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Banks take stock in lieu of payment from debtors

Update: September, 08/2012 - 09:47
HCM CITY — Converting bad debts into shares is considered by many experts to be one of the most effective methods that can help banks partly settle their bad debts.

Nguyen Van Binh, governor of the State Bank of Viet Nam (SBV), told the National Assembly in early July that the total bad debt at Vietnamese banks stood at 10 per cent, up from 6 per cent at the end of last year and from less than 3 per cent in 2008.

The Government including SBV, is under pressure to find ways to reduce the debt, including creating a national debt-purchase-and-sales company with capital of VND100 trillion ($4.8 billion) to deal with the problem.

Many experts, however, said that settling bad debts should be done first by the banking sector, whose bad debts have reached VND280 trillion.

They suggested converting banks'bad debts at enterprises into shares, which could reduce losses and costs.

Dr Pham Sy Liem, vice chairman of the Viet Nam Federation of Civil Engineering Association, said credit institutions could deal with bad debts through either immediate or future cash recovery.

Immediate recovery could be accomplished six ways: compulsory sales, package sales, general sales, inclusion of all debts, leasing, and legal action.

Future cash recovery could be done in two ways: either converting debts into shares or converting bad debts into securities.

Securitisation of bad debts is the process of conversion of existing bad debts into securities.

In particular, lenders and borrowers can come to an agreement under which debts that enterprises owe to banks would be converted into the banks'shares, or be considered to be banks' capital contributions.

Trinh Duc Tuan of the HCM City Agriculture-Forestry University said that the conversion of bad debts into shares was a solution to the banks' bad debts that had never been done in Viet Nam but it would have advantages.

Under this method, bad debts would be settled within several months, while it would take years to settle the bad debts via a national debt-sales-and-purchase company.

This means that the conversion of bad debts into shares would help enterprises soon escape from debt, while the banks would have opportunities to become the enterprises'shareholders.

Since all bad debts would be settled the companies then would have enough conditions to borrow new money from the banks to invest in their production and business activities.

Banks, therefore. would continue offering loans, Tuan told Tien Phong online.

With state-budget monies limited, the securitisation of bad debts would not require the government to use a large amount of money (estimated at VND100 trillion) to set up a national debt-purchase-and-sales company.

The recovery of the Binh An Seafood Joint-Stock Company (Bianfishco) clearly proved that the conversion of the banks'bad debts into shares was advantageous.

Sai Gon-Ha Noi Commercial Bank (SHB) decided to convert its bad debts at Bianfishco into shares and become the company's largest shareholder with a 50-per-cent stake.

The bank has the responsibility to deal with the company's financial issues and implement the entire restructuring of its operations. It also has the right to oversee operations of Bianfishco.

SHB's settling of Bianfisco's bad debt helped Bianfishco to survive but it also helped the bank and four others from losing several thousand of billion dong.

More significantly, the bank saved thousands of fish breeders from having to pay back the money so they have more cash to invest in their breeding businesses.

Experts, however, said that the banks should carefully assess enterprises before making a decision to convert debt to shares.

The banks would likely lose capital if the enterprises were unable to recover and develop.

To ensure the effectiveness of the banks'securitisation of bad debts, the central bank should closely control this transformation process, according to experts.

They suggested that banks in the future regularly withdraw their capital at the enterprises to reduce their ownership of enterprises and focus their capital on their main professional activities when enterprises begin to operate more effectively.

Nguyen Tri Thanh, deputy director of the Central Economics Research and Management Institute, also agreed that the Government still needed regulations to restrict the banks'direct investments so that risks could be reduced. — VNS

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