Thu. Feb 22nd, 2024

Banks await State’s new bad debt manager

by Thien Ly

In January the Government asked the State Bank of Viet Nam to draw up plans for establishing a national asset management company (AMC) and detailed regulations for its operations so that it can be set up in the first quarter.

If the schedule is honoured an AMC will be set up within the next week, meeting credit institutions and businesses’expectations about settling bad debts, which is one of the economy’s biggest problems currently.

The AMC will be set up under the so-called N+1 model, in which the central bank acts as the manager while ministries participate.

Basically, it is a 100 per cent State-owned enterprise established by the Government for non-profit activities.

The company, which will have an initial capital of VND100 trillion (US$4.78 billion), will buy bad debts from credit institutions and sell them to buyers who may be Vietnamese or foreign.

The AMC could make a decisive contribution to settling bad debts, which was estimated at 6 per cent (or VND180 trillion) of total outstanding loans as of January 28.

Anticipating the AMC’s creation, many banks are actively reviewing and classifying their bad debts to sell them to the AMC as soon as it is established.

But some are sceptical about the AMC’s effectiveness.

The primary problem is that the domestic debt market is not developed. It means that bad debts, after being transferred to the AMC and packaged, will likely be sold at very low prices or find no takers.

If that indeed turns out to be the case, it would mean massive losses for banks. When the banks sell their bad debts to the AMC, they will receive its bonds in exchange. But if a debt cannot be sold, it will be sent back to the bank when the bonds fall due.

The establishment of the AMC has also raised eyebrows since a large proportion of bad debts has already been settled even without its help.

On July 2012 the SBV announced that bank’s bad debts amounted to VND235 trillion (US$11.2 billion), or 8.6 per cent of total outstanding loans.

But by late January this year the ratio had fallen to 6 per cent, meaning bad debts worth VND55 trillion had been resolved within six months. This means that there is no AMC but bad debts are handled very quickly.

Besides, many point out, banks’ bad debts are a permanent problem, and not only in Viet Nam. The question is only what ratio is acceptable.

According to international norms, the bad debt ratio of a country should be less than 3 per cent of total outstanding credit.

This means that with their current bad debts ratio at 6 per cent, Vietnamese banks will only have to bring it down by another 3 percentage points.

Obviously, resolving bad debts is a very important task but effective measures are also needed to prevent their recurrence.

Franchises fail

Franchising first came to Viet Nam in the 1990’s with the appearance of fast food chains like KFC, Pizza Hut, Lotteria, and Jollibee.

The franchising model is popular and well-suited to a developing economy like Viet Nam. Together with the passage of laws regulating franchising and rising incomes, this has made the business ubiquitous in the country in recent years.

Growth prospects are getting brighter as local investors become more familiar with franchising and are increasingly exposed to successful franchises.

This is especially true in the urban centres of Ha Noi and HCM City, where incomes are significantly higher than the national average.

The franchise sector in the country is poised for continued growth not only in traditional sectors like fast foods but also in other such sectors like retail, education, entertainment, health care, and lifestyle-oriented businesses.

There are more than 70 international franchises in Viet Nam, with food and beverage brands being by far the most prevalent.

Several Vietnamese businesses have also joined the franchising trend — such as Trung Nguyen Coffee, Pho 24, Kinh Do Bakery, AQ Silk, Coffee24Seven.

But while foreign franchisers have proved to be very successful in the Vietnamese market, with the number of restaurant chains of brands like Jollibee, KFC, Lotteria, and Bread Talk increasing quickly, domestic franchisers have been having a bleak time.

The reasons are along expected lines. Firstly, they are unable to sustain service quality when their chains expand especially to above 10 outlets.

Before becoming franchises, some of the Vietnamese brands created a good impression on customers with their quality products and services and uniqueness.

But subsequently they failed to focus on improving constantly to make their products even better, and as a result lag behind foreign brands.

Some of the franchisers also failed to exercise close control over franchisees, allowing quality to deteriorate and their prestige to erode.

But on the flip side, many domestic franchisers do not provide adequate support to their franchisees. The truth of the matter is that it takes just a few bad stores in a chain to drag down the entire chain.

Unable to make head way in expanding their chains, many domestic franchising businesses have been forced to sell out to foreign investors at low prices. The buyers then pump in money and expertise to get a firm foothold in the market.

To ensure success in the franchising business, companies should have long-term strategies and stringent norms for sustaining service quality even after expansion.

A fleet of cars to fleece

Last year, the arrival of a 2008 Bugatti Veyron, one of the world’s fastest production-model cars, in Viet Nam made media headlines.

It cost US$800,000 and luxury cars are subject to import duties that can be more than 100 percent.

But cars are exempt from import and value-added taxes if they are imported as used assets by overseas Vietnamese citizens who move back permanently to Viet Nam.

Though the car’s arrival made headlines, not much more information about it was reported, except that its owner was an overseas Vietnamese who had returned to settle down in the country.

So the owner of the super fast car ended up paying no import duties, just special consumption tax of around $480,000.

The Bugatti Veyron is not the only luxury car to be imported by overseas Vietnamese in recent years and receive tax exemption.

According to the customs, 58 autos were imported in 2003 by returning overseas Vietnamese. The figure rose to 138 in 2011 and 1,100 last year.

Ninety per cent of the cars have been Lexuses, Porsches, BMWs and Audis with the occasional Bugatti Veyron and Bentley Continental Flying Spur thrown in.

In Viet Nam is there are 70 Rolls-Royces, but only two were brought in by importers; the rest were imported “unofficially,” by others, including returnees, according to a source from thanhniennews online.

The trend has prompted official agencies to start reviewing all vehicle imports by returning Viet Kieu on the suspicion that the imports are a ruse to import luxury cars without paying taxes and reselling for a profit.

In fact, many such imports of cars are suspicious due to many reasons. Firstly, the imported cars were mostly bought just a month or two before being sent to Viet Nam, and their values were much higher than their owners’ incomes.

Also, the owners of these luxury cars returned to live in Viet Nam shortly after getting permanent residence status in foreign countries. Many had registered their residences in several so that they can import more cars rather than only one that a person is allowed.

Local governments do not scrutinise permanent residence registrations very closely, and there is no proper definition of what used vehicles are. — VNS

By vivian