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Le Xuan Nghia, Director of the Business Development Institute and member of the Government’s Monetary Policy Consultancy Council, says the use of money sourced from the State budget, the State Bank of Vietnam (SBV), and the Vietnam Asset Management Company (VAMC) is expected to resolve bad debts and make it possible for businesses to access credit for development.
Diagnostic assessment of bad debts
In fact, Nghia explains the headlong rush to borrow money for the profit driven the development of real estate and stock markets during the 2007-2010 period only led to a decline in the accumulative level of the national economy.
Commercial banks were then forced to increase their chartered capital from hundreds of billions of Vietnam dong to thousands of billions of Vietnam dong to expand the scale of operation, even beyond their capacity of management and supervision.
Subsequently, bad debts arising from real estate and securities bubbles have placed a heavy burden on many small and medium-sized businesses.
Nghia cites some main reasons such as low aggregate demand, excessive stocks and inventories, and a depressed consumer market that have made them less and less competitive.
In 2009, for instance, there were attempt to exploit the discrepancy between 6.5 percent lending interest rates and 20 percent investment interest rates, but they all come cropper.
Combined solutions needed
At recent SBV survey shows bad debts account for 6.6 percent of total accounts outstanding, or (around VND2,400 trillion).
Nghia argues that the use of money from the SBV alone will be like foot dragging as the institution is still concerned about the possibility of inflation rearing its ugly head again.
If Vietnam decides to undertake domestic and foreign loans, and sells State-owned enterprises, bad debts can be dealt with in 2-3 years and real estate and credit growth will be back on track, Nghia says.
Such a combined solution can be applied for handle bad debts in 4-5 years to help maintain an annual growth rate of 5.5-6 percent.
The Republic of Korea was known as the only country to have successfully applied the State budget model since 1997 to bring businesses back to banks.
The Government and the SBV have established the VAMC to transform bad debts into business-contributed capital and act as a loan guarantor for businesses in their interactions with banks.
Many businesses—especially those involved in garments, leather, and packaging—are operating effectively. Only some, which have won export contracts for 2014, are facing certain bad debts from ill-advised real estate investment and are unable to accept bank interest rates with VAMC’s guarantee.
To cut the chase, Nghia insists on modernising the banking system in line with international standards to avoid bad debts in future.