Credit limit on non-production: not only figures

The time limit for commercial banks to bring down credits for non-production sector to 22% of total outstanding loans was already over. Many banks failed to do this and are facing fines.

The time limit for commercial banks to bring down credits for non-production sector to 22% of total outstanding loans was already over. Many banks failed to do this and are facing fines. The road to reduce credits for non-production sector to 16% by the end of this year as provided by the State Bank of Vietnam (SBV) seems to be very rough to go.

Using all means to meet the target

By the end of May 2011, 18 banks were reported to have outstanding loans for non-productive sector higher than 22%, with a half of them struggling with over 30%. Hence, many banks quickly exerted all means to lower outstanding credits to this effect to 22% but unfortunately most loan agreements were securities investments and real estate. The stock market had been in the downtrend for months while the real estate market required long-term loans, even with maturity term of 10 years or so. Thus, many banks were reportedly to turn their own loans to productive loans.

Former SBV Governor Cao Sy Kiem said banks will difficultly collect debts right away but they can convert loans into other forms. For example, they use money to “repay” loans branded “non-productive” and then they arrange new “borrows” on settled loans. In reality, cash flows have not actually left the non-manufacturing sector and of course hardly channel into productive areas. In addition, given current exorbitant interest rates, corporate customers dare not to borrow money from banks to do business.

However, eight banks failed to cap the rate of non-manufacturing lending at 22% or lower as of June 30 as required by the SBV. Although the central bank has not revealed their names, many believed that they are mainly small banks. Earlier, SBV Governor Nguyen Van Giau confirmed that “there will be no compromise with any credit institution which has outstanding credit growth exceeding 20%, and outstanding credits for non-productive fields in excess of 22%. They will be forced to double compulsory requirement reserve in Vietnamese dong.”

Ms Duong Thu Huong, Secretary General of the Vietnam Banking Association (VNBA), said: It is a very hard job for banks to reduce non-manufacturing loans to 22% at this time and 16% at the end of this year. The SBV also needs a reasonable assessment to inhibit banks failing to meet the requirement from exploiting the loophole to avoid conviction.

And bad debt problems

With the annualised inflation growth of roughly 20% at present and expected to slow down to 17-18%, banks must apply high interest rates to lure deposits. Data showed that deposit growth was just 2.45% in the year to date, an evidence for the hardship in fundraising.

Businesses will face numerous difficulties in settling debts with banks because of rising interest rates and unfavourable production conditions. The nonperforming loan (NPL) ratio of the banking system has climbed to 2.72% at present. To cope with this situation, commercial banks tend to give priority to collect debts rather than providing more loans.

Notably, credits for securities investments remain a top concern for commercial banks because they have to chop down credits for non-productive fields to 16% at the end of this year and the stock market is losing the lustre. Banks will be forced to restructure securities loans. According to the latest draft regulation of the SBV, banks cannot lend securities investments in an amount in excess of 3% of owner’s equity and the capital adequacy ratio (CAR) will be raised to 10% or more instead of 9% at present.

Dr Le Xuan Nghia, Vice Chairman of the National Financial Oversight Committee, said bad debt ratio was estimated at 2.3% in 2010, and 2.5 – 2.6% in the first six months of 2011. It is noted that bad debt calculation is currently lack of accuracy and lower than the rate using international accounting methods, he added. Foreign analysts have repeatedly warned us of this.

In fact, to reduce bad debts, especially Group 5 debts (which may cause lenders to lose their capital), many commercial lenders decided to swap debts and put in wrong debt groups. However, according to Mr Nghia, nonperforming debts tend to rise but they are still much lower than five years ago. It is vital to concentrate on dealing with bad debts which are very high for some financial companies, financial leasing companies and small banks.

To do this, Vietnam needs a financial restructuring plan for some financial institutions where asset quality is deemed a problem which needs to be resolved to avoid system-wide risks.

In addition, it also needs to solution to test strains of some commercial banks against bad debts and other risks to have more evidence for better capital adequacy ratio (CAR), and risk management, especially consumer lending risks.

Mr Nguyen Van Binh, SBV Deputy Governor said nonperforming loan ratio of Vietnamese banks rose from 2% to 3% to date. If the worst scenario for 2011 occurs, this rate will be 5% – a controllable level. To do this, the SBV needs to pull down interest rates further. Given the target inflation of 15% set for 2011 by the Government of Vietnam, deposit rates should be from 15% to 16% and lending rates from 17% to 19%. The central bank is using its policy instruments to regulate its policies to obtain the target of reasonable interest rates. – VCCI

Tags: Vietnam banking industry, Vietnam finance, Vietnam financial