Nonperforming Loans May Moderate Economic Growth in Vietnam

April 17, 2014 Posted by Vietnam Briefing Reading Time: 3 minutes

HANOI – According to the World Bank’s East Asia Pacific Economic Update, Vietnam’s economy is likely to experience moderate growth over the next several years alongside gains in macroeconomic stability, but will continue to experience some structural issues and policy distortion.

The World Bank’s analysis projects that Vietnam’s economy will grow 5.5 percent by the end of 2014 – a slight improvement from 5.4 percent growth in 2013. Inflation is forecast to remain at 7 percent within the government target on the assumption that no major supply shock happens and credit growth remains modest.

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The 2014 outlook cited nonperforming loans (NPL) as the main factor opposing strong economic growth in the country this year.

At a press conference held in Hanoi on April 7 to launch the East Asia Pacific Economic Update, Bert Hoffman, the World Bank’s Chief Economist for the East Asia and Pacific Region, addressed NPL as a bottleneck in the development and structural reform of Vietnam’s banking system. He also expressed skepticism about the accuracy of NPL data.

“I have not made specific recommendations to Vietnam due to lack of awareness of the size of NPL portfolios,” he said, but advised that Vietnam resolutely eliminate this bottleneck in order to fully promote its bank restructuring. According to Hoffman, the State Bank of Vietnam (SBV) must be strictly against the practice of avoiding NPL and including inadequate NPL reporting in the balance sheets of commercial banks. In his view, Vietnam should give banks the option of dealing with NPL independently.

Also at the press conference, Victoria Kwakwa, the World Bank’s Country Director for Vietnam, said dealing with the country’s NPL is currently the most essential issue in Vietnam’s banking sector reform because this will help regain trust in the banking system. She further explained that this unresolved issue may lead to the underperformance of credit agencies, and a credit growth rate below the SBV’s target.

In its report, the World Bank also stated that “credit growth is picking up only gradually: total credit to the economy from the banking system is estimated to have grown by about 9 percent in 2013 compared to the annual target of 12 percent.” Kwakwa further observed that many banks purchase government bonds instead of issuing loans because they are risk averse and want to avoid NPL. Therefore, according to Kwakwa, Vietnam must find a reliable solution to recovering the financial intermediary functions of its financial institutions.

In 2013, the government set up the Vietnam Asset Management Company (VAMC) to purchase bad debts held by banks. The VAMC is in charge of picking bad debts off banks’ balance sheets and offering special bonds which banks can use as collateral for loans from the SBV.

Kwakwa stated that accurate and transparent information about VAMC operation is not yet accessible, preventing the World Bank from making a specific judgment about the situation. She added that strengthening VAMC operational capacity and clarifying its implementation procedure is a critical part of dealing with NPL.

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