macroeconomics

[BAD DEBT IN VIETNAM IN 2012]

BAD DEBT IN VIETNAM IN 2012

GROUP 1

Name
Nguyen Ho Ngoc Anh
Trinh Linh Chi
Nguyen Dac Trung Hieu
Nguyen Thi Thu Huyen
Cao Thanh Tung
Nguyen Thanh Van
Do Duc Viet
Nguyen Duc Viet

Student ID
1311250002
1312250005
1312250010
1311250014
1311250022
1312250023
1311250024
1314250025

macroeconomics

[BAD DEBT IN VIETNAM IN 2012]

CONTENTS

I.

Introduction...................................................................................................................3

II.

Concept...........................................................................................................................4
1.

Definition of bad Debt..............................................................................................4

2.

Classification of Bad Debt......................................................................................4

III.

General context & causes.............................................................................................4

1.

General context..........................................................................................................4

2.

Causes.........................................................................................................................6

IV.

Policy implications........................................................................................................8

1.

The orientation of solving bad debts........................................................................8

2.

Policy implications.....................................................................................................8

Reference.................................................................................................................................13

macroeconomics
I.

[BAD DEBT IN VIETNAM IN 2012]

Introduction
"2012 is considered as the most difficult year of the world's economy and Viet Nam is
not an exception. One of the hardest problems that needs to be solved immediately and
completely is bad debt.In 2012, the bad debt ratio has been alarmingly increasing. By the
end of September, the bad debt had increased by 200 percent in comparision with late
2011.That's why we carried on this research to help you understand this problem deeper
and to point out the options we have to deal with bad debt.

I.

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II.
Concept
1. Definition of bad Debt
Bad debt is the debt that is unlikely to be paid due by debtor, which usually occurs
when debtor go into bankrupcy. Bad debt include all the debt that exceed the time limit
to pay the interest or capital for 3 months
2. Classification of Bad Debt

Period of Default
3 months from the
first day of default
but less than 6
months
6 months from the
first day of default
but less than 9
months
9 months and above
from the first day of
default

Classification

Substandard

Specific Provision on the

shortfall in collateral value
over the amount outstanding,
net of unearned interest
Without the ability to recover
principal and interest when due.
May be lost.

Doubtful

High chance to lose

Irrecoverable

Cannot be recovered

Acording to classification method of Decree 02/2013/TT-NHNN 21/01/2013 of

Government bank replace for Decree 493 issued in 2005
III.

General context & causes

1. General context
The Governor of the Central Bank said that bad debts account for around 10% of the
total debt of commercial banks, while the inspectorate of the Central Bank gave us the
number of 8,6% ( over 200.000 billion dongs ). Besides the sources from the Central
Bank, the National Financial Supervisory Commission report showed that the number
should be 11,8% ( around 270.000 billion dongs) ( Dzung, tr83, 2012 )

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[BAD DEBT IN VIETNAM IN 2012]

Bad Debt Ratios through Years (2008-2012) (sources: GSO)

From the chart above, you can see that the bad debt ratio has been tripled dramatically
since 2008 ( from 2,17% to 6%). This is bad news for our economy, especially when the
world economic status are recovering.
The arrangement , the staff and the risk management of most commercial banks also
have weaknesses. Only 40% of commercial banks meet the international standards ( Basel
3)
The credit growth race has been existed for a long time , always higher than 20%, even
reached 51,39% ( as of 2007 ) , with the looseness in lending conditions making the bad
debts increasing rapidly

2. Causes
2.1. Subjective causes
2.1.1.
Reasons from firms
Firstly, it is the deficit of enterprises, especially state enterprises. 70% of commercial
banks bad debts are of state enterprises debt because this group can approach credit
easier and account for a great part of the economys outstanding credit. The second largest
part is from some large private companies, most are mortgage loans, securities.
Secondly, many companies use their short-term loans for long-term investment. When a
company runs out of capital, it is common that company will use short-term loans for
long-term investment. For example, Thai Hoa Group used 263 billion dongs of short-term
loans, mostly overdue loans, for its long-term investment, which led to heavy financial

