INTRODUCTION
Rationale
Bad debts and their resolution have become a significant concern for nations worldwide, including Vietnam's economy An increase in bad debts poses a potential threat to overall economic development and the performance of banks.
In 2012, Vietnamese banks faced a concerning non-performing loan rate of 4.76 percent, surpassing the critical threshold that indicated potential financial instability In response, the government implemented various measures, including direct support for financial institutions and adjustments in the management of bad debts Despite these efforts, little progress was made in resolving the issue, leading to increased attention on the Vietnam Asset Management Company (VAMC) as a potential solution.
Since its inception, VAMC has garnered significant attention from banking and finance professionals, as well as the general public However, despite its notable achievements, the model also presents certain limitations These factors have motivated me to undertake research titled “A Study on the Vietnam Asset Management Company.”
Objectives of the study
This research will examine two key areas: it will first elucidate the theoretical framework surrounding the establishment and functioning of VAMC, and subsequently, it will assess the model's effectiveness and shortcomings, offering potential recommendations for improvement.
Research method
The study utilized data from multiple sources, including the State Bank of Vietnam, the Government's official website, and VAMC's website, as well as insights from both domestic and international economic experts.
Scope of the study
This article examines the recent effects of the Vietnam Airlines Management Company (VAMC) on Vietnam's economy from 2013 to 2015, while also analyzing the company's development objectives for the period of 2016 to 2020.
Structure of the study
Chapter I (Introduction) states the rationale, objectives of study, research method, scope of the study and the structure of the study
Chapter II (Literature review) deals with primary definitions and characteristics of AMC before mentioning several typical establishments of AMCs in the world
Chapter III (An overview of the establishment of VAMC) presents the macroeconomic background of VAMC, including the foundation of the model and the comparison of this company with other AMCs in the world
Chapter IV (Methodology and data analysis) describes the functions of VAMC in the real situation as well as an evaluation of VAMC’s activities
Chapter V (Recommendations and conclusion) illustrates some suggestions for future target of VAMC and includes the summary of the study
LITERATURE REVIEW
Theoretical framework
Asset management companies (AMCs) have emerged in various countries, each tailored to specific economic conditions and development policies While their names, characteristics, rights, and obligations may vary, AMCs fundamentally serve as specialized institutions focused on managing and acquiring non-performing loans from the banking sector Their primary goal is to optimize the resolution of these loans, ensuring effective management and recovery processes.
The main objective of an Asset Management Company (AMC) is to enhance the stability of the banking system When the proportion of non-performing loans to total loans becomes excessively high, banks' financial capabilities diminish, increasing their risk exposure To mitigate this, the AMC intervenes by acquiring bad debts, subsequently implementing strategic and effective methods to manage and resolve these financial issues.
This company is dedicated to maximizing the value of outstanding debts while minimizing the costs associated with reforming the banking system and businesses Its primary focus is on acquiring bad debts with low collateral value or assets lacking necessary documentation, which means the company operates without the primary goal of generating profit.
The establishment of Asset Management Companies (AMCs) is essential for economies with high non-performing loan (NPL) ratios or significant outstanding debt issues AMCs play a crucial role in bank restructuring by offering a mechanism for weaker banks to sell assets, thereby raising capital and preventing potential financial crises.
As for the economy: Debt trading promotes goods and capital flows in the economy, contributing to stabilize the financial-banking system It also
5 enhances the prestige and position of the nation in general and businesses in particular among countries in the international financial community.
An overall picture of AMCs in Asia
An Asset Management Company (AMC) must establish a clear mission and structured framework to effectively address the issue of bad debts By focusing on prioritized tasks, AMC institutions can function as a rapid solution for liquidating bad loans and relevant assets, while also facilitating the restructuring of business systems within their bad debt portfolios in the medium term.
During the financial crisis from 1997 to 1999, Asset Management Companies (AMCs) were established in East Asian countries, primarily funded by the government, with the exception of four AMCs in China Most AMCs adopted a multi-purpose model, focusing on the rapid sale and liquidation of bad loans while simultaneously implementing restructuring efforts.
In Korea, KAMCO played a pivotal role in corporate restructuring by prioritizing the swift settlement of a significant bad debt portfolio Meanwhile, in Malaysia, although the Corporate Debt Restructuring Committee (CDRC) was established to focus on corporate restructuring, the Asset Management Company Danaharta was actively involved in both direct and indirect aspects of the restructuring process.
