Hanoi (VNA) - The State Bank of Vietnam (SBV) is drafting a law onsupporting credit institutions to restructure and resolve bad debt in an effortto quicken the process.

Theincomplete legal framework for handling poorly-performing banks and bad debtsis hindering the restructuring of credit institutions, according to SBV.

Thecentral bank in a note pointed out that it currently does not have adequatejurisdiction to handle weak banks, and there is a shortage of mechanisms andresources for handling bad debts and mortgaged assets, which increase risks tothe system and the whole economy.

Thefirst draft version of the law, which SBV recently published for comments,provides mechanisms for the first time for weak banks to file for bankruptcy.The idea of allowing weak banks to go bust is not new but ii is the first time it is included in alegal document.

Allowingbankruptcy is necessary when the restructuring of the banking system must behastened and improved in term of quality, according to Bao Viet Securities.

Statisticsshow that as of the end of 2016, bad debt ratio was controlled at below 3 percent,but the central bank warned that it could amount to 8.86 percent if bad debtsmanaged by the Vietnam Asset Management Company (VAMC) and loans which couldpotentially turn into non-performing were included.

Thesafety of the credit institution system in Vietnam remains low compared toother countries in the region, while the burden of supplying capital for theeconomy is increasingly heavy, making the system vulnerable to shocks, thecentral bank said.

Theratio of credit to GDP increased in 2012-15 from 95.2 percent to 111.1 percent,high compared to Indonesia (36.5 percent), the Philippines (39.1 percent),Brazil (67.1 percent) and India (51.6 percent).

“Ifthe legal framework is not improved, it will be impossible to promote bankingcapital, which will affect GDP growth,” the central bank said in the note. “Itis necessary to have a separate law to enhance the restructuring in the nextfive years towards efficiency.”

Letweak banks fall?

Lastyear, Deputy Prime Minister Vuong Dinh Hue said that Vietnam should bravelypilot allowing a bank to go bankrupt, but the bankruptcy must ensure rights ofdepositors and not cause a domino effect.

Accordingto Nguyen Van Hung, the SBV’s Deputy Chief Inspector, 2017 will be the year tohandle weak banks thoroughly in order to resolve cross ownership among creditinstitutions.

SBVplans to handle five weak banks this year, including three banks bought atzero dong - Vietnam Construction Bank, OceanBank and GPBank.

Thecentral bank will also consider letting some poorly-performing financialcompanies and credit funds go bankrupt, as a warning for the whole system.

Six-yearcredit high

Bankingcredit grew 2.81 percent in the first quarter of 2017 over the same period lastyear, a six-year high, according to the General Statistics Office (GSO).

Creditgrowth in Q1 was higher than deposit growth of 2.43 percent, reflecting theimproved capital absorption capacity of businesses.

Depositrates were stable at 4.5-5.4 percent per year for deposits of 1-6 months,5.4-6.5 percent for 6-12 months and 6.4-7.2 percent for 12 months and up.

Lendingrates were at 6-7 percent for prioritised sectors and 6.8-9 percent forshort-term loans and 9.3-11 percent for medium and long-term loans.-VNA