September 19, 2017 / 3:48 AM / 10 months ago

Fitch: Vietnam Resolution Law Not a Quick Fix for NPL Problems

(The following statement was released by the rating agency) SINGAPORE, September 18 (Fitch) Efforts by the Vietnamese authorities to speed up resolution of legacy problem loans could help to address the asset-quality issues that weigh heavily on banks' Viability Ratings, but the resolution process is unlikely to improve significantly in the short term due to the considerable implementation challenges, says Fitch Ratings. Meanwhile, rapid lending growth continues to add to the risk of a rise in NPL creation. Resolution 42, which took effect last month, could remove some of the legal impediments to effective loan resolution. It includes measures to improve lenders' ability to enforce collateral security, which already appears to have made banks more aggressive in seizing commercial property to foreclose bad loans. It also enhances the trading of bad debt in the secondary market. Bad debt can now be sold to any legal entity, including foreign investors, without them needing a licence for debt trading. The attempt to involve foreign investors could increase the funds available for debt resolution, particularly given recent strong interest in Vietnam from foreign investors - net FDI inflows were among the strongest in APAC in 2016, at 5.6% of GDP. However, the sale of debt to foreigners could still be constrained by remaining uncertainties, including restrictions on foreign investors taking security over property. This is just one example of the problems that, in practice, are still likely to hinder bad debt resolution. The new framework will only be properly tested when large cases are handled, and we expect remaining shortcomings to be addressed only slowly. A more effective debt resolution regime could, over the longer term, help banks to reduce asset-quality problems, which weigh on their earnings and profitability. The reported system NPL ratio was 2.55% at end-March 2017, but this did not take into account banks' bad-debt sales to the Vietnam Asset Management Company (VAMC). These sales help banks avoid restrictions that the State Bank of Vietnam (SBV) applies when their reported NPL ratios rise above 3%. Our adjusted NPL ratios add back in loans sold to the VAMC - for which banks must make provision for 10%-20% of the book value annually - as well as "special-mention" loans (see chart). Inconsistencies in disclosure and subjective differences in classification mean that true NPL ratios may be even higher. <iframe src=" " title="Vietnam NPLs Understated by Official Figures" width="550" height="667" scrolling="no" frameborder="0" allowfullscreen="allowfullscreen"> Quicker debt resolution could also reduce banks' capital charge burden, which would better position banks for the scheduled implementation of Basel II in January 2020. As it stands, banks' reported capital adequacy ratios (CARs) meet minimum requirements, but these are based on official NPL ratios that understate problem loans in the banking sector. The IMF estimates that the full adoption of Basel II will reduce CARs by 200bp to 400bp. Potential progress on resolving legacy bad loans should be weighed against asset-quality risks that could be stoked by recent rapid loan growth. The SBV's guidance to the banking sector has been that loan growth should be 17%-18% in 2017, and there have been reports that this is being raised to 21%-22% to help the government hit its 6.7% GDP growth target for 2017. GDP growth in 1H17 was some way below target at 5.9% yoy. The SBV also cut its policy rate to 6.0% in July from 6.5% to give the economy a boost. Current asset-quality problems can be traced back to rapid credit growth and poor lending standards during the 2000s. Risks crystallised in 2011-13 and caused significant stress in the financial sector. Another extended period of rapid credit growth to meet GDP targets could eventually trigger another wave of defaults. Contact: Wee Siang Ng Senior Director Financial Institutions +65 6796 7230 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Ryan Foo Analyst Financial Insitutions +65 6796 7238 Dan Martin Senior Analyst Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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