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[BAD DEBT IN VIETNAM IN 2012]

imbalance and finally the group went into liquidation. From a large corporation in
agribusiness, by the middle of 2012, the group was on the verge of bankrupcy. These
consequences show that, the wrong use of capital ( like using short-term loans for longterm investment ) is the shortest way to overdue loans and bad debts for enterprises as well
as the banking system.
Thirdly, many companies use their investment loans for investment outside the main
field, especially for estates. According to credit institutions, at the peak, the mortgage debt
accounts for around 10% of the economys total debt ( in 2011 ).
The arrangement , the staff and the risk management of most commercial banks also
have weaknesses. Only 40% of commercial banks meet the international standards of
Basel 3. The credit growth race has been existed for a long time , always higher than 20%,
even reached 51,39% ( as of 2007 ) , with the looseness in lending conditions making the
bad debts increasing rapidly. ( Hoa, tr13, 2012 )

2.1.2. Reasons from mechanism of solving bad debt

Firstly, the method of classifying debts doesnt reflect the real amount of bad
debt. Currently there are no regulation to force the credit institution to classify bad debt
according to risk level of each customer. This means a debt can be classified into more
than one type of debt. It also explains why the statistics of bad debts from different
offices are not the same. The consequence is that some credit institution can abuse the
situation to adjust the debt type to extract some savings to increase the profit.
Secondly, it is the obstacle in the mechanism of handling collateral. Collateral is
often estates. When the company doesnt have the ability to pay, banks are allowed to
sell the collateral to retrieve the debt, but with current regulations, these transactions are
prohibited. If brought to the court, it will take a very long time, with many procedures
and other problems which can lead to the loss in value of the collateral
Thirdly, it is the handling of bad debts. Before 2000, the credit institutions werent
allowed to create extra funds for risks, so bad debts accumulated gradually but there
were no sources to compensate. To make the banking system develop better and more
stably, the Government allowed banks to create companies that trade accumulated
debts, while creating special bad debt processing policies for state banks and joint-stock
commercial banks. From 2001, banks are allowed to create extra funds for risks and use
this fund to create active financial sources for handling credit risks. In 2001, the
Government allow the creation of Asset Management Companies ( AMC ) and currently
there are 27 AMC of commercial banks but they are not effective because AMC often

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serves its motherbank , only trading debts that are lended to customers, due to small
capital, the lack of finance ability and bad debt processing skills. In 2003 the Gov
created the Debt and Asset Trading Corporation ( DATC ), but until now DATC still can
only handle a small part of bad debts with little results because of its financial potential
is small in compare to the scale of the whole banking systems bad debts and credit
institutions dont want to sell their debts, also because of unclear criteria of classifying
bad debts, so DATC cannot approach the bad debts. DATC have to conserve the capital
and have profits but debt trading is a risky action.
Fourthly, it is due to the credit institution and commercial banks. A large amount of
credit capital is used to invest into high-risk fields like estates and securities due to the
open of commercial banks. For a long time, credit institutions followed the strategy of
increase credit growth while risk management hadnt been improved and hadnt caught
up to the speed of development and they failed to control the credit quality. Because of
incapable staff, the work of inspecting and supervising has low efficiency, the violations
were not handled timely, and many violations had been allowed to happen until the
consequences become severe.
2.2. Objective causes
Because of the depression of the economy, as well as the rising price of materials for
producing and the higher inflation rate, the cost for producing has increased dramatically,
which affects the output greatly. The government also conducts a contractionary monetary
policy that makes the interest become higher, while enterprises have difficulty in
producing, results in a worse finance status and the bad debts of banks, therefore, grows
higher. The government still has the tendency to encourage banks to provide higher
capital than the safe level in order to reach the aim of economy growth.
The low credit quality is also due to the fact that the bank managers are authorized to
lend but they are not responsible for the quality of their credit.

IV. Policy implications.

1. The orientation of solving bad debts
To deal with the bad debt issue, we need some macroeconomic methods with the
purpose of controlling the bad debt situation, stabling the macroeconomic, curbing
inflation and economic developing at the reasonable level. In addition, we need to
change the economy from a wide to a deep economy.
The experience of the world shows that it takes a long time to deal with bad debt. So,
Vietnam needs some specific economic strategies in order to be able to solve this
problem.

