Local banks can take some fundamental steps to address Vietnam’s pressing non performing loan situation, writes Steve Punch, Financial Services director at KPMG in Vietnam.

Extensive literature has been written about the “true” level of non performing loans (NPL’s) in the Vietnamese banking system over the last 18 months.

The ongoing commentary has been both absorbing and humorous. The first red flag was raised by ratings agency Fitch in August, 2011. At the time, reported system NPLs for Vietnamese banks was about 2.7 per cent. But, Fitch estimated that 13 per cent was a more realistic number.

The State Bank governor acknowledged late last year that the real number was 8.82 per cent. We are in the middle of reporting season and the highest NPL number so far publicly reported by a Vietnamese bank is less than 4 per cent.

The real number is subject to much debate. The recent purchase by Japanese super bank, Bank of Tokyo- Mitsubishi UFJ of 20 per cent of Vietinbank values it at nearly $4 billion, but with a market capitalisation of just $2.5 billion just prior to the transaction. It seems that the clouded NPL issue has not significantly affected valuations of some Vietnamese banks and the Vietnam long-term growth story remains at the front of minds for international investors.

The single biggest question in the banking sector is how to deal with the current NPLs and I’m not going to comment any further on resolution of this issue in this article. The second biggest question is how to make sure that the NPL issue doesn’t repeat itself in the future, and this is the focus of the remainder of this article. Nearly all articles focus on an NPL cure or resolution while few have focused on prevention.

Prevention is better than cure, especially as it relates to bad credit decisions, and this is the historical issue in Vietnam. It is easy to blame the fall