Amended Credit Institutions Law Draft: Concerns about bad debt settlement

According to a State Bank of Vietnam study, from August 2017 to the end of January 2023, the whole system of credit institutions effectively managed VND 416 trillion in bad debts recognized by Resolution 42/2017/QH14, average around VND 6.3 trillion each month. This amount is much higher than the average bad debt resolution outcome from 2012 to 2017 prior to the implementation of this Resolution (about VND 3.5 trillion each month).

Although the handling of bad debts in accordance with National Assembly Resolution 42/2017/QH14 has yielded many positive results, unfavorable developments in the global economic and political situation, as well as domestic economic difficulties, have resulted in a decrease in the repayment capacity of many businesses. As a result, the bad debt ratio has begun to rise.

According to the State Bank of Vietnam's report, the whole system's non-performing loan ratio reached 2.91% at the end of February 2023, up from 2% at the end of 2022 and nearly double the amount at the end of 2021. Total gross bad debt (including domestic bad debt, debts sold to Vietnam Asset Management Company (VAMC) by credit institutions, and potential debts classified as bad debts of the credit institution system) is expected to account for 5% of total outstanding loans by the end of February 2023, which is nearly equal to the bad debt ratio that the economy faced when Resolution 42/2017/QH14 went into effect.

Meanwhile, Prime Ministerial Decision No. 689/QD-TTg dated June 8, 2022 approves the Project "Restructuring the System of Credit Institutions Associated with Bad Debt Resolution for the 2021-2025 Period," which aims to improve the handling of bad debts, improve credit quality, and prevent and minimize the occurrence of new bad debts. The goal is to reduce the credit institution system's non-performing loan ratio to less than 3% by the end of 2025, including bad debts sold to VAMC but not yet resolved and prospective loans designated as bad debts.

According to experts, this is a difficult goal to attain since it necessitates the construction of a complete, inventive, and effective legislative framework for dealing with bad debts.

To achieve this need and avoid any legal gaps when National Assembly Resolution 42/2017/QH14 expires on December 31, 2023, the State Bank of Vietnam has proposed revisions to the Law on Credit Institutions that will be submitted to the National Assembly for approval. Specifically, an additional chapter consisting of 9 articles related to the following contents has been added to the Draft Law (amended): definition of bad debts, sale of bad debts and collateral assets, purchase and sale of bad debts by debt trading and bad debt handling organizations, procedures for seizing collateral assets, purchase and sale of bad debts with collateral assets being land use rights, assets attached to land, assets formed in the future attached to land, and assets formed in the future attached to land.

Banks and the business sector have both locally and globally supported the adoption of these rules. However, there is still disagreement over the particular nature of these restrictions. Furthermore, many banks and businesses are concerned about certain Resolution 42/2017/QH14 provisions that were not included in the Draft Law on Credit Institutions (amended), such as the handling of collateral assets in real estate projects, the sale of bad debts with collateral assets that are currently being valued, the allocation of expected profits, regulations on the application of simplified trial procedures, and so on. Banks and businesses are quite concerned about determining which legal instruments will govern these contents and when they will be published.

The legislative framework for dealing with bad debts and the Law on Credit Institutions, according to Darryl Dong, Senior Country Officer of IFC Vietnam, are two fundamentally distinct texts. The Credit Institutions Law governs credit institution operations and governance, whereas the laws on bad debt resolution are directly tied to the handling of collateral assets, litigation, and other issues.

His amendments to the Draft Law on Credit Institutions include the following suggestions:

First, Vietnam requires foreign investors to come to help resolve bad debts and attract money. The Vietnam Asset Management Company (VAMC) and banks now hold a monopoly in the trading and settlement of bad loans, which is not a market-oriented solution and only exists on the accounting books. We need investors to participate since the banking industry alone cannot solve and build the market for trading bad loans. This gap should be defined and specifically governed by legislation. Vietnam requires a good new policy that will attract bad debt specialists and investors. Non-bank organizations should be able to swap bad loans with banks directly.

Second, when it comes to collateral assets, the Draft Law only gives banks and VAMC the authority to seize them. This violates market principles by prohibiting the management of collateral assets when the participating party is a non-bank enterprise. It is an impediment. Concerned about foreign investors controlling assets, Darryl Dong proposes an indirect approach in which domestic agents handle collateral assets and investors engage with local representatives.

According to Mr. Phan Duc Hieu, a member of the National Assembly's Economic Committee, Vietnam does not lack legislation for dealing with bad debts, but it does require particular and specific provisions as well as an efficient framework to manage the issue. It is vital to explain the essence of dealing with bad debts, which entails dealing with collateral assets for debt obligations; however, this should not be limit ed to simply real estate and should be broadened further.

"I hope that the law will take into account the interests of the debtors, or borrowers, in order to prevent a situation in which protecting the creditors harms the borrowers. This must be thoroughly explained. Calculations should be done to prevent manipulating the bad debt resolution rules, as well as to avoid subjective and objective causes, and instead to provide equitable advantages, "expressed Mr. Hieu.