During this period, East Asian Asset Management Companies (AMCs) identified their primary tasks based on the initial policies set during their inception In Indonesia, the Indonesian Bank Restructuring Agency (IBRA) was established in 1998 with a focus on corporate restructuring However, by early 2002, the urgent need to address a growing budget deficit compelled IBRA to expedite the sale of bad loans that had not yet undergone restructuring.
In China, after investing four years in restructuring hundreds of state enterprises, which represented about one-third of the total bad loans acquired by four Asset Management Companies (AMCs), the focus shifted towards the sale and liquidation of bad debts using various tools Conversely, Japan's AMCs, functioning primarily as bad debt collection agencies, concentrated their efforts solely on the recovery of these debts.
6 loans Only after about three years from the date of establishment that the role of involving in the corporate restructuring was added to the operational functions of this company
Since 2011, Vietnam has been grappling with the challenge of finding an effective model for bad debt settlement, prompted by a noticeable rise in bad debt levels within its banking system and the subsequent economic implications The situation worsened as banks attempted to manage bad debt independently, yet the volume of problematic loans continued to escalate rapidly.
2012 and continued to have an upward trend in the first months of 2013 Only after this point of time that research about AMC became a serious concern in Vietnam
AN OVERVIEW OF THE ESTABLISHMENT OF VAMC
Macroeconomic background
1.1 General bad debt situation in the period of 2011 – 2013
It can be said that NPLs has not just arisen recently It actually has accumulated for many years ago, becoming the major concern since the end of
In 2011, bad debts surged to 85 trillion VND, representing 3.3% of total loans, leading to significant liquidity issues and operational halts for commercial banks This situation was a direct result of stringent monetary policies and the emergence of accumulated bad debts The impact on the commercial banking system was profound, manifesting in three key areas: an increase in reserves for credit risk, a decline in sales return rates, and the potential for liquidity and systemic collapse risks.
Figure 1 The ratio of bad debt over total outstanding loans through years
(Source: Collected data from financial reports of the SBV)
The year 2012 witnessed an inevitable explosion on the rate of NPLs The credit growth rate was 26.56 percent on average, but the percentage of bad
As of May 2012, Vietnam's banking sector faced significant challenges, with bad debt reaching 117.7 trillion VND, or 4.47 percent of total loans This issue escalated to a national concern, prompting attention from Congress and the government However, the Banking Supervision Agency suggested that the actual bad debt rate might be as high as 8.6 percent, while Fitch Ratings reported an even more alarming figure, indicating that non-performing loans (NPLs) constituted 13 percent of all outstanding loans in the country.
In 2013, Vietnamese credit institutions experienced a significant rise in bad debts, increasing by 23.73% from the previous year, posing a serious threat to the banking system's security and national financial stability By July 2013, the State Bank of Vietnam (SBV) reported that non-performing loans (NPLs) totaled over 138 trillion VND (approximately 64.8 billion USD) Among the banks, VietinBank recorded some of the highest pretax profits during this challenging period.
In 2012, VietinBank experienced a significant profit decline in the first half of the year due to high provisioning for bad debts, which amounted to approximately 7 trillion VND by June 2013, making it the bank with the highest bad debt levels Additionally, financial companies reported a staggering bad debt ratio of 44.4 percent By the end of September 2013, the total off-balance bad debt ratio across the banking system exceeded 142.3 trillion VND, representing 4.62 percent of the overall bad debt.
1.2 Solutions to non-performing loans
In response to challenges faced by enterprises and credit institutions, the central bank introduced various solutions, including the establishment of risk provisions In January 2013, the State Bank of Vietnam (SBV) released Circular 02/2013/TT-NHNN, which outlined the classification of assets, methods for setting up risk provisions, and the utilization of reserves to manage losses in credit institutions Risk provisions represent funds allocated against potential losses when borrowers default on their obligations These provisions are crucial for banks to mitigate losses from bad debts, with regulations stipulating provision rates of 20%, 50%, and 100% for substandard, doubtful, and lost debts, respectively However, the implementation of risk provisions can be challenging for some credit institutions due to the associated high costs, potentially leading to reduced profits or even losses.
9 followed the regulations; consequently, many banks had decided to avoid setting up provision or drawing insufficient amount of money for this category
A proposal to increase the new credit outstanding balance faced challenges due to low credit growth and high interest rates, making it difficult to address non-performing loans (NPLs) Credit growth declined from 14.4 percent in 2011 to 8.85 percent in 2012, highlighting the issue Additionally, reducing the size of NPLs may necessitate the State Bank of Vietnam (SBV) to enhance its inspection and supervision efforts.
