Vietnam's Crisis Hard to Fathom

Vietnamese banks are saddled with bad loans but the extent of the problem remains a mystery.
An analysis by Parameswaran Ponnudurai
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Motorcyclists ride past the Vietnamese central bank in downtown Hanoi, July 6, 2012.
Motorcyclists ride past the Vietnamese central bank in downtown Hanoi, July 6, 2012.

Vietnam may be facing a serious banking crisis under the weight of toxic loans, but no one, including the government or international groups like the IMF and World Bank, can fathom the gravity of the problem.

The arrests last week of the founder and general director of Asia Commercial Bank (ACB), one of the largest nonstate lenders in the country, highlighted rocketing bad loans within the banking system as debate rages within the ruling Communist Party of Vietnam over who is to blame for the financial headaches of the once-bustling economy.

Bad debts in Vietnam's biggest banks jumped by around a whopping 100 percent in the first half of this year, based on their latest reported nonperforming loan (NPL) figures.

The debts were chalked up on the back of large loans given to highly indebted and unprofitable state-owned firms on the orders of the government which pumped vast sums of stimulus money into the country's economy during the 2008-09 global financial crisis.

Borrowers now are facing problems repaying the loans, especially in the speculative property sector.

In ACB, the fourth-largest partly private lender by assets, nonperforming loans in June was 104 percent more than that at the end of 2011, according to local newspaper Vietnam Business News. Several other big banks reported more depressing figures.

Worrisome as they may be, the amount of bad loans saddling the country's banking industry may still be understated.

The government, the central bank, international financial institutions, and debt rating agencies are in a quandary trying to pin down the "real" figures.

Nguyen Van Binh, governor of the State Bank of Vietnam, the country's central bank, said in response to questions in parliament this month that bad loans make up 8.6 percent of total loans in the banking system, contradicting a statement he made two months ago that the figure had already hit 10 percent.

The updated figure, he said, was based on the central bank's "most scientific and accurate analysis."

While he acknowledged that the current figure "is alarming," he said there was no need to "panic" as credit institutions have made adequate risk provisioning and strictly complied with the regulations on mortgage and asset disposal.

Much higher

But analysts say the bad debt ratio could be three or four times higher than the official figure. Ratings agency Fitch had put it at around 13 percent.

"In our view, timely reforms of the country's state-owned enterprises and its banking sector are essential to build depositor and investor confidence in the system, especially when nonperforming loans are rising," another ratings agency Standard & Poor's said in a statement this week.

"We have always perceived inadequate governance and transparency as key risks for Vietnam's banking industry," it said.

International financial institutions are equally concerned.

The bad loans scenario brings back memories of the 1997-1998 East Asian financial crisis in which staggering debt plunged the region into its worst recession in decades

"We have the East Asian crisis in the late 1990’s and then, the major issues were the high level of nonperforming loans," said Victoria Kwakwa, World Bank’s country director for Vietnam.

"So I think the first thing is really understanding what the nature of the problem is and the size of the problem—so getting a good grasp on the numbers and quantifying what is the nonperforming loan situation," she said in an interview posted on the website of the Vietnamese central bank.

Kwakwa said government institutions should be united and transparent in addressing the banking problem, warning that the economy is still "fragile" following a series of government measures to tame high inflation, unstable foreign exchange rates, and depleting foreign reserves.

"These are sensitive issues, but they should be done in a way that is seen as transparent and that the right approaches and experiences from elsewhere are being drawn into it and then there has to be an ability to move fast," she said.

No estimate

The International Monetary Fund, which held mandatory annual consultations with the Vietnamese authorities in March, said Hanoi acknowledged at the talks that "they had as yet no reliable estimate of their [non-performing loans] magnitude."

"In the financial sector, quick and comprehensive action to deal with weak banks, as well as deeper reforms in the financial sector will be needed," the IMF said in a report last month on the talks held in Hanoi.

An IMF mission will be in the Vietnamese capital next week for scheduled talks that could include the banking crisis.

Alfred Schipke, the IMF new mission chief to Vietnam, "will discuss recent developments and the authorities' response," said IMF spokeswoman Jennifer Beckman.

"It is premature for him to offer a detailed assessment of the situation at this point," she said.





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