Law on Credit Institutions (amended): “Lifebuoy” for banks to handle bad debt

Banks need to tighten risk management and improve credit quality to avoid bad debt recurrence. *Photo: Do Tam*

Unblocking credit flows

Previously, bad debts were handled under the provisions of Resolution No. 42/2017/QH14 dated June 21, 2017 of the National Assembly on piloting the handling of bad debts of credit institutions. During its effective period, Resolution No. 42/2017/QH14 helped increase the scale of bad debts handled monthly by 65% and the rate of customers paying their own debts out of the total handled on-balance sheet bad debts increased to 36% from 23% in the period 2012-2017, before this resolution took effect.

However, when this resolution expires in December 2023, the recovery of collateral from banks' bad debts depends on customers' cooperation or through lengthy litigation procedures, causing debt recovery rates to drop sharply.

According to experts as well as representatives of commercial banks, the National Assembly's passing of the Law amending and supplementing the Law on Credit Institutions at its ninth session, with the content of legalizing Resolution No. 42/2017/QH14, is an important step to resolve the "bottleneck" of bad debt, unblock credit flows and support economic growth of 8% in 2025.

Accordingly, the Law on Credit Institutions (amended) allows individuals and legal entities (including those not specialized in debt) to buy bad debt; bad debt and secured assets can be transparently transferred to a third party...

Credit institutions or debt trading units are allowed to seize secured assets under legal conditions, including having to publicly disclose information at least 15 days before seizure if it is real estate.

Court procedures are also shortened, such as: Faster support when disputing the transfer of secured assets, if the contract or secured transaction has been registered and is not related to people or assets abroad; debt buyers are entitled to inherit the right to receive mortgages and register mortgages, including assets formed in the future...

State Bank Governor Nguyen Thi Hong said that legalizing Resolution No. 42/2017/QH14 will create a stable and long-term legal basis, helping to handle bad debts more effectively, while protecting the interests of credit institutions, depositors and borrowers. Loans from credit institutions are deposits from the people, so protecting credit institutions also means protecting depositors.

"When bad debts are handled, credit institutions will have more resources to circulate capital, meeting customers' borrowing needs. At the same time, reducing bad debts also helps credit institutions reduce the pressure of risk provisioning, thereby creating conditions to reduce lending interest rates, bringing benefits to both businesses and borrowers," said Governor Nguyen Thi Hong.

Restoration of bank's right to seize collateral

In fact, many international organizations have also recommended that Vietnam should have regulations to protect lenders to enhance the safety of the financial system. To ensure the rights of borrowers and avoid abuse, the Law on Credit Institutions (amended) has clearly stipulated the conditions, processes, procedures and public procedures for the seizure of secured assets. Credit institutions must develop transparent internal processes and comply with legal regulations when handling secured assets.

The important content of the Law on Credit Institutions (amended) is highly appreciated as restoring the right to seize collateral assets of banks, thereby helping to improve the asset quality of the banking system in the coming time.

According to a representative of the credit rating agency VIS Rating, the Law on Credit Institutions (amended) will restore the right to seize collateral assets of banks that are not disputed or seized in certain criminal cases. This is an important mechanism that was previously allowed to be applied in Resolution No. 42/2017/QH14.

With the amendment of the Law on Credit Institutions, the right to seize collateral of banks has been restored, thereby helping to recover bad debts faster and improve the asset quality and profitability of banks, especially retail banks and less lending to speculative segment projects.

It is forecasted that the legalization of Resolution No. 42/2017/QH14 will help reduce the bad debt ratio of the entire system to below 3% in the first year of application, helping to reduce the pressure on provisioning, improve profits and create room for banks to lower lending interest rates, thereby supporting businesses and people to access capital at reasonable costs.

Experts from Saigon Securities Inc. (SSI) also said that the new legal framework will shorten debt settlement time and improve capital recovery efficiency, especially for debts related to real estate - a type of asset that accounts for 80-90% of mortgage value in the banking system.

However, in the context of strong credit growth as it is now, experts also note that banks need to tighten risk management and improve credit quality to avoid bad debt recurrence, and new outstanding loans must ensure quality. At the same time, management agencies still need to develop the debt trading market to fundamentally handle the problem of bad debt.

Source: https://hanoimoi.vn/luat-cac-to-chuc-tin-dung-sua-doi-phao-cuu-sinh-de-ngan-hang-xu-ly-no-xau-707751.html