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2. Policy implications
2.1. State
Bad debt is always a difficult problem to experts,manager and economists. As we
know, we have never known the exact amount of bad debts, especially in Vietnams
banking system. And any solutions are purely based on the forecasted number.
Therefore, Goverment often organized meetings to discuss detailed plans to solve
bad debt in Viet Nam in 2012. After many meetings, the government proposed the
following solution.
The first one is establishing debt asset management companies to resolve bad debt
and help spur businesses. The second one is attracting foreign investment and the last
one is keep macroeconomics stability next year with slower inflation anh higher
growth( Prime Minister Nguyen Tan Dzung said at a meeting in Ha Noi in 2012)1
Moreover, goverment also have special orientation to banks and ministries.
a) To the Central Bank
Vietnam Central Bank can ask banks to apply higher prudent ratios. Besides, they
need increase charter capital to meet safety requirementsor to limit credit growth.
b) To the State Bank of Viet Nam
The State Bank of Vietnam (SBV) is assigned to lead and coordinate with relevant
ministries, agencies and People's Committees of provinces and cities to implement
measures to resolve bad debts;establish a national asset management company
(VAMC) and approve its charter.
c) To the Ministry of Finance
The Ministry of Finance is assigned to build tax exemption, reduction policies
related to collateral trading for tackling NPLs of credit institutions; coordinate with
the SBV to develop plans to deal with bad loans of Vietnam Development Bank and
of state-owned corporations.
d) To the Ministries of Construction
The Ministries of Construction, planning & investment and justice are also assigned
different tasks to help to accelerate the NPL settlement.2
2.2. Private enterprises ( firms,banks)
To banks:
First of all, finding to bad debt to make the banking system operate safely and
effectivelyhas become an urgent necessity. Many organizations issued different
assessments of the bad debt situation .

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In one article, Mr. Quach Manh Hao, deputy CEO of Military Bank Securities
said Viet Nam should establish a special financial institution such as a bank to
manage bad debt. According to his ideas, we have three ways to tackle banks bad
debts. One way is to clear it. Another way is to remove the debt to the third party
such as a Debt and Asset Trading Corporation (DATC) orbad debt managing bank .
And the final way is to let banks to deal with the bad debts under certain standard in
a defined time.However, they are in theory. They seem difficult to apply separately
to situation in Viet Nam.
In fact, according to Mr. Hao, there are two important reasons leading to
current banks bad debts: (1) businesses cannot access to credit due to high interest
rates leading to slowdown in production and (2) ineffective business management and
operation.
For the first case, it is easy to tackle through extending debts or even lending
more at reasonable interest rates to bring businesses back to life.
For the second case, it needs a combination of three solutions: (1) clear a part of
bad debts, (2) buy the debts through DATC and (3) restructure business operation.
(Mr.Hao-Tuesday,10/7: Vietnam Should Establish Bad Debt Management Bank)
Therefore, there is in need of establishingan unit to classify, evaluate, appraise,
and valuate bad debts.
Otherwise,on July 13 the Vietnam Association of Financial Investors (VAFI) also
has proposals related to state policies in the field:
To increase foreign investors' holdings in domestic banks to 40 percent of
the bank's chartered capital and the holding rate of foreign strategic investors
to 25-30 percent to attract more foreign indirect investment (FII).

To allow a number of foreign banks that are strong in finance and have good
business administration to acquire weak banks. Many Asian countries such as
Thailand, Indonesia and the Republic of Korea were successful with this
solution and it helped restore their banking systems from the 1996-2001
financial crisis.
The State Bank of Vietnam should provide financially viable commercial
banks with financial assistance to help them acquire weak banks. This
assistance is aimed at reducing bad debt to make the banking system stronger.
Strong banks only acquire a weak bank on a voluntary basis when they see
that the acquisition benefits them because they have to fulfill their
responsibility to shareholders.
To free debt purchasers and sellers from value added tax (VAT) and enterprise
income tax to promote debt purchase and sales and encourage private
investors to participate in the debt purchase and sales market.

