Bad Debt Ratio of Vietnam's Credit Institution System

Decree 24/2012/ND-CP on management of gold trading activities , and many other guiding documents of Decree 24/2012/ND-CP issued by the State Bank.

Second, the State Bank has actively improved and controlled the gold bar buying and selling network to ensure that gold bar trading activities in the market take place smoothly and stably, ensuring the legitimate rights of gold holders.

Third, the State Bank of Vietnam issued Decision No. 1623/QD-NHNN on the organization and management of gold bar production to meet the needs of people, credit institutions and enterprises to convert other SJC gold bars into SJC gold bars. Accordingly, the State Bank of Vietnam decided to choose the method of gold bar production of the State Bank of Vietnam as outsourcing and assigning the processing to SJC Company. At the same time, the State Bank of Vietnam is the unit that decides the limit and time of processing of SJC Company under the supervision and control of the State Bank.

Fourth, the State Bank of Vietnam resolutely applies synchronous measures to implement the roadmap to end the situation of mobilizing and lending capital in gold and requires credit institutions to liquidate the mobilized gold balance.

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Fifth, to limit risks in the business of buying and selling gold bars and prevent gold speculation in the system, the State Bank of Vietnam issued Circular No. 38/2012/TT-NHNN regulating that the gold status of credit institutions must not be negative and must not exceed 2% of their equity.

Sixth, to support the credit institution system in settling gold mobilizations without causing negative impacts on the market, the State Bank has built and completed the legal framework and implemented intervention solutions through auctions for gold bars since March 28, 2013, as a premise for solutions to stabilize the domestic gold market.

c/ Solving existing problems of the interbank market

In 2011, the difficult situation of market 1 spread to market 2, increasing the level of systemic risk, and at the same time, the role of the interbank market in transmitting monetary policy was significantly reduced. In order to overcome this situation, the State Bank of Vietnam issued Circular No. 21/2012/TT-NHNN regulating lending, borrowing, buying and selling of valuable papers with a term between credit institutions and foreign bank branches . Circular 21/2012/TT-NHNN stipulates: Credit institutions with overdue debts of 10 days or more are not allowed to participate in the interbank market; credit institutions are not allowed to deposit money or receive deposits (except for payment deposits) at other credit institutions in market 2, but are only allowed to conduct lending transactions with a term of less than 1 year, eliminating medium and long-term loans. Thus, when making lending transactions, credit institutions are required to set aside DPRR similar to loans to regular customers, meaning that credit institutions must be more cautious when considering lending to partners on the interbank market. On that basis, credit institutions themselves have restructured their liquidity risk management activities, limiting the situation.

Race to mobilize capital through increasing interest rates, reducing the dependence of some small credit institutions on capital in the market from large credit institutions.

d/ Control and handle bad debt associated with the restructuring process of the credit institution system

The weaknesses of the credit institution system, especially the problem of low asset quality, large bad debt value and the trend of continuing to increase, have reduced the safety level of the credit institution system and the ability to prevent sudden, adverse impacts from the business environment. Not only that, the unhealthy credit institution system and the high bad debt ratio have become major obstacles to the task of transmitting the monetary policy of the State Bank to the economy. In this situation, the Prime Minister issued Decision No. 254/QD-TTg approving the Project on Restructuring the Credit Institution System for the 2011-2015 period to fundamentally, thoroughly and comprehensively restructure the credit institution system, in which handling bad debt to improve the financial situation and improve the safety level are top priorities.

Implementing the tasks according to the Project on Restructuring the Credit Institution System for the period 2011 - 2015 , and especially Resolution No. 02/NQ-CP in 2013 on a number of solutions to remove difficulties for production and business, support the market, and resolve bad debts , Decision 843/QD-TTg approving the Project on Handling Bad Debts of the Credit Institution System and the Project on Establishing the Asset Management Company of Vietnam Credit Institutions , the State Bank of Vietnam has issued directives guiding the management of monetary policy and banking activities to strive to fundamentally handle bad debts by the end of 2015. In the Project on Handling Bad Debts of the Credit Institution System , the goal of handling bad debt is closely linked to the restructuring process of the credit institution system and is both an important condition and goal of the Project on Restructuring the Credit Institution System for the 2011-2015 period , creating a foundation for the safe and sustainable development of the system until 2020.

