Vietnam Tells Central Bank to Clean Up Bad Debt

By VU TRONG KHANH

HANOI—The State Bank of Vietnam said the central government ordered it to take measures to clean up bad debt in the banking system, as authorities try to stave off downward pressure on the economy.
The central bank said in a statement Monday that it will have to deal with "weak banks" by the end of next year to stabilize the banking system and consolidate investor confidence. It didn't specify what measures it will take.

In August, central-bank governor Nguyen Van Binh told the legislature that bad debt in the banking system made up about 8.6% to 10% of total loans, up from 6% at the end of 2011.

Many private-sector analysts believe the problem is worse. An advisory group to the National Assembly's economic committee has said Vietnam may need $12 billion to $14 billion in outside assistance, the equivalent of as much as 11% of gross domestic product, to clean up the banks.

"Short-term measures could include direct government recapitalization or the establishment of an asset-management company to buy up distressed loans," said Ivan Tan, a credit analyst at Standard & Poor's Ratings Services. "However, these do not address the underlying poor underwriting standards and fragmented nature of the banking system."

In August, Mr. Binh listed several initiatives Hanoi would take to deal with the debt problem, but offered few details. He said authorities would encourage the securitization of bad debt and speed up previously approved public-investment projects to help businesses clear inventory and get on a stronger footing to meet their obligations.

He also said the central bank had a plan to set up a state asset-management company to help deal with the bad debt, a plan it would soon submit to the government for approval. There have been no further announcements about that plan.

Nonperforming loans have surged following a flood of lending—often to inefficient state-owned companies—to boost the economy during the global financial crisis.

Economists warn that Vietnam has entered a cycle in which banks, saddled with bad debts, are unwilling to lend, making it harder for businesses to invest. That weighs on economic growth, which in turn makes it harder for companies to pay back loans.

Moody's Investors Service cut the country's credit rating late last month, citing risks that the government will have to pump money into the country's banking system, and the system's general weakness.

S&P's Mr. Tan said the government needs to keep in mind the objective of having fewer but stronger financial institutions with good risk controls. "In particular, greater participation by foreign strategic stakeholders will facilitate the transfer of best practices and risk-management processes to the domestic banks," he said.

Matthew Hildebrandt, a sovereign strategist at J.P. Morgan Chase, said several Southeast Asian countries used the asset-management model after the Asian financial crisis of the late 1990s.

The process of working through the bad loans "will take a long time and may have periods of starts and stops," he said. "I think a crisis is unlikely, but the longer it takes for banks to work through their bad debts the longer it will take Vietnam to grow at a fast rate again. So I would expect the country to muddle through in coming years with around 5% growth, but the good old days of 7% to 8.5% growth are likely over for now."

Vietnam's central bank also said in Monday's statement that the government has asked it to find ways to raise the country's foreign-exchange reserves and tightly control the exchange rates "based on market conditions." The government has also told the central bank to continue pursuing flexible monetary policy to improve companies' access to loans, without letting inflation rise sharply again, the central bank said. It added that new loans should be funneled to agricultural projects and projects that are "economically efficient."
—Natasha Brereton in Singapore contributed to this article. Write to Vu Trong Khanh at trong-khanh.vu@dowjones.com