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To free enterprise bond issuance activities from the enterprise income tax,
aimed at reducing deposit interest rates, helping commercial banks to
mobilize long-term capital, through which to promote the transformation of
debts into securities, the enterprise bond market's development and the
stability in commercial bank's capital mobilization.

To find solutions to warm-up the real estate market. There are millions of
people that cannot afford to buy a house, while the number of customers
willing to buy a house at a price of several hundred million dong is big. If the
State and real estate businesses can do something so that the demand for lowprice property is satisfied, many social security problems will be solved, the
real estate market will be warmed-up and the rate of bad debts in
construction, building material and property industries will decrease. To do
this, the initiative of creating 25 square meter apartments needs to be turned
into a reality. Local authorities, especially those in urban areas, need to
simplify construction licensing procedures to pave the way for real estate
businesses to surmount difficulties and stimulate domestic consumption. A 50
percent reduction in VAT should be applied to real estate and construction
material businesses to help reduce housing construction costs and increase
business revenues.

To restructure state budget allocation for 2013 towards increasing spending

for infrastructure development and decreasing expenditure in sectors that do
not have urgent capital demands, aimed at stimulating the development of
many economic sectors through which to contribute to decreasing bad debt in
the commercial banking system./. (LanNgoc-23/7/2012. Authorities discuss
ways to tackle bad debt)

Also discussing solution in banks,Viet Nams central bank said it planned to

dealwith all weak banks this year, encouraging small lenders to merge voluntarily.
The bank is trying to move forward with initiatives to restructure and reform banks.
(thanhniennews-Vietnam needs patience to reduce bad debt: IMF-2012,September,01)

In fact, to eradicate the problem, we must start from the businesses that created bad
debts. Although there are many following solutions, this issue is unsolvable and
difficult to apply to situation in Viet Nam. It has many problem that we cant be able
to be foreseen.

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To firms:
We also have many ideas from government, experts , manager and organizations to
deal with bad debt, mostly the following solution:
Firstly, firms and corporations need to decrease the cost and the dependence
on banking capital and enhance the ability of risk management and resolve
inventories, negotiate with the debt owner to restructure the debt.
Secondly, credit protection stop problems from occurring in the future. There
has never been a better time to protect your own cash flow and credit rating. The
double dip recession is causing lenders to have even less confidence in businesses
and so they are becoming increasingly less willing to hand out credit and loans.
Credit protection can act as your safety net, saving you from bad debt from your
customers, thus saving your own credit rating.
Thirdly, credit protection company services are like insurance, if your
customer cannot pay, you get the invoice value from the credit protection company.
In order to benefit from credit protection you will pay a monthly charge to the credit
protectors, which means no matter how many invoices you have, you are always
covered if your customers cannot pay.
(is4.profit-business-advice: how-to-reduce-bad-debt).
Conclusion. : Currently bad debt is a hard problem to deal with, but it is possible to
reduce its negative impact on the economy. It will require hard work and co-operation
between the government and the private enterprises, yet we have the reasons to believe
that the future is bright and we can overcome not only this difficulty but the whole
depression.

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Reference
1. http://www.bloomberg.com/news/2012-12-26/vietnam-government-to-discuss-plansto-resolve-bad-debt.html
2. Nguyen Tri Dzung - Macroeconomic development reported 2012
3. http://www.stoxplus.com/News/116490/1/186/vietnam-government-approves-plan-toresolve-bad-debts.stox
4. Hoang Xuan Hoa - Financial Magazines 11-2012
5. http://www.stoxplus.com/News/84141/1/194/vietnam-should-establish-bad-debtmanagement-bank-quach-manh-hao.stox
6. http://ven.vn/authorities-discuss-ways-to-tackle-bad-debt_t77c175n30316tn.aspx
7. http://www.thanhniennews.com/index/pages/20120901-vietnam-needs-to-be-patientwith-bad-debt-imf.aspx
8. http://www.is4profit.com/business-advice/finance-and-money/how-to-reduce-baddebt.html