Rescheduling debt and adjusting interest rates were proposed as solutions to assist troubled firms in maintaining their operations The Decision 780/QD-NHNN, issued on April 23, 2012, aimed to enable adjustments in debt maturity and rescheduling to support businesses in accessing bank loans Additionally, interest rates, including both mobilizing and lending rates, were gradually lowered to decrease borrowing costs for companies However, these measures failed to address the underlying issue of escalating bad debts.
Despite the efforts of banks and the State Bank of Vietnam (SBV), the level of bad loans has continued to rise, indicating that the strategies implemented to reduce non-performing loans (NPLs) have yet to yield effective results The increase in bad debts was particularly notable in 2012 and persisted into the early months of 2013, highlighting the urgent need for effective measures to address this ongoing issue.
To effectively address the challenges posed by bad loans at local banks and to alleviate economic difficulties for businesses and the financial sector, a more powerful and radical approach was essential Given the limitations of the budget to comprehensively support bad debts, the establishment of a national asset management company became crucial, drawing on successful experiences from various countries to ensure the desired outcomes.
The establishment of the Vietnam Asset Management Company (VAMC) in July 2013 marked a significant step in addressing non-performing loans (NPLs) within credit institutions This initiative garnered considerable attention as it adopted a successful global model for managing NPLs, highlighting its importance in the financial sector.
The establishment of VAMC
2.1 Legal grounds for the establishment
The Vietnam Asset Management Company (VAMC) operates under the regulations set forth by the State Bank and corporate law, established through three key legal documents: Decree No 53/2013/ND-CP, which outlines its establishment and operational framework; Decision No 843/QĐ-TTg, which approves VAMC's scheme for credit institutions; and Decision No 1459/QĐ-NHNN, which authorizes modifications and supplements to VAMC's charter and operational guidelines.
The company was founded on July 7, 2013 with the full name as
“Vietnam Asset Management Company” and the abbreviation as “VAMC” Its head quarter is located in 22 Hang Voi street, Hoan Kiem district, Ha Noi
Table 1 A comparison between Decree 53 and Decree 34
Chartered capital 500 billion VND 2,000 billion VND
Purchasing model Basing on book value Basing on book value and market value
To refinance at the State
To refinance and to participate in the open market Maturity date of special bonds 5 years in maximum 10 years in maximum
Entities who can buy bad debts
Organizations and individuals, including people who are not residents
(Source: Collected data from sbvamc.com.vn)
On March 31, 2015, Decree 34/2015/ND-CP was issued to amend and supplement certain articles of Decree 53/2013/ND-CP, aimed at enhancing the operational effectiveness of the Vietnam Asset Management Company (VAMC) The company's initial charter capital, originally set at 500 billion VND, was increased fourfold to 2,000 billion VND following the enactment of this new decree.
11 change is due to the claim that more money would help VAMC gain efficiency in purchasing bad debt through the market price
This Vietnamese asset management company, fully owned by the State, operates under the direct oversight of the State Bank of Vietnam (SBV) and adheres to applicable legal regulations.
The State Bank of Vietnam (SBV) is responsible for appointing and dismissing key positions within the Vietnam Asset Management Company (VAMC), including the Chairman, Board members, Supervisory Board members, General Director, and Deputy General Director The VAMC's Board comprises a maximum of 7 members, while the Supervisory Board is limited to 3 members Management and professional staff are primarily sourced from the SBV and other reputable credit institutions.
2.3 Objectives and principles of VAMC
VAMC follows a self-financing model rather than a profit-driven approach, emphasizing transparency in its operations The organization is committed to minimizing risks and costs associated with managing bad debts.
The Vietnam Asset Management Company (VAMC) serves as a vital state instrument aimed at efficiently addressing non-performing loans (NPLs) to enhance the financial stability of credit institutions By minimizing risks for both financial entities and businesses, VAMC fosters sustainable credit growth across the economy It possesses extensive authority to manage NPLs, including restructuring options, enforcement of security, and auctioning collateral Additionally, credit institutions with NPL ratios of 3% or higher are required to sell these loans to VAMC in exchange for special bonds.
The introduction of VAMC has demonstrated its effectiveness as a crucial tool for swiftly addressing bad debts This model is yielding positive results in managing the bad debt issues faced by financial institutions while also providing essential support to clients.
