Commencing from the global financial crisis in 2008, “nonperforming loan” has become a common problem for the worldwide credit system in particular and the economy in general. There is no single definition of a nonperforming loan. Country definitions differ, and it is recognized that it is possible that what is appropriate in one country may not be so in another. However, from the point of view of the World Monetary Organization (IMF):
“A loan is nonperforming when payments of interest and/or principal are past due by 90 days or more, or interest payments equal to 90 days or more have been capitalized, refinanced, or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons—such as a debtor filing for bankruptcy—to doubt that payments will be made in full.”[1]
In Vietnam, according to the State Bank’s regulations, “debt” includes:[2]
- Loans, advances, overdrafts and financial leases;
- Discounts, rediscounts of commercial papers and other valuable papers;
- Factoring amounts: and
- Other forms of credit facilities.
These debts will be classified by credit institutions into 05 groups, including:[3]
Group 1: Qualified debts;
Group 2: Debts, which need special attention;
Group 3: Sub-standard debts;
Group 4: Doubtful debts; and
Group 5: Potentially irrecoverable debts.
Of which, Bad debts (Nonperforming Loan – NPL) are debts, which have been classified as those in Groups 3, 4 and 5 mentions above. The ratio of bad debts to the total outstanding debt is used to assess the credit quality of credit institutions.
In Vietnam, the NPL ratio tended to increase from the end of 2007 and became more severe since the end of 2011. According to reports of credit institutions, as of May 31, 2012, the system’s bad debt was 117,723 billion dongs, accounting for 4.47%. However, the State Bank has announced a bad debt ratio of 8.82% (2012), far exceeding the figures announced by commercial banks. Even as of May 2015, when fully reassessing bad debt sources, the State Bank gave a NPL ratio doubled to 17.21% as of September 30, 2012, equivalent to VND 465,000 billion of non-recoverable loans.[4] Meanwhile, according to international practice, the acceptable safe ratio of bad debt is below 3%.
In order to settle with the NPL increment, in mid-2013, the Government and the State Bank of Vietnam gave out many solutions, including:
- Directly supporting from the Government, providing additional capital to financial institutions to improve their financial capacity;
- Adjusting regulations related to NPL classification and management or allow credit institutions and borrowers to negotiate debt settlement plans in various forms such as asset liquidation, term structure debt repayment, interest rate exemption or reduction;
- Establishing of Asset Management Company of Vietnam Credit Institutions (VAMC) in accordance with the provisions of Decree No. 53/2013 / ND-CP to manage NPL, promote reasonable credit growth for the economy. VAMC is organized in the form of a one-member limited liability company (LLC) with 100% charter capital owned by the State Government of Vietnam;
- Allowing and giving specific instructions for debt purchase and sale activities of foreign credit institutions, bank branches by Circular 09/2015 / TT-NHNN;
- To organize piloting policies on handling bad debts and handling collateral of bad debts of credit institutions, foreign bank branches, and organizations in which the State Government establishes and owns 100% charter capital to deal with bad debts of credit institutions, following Resolution No. 42/2017 / QH14 approved by the 14th National Assembly, the 3rd session on June 21, 2017.
Except for measures (1), (2), which are applied explicitly to particular entities, the remaining regime on trading and management NPL are regularly adjusted and updated for suitable with the new situation, and also the options that investors can consider if they want to invest in bad debt in Vietnam. Namely:
1. If to Vietnamese credit institutions and banks
According to currently valid regulations, in addition to adjusting regulations related to classification and management of bad debts or negotiating debt settlement plans with borrowers, Vietnamese credit institutions and banks can only sell NLP balance to VAMC by (i) by special bonds issued by VAMC; or (ii) by market value. Therefore, if to the NPL of Vietnamese Credit Institution, banks, Investors will have to work directly with VAMC to buy back these debts.
However, to VAMC, the NPL must meet the following conditions:[5]
a) The credit institution’s bad debts, including the ones in activities of credit granting, purchase of corporate bonds, trusted purchase of corporate bonds and trusted credit granting and other activities as prescribed by the State Bank.
b) Bad debts with collateral;
c) Bad debts and collateral must be legal with valid documents and papers;
d) Loan customer still exists;
e) The balance of bad loans or outstanding loan customer is not lower than the level prescribed by the State Bank.
In which, to sell bad debts to VAMC at market prices, in addition to the above minimum conditions, bad debts must also meet:
b) Being able to fully recover money used to buy bad debts;
c) Secured assets of the bad debts can be put on sale;
d) Loan customer is able to restore debt repayment.
