Positive changes in dealing with bad debts after 2-year implementation of Resolution 42


Thanks to the leadership and the close instructions of the National Assembly and the Government together with the efforts and determination of the entire banking sector and the coordination from ministries, agencies and local authorities, after nearly two years of implementing the Resolution No. 42/2017-QH14 on pilot resolution of bad debts of credit institutions (Resolution 42), bad debts have been maintained and controlled at a safe level, thus  facilitating the restructuring of credit institutions (CIs).

Active implementation of trading and resolving bad debts

Following the direction of the Prime Minister in the Directive No. 32/CT-TTg dated on July 19, 2017, the State Bank of Vietnam (SBV) instructed CIs to build a plan on dealing with bad debts in accordance with Resolution 42 and solutions in the restructuring plan in association with dealing with bad debts until 2020 under Scheme 1058. CIs have actively implemented measures to improve risk management capacity, especially risks in credit provision; implemented preventive and control measures to minimize bad debts. Besides, in order to improve the role and effectiveness of the Vietnam Asset Management Company (VAMC) in dealing with bad debts of the CIs system, the SBV has approved the Scheme on restructuring and improving the VAMC’s capacity in the period of 2017-2020, towards 2022 and closely monitored and supervised the VAMC in the implementation of the Scheme.

In the first months of 2019, in order to meet the targets set in the Government’s Resolution No. 01/NQ-CP  (the internal non performing loans (NPL) ratio is below 2%; the NPL and potential NPL to bad debts ratio is below 5%), the SBV  drastically instructed CIs to implement solutions to reduce both the ratios and volume of bad debts; at the same time, took measures to remove obstacles and facilitate CIs in local areas to deal with bad debts, handling collateral for bad debts. Especially, the SBV provided support in doing administrative procedures in the locality to settle bad debts, collateral; facilitated CIs to quickly handle collateral for the bad debts related to cases being resolved in the locality in accordance with law.

With the participation of other agencies and drastic direction of the SBV and the efforts of CIs, up to now the control and settlement of bad debts has achieved some important results.

With regard to dealing with internal bad debts (according to the Circular No. 02/2013/TT-NHNN), from 2012 to March 2019, the CIs system settled about 907.33 trillion dongs of bad debts. In particular, in 2018 alone, the CIs system handled 163.14 trillion dongs of bad debts; internal bad debt ratio was maintained at below 3%, at the end of March 2019, it was 2.02%.

Regarding the results of bad debt settlement  under Resolution 42, from August 15, 2017 to the end of March 2019, the CIs system handled 227.86 trillion dongs of bad debts indentified by Resolution 42, of which internal bad debts were 117.8 trillion dongs.  Dealing with bad debts of the CIs system after Resolution 42 came into effect has achieved positive results. From August 15, 2017 to March 2019, the CIs system handled bad debts worth about 5.8 trillion dongs per month on average, 4 trillion dongs more than the average result in the 2012-2017 period, before Resolution 42 took effect. Besides, the amount of bad debts repaid by clients tended to increase, partly reflecting the improvement of customers' sense of debt repayment when CIs and the VAMC have the right to seize collateral in accordance with Resolution 42. In addition, the VAMC’s debt purchase using special bonds and debt purchase at market prices also achieved important results.

Obstacles still need to be removed

Basically, Resolution 42 is an important legal basis to handle difficulties and obstacles in bad debt resettlement over the past time. However, during the implementation process, the VAMC realized that there are a number of legal regulations that need to be further considered and adjusted to meet the arising practical needs, especially those related to collateral.

For example, there are difficulties and obstacles in  collateral seizure. Previously, when dealing with debts of CIs, the right to seize collateral is a natural right according to the Decree No. 163/2006/ND-CP. However, as the Civil Code 2015 does not recognize the right to seize collateral, CIs faced many difficulties in dealing with collateral assets. Resolution 42 removed this problem by acknowledging the right to seize collateral and stipulating the conditions to exercise the right of seizing collateral assets. However, Resolution 42 does not apply to all bad debts  and Resolution No. 42 is only valid within 5 years from the issuing date. Therefore, afterward,  dealing with collateral assets will be hindered again due to no application of seizure.