A comparison of VAMC with other outstanding asset management
During the Asian financial crisis from 1997 to 1998, East Asian countries set up state-managed asset management companies (AMCs) to address bad debts and facilitate the restructuring of their banking systems and economies.
Some of the most outstanding ones could be named such as IBRA (Indonesian bank Restructuring Agency, 1998); Danaharta (Asset Management Malaysia, 1998); TAMC (Thai Asset Management Corporation, 2001)
Management companies, such as Danaharta in Malaysia and Thailand's TAMC, typically benefit from government funding and a focused organizational approach These debt settlement companies possess unique authority to manage bad debts, enabling them to take actions like distraining mortgages and compelling customers to negotiate debt payments Government support is crucial in enhancing the effectiveness of Asset Management Companies (AMCs) in addressing non-performing loans (NPLs), facilitating the swift transfer of bad loans from banks to AMCs.
In Vietnam, the global economic downturn has severely impacted numerous enterprises, leading to challenges such as declining exports, increased inventories, and slower consumption rates The struggling real estate market has further exacerbated these issues, putting many businesses at risk of bankruptcy Consequently, non-performing loans (NPLs) in the banking system have surged to hundreds of thousands of billion VND Additionally, the budget deficit has become a pressing concern, with budget revenue in 2013 falling to just 66.6% of the previous year's figure during the first nine months, compared to 80% in 2012, making it difficult to utilize budget funds for writing off bad debts as seen in other countries.
In its initial phase, VAMC aims to swiftly address bad debts within financial institutions while simultaneously assisting enterprises and supporting commercial banks without relying on state funding This innovative approach is tailored to Vietnam's unique circumstances, effectively tackling bad debts and enabling businesses to overcome challenges, thereby fostering economic growth Notably, VAMC's model of disposing of bad loans without state funds is unprecedented globally, distinguishing it from other Asset Management Companies (AMCs) that typically utilize national budgets for debt purchases, as VAMC opts for special bonds instead.
The VAMC employs a centralized debt settlement model, with the government playing a crucial role in the process, akin to practices in several East Asian countries like Malaysia, Thailand, and Korea.
Western countries often follow decentralized model There are some positive aspects as well as drawbacks associated with this model of VAMC
The centralized model offers significant economic advantages by consolidating power and resources, enabling companies to expedite debt repayment and streamline bank restructuring This approach allows banks to concentrate on their core business activities while VAMC implements unified financial restructuring solutions Additionally, VAMC's ability to alleviate pressure on banks facing operational challenges is a noteworthy benefit.
Despite its advantages, the VAMC model has notable shortcomings Primarily, VAMC struggles to gain a comprehensive understanding of each loan, which can hinder its effectiveness Additionally, operating under the State Bank's management means that VAMC is heavily reliant on governmental policies, exposing it to political pressures during its settlement procedures Furthermore, the diverse origins of non-performing loans (NPLs) complicate the resolution process, making it less systematic compared to other credit institutions.
METHODOLOGY AND DATA ANALYSIS
Main activities of VAMC
The Establishment Announcement of VAMC (2013) outlines the company's primary functions, which include acquiring bad debts from financial institutions and managing the recovery, collection, processing, and sale of these debts or their collateral Key responsibilities also encompass debt restructuring, adjusting repayment terms, and converting debts into equity for borrowers Additionally, VAMC engages in investing in, repairing, upgrading, or utilizing collateral previously collected by the company.
VAMC is responsible for managing bad debts, overseeing related collateral, and maintaining relevant documentation The company also engages in consulting and mediating debt and asset transactions, as well as making financial investments and purchasing shares Additionally, VAMC acts as a guarantor for organizations and individuals seeking capital from credit institutions Furthermore, it may undertake other activities aligned with its functions, pending approval from the Governor of the SBV.
The company is actively engaged in various initiatives to address bad debts, with a particular emphasis on three key tasks: purchasing, recovering, and restructuring non-performing loans (NPLs).
1.1 Measures to purchase bad debts
The Vietnam Asset Management Company (VAMC) will acquire the non-performing loans of credit institutions at their book values, adjusted for any unused provisions In exchange, VAMC will issue special bonds to these institutions, which are distinct from traditional market-traded bonds and are specifically created when VAMC purchases bad debts from banks.
Banks can utilize special bonds that allow them to borrow money from the central bank at a zero percent interest rate for a specified duration These bonds enable credit institutions to effectively refinance their loans when they require additional capital.
