HANOI When Nguyen Manh Hung's furniture company Phuc Luc was bustling, orders flew in from wealthy Vietnamese who sought his hand-crafted beds, cabinets and tables, netting him $25,000 a month after costs and wages for 35 staff.
Two years later, hurt by the slump in Vietnam's economy, business in his Hanoi shop is crumbling. Hung is hemorrhaging about $4,000 a month even after slicing costs to the bone and idling 30 workers he could no longer afford to pay.
"I just need a few customers to stay afloat, but the ones I have, they've cancelled orders," Hung says. "None of the banks will lend to me. I'm finished."
Hung's anguish reflects the desperation of one of Asia's most chronically ill economies, with a debt-stuffed banking system unable to provide the lifelines that companies need to turn things around. What's more, the government's solution - expected to be announced any day - appears potentially inadequate.
Central bank deputy governor Dang Thanh Binh told Reuters a bad-debt bank, the Vietnam Asset Management Corp (VAMC), would be set up imminently with $24 million starting capital.
But commercial banking sources say that's puny in comparison with the bad debt problem that is shackling almost every part of Vietnam's economy. The State Bank of Vietnam estimates bank non-performing loans (NPLs) at 6 percent, or $7.8 billion, of total outstanding loans of $130 billion.
Two sources told Reuters, however, that the real level of bank NPLs could be at least three times that estimate, or more than $23 billion. At best, the capital of the proposed bad-debt bank would be only one-third of one percent of the outstanding bad loans and probably represents only working capital, while the real debt reduction would be made through IOUs backed by the central bank.
"In that context, $24 million seems like a small amount to recapitalize the banking system," said Matt Hildebrandt, an economist at J.P. Morgan Chase in Singapore.
"My concern is that the creation of the AMC will be too slow and its funding size too small to effectively address the problem. A piecemeal approach ... could mean that the economy will underperform for several years to come."
The VAMC is a concept similar to Thailand's efforts to rebuild its banks after the 1997/98 Asian financial crisis. It will initially buy only NPLs taken out for real-estate mortgages. Debt would be bought at book value and "special bonds" issued in return for the same value, to use as collateral for refinance capital from the central bank, according to Binh.
Even though the VAMC will not need cash on hand to address the bad loans, the fact that it will have such a small balance sheet raises questions about the point at which the central bank might cap its support for the bad debt special bonds.
"The company may resolve 50 percent of the credit institutions' NPLs," Binh said in an e-mail to Reuters in response to questions, describing the VAMC as an "important kickstart" that would bring positive results this year.
"After that, depending on the situation, the company may widen the scope of debts and mortgages to reach the final objective, which is to bring the credit institutions' NPLs down to the safe ratio."
Analysts and commercial banking officials say that may be too optimistic. Binh did not say who would foot the bill for VAMC, what it would do with the NPLs it buys or whether it is simply moving bad debt off one set of books to another.
The credit slowdown has inflicted a heavy toll in Vietnam.
Banks saddled with Asia's highest ratio of non-performing loans (NPLs) have dramatically tightened lending and created a liquidity trap in a consumer market of nearly 90 million people. The property sector has slumped. A once-roaring economy seen as Asia's next rising star is chugging along at its slowest pace in 13 years.
As a result, more than 100,000 local businesses shut down in 2011 and 2012 and a further 13,000 closed in the first quarter of this year, according to the Ministry of Planning and Investment. They have struggled to borrow as consumer spending slows, with first-quarter retail sales growing 11.8 percent, the slowest pace in eight years, government data shows.
Central bank Governor Nguyen Van Binh said in March that lending rates, now about 9-16 percent, would be cut to below 13 percent to make loans accessible, but some businesses complain about slow action and rates as high as 17-18 percent.
After annual economic growth of about 7 percent, Vietnam is at a critical juncture: public discontent simmers over graft and high living costs. Inefficient state-run firms sap billions of dollars of much-needed credit and doubts linger about Vietnam's ability to compete with regional peers.
The Communist Party faces policy decisions that could either revive the once-promising "tiger" economy or seal its fate as a perennial laggard bucking Southeast Asia's boom trend.
There are scattered signs of hope. A trade surplus was posted for the first time in two decades in 2012 and economists expect another this year. The World Bank forecasts 2013 growth of 5.2 percent and inflation has slowed to 6.6 percent from more than 20 percent in December 2011.
The dong currency, after several devaluations, has been stabile against the dollar since then and the main Ho Chi Minh stock index is one of Asia's best-performing bourses, up nearly 15 percent this year, with Vietnamese accounting for 95 percent of buying.
But the robust stock market masks deeper problems and uncertainty over how they will be addressed.
"Trading on this market is like sitting in an electric chair," said Tran Tien Dung, a 43-year-old retail investor who dumped most of his stocks in February for a 20 percent profit. "The economic problems have been revealed, but there's no clear picture of the future."
Despite government announcements of "roadmaps", "steering committees" and other reformist rhetoric, economists say Vietnam has been too slow to clean up toxic loans in its banks - a step critical for any real revival in foreign investment.
Alfred Chan, director of financial institutions at Fitch Ratings in Singapore, says the magnitude of Vietnam's NPL problem is heavily understated, with transparency poor and reform plans protracted and sketchy. Other deep-rooted problems, such as management of the state-owned enterprises (SOEs), still need to be addressed.
"These are steps in the right direction. But this is only the first part of the reform journey," he said in an e-mail.
Vietnam's 100 biggest SOEs took out loans worth $64 billion, about half of all debts and many strayed far beyond core areas and invested heavily in a real estate market that sank.
"If Vietnam can't restructure and show policy stability, investor interest will disappear in 3-5 years," Nguyen Duc Kien, deputy head of parliament's economic committee, told Reuters.
Louis Taylor, chief executive of Standard Chartered Bank for Indochina, said foreign banks have a role to play in helping clean up Vietnam's banking system, but he suggested what was on offer to them was insufficient.
"We're doubtful that there's an enormous amount of attraction for foreign banks in the weakest banks in Vietnam," he told reporters.
Total foreign ownership in a Vietnamese bank is now restricted to 30 percent and no more than 20 percent for a single foreign strategic partner. In February, the central bank proposed to raise the foreign shareholding limit to more than 30 percent, but only for a "special case" where the prime minister would determine the maximum foreign ownership level in a bank classified as weak.
Commercial banking sources said the sector should be liberalized to strengthen risk management practices and inject capital, but wealthy interest groups with political connections would try to avert that.
"They look at foreign banks as unwelcome giants," one senior official at a commercial bank said. "It's likely banks don't want foreigners coming in, looking at the books and digging things up."
($1 = 20,925 dong)
(Reporting by Martin Petty, assisted by Ngo Thi Ngoc Chau; Editing by Jason Szep and Ken Wills)