The total bad debt of the local banking system went up from 3.25 percent recorded at the end of last year to 3.49 percent of outstanding loans as of January 31, 2015, according to the latest update from the State Bank of Vietnam (SBV).

In terms of value, total bad debt was estimated to hit VND139 trillion (US$6.4 billion).

However, the updated report was compiled using data from credit institutions, which is often quite different from what the SBV gathers through its own tool called remote monitoring, according to the SBV, which is the central bank of Vietnam.

Local banks have faced increased pressure since April 1, 2015, as bad debt will rise following the expiry of Decision No. 780/QD-NHNN on classification of rescheduled loans.

The decision, released by the SBV on April 23, 2012, was designed to help local financial institutions avoid having to make an additional loan-loss provisioning for bad debt.

A bad debt increase will force commercial banks to increase the provision for bad debt, thus eroding their profitability, the SBV said.

To back the local banking system, the Vietnam Asset Management Company (VAMC) under the SBV has been given more power to deal with bad debts.

In particular, the VAMC in March was allowed to issue special bonds to buy bad debt at market prices, which enables the agency to purchase 100 percent of the value of a package of bad debt, up from the previous rate of 70 percent.

Also, banks are allowed to have more flexible mechanisms for provisioning when selling debt to the VAMC, as the time for setting the provisioning will be relaxed from five years to 10 years for a bank under restructuring or facing financial difficulties.

The government on March 31 permitted the VAMC to raise its charter capital four-fold to VND2 trillion ($94 million), part of the prime ministerial decree 34/2015/ND-CP to revise and supplement a number of clauses of Decree 53/2013/ND-CP, issued in May 2013.

The decree, based on the SBV proposal, allowed the VAMC to issue bonds to purchase debts at market prices rather than those fixed by lenders based on inflated collateral evaluation, as has previously been done.

The VAMC plans to issue bonds worth up to VND80 trillion ($3.76 billion) this year.

Last year, the VAMC bought non-performing loans worth about VND96 trillion ($4.57 billion), raising the total bad debts it had purchased from credit institutions to VND135 trillion, or 3.4 percent of total outstanding loans.

According to the SBV, 2015 is the right time to accelerate the banking restructuring scheme because the banking system has overcome the most difficult period, while inflation was controlled at a low level, and the recovery of manufacturing operations has been well on track.

According to the latest data from the SBV, as of February 2015, the total outstanding credit to the economy was more than VND3,990 trillion ($183.5 billion), up 0.65 percent compared to the end of 2014.

In particular, credit to industry and construction accounted for the largest proportion, with more than VND1,394 trillion, of which over VND1,000 trillion was channeled into many industry sectors.

According to data provided by the National Financial Supervisory Commission, as of April credit growth reached 2.78 percent, the highest growth in the same period in the last three years, while total outstanding loans of the country surpassed VND4,080 trillion.

The SBV first set a target for credit to grow by 13-15 percent, so total loans until the end of 2015 are expected to be from VND4,480 trillion ($206 billion) to VND4,560 trillion ($210 billion).

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