Vietnam Establishes Management Firm to Buy Bad Debt

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Aug. 1 – Last week, in a move to try to fix its credit-starved economy, Vietnam officially launched the Vietnam Asset Management Company (VAMC) by way of Decree 53/2013/ND-CP. The VAMC will essentially buy up any bad debts that its country’s banks hold.

The VAMC, colloquially known as the “bad debt bank”, finally commenced operations after multiple delays. Its establishment shows the Vietnamese government’s commitment to restructuring its once thriving economy.

“Bad debt” specifically refers to non-performing loans (NPLs), something that Vietnam holds one of the highest ratio of in all of Asia. The State Bank of Vietnam (SBV) estimates that NPLs in the country represent about 6 percent (or US$7.8 billion) of total outstanding loans worth US$130 billion.

Central Bank Governor Nguyen Van Binh commented on the efficacy of the VAMC, saying: “This is not a magic wand to make all bad debt disappear. It’s just a tool to help solve the bad debts in the banking system.”

He also added that the primary short-term goal behind the move is to bring NPLs to a “manageable” level by 2015.

Basically, its primary function is to purchase NPLs from credit organizations in either one of two ways. It can buy bad loans at book value by issuing special bonds, or it can buy bad loans at market value by using other sources.

The bonds are valid for a period of five years at zero percent interest. However, the banks will have to free themselves of all bad debts within that five year period, will be held fully responsible for managing all of its debts and is also liable for a 20 percent provision on the bonds.

The VAMC can also function as a consultant, brokerage, financial investor, investor or stake buyer, or underwrite an organization, individual or enterprise looking to borrow money from Vietnamese banks.

The VAMC’s working capital is currently set at 500 billion Vietnamese dong (US$23.6 million), and it expects to resolve roughly VND80-100 trillion (US$3.8 – 4.7 billion) in bad loans (with a projected loan recovery rate of 20-40 percent).

Not all feedback regarding the newly established VAMC has been positive, however. The World Bank commented  that “the [Vietnamese] government’s approach to restructuring its banking sector is considerably different from what is generally considered as good practice.”

Furthermore, leading to many more questions and concerns from the public, the SBV has yet to say what the VAMC will do with the debts it buys.

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