Only in 2017, VAMC bought 31,831 billion dongs of bad debt with special bonds, 3,141 billion dongs of debt at market price, and collected 30,700 billion dongs of bad debt to sell through VAMC.
In addition to restructuring and reselling bad debts, many credit institutions have called for domestic and foreign investment capital to strengthen their financial capacity to handle bad debts. However, in Vietnam, in order to protect the domestic economy, the number of important business lines is limited in the proportion of foreign investors’ capital ownership, and finance – banking is not an exception. Although since early 2014, Vietnam has allowed foreign investors to own capital in Vietnamese credit institutions in the form of buying shares of Vietnamese credit institutions. However, up to now, the capital ownership ratio of foreign investors is still capitalized on capital ownership as follows:[6]:
- The holding of a foreign individual shall not exceed 5% of the charter capital of a Vietnamese credit institution.
- The holding of a foreign organization shall not exceed 15% of the charter capital of a Vietnamese credit institution except for the strategic investor.
- The holding of a foreign strategic investor shall not exceed 20% of the charter capital of a Vietnamese credit institution.
- The holding of a foreign investor and the concerned persons of such foreign investor shall not exceed 20% of the charter capital of a Vietnamese credit institution.
- Total shareholding level of foreign investors shall not exceed 30% of the charter capital of a Vietnamese commercial bank. Total shareholding level of foreign investors at a Vietnamese non-banking credit institution shall comply with legislation applicable to public companies and listed companies.
2. If to Foreign credit institutions and banks
Under the provisions of Circular 09/2015 / TT-NHNH, credit institutions and foreign bank branches in Vietnam are entitled to sign written agreement on the transfer of the right to claim debts arising from loan operations, the payment on behalf of a guarantee operation, whereby the debt seller transfers ownership of the debt to the debt purchaser and receives payment from the debt purchaser. This debt sale and purchase agreement must be approved by the State Bank of Vietnam, and must meet the following conditions:
Regarding debts, debts purchased and sold must meet the following conditions:[7]
- The dossier, related documents and records of the debt to be purchased, and security contract (if any) provided by the debt seller must fully and accurately show the state of the debt in accordance with the law.
- There is no written agreement on a ban on debt purchase and sale.
- The debt is not used to secure the fulfilment of a civil obligation at the time of debt purchase and sale, except the case where the secured party accepts in writing the debt sale.
Regarding the debt purchaser, Debt purchasers include the following organizations and individuals: [8]
a/ Organizations and individuals being non-residents.
b/ Organizations and individuals being residents, including:
- Credit institutions and foreign bank branches having obtained the State Bank’s approval of debt purchase activity;
- Organizations providing debt purchase and sale service (other than credit institutions and foreign bank branches), which fully meet the law-prescribed conditions for the provision of debt purchase and sale service;
- Other organizations and individuals not providing debt purchase and sale service.
And other conditions for payment currency, debt trading method, debt valuation, etc. as prescribed in Circular 09/2015 / TT-NHNN.
In addition to buying and selling bad debts in the credit system, the securities law also allows the private placement or sale of shares to swap with the issuer’s debts to the creditors. However, in order to swap shares with these debts, the issuer will have to meet the conditions of internal approval, the issuer, etc. in accordance with the securities law.
The structure of buying debt from credit institutions still has many shortcomings in practice. The Vietnamese Government has also piloted the resale of bad debts by bad debt trading organizations and handling bad debts according to the provisions of Resolution 42/2017 / QH14. Still, there are currently no general regulations applicable. Therefore, investors who want to invest in bad debt should pay attention to the purpose of buying bad debt to choose a plan to buy debt and handle debt appropriately.
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If you have any questions or require any additional information, please contact Apolat Legal – An International Law Firm in Viet Nam.
This article is for general information only and is not a substitute for legal advice.
[1] Page 9 of the Treatment on Nonperforming loans https://www.imf.org/external/pubs/ft/bop/2005/05-29.pdf
[2] Paragraph 4 Article 2 of Decision No. 493/2005/QD-NHNN of the State Bank of Vietnam
[3] Article 6, Article 7 of Decision No. 493/2005 / QD-NHNN of the State Bank of Vietnam
[4]Banking magazine number 21/2018 https://tapchinganhang.gov.vn/tinh-hinh-xu-ly-no-xau-tai-viet-nam-qua-cac-giai-doan-cac-van-de-can-quan-tam-va-khuyen-nghi.htm
[5] Article 7,8 Decree 53/2013
[6] Article 7 Decree 01/2014
[7] Article 4 of Circular 09/2015 / TT-NHNN
[8] Paragraph 4 Article 3 of Circular 09/2015 / TT-NHNN
