Local banks can take some fundamental steps to address Vietnam’s pressing non performing loan situation, writes Steve Punch, Financial Services director at KPMG in Vietnam.
Extensive literature has been written about the “true” level of non performing loans (NPL’s) in the Vietnamese banking system over the last 18 months.
The ongoing commentary has been both absorbing and humorous. The first red flag was raised by ratings agency Fitch in August, 2011. At the time, reported system NPLs for Vietnamese banks was about 2.7 per cent. But, Fitch estimated that 13 per cent was a more realistic number.
The State Bank governor acknowledged late last year that the real number was 8.82 per ...view middle of the document...
These are outside the control of any and all banks, so it makes more sense to highlight the contributing factors that are in the control of the banks. Some of the many reasons for the current high level of NPLs are listed below:
• Poorly designed internal ratings methodology leading to poor credit decisions
• Dysfunctional credit processes and structures that have been easy to game
• Credit ratings are not updated after the initial assessment
• Weak internal control framework and Internal audit functions
• Overstated collateral values and lack of independent and ongoing valuations
• Ratings models that assessed different borrower classes using the same methodology
• Due diligence on customer financial statements was weak or non-existent
• Lack of early warning systems at banks to highlight triggers to problem loans
Local banks have been urged to work in a transparent manner to attack the NPL issue
Banks globally use internal credit ratings models to assess a customer’s creditworthiness, ability to repay and to provide indicative pricing of a loan. Banks in developed markets generally apply a 90/10 rule to corporate lending assessment which means that 90 per cent of the credit assessment is based on the corporate borrower’s ability to repay (by using quantitative factors) and only 10 per cent is dedicated to qualitative factors such as the borrowers corporate governance, internal control environment and strength of its management.
Models are structured in this way because at the end of the day, the bank wants its money back and while internal control and strong corporate governance are desirable qualities for a borrower, it is the strength of the company’s financial position that will ultimately ensure repayment of the loan. The simple rule is, the more reliance placed on qualitative factors in the credit assessment process, the more risky the assessment process and the less likely the bank will get its money back.
In Vietnam historically, a reliance on the quality of the data in financial statements provided by borrowers has been low. Models were tailored for Vietnam that assess a corporate borrower 35/65 (quantitative/qualitative), and while that might be suitable at a point in time, it is not appropriate now and is one of the main reasons that banks made unsavory...