Credit ratings agency Moody’s has responded positively to steps taken by the Vietnam Asset Management Company (VAMC) in handling non-performing loans (NPLs) this year, but also mentioned it may face difficulties from its own capacity as well as the existing legal framework limiting the handling of NPLs.

A cash purchase scheme would directly reduce NPLs and add cash to the banks, improving loss absorption capacity.

Bank profitability would also increase because cash from the sale can be channeled to new, performing loans, according to analysis from Moody’s.

It is necessary to buy bad debts with cash, Mr. Nguyen Quoc Hung, Chairman of VAMC, told Thoi bao Kinh te Vietnam - a sister publication of VET.

“VAMC plans to buy NPLs with VND2 trillion ($93 million) in cash, but in order to do so we need a clear debt selling mechanism when handling collected debts,” he said.

This is credit positive for Vietnamese banks because a cash sale would effectively transfer all economic risks associated with an NPL to VAMC and away from the banks.

The motivation behind the planned cash purchase is to accelerate the clean-up of Vietnam’s banking system in order to help boost lending to spur growth.

However, the success of the plan depends largely on VAMC’s capacity to purchase NPLs from banks, Moody’s commented.

There are challenges VAMC face that affect the process of selling and collecting NPLs, including that VAMC is unable to collect collateral assets and the absence of a debt market, according to Mr. Hung.

He also touched on the limitations in VAMC’s capacity, saying that its personnel of 150 must cover a large amount of work and its charter capital is now VND2 trillion ($93 million), which is modest compared to the total NPLs on the market.

“Since the beginning of the year we have conducted auctions but all have been unsuccessful due to the requirement of financial institutions for a high starting price on their collateral assets,” Mr. Hung said.  

Ms. Daphne Cheng, an analyst at Moody's, told VET that “VAMC’s current seed capital is VND2 trillion, which is less than 10 per cent of the size of our rated banks’ reported NPLs.

This gives a good sense of the limited financial capacity of VAMC to engage in true cash sales. Developing a distressed debt market that is open to specialized buyers would help reduce true bad debt levels and an improvement in the legal and institutional framework would help the enforcement of asset recovery."

The State Bank of Vietnam (SBV) requires all banks to transfer NPLs in excess of 3 per cent of total loans to VAMC. In return, banks receive VAMC bonds for the net amount of transferred NPLs or other problem assets.

According to Moody’s analysts, “the current VAMC bond exchange for NPLs is a mechanism that does not fully clean up bank balance sheets.”

After VAMC bonds appear on a bank’s balance sheet (and NPLs move out), the bank must create provisions every 12 months until the value of the VAMC bonds falls to zero in five or ten years.

VAMC bonds do not earn any interest and cannot be sold, although banks can pledge these bonds with the SBV to receive short-term funding.

Moody’s said that while VAMC’s current capacity to purchase NPLs for cash is VND2 trillion, the reported NPLs of Moody’s rated banks are VND30 trillion ($1.3 billion).

“In this respect, greater financial support from the Vietnamese Government is crucial for the cash purchase scheme of NPLs,” Moody’s analysts noted. 

Banks with the largest percentage of special mention loans could benefit from VAMC’s cash purchase of NPLs, since these are loans that are most likely to become non-performing. VPBank and BIDV would benefit the most.

As at December 2015, special mention loans made up 5.8 per cent of VPBank’s adjusted loans and 2.8 per cent of BIDV’s adjusted loans.