What solutions to traffic BOT bad debts?

As of September 30, 2023, 22 credit institutions had financed BOT, BT traffic projects, with a total outstanding loan of 92,319 billion VND

>> Bad debt ratio of banking system surges to 3.56 per cent

Many financial experts believe that it is necessary to put safeguards in place as quickly as possible to prevent and handle bad debts from BOT traffic projects in order to avoid hindering loan inflows into the economy.

Negligible outstanding loans, big bad debt

Responding to NA delegate Nguyen Dai Thang (Hung Yen), SBV Governor Nguyen Thi Hong stated that as of September 30, 2023, 22 credit institutions had financed BOT, BT traffic projects, with a total outstanding loan of 92,319 billion VND, accounting for only 0.72% of total outstanding loans, but bad debt accounts for 3.83%, much higher than the overall banking system's bad debt ratio. Furthermore, the 2-tier debt ratio of BOT and BOT projects has risen to 26.52%. Meanwhile, it is located close to the three-tier debt (bad debt).

"The reason traffic BOT bad debt increased sharply is that the financial plans of these projects are often not the same as the original plans," said Nguyen Thi Hong.

Furthermore, the aforementioned predicament is attributable to many BOT investors' poor financial and management capabilities. Furthermore, because certain finished BOT projects are not permitted to collect tolls, establishing additional toll-free routes encourages vehicles to avoid stations, resulting in revenue that does not meet the financial plan...

It should be mentioned that in mid-October 2022, the Government proposed to the National Assembly a solution to address shortcomings in eight BOT traffic projects by covering part of the expenditures and extending toll collecting time. The Government advises that if discussions with BOT investors fail according to the above plans, the contract be canceled before the deadline, allowing the Government to pay investors about 13,115 billion VND to receive these projects under State control.

>> Gradually "revealing" business results, bad debts of some banks increased

How to handle?

Bank loans for traffic BOT projects, according to financial analysts, carry significant risks. First, large loans are required for traffic BOT projects, while banks must diversify credit risks. Second, BOT loans are primarily unsecured.

Third, the financing duration for traffic BOT projects is typically 10-15 years or longer. While banks' primary sources of capital are short-term, liquidity and interest rate concerns are equally significant. That is why the State Bank of Vietnam required commercial banks to gradually lower the ratio of short-term deposits to medium- and long-term loans (this ratio has been reduced to 30% as of October 1, 2023).

Fourth, banks find it difficult to manage all risks associated with the quality of BOT projects, such as capital loss during construction, lower-than-expected traffic vehicles... Those are the reasons why many commercial banks are not interested in lending for BOT projects.

The State Bank of Vietnam also warns commercial banks to exercise caution when lending to possibly risky industries, such as traffic BOT projects. Mr. Dao Minh Tu, Deputy Governor of the State Bank of Vietnam, previously informed the press that the banking industry does not make distinctions between economic sectors when making loans because every sector is essential. However, if any industry is considered dangerous, the State Bank of Vietnam must provide warnings, monitor capital flows into that sector, and mitigate the impact on the banking system.

Many financial experts say that the easiest way to deal with bad debt for traffic BOT projects is to avoid risks in this industry. Nguyen Thi Hong, Governor of the State Bank of Vietnam, also stated before the National Assembly on November 6: "With the demand for big loans in traffic BOT projects for the long term, the project developers must search for many other financial resources, both domestic and foreign loans, to meet the requirements, and bank loans will also be implemented, but the safety of the banking system must be ensured."