What is the solution to reduce bad debt in banks to below 3%?

As of January 2025, the bad debt ratio of the entire banking industry is at 4.3%, so how to reduce this ratio to below 3% is a question of interest to many people.

It is necessary to build a legal framework.

Since its inception, Resolution 42/2017/QH14 has been an important legal step forward to help credit institutions handle bad debts more effectively, through regulations on the right to seize secured assets, legal procedures applied in handling and disputing secured assets in court, and regulations and instructions on handling accrued interest.

A major breakthrough of the resolution is to allow the sale of bad debts at market prices, reflecting the true value of the debt, thereby promoting faster debt trading, which is a premise for the development of debt trading floors in the future. In particular, this also helps state-owned commercial banks no longer worry about legal risks related to "losing state assets", which was a major barrier in the past.

As of January 2025, the bad debt ratio of the entire banking industry is at 4.3%. Illustrative photo.

After 6 years of implementation, Resolution 42 has shown clear effectiveness when giving creditors, specifically commercial banks and secured asset handling companies, additional rights related to handling secured assets to shorten the time for handling bad debts and secured assets, contributing to unblocking credit capital sources in the economy .

However, since January 1, 2024, this Resolution has officially expired, creating an urgent need for a new legal framework to maintain and expand the positive effects that have been achieved. In particular, the legalization of Resolution 42 is being discussed recently.

According to Lawyer Truong Thanh Duc - Director of ANVI Law Firm, Arbitrator of the Vietnam International Arbitration Center (VIAC), after Resolution 42/2017/QH14 on piloting bad debt settlement expired, the credit institution system was almost "tied up" when it lost the tool to seize secured assets that was once allowed under Resolution 42. In reality, there is a great need to legalize the right to seize secured assets.

The government targets at least 8% growth in 2025, with the banking sector expected to be an important lever to boost the economy. With Resolution 42 expiring and the sector’s bad debt ratio remaining high (4.3% as of January 2025), the need to develop an official legal framework to deal with bad debt is urgent.

According to VnDirect, legalizing the regulations in Resolution 42 will help credit institutions feel more secure in granting credit when the "bad debt blood clots" are cleared, while also contributing to reducing borrowing costs for people and businesses.

According to financial experts, the draft Law amending and supplementing a number of articles of the Law on Credit Institutions is being pushed forward to be submitted to the 15th National Assembly for consideration at this session. If passed, the law will be more stable and sustainable than the previous resolution, specifically: First, the scope of application is expanded. The new law applies to all bad debts regardless of the time of occurrence, instead of only limiting before August 15, 2017 as in Resolution 42.

Second, increase the power of credit institutions: Grant more power to seize and receive back secured assets (add regulations on receiving secured assets in administrative violations), helping to speed up the debt settlement process.

Third, priority of law application in disputes: If the provisions on seizure, attachment and return of secured assets are fully codified, the Law on Credit Institutions will have priority of application in civil and administrative disputes, except in cases related to ongoing criminal proceedings.

Legalizing bad debt settlement helps reduce bad debt and lower borrowing costs

Although the Law on Credit Institutions (2024) has legalized part of the content of Resolution 42 such as handling of collateral assets being real estate projects; allocation of accrued interest, difference when selling bad debts of credit institutions, debt trading and handling organizations, there are still 3 important contents that have not been legalized, including: The right to seize collateral assets (except for the provisions on transition in Clause 6, Article 210 of the Law on Credit Institutions); Regulations on the attachment of collateral assets of the party subject to enforcement; Regulations on the return of collateral assets as evidence in criminal cases.

Thus, when Resolution 42 expires, the regulations related to the above 3 articles will no longer be applied, causing limitations in the handling of bad debts and collateral of bad debts, thereby negatively affecting the restructuring process of weak credit institutions; slowing down the process of liquidating assets to pay off debts before these debts jump to higher debt groups, leading to increased provisioning costs and limiting the ability of people and businesses to access credit.

VnDirect believes that legalizing three provisions in Resolution 42 will help reduce the bad debt ratio of the banking industry to below 3%. As of January 2025, the bad debt ratio of the entire industry was at 4.3%, concentrated in a number of weak banks and those under special control.

It is expected that the industry-wide bad debt ratio will decrease significantly in the first year of implementation thanks to the strong handling of secured debts, based on experience from the 2017-2021 period when Resolution 42 takes effect.

In addition, legalization also helps reduce borrowing costs for businesses and people, in line with the Government's direction. Clear and transparent regulations will shorten debt collection time, reduce debt handling costs, provisioning costs and risks for banks. When the cost of bad debt risk decreases, banks can lower interest rates, helping customers access capital more easily.

The legalization of the right to seize collateral is expected to speed up the time and reduce the cost of bad debt settlement. In addition, the legalization will also support credit institutions receiving compulsory transfers in restructuring weak banks.

Duy Minh

Source: https://congthuong.vn/giai-phap-nao-de-no-xau-ngan-hang-giam-xuong-duoi-3-391209.html