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How do you perceive the readiness of Vietnam’s regulatory framework and financial infrastructure in terms of movables lending?
I think the regulatory environment is quite ready and advanced for banks to lend against movable assets. The financial infrastructure has also improved significantly with the launch of the electronic secured transaction registry more than a year ago. Now we can see at the registry’s operations to know what is happening with movables lending.
So in your view, what will push movables lending move forward?
In my view, the movables lending environment is there, and the next step is to get movables lending going. So far that’s not happening as a number of banks do not know that the registry exists, they do not know how to use it to build movables lending practices.
So what is actually important now, as the financial infrastructure is in place, is to work with the banks both in terms of raising awareness about the system and also individually to show them the best ways to do movable asset-based lending. We have worked very intensively in China on the same online registry and now you can actually see movables lending happening. But it did not happen automatically.
There is actually a need to support the banks to understand how the system works to make it happen. That is the next major step toward moving up movable asset-based lending.
For Vietnam, this is very important. One of the best ways to use movable asset-based lending is actually in the area of agriculture. Normally it is very difficult for farmers to get legal land titles. So for farmers the traditional asset does not work, not just in Vietnam but in a lot of countries where we work. But if farmers can use the inventories they have or the crops as collateral, that will help build movables lending practices in agriculture. Since agriculture is a key sector in Vietnam, we see a direct relationship between the development of a stronger agricultural base and the financial infrastructure of registry.
With the current high rate of non-performing loans (NPL), do you think banks are still willing to lend against movable assets?
One of the reasons the NPL rate in Vietnam rose so high was actually the practice of lending that mainly based on real estate. And as you know, the fact that real estate prices kept increasing over a period of time made people think that the boom would last forever. So when the real estate prices stopped increasing or slowed, that was when the NPL rate went up because most of the loans were based on real estate. So we see different ways to solve the NPL crisis. It is very important for banks to implement good risk management practices and IFC is engaged with different banks toward improving their risk management. Having a strong independent risk management officer is the first step in the improvement process.
The second piece of our work with banks is to allow them to diversify the collateral base of lending. That is why we see movable asset-based lending as having a good impact on this. And the third piece is the regulatory work on bankruptcy to solve disputes. What happens now if there is a dispute about taking the collateral pledged for lending, it will be likely solved in court, which can be very time consuming. So there should be an alternative dispute mechanism for a bank and an entrepreneur to resolve the issue out of court. Without this piece, the NPL crisis will continue. So, IFC is working in all three of these areas in Vietnam.
What should banks do to successfully implement movables lending?
The first step I think is to make banks understand that collateral is not just real estate. This is true, not just in Vietnam but in other countries in the region as well where bankers tend to be comfortable with real estate only and they prefer lending against real estate much more than other alternatives. So we need to show good examples in convincing them to try other ways. This is the first step I think. The other step is to work with entrepreneurs. If you can improve the regulatory framework for SMEs concerning taxation and governance, they can show a clearer financial statement. A common situation in many countries is, for various reasons, entrepreneurs are not willing to show the full picture of their performance. So, it is essential to create a good regulatory environment for smaller businesses.
How can banks mitigate risks in movables lending?
I think the key is effective asset monitoring. This only works if you can actively monitor the assets. If you are not active or do not have a clear procedure for asset monitoring, things will not work. So that is the most important thing to ensure the success of movables lending.
How can IFC support movables lending in Vietnam?
We have been conducting a program that supports the Vietnamese government on movables lending. First is to continue working on enabling a framework for the registry to make it really top notch. The second is training and knowledge sharing to improve banks’ comfort with movables lending. The third is to work with several banks to help develop movables lending portfolios. As I said, the regulatory framework is already very good so our work now mainly focuses on building confidence in the lenders and other stakeholders to push movables lending forward.