31 Aug 2012 Intellasia Finance Vietnam - Hong Kong Business ...

FINANCE
Vietnam finance & business 31 August 2012
holds no surprise that real estate loans (together with bad debt in securities industry)
account for the largest proportions in total bad debts of credit institutions in Vietnam.
Avoiding groundless optimism
Investments in real estate development and cement production projects and other
non-core businesses have caused giant State-owned enterprises (SOEs) and popular
private firms to hold above half of bad debts in the banking system. Credit institutions
stopped funding the real estate market. The burst of real estate bubble has panicked
investors although none wants to mention it.
Bad real estate debts include debts of investors to construction contractors; debts of investors
to credit institutions; and land-related loans of investors (land rents, site clearance
compensations, etc).
Another source of debts comes from deposits and advances from homebuyers. However,
investors do not have houses to hand to buyers.
Bad property debts come from both subjective and objective reasons. Objectively, economic
slowdown and other risks drag on property demand. And, subjective causes decide
the severity of bad debts. In particular, risk management capabilities, especially
monetary risk management of both lenders and borrowers play very important roles.
In fact, many real estate companies (and not only they) know little about business risk
management, even have very poor knowledge of market and investment project establishment,
and disregard target market research. What they care is eventual ideal results:
Multiple profits on investment.
Another reason is groundless optimistic forecast by specialists and authorities, aiming
to sooth the public. This lingers property investors to use timely solutions to deal with
bad debts.
Only enterprises that are alive can repay debts
Credit institutions deal with bad property debts in two ways: (1) immediately cash recovery;
and (2) future cash recovery.
The first method has six ways to deal with security assets: Compulsory sale, package
sale, general sale, inclusion of all debts, leasing and legal actions.
The future cash recovery is expected to have two ways to handle debts: Convert debts
into shares; and convert bad debts into securities.
I think that our country can apply these methods now except securitisation because
our stock market is too young.
However, these methods are deployed at the last resort. As only living businesses can
repay debts, lenders should sit down with indebted companies to discuss solutions.
If they have good incomplete projects like building affordable houses or offices for
lease, banks should fund them to complete those projects.
If borrowers find buyers for their ongoing projects and change purposes of those
projects like hospitals or schools, banks (and authorities) should facilitate them to finalise
the deals if they do not cause any problems to master planning.
Debt freezing, debt rescheduling and rate cut should also be taken into consideration
if borrowers can thereby increase the capacity of repayment.
They can sell projects to other investors or cancel suspended projects.
Some bankers used to say that they would rather let capital be idle rather than lend real
estate companies. In reality, not all the property market of Vietnam is frozen. Some
projects are stilling making a profit in this tough time. So, why did they discontinue
financing? Real estate businesses are important customers of banks and they are not
deserved to be dropped. Banks should have had risk management plans for your businesses,
not behaved like that.
Apart from reducing prices, changing usage purposes to sellable segments and cutting
expenses to deal with bad debts, real estate businesses also need to seek out other creative
solutions like accepting instalment payments. These will ease pressures for customers,
banks and themselves.
Finally, real estate enterprises must undergo restructuring.
A majority of real estate companies have small operating scale, with registered capital
of less than VND10 billion (less than VND500,000), they are not strong enough to deal
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