Efforts by the Vietnamese authorities to speed up resolution of legacy problem loans could help address the asset-quality issues that weigh heavily on banks’ viability ratings.
However, the resolution process is unlikely to improve significantly in the short term due to the considerable implementation challenges, Fitch Ratings says in a statement this week.
Besides, the statement notes, rapid lending growth continued to add to the risk of a rise in non-performing loan (NPL) creation.
According to Fitch, the Resolution 42/2017/QH14 on piloting the bad debt settlement of credit institutions, which took effect mid last month, could remove some of the legal impediments to effective loan resolution.
The resolution includes measures to improve lenders’ ability to enforce collateral security, which already appears to have made banks more aggressive in seizing commercial property to foreclose bad loans, Fitch says, adding that it also enhances the trading of bad debt in the secondary market.
“Bad debt can now be sold to any legal entity, including foreign investors, without them needing a licence for debt trading.”
According to Fitch, the attempt to involve foreign investors could increase the amount of funds available for debt resolution, particularly given the recent strong interest in Viet Nam from foreign investors -- net FDI inflows were among the strongest in Asia Pacific countries in 2016, at 5.6 per cent of GDP. However, the sale of debt to foreigners could still be constrained by remaining uncertainties, including restrictions on foreign investors taking security over property.
"This is just one example of the problems that, in practice, are still likely to hinder bad debt resolution. The new framework will only be properly tested when large cases are handled, and we expect remaining shortcomings to be addressed only slowly,” Fitch says.
Fitch expected that a more effective debt resolution regime could, over the longer term, help banks reduce asset-quality problems, which weigh on their earnings and profitability.
The reported system NPL ratio was 2.55 per cent at end-March 2017, but this did not take into account banks’ bad-debt sales to the Viet Nam Asset Management Company (VAMC).
“Quicker debt resolution could also reduce banks’ capital charge burden, which would better position banks for the scheduled implementation of Basel II in January 2020. As it stands, banks’ reported capital adequacy ratios (CARs) meet minimum requirements, but these are based on official NPL ratios that understate problem loans in the banking sector. The IMF estimates that the full adoption of Basel II will reduce CARs by 200bp to 400bp,” Fitch says.
However, Fitch says potential progress on resolving legacy bad loans should be weighed against asset-quality risks that could be stoked by recent rapid loan growth.
“Current asset-quality problems can be traced back to rapid credit growth and poor lending standards during the 2000s. Risks crystallised in 2011-13 and caused significant stress to the financial sector. Another extended period of rapid credit growth to meet GDP targets could eventually trigger another wave of defaults,” Fitch concludes. — VNS