The state-run Vietnam Asset Management Co (VAMC) can only handle some VND30 trillion ($141 million) worth of bad debts from now to the end of this year, said a senior state official.

This merely meets 42.8 percent of the initial target of VND70 trillion ($329 million) worth of bad debts which is expected to be handled by the year-end.

“The reduction of more than half the size of the bad debts that should be handled can cause a major impact on improving the asset quality of local banks this year and will impact negatively the profitability prospects of the banks,” said Nguyen Van Binh, governor of the State Bank of Vietnam.

However, there are some signs that the local credit institutions themselves are struggling to handle bad debt instead of waiting for VAMC. As of June 2013, the bad debt ratio of the financial system has decreased for the second consecutive month to 4.46 percent, as reported by the credit institutions.

SBV has prepared 4 circulars giving the guidelines for VAMC and local banks, and VAMC has worked with local commercial banks on addressing the bad debt problem.

Initially, VAMC, which was officially launched on July 26, 2013, is planned to handle about VND80-100 trillion ($1.88-4.7 billion) in bad debts with recoverable ratio of 20-40 percent. In 2013, the central bank expects VAMC to handle about VND40-70 trillion worth of bad debts.

Bad debt was estimated at $7.8 billion, or 6 percent of the total outstanding loans of $130 billion, by the end of February this year, according to the central bank. Meanwhile, local banks said nonperforming loans accounted for 4.51 percent of the total loans.

The central bank has also sought for the Prime Minister’s permission on the application of a lower refinancing rate for banks borrowing from SBV by using special bonds issued by VAMC.

If the refinancing rate for banks using VAMC-issued bonds is lower than the normal refinancing rates, local banks can expand credit to meet the 12-percent credit growth target this year, said SBV.

According to information from the website of the SBV, as of August 15, VAMC had received no bad debts transferred from local credit institutions due to the lack of official circulars offering specific guidelines.

In an interview with Bloomberg early last month, VAMC Chief Executive Officer Nguyen Huu Thuy said VAMC will acquire as much as VND10 trillion ($474 million) of spoiled debt over the next two months as it considers possible foreign funding.

Vietnam Asset Management Co. will issue special bonds to about 10 banks in exchange for as much as 10 trillion dong of non-performing loans in the next two months, he told Bloomberg, adding that the lenders will be able to use the bonds to secure funding from the central bank.

“We can start buying the first batch of bad debt in the next two weeks, and this will send a positive signal to the market and investors, so they can see how quickly we can move forward and how determined we are in resolving the bad debt,” Thuy said.