The Viet Nam Asset Management Company (VAMC) has been operating for nearly one month. However, investors still lack information about how the company will buy non-performing loans (NPLs) from banks.

As an international finance organisation with experience in resolving bad debts in emerging markets, the World Bank Group's International Finance Corporation (IFC) said it had talked to the company to discuss how it would be able to help address the NPLs.

Viet Nam News reporter Bich Ngoc spoke with IFC regional manager for Viet Nam, Laos, Cambodia and Thailand, Simon Andrews, on his viewpoint.

There has been no information about how VAMC will issue its special bonds. What would you suggest to the company in governing bond issuance?

Simon Andrews

What I understand about the way it works is that VAMC will actually buy the loans from the banks with bonds. So it will issue bonds to buy loans from the banks. The banks can then take the bonds to the State Bank of Viet Nam and cash them.

The process of issuing the bonds is really raising the money to buy the loans. The really important part is what you do with the NPLs: agree upon the buying price and giving investors the right to restructure or recover the loans, repackage and sell them off. That's why we talked to the Government about what they're doing to solve the problems of distressed assets.

We encourage them to use market-based solutions, buying the assets at the price that is market-based, let the distressed asset specialists restructure and recover the loans and sell them to make a profit.

Commercial banks think that the criteria for offloading NPLs are too tight (over 60 per cent of the assets must be backed by real estate properties, banks must make provisions of 20 per cent per year) and that VAMC only buys guaranteed debts. Should the company loosen the criteria?

With any distressed assets, somebody has to take a haircut, to recognise that they made a bad loan and they're not going to get back from them what they paid for them. The banks lend a hundred dollars while the real value of that loan is only $70. They sell it to the asset company for $70, so they have to take that haircut. The job of the asset company is to try to recover something more than $70 so they make a profit on that.

Some of the banks have been window-dressing to make NPL rates under 3 per cent so that they don't have to sell the debts. What can VAMC do to make banks willing to offload?

Every bank everywhere in the world makes bad loans at some point. Some of them recover them themselves, some of them are tied up making new loans and reselling these NPLs to somebody who can invest the time and resources to recover the loans.

Banks that don't want to get rid of NPLs will find they spend a lot of time and resources trying to get money back in an inefficient allocation of capital and resources. In markets that have well developed NPL frameworks, banks get to a point where they realise they cannot recover these loans without investing significant resources. So they will sell them to somebody who can do that job better, and say, "Ok, I'm not gonna get back my $100, but with the $70 that I get from selling it now I can make a new loan."

VAMC has shown its interest in the participation of foreign investors. IFC itself discussed with the company a way to deal with NPLs. Do you think it really is a good idea to allow as many foreign investors as possible to buy the debts from the banking system?

A lot of foreign investors are interested in the NPL market in Viet Nam. I think it's a good idea that foreign investors can come in and compete to buy because the result is Viet Nam will get the best deal.

In China, we worked with one of the asset management companies to run options of the NPL portfolios. We could help with technical capacity building and regulatory framework. We can also help with the processes. When a bank or an asset management company (AMC) is ready to sell a NPL, we can track foreign investors and help the money run through options so they can get the best price.

Can you tell the differences between Viet Nam's model and the world's successful models in handling bad debts?

There are many different ways of doing it. Some countries have simply set up the regulatory framework and encouraged the private sector to do this, so it's just the transactions between the banks and the private sector through distressed asset companies.

Thailand is a very good example in the region to solve this issue successfully in this way. The other model is to set up the national AMC. The key is to focus on the objective, which is to get banks lending to SMEs and businesses to drive growth. The more quickly and decisively you act, the quicker you will get banks back to the business of lending.

There remain many countries that have not done that, where banks have left bad debts on their books and the capital and resources are tied up in managing that. And that ultimately slows down credit growth, then economic growth. — VNS