The escalating ratio of NPLs is going, requiring banks to set up provisions funds which in turn negatively impacts their ability to increase lending activities and get badly needed money commercial loans provide into the coffers of businesses to fuel the nation’s economic expansion.

Reasons for escalating NPLs

Leading economists largely attribute the increase in bad debts to slow lending growth in the banking system, gloomy improvement in corporate financing in the context of the slow paced economic recovery and settlements by the central bank-run Vietnam Asset Management Company (VAMC) that are below expectations.

VAMC statistics show that through the end of June, the company had purchased only VND11,414 billion worth of bad debts, a somewhat modest figure when compared to its purchase plan of VND70,000-100,000 billion for the whole year.

Experts from BIDV Securities Company (BSC) emphasised that the VAMC’s purchase of bad debts might also be rather slow in the third quarter but should increase again in the fourth quarter as the deadline for the classification of debts approaches.

BSC experts added that VAMC’s purchase target of VND70,000-VND100,000 billion of bad debts this year is also highly dependent on incentive measures in association with economic benefits which will be applied to credit institutions.

The legal corridors to resolve bad debts are also hindering the resolution. Recently, the National Assembly approved an amended bankruptcy law and eliminated a number of highly complex regulations to supplement to the real estate business law, but at the same time the legislation erected some new barriers to the settlement of bad debts.

Greater pressure

In the first half of the year, the SBV's freshly issued documents have effected the classification of the banking sector’s debts.

The recent issuance of two complex circulars in June stipulated that credit institutions should not implement the classification of debts or make adjustments of their classification according to the results of the Credit Information Centre (CIC) until the end of the year. This has created an impasse in resolving the bad debts issue and needs clarification.

SBV former governor Cao Sy Khiem said that commercial banks have been negatively affected by bad debts, principally overdue debts in the field of real estate and state-owned enterprises.

“Although VAMC is implementing the purchase of bad debts, its efforts can not reduce NPLs at commercial banks entirely,” Khiem said, adding that ”The SBV’s two recent circulars have forced commercial banks to use available funds to increase loss reserves, which further exacerbates their efforts to increase lending.”

BSC experts said that the purchase of NPLs is not final solution to settle bad debts as VMAC needs to deal with or sell NPLs, especially to foreign partners.

There have not been adequate legal corridors to sell NPLs in the first six months of the year, they say.

Therefore, VAMC needs to clarify with specificity the details on the subjects, methods and mechanism of selling bad debts, which will continue to become a challenge for the national economy in the coming time.

BSC experts underscore that a clear road map should be devised to avoid an ever worsening situation, causing greater losses.