Assignment 1 For Banking Management Course

(www.c10mt.com) Recently, the State Bank of Vietnam has set up a Vietnam Asset Management Company (VAMC) to help solve the bad debt problem of the banking system. Present your knowledge about operation of VAMC and in your opinion, which criteria will determine VAMC running efficiently under Vietnam Banking conditions. Assignment 1 For Banking Management Course.

I. Vietnam Asset Management Company and Industry Background.
II. The operation of VAMC.
III. Comparison between VAMC and similar operations in the world.
IV. Criteria determine VAMC running efficiently.

I. Vietnam Asset Management Company and Industry Background

Like any other business, banks may also have many risks and bad debt is one of the most serious risks in Vietnam’s bank system. A bad debt is an amount owed to a business or individual that is written off by the creditor as a loss because the debt cannot be collected and all reasonable efforts to collect it have been exhausted. At the beginning of 2013, as State Bank Deputy Governor Nguyen Van Binh’s announcement, bad debt ratio of whole bank system is at the rate of 6%, bad debt has continued to soar.

According to the State Bank’s statistics by the end of July 2013, total bad loans of whole banking system is VND 138,980 billion. In ten banks which recently announced the second quarter financial statements, three state-owned banks (BIDV, Vietcombank, Vietinbank) holds 55% of the "bad debt pie”. The state-owned enterprises account for a large proportion of bad loans in Vietnam’s commercial banking system such as Vinashin owed VND 86 billion.

Bad debt ratio of Vietnam is extremely high. It is a cause made banking sector profits plunge in recent years. According to the first six months of banks’ publication, very few banks achieve a half of target earnings in 2013. For example, Eximbank’s profit before tax reached VND 800 billion and equivalent to one-quarter profit plans, VP Bank accumulated profit of the first six months is VND 279.82 billion, down nearly half compared with VND 512.08 billion of same period last year. Thus, the problem of Vietnam’s banking system today is not how to stimulate credit; it is how to solve bad debt efficiently. Bad debts are resolved as soon as quickly regain confidence in the market and will circulate the flow of capital and stimulate economic growth. Solving bad debt is a bank’s responsibility. But if banks solve all of their debt by themselves, they have to focus several resources into this and thus will not have resources to lend. Therefore, the establishment of Vietnam Asset Management Company (VAMC) will help banks can deploy normal business operations and gradually resolve bad debt.

II. The operation of VAMC.

VAMC formally established and put into operation since July 9, 2013. It is one-member limited company with a charter capital of VND 500 billion, is 100% state owned and is managed, supervised and inspected by the State Bank of Vietnam. It will work in a non-profit capacity. The company has a Members Board, a Supervisory Board and a CEO. VAMC is permitted to buy bad debts from banks and will recover debts and put collateral up for sale as well as restructure debts. It will also adjust the conditions on loans and convert debt into equity. In addition, it is allowed to consult and act as a broker to trade debts and assets, make financial investments and purchase sales as well as auction off assets and provide guarantees for businesses and individuals so they can access bank loans. It expects to resolve roughly VND 80 to 100 trillion in bad loans with a projected loan recovery rate of 20 to 40%.

VAMC is a tool that will help increase financial healthiness of commercial banks. Its primary function is to purchase bad debt from credit organizations in either one of two ways. It can buy bad debt at book value by issuing special bonds or at market value by using other sources. However, VAMC initially will focus on buying debts at book value and will buy debts at market value when conditions are favorable. The bonds are valid for a period of five years at zero percent interest. The banks will have to free themselves of all bad debts within five years and will be held fully responsible for managing all of its debts. Besides, banks will have to make provisions of up to 20% annually for bad debts they sell to VAMC. Financial institutions that have bad debt rates of 3% or more of their total outstanding loans will have to sell their bad debts to VAMC but the institutions with rates less than 3% will completely sell their bad debts to VAMC because VAMC’s target is to stabilize the economy and strengthen credit growth. Nevertheless, to be acquired, bad debts must meet five conditions:

Firstly, bad debts are of credit institutions, including bad debts in credit grants, purchase of corporate bonds, entrusted investments in corporate bonds, entrusted lending and other activities according to regulations of the State Bank.
Secondly, bad debts are backed with collaterals.
Thirdly, bad debts and collaterals must be legitimate and have full records and legal papers.
Fourthly, borrowers still exist.
Fifthly, balances of bad debts or outstanding bad debts of borrowers are no lower than the level prescribed by the State Bank.

The Prime Minister will decide that the VAMC buys bad loans that do not meet those above conditions as suggested by the State Bank.

III. Comparison between VAMC and similar operations in the world.

VAMC can refer from some typical bad debt solving patterns in the world such as Korea (KAMCO), China (four AMCs) and Malaysia (Danaharta).

VAMC : Asset Management Companies have task of acquiring bad debts from the financial system and issuing bonds under the government guarantee for the period of 5 years. Charter capital of VND 500 billion ($23.61 million). Limit using State’s budget to resolve bad debt. Bonds are issued at zero percent interest rate. Financial institutions that have bad debt rates of 3% or more of total outstanding loans must sell bad debts. Buy bad debt at book value. All leaders of VAMC are people in the field of banking.

