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Thursday, December 8, 2022

Extending bad debt settlement scheme can minimize potential risks

By Van Phong

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HANOI – The extension and improvement of several regulations on bad debt settlement in Resolution 42/2017 will help credit institutions handle potential bad debts after two years of the pandemic.

Talking to the press about extending the resolution by the National Assembly on piloting bad debt settlements at credit institutions, Nguyen Quoc Hung, General Secretary of the Vietnam Banks Association, said the extension is necessary as it can help people improve their sense of responsibility in debt repayment.

The Saigon Times: How do you evaluate the results after nearly five years of implementing Resolution 42/2017?

– Nguyen Quoc Hung: Since its promulgation, Resolution 42/2017 has had a positive impact on the bad debt settlement of credit institutions. Accordingly, competent authorities, ranging from the Ministry of Justice, and the Ministry of Public Security to local governments, have created favorable conditions for the banking system to collect debts, sell assets and improve property handling procedures.

The responsibility of debt repayment has also been considerably better as more people have actively cooperated with banks to handle debts.

As a result, credit institutions have settled some VND750,000 billion of bad debts from 2017 to 2021, including VND390,000 billion handled under Resolution 42. More than VND600,000 billion out of the amount was directly handled by credit institutions, while more than VND100,000 billion was handled by the Vietnam Asset Management Company (VAMC) and the remaining VND20,000 billion by other debt trading institutions.

This has helped the entire banking system’s debt ratio decline to 1.49-2% as of December 31, 2021. If not for the Covid-19 pandemic, the banking system would have met the requirements set out in Resolution 42/2017.

Besides the positive results, what are the shortcomings of this policy?

– Firstly, since Resolution 42/2017 was promulgated five years ago, a court has been allowed to conduct an abbreviated trial. But so far, no case has been heard.

Second, asset seizure and transfer have met difficulties, especially for collaterals not from projects.

Third, Resolution 42/2017 allows proceeds from the sale of priority assets for instalments. But in many cases, people must pay taxes before making loan payments. Some credit institutions have sold collateral, but they have not fully collected debts. Moreover, the collaterals have not been transferred due to not paying enough taxes.

Fourth, some local governments have not been active in protecting lenders due to a lack of updated information.

To reduce the pressure of bad debts on the banking system after two years of the pandemic, the Government is asking to the National Assembly to extend Resolution 42/2017, paving the way for drafting a law on bad debt settlement. What is your view?

– I think it is necessary to ask: “Why does the National Assembly have to issue Resolution 42/2017 to handle bad debts?”

In fact, while implementing bad debt settlement according to the Civil Law, the Law on Credit Institutions and related regulations, the contents are not appropriate, not ensuring the legitimate rights and interests of both lenders and borrowers. Some regulations tend to be more protective of borrowers.

These have led to credit institutions facing many difficulties in debt settlement.

The introduction of Resolution 42/2017 has solved many matters for banks in bad debt settlement while helping people and businesses become more responsible for debt repayment.

However, the Covid-19 pandemic caused significant difficulties for the Vietnamese economy, especially the banking system.

In order to partly help people and businesses surmount difficulties, the State Bank of Vietnam issued circulars, namely 01/2020, 03/2021 and 14/2021, on rescheduling debt repayment, reducing fees and interests as well as grouping debts to support customers badly affected by the pandemic.

This policy has paved the way for people to overcome difficulties. But, it has also caused another issue. There are subprime loans considered so that customers can continue to borrow money if they can map out effective business plans. This will increase the potential risks of loans turning sour in the near future.

According to statistics, millions of billions of debts have been accounted for due to the pandemic. But, restructured debts have only been some VND300,000 billion.

Such figures do not fully reflect the reality because businesses and people have encountered many difficulties in the past two years, maybe increasing bad debts.

If Resolution 42/2017 is not extended, I think that banks will face more difficulties in debt settlement due to customers’ inaction and a lack of responsibility for payables.

In that context, SBV had proposed the Government ask the National Assembly to continue reviewing, amending, supplementing and prolonging this policy.

The fact also shows that Resolution 42/2017 has created a relatively complete legal framework, helping the banking system achieve positive results in dealing with bad debts. In addition, this allows customers to become aware of their responsibilities in debt repayment.

Therefore, it is necessary to prolong Resolution 42 or promulgate a specialized law on bad debt settlement.

During the prolonged Resolution 42/2017, SBV should coordinate with ministries and other competent authorities to review the Law on Credit Institutions and related regulations based on lessons learned from Resolution 42/2017. Then, we can amend and supplement several regulations to synchronize the Law on Credit Institutions and related regulations, including the Civil Code, the Law on Real Estate Business, the Tax Law, the Land Law, and the Law on Land.

Before increasing bad debt pressure, what solutions can banks opt for to prevent potential risks?

– SBV continuously conducts inspections ofcredit institutions that have committed violations on lending or have not reported bad debts for many years.

With credit institutions, they have carried out the restructuring and handling of bad debts in parallel. Unresolved debts also require risk provisions.

Currently, bad debts and potential ones at credit institutions are fully provisioned. Some credit institutions with a healthy financial situation have made provisions with a bad debt coverage ratio that is much higher than the actual bad debt ratio.

In addition, many credit institutions have raised the issue of increasing charter capital in 2022, thereby improving financial capacity, and expanding risk provisioning to ensure operational safety.

These moves show that credit institutions have increased innovation and protection activities.

However, the efforts of the banking system alone are not enough. A legal corridor is needed. With this legal action, borrowers are responsible for repaying the debts. Ministries and competent authorities are responsible for supporting banks in handling bad debts.

Some said that the National Assembly and the Government have granted “many privileges to the banking system” when issuing Resolution 42/2017. What are your thoughts?

– I do not think it is a privilege because before Resolution 42/2017 was introduced, many banks could not collect debts due to customers’ debt repayment delays. Specifically, banks could not sell and seize their assets though some customers left their assets to be handled by the banks.

This is one of the factors that caused bad debts to rise, affecting the safety of the banking system.

However, Resolution 42/2017 has had a very positive effect on supporting banks in debt recovery and settlement of collaterals for debts. Therefore, the resolution needs to be extended.

As for the Vietnam Banks Association, we will review all relevant legal documents before making a written recommendation to the Government for consideration in the process of amending the Law on Credit Institutions and related regulations such as the Civil Code and the Law on Real Estate Business to ensure the rights and responsibilities of banks and borrowers as well as the coordination of ministries, competent authorities and local governments in debt settlement.

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