Vietnam Resolution Law Not a Quick Fix for NPL Problems, Says Fitch

Efforts by the Vietnamese authorities to speed up resolution of legacy problem loans could help to address the asset-quality issues that weigh heavily on banks' Viability Ratings, but the resolution process is unlikely to improve significantly in the short term due to the considerable implementation challenges, says Fitch Ratings.

Meanwhile, rapid lending growth continues to add to the risk of a rise in NPL creation.

Resolution 42, which took effect last month, could remove some of the legal impediments to effective loan resolution. It includes measures to improve lenders' ability to enforce collateral security, which already appears to have made banks more aggressive in seizing commercial property to foreclose bad loans. It also enhances the trading of bad debt in the secondary market. Bad debt can now be sold to any legal entity, including foreign investors, without them needing a licence for debt trading.

The attempt to involve foreign investors could increase the funds available for debt resolution, particularly given recent strong interest in Vietnam from foreign investors - net FDI inflows were among the strongest in APAC in 2016, at 5.6% of GDP.

However, the sale of debt to foreigners could still be constrained by remaining uncertainties, including restrictions on foreign investors taking security over property. This is just one example of the problems that, in practice, are still likely to hinder bad debt resolution.

The new framework will only be properly tested when large cases are handled, and we expect remaining shortcomings to be addressed only slowly.

A more effective debt resolution regime could, over the longer term, help banks to reduce asset-quality problems, which weigh on their earnings and profitability.

The reported system NPL ratio was 2.55% at end-March 2017, but this did not take into account banks' bad-debt sales to the Vietnam Asset Management Company (VAMC).

These sales help banks avoid restrictions that the State Bank of Vietnam (SBV) applies when their reported NPL ratios rise above 3%. Fitch's adjusted NPL ratios add back in loans sold to the VAMC - for which banks must make provision for 10%-20% of the book value annually - as well as "special-mention" loans.

Inconsistencies in disclosure and subjective differences in classification mean that true NPL ratios may be even higher.



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