KAMCO (Korea Asset Management Corporation) : Asset Management Companies have task of acquiring bad debts from the financial system and issuing bonds under the government guarantee for the period of 5 years. Initial charter capital of 1500 billion won ($1.34 billion). Use State’s budget to offset losses of solving bad debt. Bonds are traded on the stock exchange with floating rate. Banks must sharply decrease bad debt, Government will buy bad debts to restructure banks which cannot handle. Only buy bad debt from 20-40% at book value. Leaders come from many agencies such as Finance, Planning and Budget, Audit, Law, Professor University.

• In China, late 1999 and early 2000, bad debt at some banks was even exceeding 40%. Meanwhile, it set up four asset management companies to only resolve bad debts of four banks owned by the State (Big Four). Differ from VAMC, Big Four transferred 14,000 billion Yuan bad debts for AMCs, and then AMCs transferred back to the Big Four 248 billion Yuan (total owner equity) and 10-year bonds.

• In Malaysia, Danaharta (1998-2005) has achieved impressive results. Differ from VAMC, Danaharta aimed to only buy bad debts over 5 million ringgit. Purchase price was determined based on the fair value (FV) of collateral. When FV is higher or equal to the outstanding principal plus interest, it purchased at the price of loan principal plus interest. When FV is lower than the value of total principal and interest but higher than or equal to principal debt, purchase price is FV. But FV is less than the original debt, purchase price will be the original debt but Danaharta only prepaid an amount equal to FV.

IV. Criteria determine VAMC running efficiently.

Based on the comparison between VAMC and some similar operations in the world, we can identify criteria will determine VAMC running efficiently under Vietnam Banking conditions:

Firstly, we need to consider the cost of bad debts when VAMC buy. Decree 53 allows VAMC buy bad debt at book value or market value. But it initially will focus on buying debts at book value. After buying bad debts, VAMC must resale and obviously sell at market prices so VAMC may face a loss because real value has dropped compared to the book value. In fact, the majority of bad loan’s collaterals are real estate. The sale of real estate will take time and cost of VAMC such as appointing custodians to manage those assets is not degraded and lost value. With corporates, in the situation of real estate market froze, the loss of value over time loan is obvious. For example, business A borrow VND 50 billion at bank B, collateral is real estate at that time worth VND 100 billion. Now the real estate market is frozen, VAMC prices this bad debt only VND 60 billion, including collateral. Then, VAMC can auction resell debt. So this is disadvantage for bank B and business A. Therefore, VAMC should create a reasonable formula as Korea and Malaysia to evaluate bad debts and have a separately transparent auditing company to avoid bribery when appraisers deliberately evaluate price of bad debt higher than actual value.

Secondly, we need to consider VAMC’s human resources because senior staff is the core factor of the successful restructuring process. In fact, annual reports of businesses are now very confusing and unclear, thus, to identify what bad debt can be converted into business opportunities, requiring human resources of VAMC must be market expert, professionally proficient and devoted. All leaders of VAMC are people in the field of banking. For example, State Bank’s Deputy Governor Dang Thanh Binh holds office as Chairman of the Board Members, Mr. Nguyen Quoc Hung who is Deputy General Director of Agribank holds office as VAMC’s Deputy Permanent Chairman, VAMC’s General Director Nguyen Huu Thuy is Deputy Director of Foreign Credit Institutions Inspection Department, three Deputy General Director of VAMC are Mr. Le Quang Chau, Mr. Đoan Van Thang and Mr. Bui Tin Nghi who have more experience in commercial banks. They can have a lot of experience in finance, but in fact, handling bad debt includes debt restructuring, restructuring activities of the company is burdened with debts or revaluating the value of bad loans to transfer to third parties. These things not only require financial management skills but also require business management skills, law and even applying complex financial theories into reality. In addition, it is very necessary to recruit good staff appraisal to honestly evaluate bad debt and collateral which is the most important step in buying bad debts. If the evaluation team is weak, VAMC easily get loss and solve bad debt inefficiently. Hence, Vietnam Government should send senior personnel to Korea and other countries to learn the restructuring experience; expand recruiting talents in auditing, legal and financial analysis as human resources of KAMCO. In addition, it is great to invite many foreign and domestic experts in this field such as IFC (International Finance Corporation) to create and develop suitable regulations of VAMC under Vietnam conditions.

Thirdly, VAMC is established but still not solved absolutely the problem of accessing capital for business. According to regulations, bad debts must meet five conditions to be bought by VAMC such as bad debts are backed with collaterals, those must be legitimate and have full records and legal papers. When credit institutions selling loans to VAMC, they must transfer secured assets of companies to VAMC. Collateral of those companies are usually buildings, land, machinery and goods. Now, the majority of businesses have high inventories and no assets to ensure they get what for mortgage loan? Meanwhile, banks do not lower lending standards and require collateral loans. This can lead to the bribery between banks and corporates to make loans without collaterals or sometimes corporates may fake the book value of collaterals to borrow money from several banks. For example, Southern Seafood Company borrowed VND 1600 billion based on its collaterals and when out of collaterals, it even fake the book value of inventory over VND 700 billion to request loans from LienVietPostBank (VND 328 billion) and Vietnam Development Bank (VND 341 billion), but the actual inventory just about VND 22 billion. According to Mr. Cao Sy Kiem who is Chairman of Small and Medium Enterprises Association in Vietnam, although bad debts of business are clean, they want to request bank loans they still must have collateral. If there is no collateral, businesses cannot borrow capital from banks. Hence, besides buying bad debts, Vietnam should implement synchronous measures such as increasing purchasing power, increasing wages, reducing goods price, reducing tax to help businesses recover production and repay bad debts. It really help banks solve bad debt, businesses access capital safely and properly.

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