Law needed to ensure banks can repossess collateral on bad debts

Transactions at an office of SeABank in Hanoi. (Photo courtesy of SeABank)

It is necessary to create a synchronous and breakthrough legal framework to deal with bad debts in order to achieve more positive results as the work is facing many challenges, according to experts.

According to General Secretary of the Vietnam Bankers Association Nguyen Quoc Hung, Resolution No 42 on piloting bad debt settlement will be extended only until the end of 2023. Therefore, the legalisation of the resolution provisions is absolutely necessary.

Data from the State Bank of Vietnam (SBV) showed the bad debt ratio of the whole banking system by the end of February 2023 reached 2.91%, a sharp increase compared to 2% at the end of 2022 and nearly doubling compared to the end of 2021.

Total bad debts of the banking system by the end of February 2023 were estimated to account for 5% of total outstanding loans, which was nearly equal to when Resolution 42 came into effect.

In the process of bad debt settlement, a very important issue is seizing collateral, which will become illegal when Resolution 42 expires as at that time it must comply with the provisions of other laws.

Without regulations allowing them to seize collateral under Resolution 42, banks may be afraid to grant credit, affecting the ability to access loans of firms and inpiduals.

Techcombank’s senior director of public relations Nguyen Thi Van Hoai said the application of measures for collateral plays an important role in banks’ credit activities, ensuring they can recover capital in the event of defaults. It is necessary to have a clear and transparent legal framework to protect the lender and the secured party in cases the borrower is unable to repay or deliberately delays fulfilling the debt repayment obligation.

Dr. Phan Duc Hieu, member of the National Assembly’s Economic Committee, said there should be special regulations on dealing with bad debts and a mechanism to increase the efficiency of handling the problem.

The law needed to take into account the interests of creditors and borrowers to ensure fairness, Hieu said.

In order to streamline regulations, especially after Resolution 42 expires on December 31, 2023, the SBV has drafted the Law on Credit Institutions (amended) to submit to the National Assembly for comments. The draft Law adds a chapter on handling bad debts and collateral, in order to legislate Resolution 42.

The draft law also legislates a number of provisions in Resolution 42 on piloting bad debt settlement of credit institutions related to the sale of bad debt and collateral; as well as the purchase and sale of bad debts with collateral being land use rights, land-attached assets, and land-attached assets formed in the future.

The addition of these regulations has so far received the support of domestic and foreign banks and business communities.

According to Dr. Chau Dinh Linh from Ho Chi Minh City Banking University, the legalisation of Resolution 42 will create a legal corridor to improve the effectiveness of bad debt settlement.

When Resolution 42 is legalised, it will create a unified and synchronous legal mechanism to help banks handle bad debts faster and more effectively as the current difficulties closely relate to many other laws, such as the Law on Land (amended), the Law on Housing (amended), the Law on Real Estate Business (amended) and the Law on Electronic Transactions./.