A bad debt settlement law is urgently required

Many unresolved obstacles

Resolution 42/2017/QH14 on the pilot dealing with bad debts by credit institutions established a legislative framework for the functioning of credit institutions and foreign bank branches in Vietnam.

However, according to research by Associate Professor Dr. Hoang Xuan Que, Director of the Institute of Banking and Finance at the National Economics University, there are still many obstacles and reasons why some Resolution 42 solutions for dealing with bad debts have not been used or have been used in a limit ed manner. These are some examples:

First, the provision of returning collateral in criminal cases as secured assets for bad debts is significantly dependent on the prosecuting agency's position, causing credit institutions to be delayed to obtain collateral for processing and collecting bad debts.

Second, there is a mechanism for keeping secured assets in the event of a bad debt. Resolution 42 specifies in Article 7: "In the collateral agreement, the guarantor agrees to allow the credit institution to retain the secured assets..." However, this clause is not expressly stated in collateral agreements executed prior to the implementation date of Resolution 42. To solve this, it is proposed that the policy on the right to keep (in the right of disposal) credit institutions' collateral assets be specified. This would assist minimize the number of cases that must be settled in court and shorten the process of dealing with secured assets, lowering expenses for the state and credit institutions while increasing debt recovery from collateral assets and reducing bad debts in the system of credit institutions.

Third, it is critical to register changes in the Certificate of Land Use Rights, Ownership of Residential Houses and Assets Attached to Land, and Real Estate Projects when selling or transferring secured assets such as land use rights, ownership of residential houses, assets attached to land, and real estate projects. However, most asset owners refuse to participate throughout the bad debt collection procedure.

As a result, financial institutions propose utilizing Seizure Orders instead of the document for transferring collateral/assets or the document for transferring bought debt assets, however the Land Registration Office rejects this idea. As a result, the parties concerned are unable to transfer asset ownership and usage rights to the purchasers.

The fourth problem is the simplified processes regulation. Currently, the number of bad debt cases being processed through expedited processes in the courts is extremely limit ed, which has a negative impact on the overall outcome of bad debt resolution. To solve this, it is suggested that debts be handled first using simplified methods, which would speed up the settlement process.

Fifth, there are rules governing tax payments made during transfers. The necessity to pay taxes before satisfying the secured party's priority payment obligations has limit ed the amount of debt recovery for credit institutions. In many cases, the proceeds from the sale of secured assets are insufficient to cover the debt, but credit institutions must still pay taxes, causing difficulties for both the guarantor and the secured party and significantly affecting the credit institution's rights.

Sixth, there is a procedure for obtaining information on the status of secured assets (as outlined in Resolution 42's Article 7). Currently, courts and civil enforcement agencies lack a data infrastructure that allows credit institutions to extract and search for information on assets relevant to cases under investigation.

Furthermore, there is no guidance on the method for defining disputed assets or which assets require interim emergency measures, resulting in diverse interpretations of disputed assets across prosecuting authorities at different levels and locations. This complicates the application of asset management methods.

Seventh, provisions for the assessment system for secured assets are included. Appraisal organizations presently appraise debt assets in accordance with the Vietnam Valuation Standards system (which applies to the appraisal of various categories of assets). However, when assessing debts, appraisal companies' methods may differ, making it difficult for parties to choose reference prices as the foundation for calculating the beginning price in debt trading.

Eighth, procedures for cooperation are required in the implementation of Resolution 42. Although there are coordination regulations between the State Bank of Vietnam and the Ministry of Justice regarding civil enforcement activities, the activities of bank enforcement are not truly effective in some localities for various reasons, resulting in prolonged cases and additional costs for credit institutions in debt handling.

Ninth, inconsistencies with other laws or a lack of relevant legal documents, such as the Mineral Law, specific regulations on debt valuation in the debt trading market, local laws on enforcement, or difficulties in implementing the seizure of secured assets that are residential houses or structures attached to land (factories, warehouses, machinery, equipment, and so on).

Recommendations for solutions

Although Resolution 42 produced positive results and played an important role in restructuring the credit institution system, the practical situation now necessitates the enactment of a bad debt resolution law or the inclusion of certain provisions in the amended Credit Institutions Law of 2010. If the Law is not passed promptly, it will have a detrimental impact on the development and efficacy of bad debt resolution, as well as delay the process of restructuring weak credit institutions.

Based on the foregoing research, Mr. Que underlined the following critical revisions and additions to the future Law in order to formalize the treatment of bad debts and build a clear, transparent, and consistent legal framework for this issue:

Specifying the policy on the right to retain (in the right of disposal) credit institutions' collateral assets will help reduce cases that need to be resolved in court and shorten the process of handling secured assets, minimizing costs for the State and credit institutions, maximizing debt recovery from collateral assets, and reducing bad debts in the credit institution system.

Credit institutions periodically determine the value of collateral assets throughout the lending tenure. Customers, on the other hand, frequently refuse to consent when credit institutions need to dispose of collateral assets. Collateral assets in credit operations are growing increasingly diversified in terms of nature and location. Many collateral assets have no obvious market for disposal. In practice, credit institutions must dispose of collateral assets many times, incurring expenses and lengthening the process owing to inappropriate valuation and appraisal provisions. The law should provide a "framework" for valuation and allow credit institutions and customers to agree on a value strategy for collateral assets from the time the collateral contract is signed.

Besides, it is needed to maintain the priority order of payment policy while dealing with collateral assets, boosting credit institutions' debt recovery capabilities and lowering financial strain on credit institutions during the bad debts management process. This assures that while dealing with collateral assets, the concept of prioritizing payment to collateral beneficiaries is followed.

In addition, it is necessary to address any issues or inconsistencies with the other laws and regulations stated above. The National Assembly should include a special clause that prioritizes debt management, collateral asset management, and the ability to exploit credit institutions' collateral assets when they are entangled with other laws.

To date, the process of legalizing Resolution 42's provisions through the implementation of a bad debt resolution law or the inclusion of specific parts in the updated Credit Institutions Law requires immediate attention. The Law on Bad Debt Resolution will inherit the provisions of Resolution 42 that are still applicable, as well as amend and supplement other content to align with the practical operation of bad debt resolution, overcome difficulties and limit ations in implementing Resolution 42, and contribute to the expediting of bad debt handling by credit institutions.