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. However, the sale of debt to foreigners could still be constrained by remaining uncertainties, including restrictions on foreign investors taking security over property.
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 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%
Quicker debt resolution could also reduce banks' capital charge burden, which would better position banks for the scheduled implementation of Basel II in January 2020.
As it stands, banks' reported capital adequacy ratios (CARs) meet minimum requirements, but these are based on official NPL ratios that understate problem loans in the banking sector. The IMF estimates that the full adoption of Basel II will reduce CARs by 200bp to 400bp.
The SBV's guidance to the banking sector has been that loan growth should be 17%-18% in 2017, and there have been reports that this is being raised to 21%-22% to help the government hit its 6.7% GDP growth target for 2017. GDP growth in 8 months was some way below target at 5.9% yoy.
