Non-performing loan (NPL) figures have soared at Vietnam’s banks even though lenders have been reclassifying bad debts as bonds in order to keep the official figures down. But the country’s central bank is set to implement a new asset-classification rule that could expose a wealth of corporate bond defaults.
As part of Hanoi’s plans to reform the country’s banking sector, the State Bank of Vietnam (SBV) has called for increased transparency on NPL figures at the nation’s lenders. The official figure from the central bank is currently 8.6%, though many estimates suggest the level is as high as 15%.
However, non-performing loan classification in Vietnam is relatively loose compared to international standards, and banks in the country tend to attempt to contravene the regulations, according to Marc Djandi, director at Asean Strategy Group.
“In 2012, in order to try to reduce their NPL levels banks would transfer the loans to bonds. They would also buy corporate bonds in order to get around the maximum credit growth limit. Though there’s no real information about the extent to which this happened,” he said.
“Banks were not including those bonds on their books so now the central bank is trying to make sure everything that’s both on and off the books is encapsulated in the NPL and credit growth figures.”
The SBV published circular 02/TT-NHNN on January 21. The aim of the new rules is to tighten asset classification as well as risk provision, and to help improve transparency in the banking system. It will come into effect on June 1.
Banks will also have to increase the amount of money they set aside as a cushion for the purchase of unlisted bonds. In addition to this, credit institutions and foreign banks will have to establish an internal credit rating system to assess customers before extending loans or bonds.
But the most important element of this circular is that all off-balance sheet contingent liabilities and credit commitments will be considered part of the NPL ratio, according to Trinh Quang Dung, fixed income analyst at Vietcombank Securities.
“These regulations will force banks to make more adequate provisions and reduce negative impacts from bad debts.”
Scale of the problem
At the time of going to press, Asiamoney PLUS could not obtain any accurate figures on the volume of off-balance sheet corporate bonds bought by Vietnam’s lenders.
In October last year, local news website VietNamNet Bridge reported that by the end of August 2012, commercial banks in Vietnam had spent VND160 trillion (US$7.69 billion) buying corporate bonds. However, many of these will have been declared on banks’ balance sheets, particularly if they were not issued in place of NPLs.
According to the local news article, corporate bonds at some banks comprised up to 90% of their assets, it said. This is particularly risky as lenders are not currently required to provide against the risk of default and many of them have not put aside sufficient capital, according to Dung.
“Last year some corporate bond investments were not classified as NPLs. We don’t have any concrete number but we expect it’s not a small amount. There is a lot of ownership between banks, where one bank issues bonds that are bought by the other banks,” said Dung.
A majority of the bonds issued are bought by the banks, but some are also bought by SOEs. Once this new regulation comes into effect, banks will have to include all of this information on their balance sheets. However, this does not mean that a reform of the banking system is imminent, he said.
“The corporate bond market is very underdeveloped so I think it will take a long time to make things more transparent and clearer for investors. People buy and hold and sometimes the bond is overdue and they just extend it. They don’t want to write it as bad debt so they try to extend the term of the bond and reissue it,” he said.