State Bank 'has shortcomings' in handling bad debt, weak banks

The conclusion of the Government Inspectorate pointed out many shortcomings of the State Bank in the period 2013-2017 when appraising and approving the restructuring of banks.

This information is stated in the announcement of the conclusion on the implementation of the project to restructure and handle bad debts in banks in the 2013-2017 period.

To restructure credit institutions, the State Bank has issued criteria for classifying weak banks based on independent supervision, inspection and audit. 9 banks are included in this list. However, through inspection, the Government Inspectorate found that 3 banks, Phuong Nam, Viet A (VietABank) and National Citizen Bank (NCB), met the criteria of "weak banks that must be restructured", but were instructed by the State Bank to develop a plan for self-restructuring and self-correction. These three banks all have bad debt of over 10%, with NCB alone at 32.6%.

State Bank Headquarters, October 2022. Photo: Giang Huy — State Bank Headquarters, October 2022. Photo: *Giang Huy*

During the restructuring plan development process, some banks were also found to have violated the law by the Government Inspectorate. Specifically, HDBank 's plan was approved before the capital contribution and share purchase exceeding the prescribed ratio at the Petroleum Trading Joint Stock Company and Nhon Trach Investment Joint Stock Company were completed. ABBank's restructuring plan was also approved before the divestment from its subsidiaries and associated companies was completed.

In the case of Sacombank's merger and restructuring, according to the conclusion, at the time of inspection, this bank violated cross-ownership with Kien Long Bank and contributed capital to buy shares in Saigon Seafood Trading Joint Stock Company exceeding the prescribed 11%.

In addition, the implementation of some solutions and recommendations in the restructuring plan after the merger of Sacombank is still limited, lacking, and risky, such as the slow recovery of VND 934 billion from some individuals who repo shares (buy and sell shares with a term) of Kien Long Bank. This bank has not hired a consultant to determine the actual value at the time of merger; the result of collecting accrued interest is low, and the handling of assets authorized by customers to collect debts is slow due to the assets not having full legal status.

On the other hand, the signing of the agreement to determine the price to handle Sacombank shares owned by Mr. Tram Be and related persons was slow; the provision for debt before selling to VAMC was 1,958 billion VND and the bank also did not make provision for bad debt of 4,412 billion VND that was not eligible to be sold to VAMC.

Regarding the handling of bad debts of credit institutions , the Government Inspectorate said that management agencies have not properly assessed the bad debt situation.

In the period 2013-2017, the bad debt ratio was 4.46% as of June 30, 2013. This ratio decreased to 2.25% by the end of 2015 and to 1.99% in 2017. Bad debt was reduced to below 3% thanks to the sale to the Vietnam Asset Management Company (VAMC), about 43% of the total bad debt was handled during this period. If the debt sold to VAMC that has not been handled is included, the debt ratio in 2015 and 2017 is 6.3% and 4.5% respectively.

However, the Government Inspectorate said that some credit institutions reported to the State Bank incomplete bad debt data, and inaccurate debt classification and debt group transfer. For example, Sacombank has not transferred the debt group for the 262 billion VND loan of Duc Long Gia Lai Company according to the auditor's recommendation when reporting to the State Bank.

The State Bank allows Sacombank to set aside provisions based on its financial capacity (according to Article 2 of Circular 02) for bad debts that have not yet arisen at the time of approving the plan and are expected to arise within 10 years. The Government Inspectorate's conclusion notice stated that this is also not legally strict.

Regarding the responsibility of VAMC , according to the inspection conclusion, during this period, the business's activities were to buy bad debts with special bonds with terms approved by the State Bank. This was a temporary solution to extend the time for credit institutions to gradually handle bad debts, reducing debt on the books, while in reality the debt amount remained unchanged.

After purchasing the debt, VAMC still authorizes the banks to handle the debt, so in essence, the credit institution still has to fulfill the entire responsibility of debt collection and debt handling. By the end of 2017, VAMC had purchased a total of 309,711 billion VND of on-balance sheet principal debt, the debt purchase price using special bonds was 279,255 billion VND.

The Government Inspectorate found that the plan to buy debt with special bonds at VAMC did not ensure transparency and objectivity, and lacked legal documents to prove it.

Some files for purchasing debt with special bonds at VAMC have violations, such as the assets securing the bad debt when selling debt to this enterprise have not met the conditions of "legal assets, with valid documents and legal status". The assets securing the bad debt at the time of selling to VAMC have not been valued by an independent appraisal organization; do not meet the prescribed conditions, affecting the face value of the special bonds used for refinancing loans.

According to the inspection agency, 34 bad debt purchase dossiers of 13 banks at the time of selling debt to VAMC had violations, of which 59% of the dossiers had collateral assets that were no longer fully legal, the remaining collateral assets had not been valued or the valuation had expired. This affected the determination of the value of collateral assets when setting up risk provisions, incorrectly reflecting the debt purchase price and the face value of special bonds used for refinancing loans.

The cause of the above shortcomings and inadequacies, according to the Government Inspectorate, the leaders of the State Bank, and some functional units of this agency, is that VAMC has not seriously performed its tasks in advising, building mechanisms, appraising, approving and supervising the restructuring and handling of bad debts.

In addition, some banks do not strictly follow the regulations and instructions of the State Bank on restructuring and bad debt settlement. These banks also do not reflect the real situation, propose inappropriate restructuring solutions, leading to the need to revise the plan many times and delay approval. Others violate regulations on credit granting and accounting for accrued interest during the restructuring process.

With the above conclusions, the inspection agency recommended that the Prime Minister direct the State Bank to overcome existing shortcomings; review the responsibilities of the heads of the 2012-2015 period, individuals, collectives, and related units regarding shortcomings in restructuring credit institutions and handling bad debts.

The State Bank also needs to review and improve its institutions, rectify management, and complete the credit institution restructuring project associated with bad debt handling in the coming period. Credit institutions must overcome shortcomings, shortcomings, and violations, and consider handling the responsibilities of units and individuals under their authority.

The Government Inspectorate requested VAMC to review its role in participating in handling bad debt, rectify the purchase of debt with special bonds to comply with regulations, and review violations discovered through inspection to overcome existing problems.

Ha Duyen

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