The SBV offers bonds with a maximum value of 70 percent, typically having a five-year term If the VAMC has not settled the debts by the maturity date, these debts will revert to the credit institutions.
This method applies exclusively to non-performing loans (NPLs) from banks, encompassing bad debts from credit activities, corporate bond purchases, and other activities as defined by the State Bank of Vietnam (SBV) To qualify, these bad debts must have associated collateral, and both the debts and collateral must be legally documented Additionally, borrowers must not have had their operating licenses revoked, declared bankrupt, or dissolved (for businesses), nor can they be deceased or missing (for individuals).
After completing a purchase, VAMC accelerates the recovery of funds by offering loans or auctioning loans and collateral to organizations and individuals In instances where borrowers demonstrate resilience or present new projects with strong repayment guarantees, VAMC may provide endorsements, financial support, and assistance in overcoming temporary financial challenges to help restore production and business operations.
Banks with a high ratio of bad debt or reduced payment capacity can seek financial assistance from the State Bank by selling their debts to the Vietnam Asset Management Company (VAMC) This process allows them to maintain operations while only needing to reserve a specified amount annually.
20 percent of bad debts for provision in 5 years instead of setting up provision immediately
VAMC is not required to set aside provisions for bad debts when using special bonds for their acquisition, and they are not pressured to resolve bad loans since banks must repurchase any unresolved debts at par value Additionally, VAMC incurs no interest costs on these special bonds, further reducing financial risk Consequently, VAMC remains insulated from potential losses, as they earn a commission regardless of the recovery price of the bad debts they manage.
Since then, many economic experts believe that the use of special bonds instead of real money may be not a wise option as most people believe They
16 claim that this alternative will create risks to the economy as the State bank has to pour money into banks to fill gaps of bad debts
Debt trading at market value transforms administrative buying, which lacks price negotiation and debt recovery capabilities, into a definitive purchase using "real money" that reflects the true value of the debt The transaction's value hinges on the recoverability of debts and the asset's worthiness, assessed through evaluations or transparent public auctions In this process, banks sell debt to the VAMC, which then liquidates assets to recover expenditures or sells the debt to new investors Additionally, VAMC can aid debtors in regaining financial stability by converting debt into shares This model, characterized by realistic pricing and a vibrant market of active buyers and sellers, presents a promising option for debt recovery.
VAMC will acquire bad debts from credit institutions at market prices, utilizing capital from special bonds, contingent upon certain conditions To qualify for purchase, bad debts must meet VAMC's criteria and be evaluated for the potential recovery of the funds spent on them Additionally, the collateral associated with these bad debts may be sold, and borrowers must demonstrate a viable path to restoring their financial stability.
When acquiring bad debt at market value, the Vietnam Asset Management Company will reevaluate the debts based on the potential for capital recovery and the collateral involved If needed, the company may engage a consulting firm to assist in assessing the bad debts and their collateral.
To effectively manage bad loans like a traditional asset management company, adequate human resources and financial resources are essential However, recent regulations lack guidance on how the Vietnam Asset Management Company (VAMC) can increase its capital for debt purchases or provide solutions for staffing to address bad debts As a result, the primary method for acquiring and resolving bad debts currently relies on special bonds.
After acquiring debts, the Vietnam Asset Management Company (VAMC), along with the borrower, debt buyer, and securing party, assumes all rights and obligations pertaining to the sold debts as stipulated by law This includes both the principal and any unpaid interest owed by borrowers To ensure financial stability and compliance with banking safety standards, the State Bank may compel credit institutions to sell their bad loans to VAMC for necessary financial restructuring.
1.2 Measures to settle debts and collateral
Evaluation of VAMC’s activities
The banking system's bad debt settlement process in Vietnam has two distinct perspectives Many individuals commend the State Bank of Vietnam's initiative in establishing the Vietnam Asset Management Company (VAMC), highlighting its achievements in addressing bad debts Conversely, some experts argue that this approach lacks comprehensiveness and merely serves as a technical solution rather than a holistic remedy.
Both perspectives on the banking system's performance are valid Notably, the bad debt rate has decreased to below 3 percent, aligning with international standards Additionally, the operation of asset management companies plays a crucial role in maintaining stability within the banking sector, mitigating the risk of widespread disruption These accomplishments highlight the significant progress made in restructuring and managing bad debts within the banking system in recent years.