Firstly, linking bad debt handling with restructuring the credit institution system, the State Bank has identified credit institutions that need to focus on restructuring, timely liquidity support, allowing mergers or self-restructuring on the principle of prudence, ensuring safety for the system. The State Bank has received and approved the restructuring plans of the joint stock commercial banks that are operating normally, approved the plans, and directed the remaining banks to complete the plans for approval. On that basis, the State Bank has directed the restructuring of the credit institution system closely following the restructuring roadmap in the Project on Restructuring the Credit Institution System for the 2011-2015 period, including the following contents: (i) assessing and determining the current status of operations, asset quality and bad debts of credit institutions; (ii) assessing and classifying credit institutions; (iii) developing and implementing plans to restructure weak credit institutions and other credit institutions; (iv) focus on liquidity support to ensure the solvency of the

Credit institutions; (v) implementing mergers, consolidations, and acquisitions of credit institutions; (vi) increasing charter capital and handling bad debts of credit institutions; (vii) restructuring operations and governance systems... In addition, many solutions to support the restructuring of the credit institution system have also been promoted, such as: (i) innovating and perfecting legal documents; (ii) innovating and improving the effectiveness of banking inspection and supervision; creating conditions for mergers, consolidations, and acquisitions of credit institutions; strictly handling violations in governance, operations, and violations of the law at credit institutions...

Second, the State Bank has issued and requested credit institutions to seriously implement many documents related to bad debt handling, creating a favorable environment for handling and limiting bad debt arising as follows:

Regarding the reassessment of the quality and recovery of debts, the increase in provisioning and the use of reserves to handle bad debts, the State Bank of Vietnam issued Document No. 7780/NHNN-TTGSNH on provisioning and the use of reserves to handle risks on November 27, 2012. Accordingly, credit institutions are required to proactively classify debts in accordance with regulations, assess the ability to recover debts from handling collateral, proactively set aside risk provisions and cut costs, and adjust profits to create sources to handle bad debts in 2012 and the following years.

Regarding debt restructuring and active recovery of bad debts, supporting customers to overcome difficulties, the State Bank of Vietnam issued Decision No. 780/QD-NHNN on debt classification for debts with adjusted repayment terms and debt extensions on April 23, 2012. Accordingly, the State Bank of Vietnam allows credit institutions to maintain the debt group as classified before debt restructuring when restructuring debts with positive recovery prospects. This measure aims to reduce temporary financial difficulties, create opportunities for customers to restore and improve the efficiency of production and business activities, thereby creating new sources of income to repay debts to credit institutions.

Regarding the development and implementation of a plan to handle bad debts and improve credit quality, the State Bank of Vietnam has issued Document No. 8421/NHNN-TTGSNH on the implementation of Decision No. 843/QD-TTg . In this document, the State Bank of Vietnam requires credit institutions to focus on handling bad debts and limiting the further occurrence of bad debts through improving credit quality. In order to have an accurate assessment of the bad debt situation and propose timely solutions, avoiding causing disruptions in debt classification and risk provisioning, credit institutions must report data on bad debts in cases where Decision 780/QD-NHNN is not applied and Circular 02/2013/TT-NHNN is applied.

Regarding the establishment and operation of the Vietnam Asset Management Company (VAMC) , VAMC is established and operates under the State Bank Law, the Enterprise Law and Decree No. 53/2013/ND-CP. VAMC is an enterprise

VAMC is a special enterprise with 100% charter capital owned by the State, subject to state management, inspection and direct supervision by the State Bank of Vietnam with the aim of contributing to the rapid handling of bad debts, financial health, minimizing risks for credit institutions and enterprises and promoting reasonable credit growth for the economy. In terms of operating principles, VAMC operates on the principle of revenue to cover expenditures and not for profit; is public and transparent in purchasing and handling bad debts; and limits risks and costs in handling bad debts.

According to Decree No. 53/2013/ND-CP, credit institutions with a bad debt ratio of 3% or more must sell bad debt to VAMC, otherwise measures such as inspection and reassessment of asset quality and value will be applied, on that basis, credit institutions must resell bad debt to VAMC. This regulation has created pressure forcing credit institutions to quickly implement measures to handle bad debt, or to sell bad debt to VAMC to quickly bring the bad debt ratio back to the permitted level. To continue promoting VAMC's bad debt purchasing activities, the Government issued Decree No. 34/2015/ND-CP amending and supplementing a number of articles of Decree No. 53/2013/ND-CP, increasing VAMC's charter capital from VND 500 billion to VND 2,000 billion and allowing VAMC to issue bonds to purchase debt at market value. On that basis, the State Bank of Vietnam issued Circular No. 14/2015/TT-NHNN amending and supplementing a number of articles of Circular No. 19/2013/TT-NHNN regulating the issuance, use and payment of VAMC bonds to purchase bad debts at market prices; and amending and supplementing regulations on the issuance, use, risk provisioning and payment of VAMC special bonds.

