The_ATCBK12 Page 59 Graduation Thesis 2013 Weaver, P.M., and Kingsley, C.D 2001 Banking and Lending Practice, 4edn Australia: Thomson Learning, NSW Student Vu Thi Hong The_ATCBK12 Page 60