While the second viewpoint shouldn't be dismissed as a myth, it's important to note that the VAMC has not recently pursued the sale of non-performing loans to either domestic or international private investors The goal of addressing these bad debts is to facilitate a transfer of "real money" back to banks, enabling them to reinvest in production and business operations Unfortunately, the current situation indicates that the VAMC is primarily focused on debt collection, leaving operators to manage the substantial volume of bad loans.
Established with the aim of reducing bad debts to manageable levels, the Vietnam Asset Management Company (VAMC) quickly received numerous offers to sell bad debts following its inception By October 2013, VAMC made its first significant deal with Agribank, amounting to 1.7 trillion VND in bad debt sales The company prioritized purchasing bad debts from three key groups: state-owned banks, banks undergoing compulsory restructuring, and banks with bad debt ratios exceeding 3 percent.
Figure 2 Several banks sold non-performing loans to VAMC in 2013
(Source: Debts purchasing report of VAMC in 2013)
Following its initial business transaction, the Vietnam Asset Management Company (VAMC) acquired non-performing loans (NPLs) from three commercial banks—SCB, SHB, and PG Bank—totaling 846 billion VND As of November 21, VAMC reported that it had purchased over 18.398 trillion VND in NPLs from more than 20 commercial banks.
In 2014, the Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) emerged as the leading bank in selling debt to the Vietnam Asset Management Company (VAMC), with a total of 6.6 trillion VND Following closely was the Saigon Commercial Bank (SCB), which reported a provision for special bonds of VAMC amounting to 1.225 trillion VND in its annual report This indicates that SCB sold approximately 6.125 trillion VND in bad debts to VAMC that year.
Figure 3 The amount of non-performing loans from different banks being sold to VAMC in 2014
(Source: Collected data from financial reports of banks in 2014)
In 2023, the Vietnam International Commercial Joint Stock Bank (VIB) successfully sold bad debts totaling 2.506 trillion VND, slightly exceeding its target of 2.500 trillion VND, while establishing a provision of 1.2 trillion VND Meanwhile, Saigon Commercial Joint Stock Bank (Sacombank) reclaimed nearly 354 billion VND in debts and converted bonds worth 4.349 trillion VND to the Vietnam Asset Management Company (VAMC), with an outstanding loan balance of 4.984 trillion VND.
According to reports from Techcombank, the bank sold approximately 3.4 trillion VND to the Vietnam Asset Management Company (VAMC), with its bad debt estimated at around 1 trillion VND for potential further purchases In the same context, LienViet Post Joint Stock Commercial Bank also participated by selling 1,232.5 billion VND of bad debts to VAMC in exchange for special bonds in 2014.
The Vietnam Asset Management Company (VAMC) has proven to be a strategic asset in reducing bad debts for credit institutions, as evidenced by the declining non-performing loan (NPL) ratios among banks This trend was particularly notable during the latter half of 2014 and the first half of 2015, when VAMC actively purchased bad loans through special bonds, benefiting banks that qualified for this support.
21 regulations In the accumulated data from December 2013 to December 2014, VAMC had acquired 133.555 trillion VND of outstanding principal with the purchase price of 108.652 trillion VND from 39 credit institutions
Figure 4 Bad debts purchased by VAMC from December 2013 to
(Source: Tri thuc tre News, 2015)
Since early 2014, VAMC has not only continued purchasing non-performing loans through special bonds but has also focused on enhancing the debt handling process This includes organizing loans, implementing interest remission, collecting debts, and selling both debts and collateral VAMC has proactively engaged with domestic and international financial institutions, collaborating with banks to gather information for accurate evaluation and analysis This strategic approach aims to provide tailored support to enterprises while improving business skills to align with real market conditions, ensuring mutual benefits for clients, banks, and VAMC.
From January to September 2015, the final year of the 2011-2015 Credit Institutions Restructuring Scheme marked a crucial transitional phase for the Bad Debts Solving Plan During this period, both the government and the central bank took significant steps to implement necessary changes.
22 thoroughly tackle bad debt - one of the major factors leading to the macroeconomic instability in Vietnam
Between January and September 2015, the Vietnam Asset Management Company (VAMC) acquired bad debts from credit institutions totaling 91.314 trillion VND in outstanding principal, with a purchase price of 82.155 trillion VND By the end of the third quarter of 2015, VAMC's purchases surpassed the initial estimate of approximately 80 trillion VND set at the beginning of the year.
