Developing debt trading market: Moving from "debt collection" to "debt consumption"

The supply for the debt trading market in Vietnam is plentiful while demand is limited due to policy constraints.

Supply is high, demand is limited

Speaking at the seminar "Developing Debt Sale and Debt Market in Vietnam" held recently at the University of Economics in Ho Chi Minh City, Dr. Nguyen Manh Hung, Head of Supervisory Board of VAMC, said that bad debt management through VAMC was the most effective way in the past five years (2012-2016) with VND 253,015 billion bad debts bought from credit institutions. These accounts accounted for over 41% of total NPLs recovered during this period. However, as of 31st December, 2016, VAMC only recovered VND 50,169 billion, accounting for less than 20% of total debt. The method of collecting debts by VAMC mainly coordinate with credit institutions to sell assets to secure loans, sell debt, urge customers to pay debts, etc.

So, according to Mr Hung, VAMC is now regarded as a "bad debt" of credit institutions. In essence, this amount of bad debt is bad debt to credit institutions. Annually, credit institutions still have to deduct 20% of the risk reserve and return it to the credit institution within 5 years if they fail to sell their debts. Including the bad debt sold to VAMC, it has not been recovered and the debt has not been grouped into bad debt, but nature is bad debt, and banking sector bad debt to the end of 2016 is still over 8%. Thus, despite the best efforts, the level of bad debt treatment has not been as expected, bad debt ratio is still high.

Also in the period 2012-2016, credit institutions disposed of VND 154,392 billion of bad debt from provision. This is the second most effective bad debt channel after VAMC. However, the provision level of credit institutions is equal to over 33% of charter capital of the same banking sector. Many banks have "eaten" their own funds because they do not generate enough profit to make up. Together with the burden of provisioning to deal with bad debts, banks are also under great pressure to set aside 20% per annum for bad debt sold to VAMC, but the collateral cannot be resolved to recover the debt.

According to Mr. Hung, banks have not only reduced their expenses to increase their income but also have to adjust their business strategies to reduce the interest rate. The mobilization rate, raising the lending interest rate to increase the income. This also means that businesses find it difficult to receive capital to expand production, resulting in limited budget revenues and the competitiveness of enterprises in particular, as well as the economy in general is reduced.

According to experts, the cause of the situation is that Vietnam has no market for bad debt trading in accordance with market principles. VAMC buys debt from credit institutions, but there is no market for this company to sell debt to other organizations. The debts that VAMC purchased from credit institutions are mainly purchased at book value (principal balance), the purchase at market price was implemented by VAMC in 2016 but without results. On the other hand, there are not many participants in the debt market. While there are hundreds or even thousands of debtors, such as credit institutions and branches, the debt purchaser has only three entities, namely VAMC, Vietnam Debt Trading Company Limited (DATC), Ministry of Finance, and asset management and sale (AMC) companies of credit institutions. Thus, the supply is high, demand is limited, so the handling of bad debt is slow.

Open the market

From the above reality, Dr. Can Van Luc, BIDV's chief economist, estimated that supply for debt trading in Vietnam was plentiful, including loans of credit institutions with over VND 6.5 trillion, equivalent to 125% GDP, of which, elimination of personal and household debt is about VND 4 million billion. Along with the bad debt and potential bad debt, estimated at the end of 2016 is about 8.6% total outstanding loans, and equivalent to VND 516,000 billion. There are also loans between enterprises. In addition, debt sold to VAMC and untreated as of September 2017 is about VND 230,000 billion. However, at present, Vietnam has no common standard on debt trading.

According to Mr. Luc, at present, some foreign and domestic investors are very interested and want to buy debt at VAMC as well as some credit institutions. However, the underdevelopment of financial intermediaries has made these investors difficult to access the market. Specifically, Vietnam has a lack of credit rating agencies, and only the rating criteria VNR 500 companies are published, no unit has been given credit rating for debts.

Meanwhile, one of the successful characteristics of the Korean market is the diverse involvement of credit rating agencies. Vietnam also lacks professional brokers who hold all the market information, focal arrangements for buyers and sellers to meet. Thanks to this team, trading debt is done professionally, legally, as well as protecting the interests of investors. The debt trading market in Vietnam is lacking these brokers. Other financial institutions such as insurance companies, investment funds, pension funds, securities companies etc., have not yet been formed.

Accordingly, experts said that Vietnam needs to improve the legal framework to build and develop the debt trading market, and attract investment capital into the market. At the same time, it is necessary to internationalize accounting standards as a basis for valuation, M&A in the market, creating a corridor for efficient debt trading markets. Experts also questioned whether Vietnam needed to develop a unified, transparent, and complete national database on sectors and businesses that had been standardized to join the market. This will create a convenient basis for any investor who intends to enter the market, as well as save costs, time, and increase efficiency in making investment decisions.