VAMC has bought a large volume of bad debts but it can only handle a small percentage of the debts by now.— Photo laisuat.vn

HA NOI (Biz Hub)— Vietnamese banks can improve their liquidity by selling bad loans to the Vietnam Asset Management Company (VAMC), but the related economic risks still exist, noted a Moody's Investors Service's report.

According to Moody's Vice President and Senior Analyst Gene Fang, VAMC took bad loans off banks' balance sheets and in exchange offered the banks special VAMC bonds, which did not pay interest, but could be temporarily placed with the State Bank of Vietnam (SBV) for liquidity.

Under the current VAMC's regulations, local banks can make full provisions for VAMC bonds over a period of five years, which effectively wrote down the value for transferred assets, thus transferring the economic costs of potential losses to the bank. Concurrently, if the VAMC successfully sold off the assets to a third party, any recovered value can be retained by the bank, according to Moody's report released on April 10.

Banks may repurchase (repo) 70 per cent of the net value of the VAMC bonds with the SBV for liquidity at a cost set at 2 per cent below SBV's current refinancing rate.

However, in practice, Moody pointed out that no repo transactions have occurred, partly since repo facilities have not been established in the local system and the banks' liquidity requirements were low.

The report also claimed that the liquidity has improved more significantly in the banking system than the period before VAMC was established, as stable inflation rate has restored some confidence in the local currency.

At the same time, loan demand remains extremely weak and one-month interbank rates had fallen to 2.98 per cent as of March, from 5.66 per cent in September, last year. As a result, the potential yield on incremental liquidity may be limited, according to the report.

Early this week, the experts from both the Asian Development Bank and the World Bank also shared their concerns with the local media on VAMC's working mechanism, adding that they were aware of the fact that a large volume of bad debts had been bought by VAMC, but did not know how to handle the debts.

State-owned VAMC was set up in July, 2013, with the objective of solving the issue of bad loans in the baking system. It has so far bought VND42.8 trillion (US$2.038 billion) worth of debts from 40 credit institutions in Viet Nam.

While it plans to buy VND70 trillion (US$3.3 billion) in bad debts during 2014, Nguyen Quoc Hung, VAMC member board's vice president informed baodautu.vn that VAMC has handled more than VND300 billion (US$14.2million) or just 0.69 per cent of the bad debts it has bought.—VNS