Figure 2.13: Bad debt ratio of Vietnam's credit institution system

Figure 2.14: Bad debt ratio of Vietnamese and ASEAN banking systems

3.8%

3.3%

3.5%

3.6%

3.7%

2.9%

2.7%

5% 5%

4% 4%

3% 3%

2% 2%

1% 1%

2014T12

2015T1

2015T2

2015T3

2015T6

2015T9

2015T11

0% 0%

2008 2009 2010 2011 2012 2013 2014

ASEAN Vietnam

Source: State Bank Source: Bankscope

The system-wide bad debt ratio decreased to 2.72% by the end of November 2015, lower than the 3% target set in the Bad Debt Resolution Project. In the first half of 2015, bad debt increased rapidly due to the requirement to classify debt according to CIC's credit rating and regulations.

regulations on restructuring debt repayment terms and maintaining expired debt groups. However, the bad debt ratio has continuously decreased since the third quarter due to VAMC accelerating the pace of bad debt purchase (over 40% of bad debt is handled through sale to VAMC), the warming of the real estate market, and good credit growth (see Figures 2.13 and 2.14).

The regulation allowing VAMC to buy bad debts at market value with VAMC bonds, effective from October 2015, is expected to encourage banks to increase the sale of bad debts at market value in the coming time. Specifically, banks do not have to set aside risk provisions for this type of bond and the risk coefficient of this bond is 0% when calculating the minimum capital safety ratio (compared to the provision rate of 20%/year and the risk coefficient of 20% for special bonds).

e/ Perfecting the legal system on currency and banking

Recognizing the importance of the monetary and banking institutional system in ensuring the effectiveness of management and safety of the credit institution system, the State Bank of Vietnam has identified the key task of legal work as supplementing and perfecting legal documents in accordance with Vietnam's conditions and international practices. In the period of 2011 - 2015, the State Bank of Vietnam issued many Circulars, focusing on documents guiding the Law on the State Bank of Vietnam and the Law on Credit Institutions, important policies on currency, credit, foreign exchange management, ensuring the safety of banking operations, information disclosure, and administrative procedure reform. Specifically, the State Bank of Vietnam focuses on building, promulgating and guiding the legal framework on monetary and banking operations; creating legal tools for operating monetary policy, managing foreign exchange and unblocking credit for the economy; creating a new legal corridor on safety standards for banking operations, handling weak banks; perfecting the legal framework for developing modern banking technology and developing cashless payments...

f/ Strengthening transparency and accountability in CSTT management

A point that is not new but has had a significant change (in both frequency and content) in the management of monetary policy in the period of 2011 - 2015 is the work of communication and transparency of information on the activities of the State Bank in particular and the entire banking sector in general. Accordingly, the State Bank has improved the information provision mechanism, increased the proactiveness, timeliness, and transparency of the mechanisms, policies, management decisions of the State Bank and the operation of the system of credit institutions through many different channels.

Firstly, the State Bank proactively publishes accurate and timely information on issues related to monetary policy, banking activities, etc. that are of public interest at the National Assembly forum, the State Bank website, at press conferences organized by the Government Office, at press conferences organized by the State Bank, at press interviews, at seminars and scientific discussions related to monetary policy and banking activities.

Second, the State Bank coordinates with major media agencies outside the industry to promote policy orientations, policy solutions and results of the banking industry in implementing the country's socio-economic development goals in order to gain consensus and support from the whole society.

Third, the State Bank of Vietnam issued Circular No. 35/2011/TT-NHNN to publish nearly 20 important indicators and information on currency developments and banking activities on the State Bank of Vietnam website, aiming towards international practices on information transparency.

Fourth, closely monitor information related to monetary and banking activities, promptly detect errors and take measures to promptly respond and handle inaccurate information, ensuring the stability of the monetary and financial market.

2.1.3. Monetary policy transmission in Vietnam through quantitative research

2.1.3.1. Model building

The thesis uses the vector autoregressive model to examine the level of monetary policy transmission through the interest rate, stock price, exchange rate, and credit channels to the Vietnamese economy. Since the 1990s, the VAR model has been widely used to analyze the transmission mechanism of monetary policy and the monetary policy framework in many economies (see the research overview and content 1.3 on quantitative studies). On that basis, the thesis builds a simple VAR model (abbreviated as the basic VAR model) for the Vietnamese economy with the assumption that Vietnam is a small, open economy. The basic VAR model includes 5 variables: world commodity prices, US overnight interest rates, output deviation, consumer price index, and broad money supply. The variables in the basic VAR model are arranged in the above order based on the assumption that (i) shocks to world commodity prices and currency from the US are exogenous shocks to the Vietnamese economy and (ii) the monetary variables reflect unanticipated changes (by the public) in the monetary policy of the SBV that do not immediately affect the output and prices of the economy but take time. The broad money supply variable M2 is chosen as a proxy for the monetary policy shock of the SBV.