Figure 5 Accumulation of VAMC’s purchase through years
(Source: Collected data from sbvamc.com.vn)
In 2013, VAMC’s buying bad debt was 39 trillion VND and recovered
In 2014, the Vietnam Asset Management Company (VAMC) achieved remarkable results, recovering 200 billion VND, significantly surpassing the projected 2.5 trillion VND in their recovery plan The figures for debt purchased and recollected reached 82 trillion VND and 4.2 trillion VND, respectively, indicating that VAMC exceeded its targets in both 2013 and 2014 This demonstrates VAMC's proactive approach in enhancing the debt recovery process following asset purchases.
2015 to September, VAMC’s debt recovery, debt sale, collateral sale were
Nov Dec Mar May Jun Aug Oct Dec Mar Apr Jun Aug
23 worth 9.827 trillion VND, doubling that of 2014 To sum up, as of September
2015, a total amount of 14.847 trillion VND was recovered from the debts
The Vietnam Asset Management Company (VAMC) has played a crucial role in addressing bad debts by purchasing a significant volume of non-performing loans Despite these initial successes, effective strategies for managing and recovering these debts post-acquisition remain uncertain While VAMC has implemented various flexible measures, including public sales, auctions, and direct debt sales, the overall recovery rate of these debts remains disappointingly low compared to the total amount purchased.
The establishment of VAMC was initially viewed as a potential solution to Vietnam's bad debt crisis However, more than two years after its inception, the company has revealed significant operational shortcomings and is confronted with various challenges in the current landscape.
RECOMMENDATIONS
Development plan of VAMC from 2016 to 2020
1.1 Focus on debts settlement after purchasing
After two years of acquiring non-performing loans to assist customers and credit institutions, VAMC now has a vital opportunity for restructuring Without effective strategies to address bad debts, it will be necessary to pursue debt collection, asset sales, and auctions.
Starting in 2016, the Vietnam Asset Management Company (VAMC) will operate independently, as the bad debts of credit institutions have fallen below 3% This shift means that the State Bank will no longer require commercial banks to sell their bad loans to VAMC, establishing a relationship akin to that of two enterprises engaging in debt trading Consequently, VAMC’s primary focus from 2016 to 2020 will be on managing and resolving the purchased debts, including debt sales and collateral liquidation.
1.2 Purchase debts basing on the market value
The VAMC will now purchase bad debts at market prices using special bonds, facilitating a more efficient resolution of non-performing loans The implementation of Decree 34, which amends Decree 53 regarding the establishment and operation of the VAMC, officially enables this process, enhancing the company's ability to tackle bad debt effectively.
VAMC is now authorized to issue bonds for purchasing bad debt based on the market value outlined in the approved issuance plan by the State Bank This program allows VAMC to utilize four methods for bond issuance: tender issue, underwriting, agent issue, and direct selling.
To achieve its objectives, VAMC aims to develop purchasing strategies for bad debts based on the classification of non-performing loans acquired through special bonds, facilitating a definitive takeover at actual value By the end of 2016, VAMC had purchased approximately 150 trillion VND in bad loans.
200 trillion VND with the amount of bad debt recovery reached 20 trillion to
The VAMC manages a minimum of 100 to 150 trillion, with banks having provisions at about 50 percent This allows for quicker negotiations to purchase bad loans at market-appropriate values Additionally, VAMC aims to contribute capital to businesses and convert debts into equity to help restructure viable enterprises Another strategy involves continuing to restructure debts while ensuring clients can access loans from local banks.
Recommendations
The debt settlement model of the Vietnam Asset Management Company (VAMC) has faced various perspectives since its inception, yet it remains the most suitable approach for the current Vietnamese economic landscape However, VAMC must not rest on its laurels, as there are significant shortcomings in its operations that need urgent attention for long-term improvement Effective changes should involve not only VAMC itself but also the broader legal framework, with active public participation Therefore, timely and practical modifications are essential, and this study presents several recommendations for enhancing VAMC's effectiveness.
VAMC should focus on increasing its chartered capital, as outlined in the newly issued Decree 34/2015/ND-CP, which permits a rise from 500 billion VND to 2,000 billion VND Despite this increase, VAMC's ability to purchase bad loans at market prices remains constrained To address this limitation, VAMC has proposed an additional 1,500 billion VND capital increase to the SBV, which would enhance its financial capacity to acquire loans at market rates and facilitate debt restructuring efforts.
To enhance its operational efficiency, VAMC should be granted greater independence from the State Bank, as its current activities heavily rely on the bank's policies, mechanisms, and human resources By providing VAMC with special rights, the State Bank can empower the company to address and resolve existing challenges more swiftly.