Clause 2, Article 7 of Resolution 42 stipulates that one of the conditions for seizing collaterals is "the collateral is not in dispute in a case that has been accepted but remained unsolved or has been resolving at an authorized court; the collateral  is not put under temporary emergency measures; and the collateral  is not distrained or under judgment enforcement as prescribed by law”. However, the current regulations do not stipulate a database that allows the VAMC and CIs to extract and search for information about properties related to a case being handled. It is difficult for the VAMC and CIs to determine which collateral assets are in dispute, which ones are put under emergency measures.

With regard to dealing with collateral which is future real estates or property rights, currently, the VAMC and CIs can not apply the method of seizing collateral assets which are future properties or property rights arising from investment cooperation contracts... Because future properties often do not have certificates of ownership, property rights are intangible assets which are difficult to hold.  Dealing with them must be through lawsuits, in case there is court judgment, it is also very difficult to liquidate assets which are property rights.

In addition, there are some other issues that need to be solved in relation to transfer of collateral which is the land use right associated with the transfer of a part or the whole of the housing construction and investment project, land use right of housing construction and investment project; purchasers’ rights to receive pledge of land use right, land-attached assets are collateral for bad debts; regulations on registration of land use rights, ownership of land-attached assets...

Strengthening coordination between ministries and agencies in dealing with bad debts

In order to gradually remove obstacles in resolving bad debts, thus contribute to speeding up the settlement of bad debts   effectively, regulators should continue to strengthen inspection and supervision over the implementation of Resolution 42, the restructuring plan associated with  dealing with bad debts of CIs in the period 2016-2020; in addition, strictly penalize legal violations  of CIs in the implementation process. Besides, it is necessary to strengthen inspection and examination of credit institutions in complying with regulations on credit granting, operational safety and debt classification, risk provisioning; closely monitor and supervise the operation of credit institutions, timely deal with potential risks and weak institutions, in order to ensure operational safety and compliance with legal regulations.

Moreover, the SBV should continue to regularly monitor the progress and results of the VAMC’s bad debt settlement. The  VAMC needs continue to actively coordinate with credit institutions to review and complete the records of bad debts purchased in accordance with law; classify bad debts purchased by different criteria in order to assess the level of risks and bad debt recoverability; review and clearly identify obstacles and difficulties in the process of recovering bad debts, dealing with collateral...

The SBV should also continue to direct the VAMC: (i) to continue to implement the solutions specified in the Plan on restructuring and improving the VAMC’s capacity in the period of 2017-2020; to promote trading and dealing with bad debts in line with market mechanism, laws and the approved plan, and at the same time, apply measures to minimize risks in debt trading at market values; (ii) to strengthen coordination with credit institutions to review, classify, re-evaluate collateral assets and bad debts purchased to determine debt recoverability and offer appropriate solutions; To uniformly apply   measures to remove difficulties and obstacles in dealing with bad debts and collateral for bad debts purchased; seek for and facilitate domestic and foreign investors to purchase and deal with bad debts, collateral assets ...

As for credit institutions, they should: (i) drastically implement bad debt settlement according to Resolution 42; continue reviewing and assessing each bad debt specifically according to Resolution 42; identify large bad debts, and collateral  ; assess recoverability, causes, difficulties and obstacles in the bad debt settlement  in order to offer effective solutions; (ii) dffectively implement the approved plan on restructuring credit institutions associated with settlement of bad debts; speed up the provision of bad debts sold to the VAMC and paid by special bonds in order to finalize the bonds before maturity or on time as prescribed.

Especially, in order to deal with bad debts more effectively, it is necessary to strengthen coordination with ministries, agencies, People's Committees of provinces and cities in solving and dealing with difficulties and problems, especially those regarding mechanisms and policies in the process of restructuring and dealing with bad debts; support credit institutions to accelerate the process of dealing with bad debts. In addition, it is necessary to strengthen communication in order to raise public awareness and support of the role, significance, policy objectives and solutions of bad debt settlement, and build a consensus in the society.

Research and International Cooperation Department