Bad debt – The obsession of many businesses

Bad debt – The obsession of many businesses

According to statistics in 2014, many businesses were “bogged down” because of bad debts. Debt difficult to collect account for hundreds of thousands of billion, enterprises will fall into the situation of capital appropriation, loss of capital, affecting the Company’s profit as well as shareholders’ dividends.
Financial reports for the first half of 2014 showed that profits of many businesses have been affected, significantly reduced due to the difficult business, the costs have increased sharply. In particular, enterprises must increase the risk provision for bad debts from enterprises insider, partners, customers …


Debt running around!

According to the financial report of Vinaconex in 2014, many liabilities were noted by the auditing company because of its unrecoverable, the situation of bad debts and contingency debts is very worrying.
As of June 30, 2014, Vinaconex still recorded two overdue debts at Vinaconex – Viettel Joint Stock Company (affiliated company), including VND 79 billion – a deposit balance at another financial company and VND 150 billion of corporate bonds matured 1 year, not yet paid.

Vinaconex – Viettel representative once lamented that because of trusting reputable banks stood out for guarantee, so they bought new bonds, but did not expect to be “brushed off” by their partners. This creditor is also expected to sue SeaBank, asking for repayment of 150 billion dong, which has been overdue for 2 years. The business loses during 6 months of 2014 made Vinaconex – Viettel to quickly recover “bad debts”, especially if they want to merge with other credit institutions.

Similarly, two subsidiaries of Vinaconex are Construction Joint Stock Company No. 15 and Vinaconex Transport Joint Stock Company are also being “bogged down” with accounts receivable from customers, receivables of principal and investment trust interest that have been overdue for a long time. The total debt amounted to VND 91 billion and it is currently unclear whether it can be recovered. Meanwhile, according to regulations, enterprises also have to make provisions for risks of 100% of the value of difficult to recover debts (3 years overdue), making the financial balance more difficult.

Sudico – The famous company with Song Da family is also under pressure to handle receivables of up to VND 374 billion (as of June 30, 2014), including receivables from customers, prepayments to sellers, other receivables amounts. Particularly, receivables from Song Da Corporation and its subsidiaries are over VND 98 billion. The company had to raise provision for up to VND114 billion for bad debts. Of course, Sudico can hardly rely on debt recovery to have more than VND 4,500 billion in debt repayment. Especially, profit of the second half of 2014 only stood at VND 36 billion.


Buy debt shares!

In fact, when the economy is difficult, bad debts between businesses – partners, customers, between businesses internally, business transaction relations … become more serious. The story of businesses borrowing and repaying each other is common practice. There has not been an accurate statistical result on the situation of debt difficult to run “around” of businesses, but many businesses have been “taking bitter, swallowing spicy” because they have been occupied capital up to hundreds of billion.

The concern is that bad debts still accumulate on books for a long time without any way to “clean up”. For businesses, they do not have a strong legal instrument like banks to deal with bad debts, capture assets to ensure that debtors have to repay the appropriated capital. In fact, receivables often do not have collateral for payment obligations. Even if enterprises sue partners to pay back debts to court, the judgment execution ability and recovery are very hard.
For state-owned enterprises, obstacles in handling bad debts are reducing the attractiveness of stocks when equitizing and offering shares to the public. For example, the case of SASCO – Tan Son Nhat Airport Air Service Company is about to auction shares (September 18, 2014). At that time, SASCO had a bad debt of nearly 300 billion VND for a long time, it is unclear how to handle after equitization. In 2013, the Company had to deduct provisions of more than VND 295 billion related to expenses for subsidiary, investment capital …
This irrecoverable debt has been included in the value of SOEs for equitization, meaning that the state capital has added “future” value. Of course, no investor wants to buy shares to shoulder even more bad debt.
According to the jokes of some corporate shareholders: “Just consider being debited, it will help you feel better than handle bad debts”.


However, VAMC is not a “magic wand” that can handle all bad debts

Regardless of whether the bank is big or small, bad debts are gradually increasing over time and the Asset Management Company of credit institutions (VAMC) is not a “magic wand” when handling these debts …

The newly announced numbers of the two banks that belong to the “giants” are “piggybacking” of big bad debts that have made many people worried. Bad debt is considered as a “blood clot” of the economy which is adversely affecting most industries. According to VietinBank, the bank’s credit growth was only 0.4%. After negative growth, securities investment also saw a net loss of over 130 billion dong. While in the same period last year, profit was nearly VND 120 billion. Notably, VietinBank’s NPL ratio increased from 1.8% to 2.53%, thus the bank’s provision expenses increased by 35%.

In 2014, “NPLs” continued to increase, while VAMC only handled about VND55,000 billion, causing many people to wonder about VAMC’s performance. However, Mr. Nguyen Quoc Hung, Chairman of VAMC affirmed that the purchase of bad debts of the company still follows the schedule.

VAMC does not aim to buy bad debts and will sell them immediately, but also participate in analysis and evaluation to support businesses. Units that are capable of producing and doing the business to pay debts will be considered to adjust the interest rate appropriately or continue to provide loans to find sources of debt repayment.

With businesses that cannot recover, the company will handle. Deputy Governor Nguyen Thi Hong admitted that the bad debt that VAMC can buy is still too small compared to the total bad debt of the banking system, but VAMC is not “magic wand”, moreover due to budget funding. Due to the limited capital of VAMC, the handling of bad debts through VAMC is just one of many solutions. The method of dealing with bad debts like VAMC is appropriate, creating conditions for credit institutions to continue lending and reducing lending rates, thereby contributing significantly to supporting enterprises to recover production and business.