Based on the basic VAR model, the thesis examines the status of transmission channels by adding variables representing each transmission channel to the model. The variables of interest rate, exchange rate, stock price index and credit are added to the basic VAR model to form VAR models for each transmission channel: interest rate channel, exchange rate channel, stock price channel, and credit channel.

2.1.3.2. Model defect data and verification

The variables in the model include: world commodity prices in the form of an index (com) taken from the International Monetary Fund - IMF; US overnight interest rate (ffr) taken from the website research.stlouisfed.org of the US Federal Reserve Bank of St.Louis; deviation

output is filtered by the Hodrick-Prescott method (gap) from gross domestic product, consumer price index (cpi) in base year 2005 is taken from the General Statistics Office; broad money supply (msl), short-term interest rate (int), stock price index (shp), credit to the economy (cre) are taken from International Financial Statistics, International Monetary Fund.

The research data series is collected quarterly from the first quarter of 2000 to the fourth quarter of 2014 (see Appendix 3). The data, except for the US overnight interest rate, the output deviation and the short-term interest rate of Vietnam in % form, the stock price index converted to the growth form compared to the same period of the previous year, are all converted to logarithmic form. To remove the seasonal factor from the data, the Census X12 method is applied to all variables.

Augmented Dickey-Fuller stationarity test shows that US overnight interest rate, output deviation, stock price index growth and Vietnam short-term interest rate are stationary while other variables are non-stationary, only after taking first differences. Non-stationary variables are converted to first difference form (see Appendix 4).

The Sequential modified LR, Final prediction error, Akaike information criterion, Schwarz information criterion and Hannan - Quinn information criterion are used to determine the optimal lag. The criteria indicate either 2 lags or 3 lags. Referring to the studies on CSTT transmission using quarterly frequency data such as Ramaswamy and Sloek (1997), Disyatat and Vongsinsirkul (2003), the lag of 2 quarters is chosen 2 [107, 57]. The choice of 2 quarters also limits the reduction of degrees of freedom in the case of relatively short data series. Testing the root

The units for all solutions are less than 1, which means that the model is statistically stable.

2.1.3.3. Model results

The response function of the output deviation to the money supply shock in the basic VAR model and the models with transmission channels shows that the credit channel and the exchange rate channel play a better transmission role than the other two channels in the first one-year period. In the medium and long term, the interest rate channel plays a better transmission role than the other channels. In general, it is not until the third quarter that the effects of monetary easing have an effect on promoting economic growth (see Figure 2.15). Regarding the response function of the consumer price index, the interest rate channel and the exchange rate channel play a good role in transmitting the impact of money supply. In addition, the response of prices to the monetary shock is faster than that of output when it only takes until the second quarter for monetary easing to have the effect of increasing the consumer price index, reaching its highest level of influence in the third and fourth quarters and gradually decreasing thereafter (see Figure 2.16).

2 The author also applies a lag of 3 quarters to the models and the response function and variance decomposition results are quite similar to the results when applying a lag of 2 quarters.

Figure 2.15: Response function of output deviation to money supply shock in basic VAR models and VAR with transmission channel

0.0015

0.0010

0.0005

0.0000

-0.0005

-0.0010

-0.0015

1 2 3 4 5 6 7 8 9 10 11 12

Basic

Interest Rates Exchange Rates Stock Prices Credit

Source: author's calculation

Figure 2.16: Response function of consumer price index to money supply shock in basic VAR models and VAR with transmission channel

0.010

0.008

0.006

0.004

0.002

0.000

-0.002

-0.004

1 2 3 4 5 6 7 8 9 10 11 12

Basic

Interest Rates Exchange Rates Stock Prices Credit

Source: author's calculation

The response functions of output deviation and consumer price index to shocks from interest rates, exchange rates, stock prices, and credit are consistent with theory when a sudden increase in interest rates reduces output deviation and consumer price index. Conversely, a depreciation of the domestic currency, an increase in stock prices, and credit will have the effect of increasing output and prices. Among the response functions of output deviation and consumer price index to shocks, credit is the fastest, reflecting the reason why the State Bank often applies regulations on credit activities such as growth limits or lending under programs in the context of the economy falling into inflation or recession (see Appendix 5).

In general, the interest rate channel and the exchange rate channel transmit the impact of money supply on economic output and prices better than the other two channels. The stock price channel is the channel with the weakest transmission ability among the studied channels, partly reflecting the development status of the Vietnamese stock market.

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