To mitigate risks, VAMC must strategically analyze and select the debts it purchases, as acquiring unsellable debts can be detrimental Despite not using actual cash for transactions, it is crucial to avoid indiscriminate buying of loans A thorough assessment of the collateral's true value is essential, alongside the establishment of clear auction rules and the classification of loans to facilitate faster settlements.
Many organizations purchase debts for profit, focusing on quick trades rather than assisting debtors in repaying their obligations Therefore, it is crucial for VAMC to make informed decisions about whom to sell these debts to, ensuring that the primary goal of helping debtors is not overlooked.
To enhance its effectiveness, VAMC requires a robust legal framework that includes a dedicated law governing its operational mechanisms, allowing for the timely management of bad loans Currently, VAMC's operational guidelines are limited to theoretical documents such as circulars and decrees The organization should be empowered to dispose of collateral and transfer or sell debts without needing borrower consent While recent circulars have granted VAMC greater autonomy in valuing bad debts, existing legal constraints related to collateral, particularly real estate, continue to impede the company's ability to efficiently sell debts.
Over the past two years, VAMC's initiative to purchase debts through special bonds has been recognized as a significant effort However, the organization is currently encountering numerous challenges in managing properties and the rights to dispose of collateral The lack of a clear legal framework for protecting VAMC staff during asset valuation, sales, or auctions further complicates the situation These issues contribute to substantial limitations for VAMC in the debt collection process.
Establishing a debt trading market in Vietnam is essential for attracting foreign investors and enhancing the economy with clean cash flows Allowing foreign participation will foster competition among investors in the debt trading sector Currently, Vietnam lacks a structured bad debt trading market, and the Vietnam Asset Management Company (VAMC) does not have an effective platform to actively sell non-performing loans.
The lack of a structured pricing mechanism for bad debt in Vietnam hinders the quick evaluation and transaction of bad debt sales Establishing a robust legal framework is essential to foster a vibrant market for buying and selling bad loans, which will, in turn, attract both domestic and international investors to participate in these transactions.
2.2 As for State bank of Vietnam
To enhance transparency in the debt settlement process, the State Bank of Vietnam (SBV) must provide clear and accessible information to the public regarding the procedures, outcomes, shortcomings, and associated risks of the Vietnam Asset Management Company (VAMC) It is crucial for the SBV to clarify that VAMC is not a "magic wand" for the economy, as many citizens have unrealistic expectations about its impact due to a lack of understanding of its role The establishment of VAMC alone will not revitalize the entire economic system, as there are numerous other challenges beyond bad debts that persist in the Vietnamese economy.
To encourage credit institutions to sell non-performing loans rather than conceal them, the State Bank should enhance the mechanism for debt resolution through the Vietnam Asset Management Company (VAMC) This includes refining the discount rates on special bonds and clarifying the financial returns upon bond maturity By providing clear guidelines, banks can make informed decisions that effectively mitigate risks associated with bad debts.
In recent years, numerous announcements regarding bad debts have emerged, primarily due to banks' inadequate preparation in debt classification and risk provisioning, as well as potential intentional misrepresentation of data Accurate and complete data is essential for effective bad debt resolution Currently, banks are adhering to the State Bank's regulations outlined in Circular 02/2013, which has enhanced the accuracy of bad debt ratios To address bad debts effectively, supervisors must implement rules requiring commercial banks to disclose source data that enables the Vietnam Asset Management Company (VAMC) to assess the true level of bad debts.
To ensure sustainable growth, banks must maintain strict control over credit quality, as loosening lending conditions can lead to an increased risk of bad loans By prioritizing effective credit management, banks can mitigate potential bad debt issues and safeguard their financial stability.
Commercial banks and the Vietnam Asset Management Company (VAMC) should collaborate to identify specific bad loans for trading, rather than acquiring all debts indiscriminately This partnership can enhance the evaluation of collateral values, ensuring a more accurate assessment Additionally, banks can contribute to developing effective bidding mechanisms and categorizing appropriate groups of non-performing loans, fostering a more strategic approach to debt settlement.
Under the management of the State Bank of Vietnam, the Vietnam Asset Management Company (VAMC) is actively working to assist banks and enterprises in addressing their bad debts While VAMC has achieved initial success in the debt resolution process, it faces several shortcomings and challenges in its operations To foster public trust and support, it is essential to recognize the company's role and functions accurately Additionally, improvements must not only stem from government and other credit institutions but also from within VAMC itself, ensuring long-term success and contributing to overall economic development.