Legal Loopholes in Bad Debt Processing

Bad debts and the speed of bad debt processing can be hindered when the right to collateral enforcement for borrowing customers is no longer inherited in Resolution 42/2017 amended by the Law on Amending Credit Institutions. This will force banks to carefully consider before lending, avoiding the risk of debt recovery in the future.


The bad debt ratio of many banks is increasing in 2023. Photo: THANH HOA

Rising pressure on bad debts

Along with information on the growth of revenue and profits in 2023 compared to 2022, the financial reports of some banks have shown a sharp increase in the value of bad debts. In particular, the value of Group 3 and Group 4 debts is decreasing, while Group 5 debts are increasing significantly.

Techcombank has recorded a nearly twofold increase in the value of bad debts in absolute terms, from VND 3,032 trillion at the end of 2022 to nearly VND 6,000 trillion at the end of 2023. This has raised the bank’s bad debt ratio from 0.74% to 1.19%.

The rapid increase in bad debts has forced the bank to increase provisions. Accordingly, credit risk provision expenses increased significantly from VND 691 billion in Q4-2022 to VND 1,634 billion in Q4-2023. Accumulated in 4 quarters of 2023, the bank has set aside VND 3,921 billion for provisions, more than twice that of the same period in 2022.

Similarly, TPBank recorded a total bad debt of over VND 4,200 trillion at the end of 2023, three times higher than the previous year. The bad debt ratio to the total debt of the bank increased from 0.84% to 2.05%.

The bank set aside VND 1,970 billion for credit risk provisions in Q4-2023, 17 times higher than the same period in 2022. Accumulated in 4 quarters of 2023, the bank has had to allocate VND 3,946 billion, more than 2.1 times higher than the same period last year.

MSB recorded a total bad debt of VND 4,280 trillion at the end of 2023, twice as much as at the end of 2022. BVBank recorded a total bad debt of VND 1,913 trillion at the end of 2023, a 35% increase compared to the same period last year. Among them, Group 5 debt is over VND 1,000 trillion.

In reality, strong credit growth in the last month of 2023 has been aided by resolute policies from the government and the SBV. This context has also helped many enterprises restructure their debts. These two factors have contributed to reducing the bad debt ratio in the scale of total credit.

However, Wichart’s experts also note that the reduction in the bad debt/total outstanding balance ratio of the majority of banks is due to an increase in the absolute value of outstanding debt, except for banks specializing in corporate lending.

Specifically, the group of banks specializing in corporate lending saw the largest decrease in bad debts, from 2.32% in Q3-2023 to 1.87% in Q4-2023. The borrowers from this group are mainly large enterprises, especially those operating in the real estate sector.

In light of the above trend, Mr. Nguyen Duc Vinh, CEO of VPBank, also admitted that banks prefer real estate loans over business loans.

According to Mr. Vinh, if real estate loans have complete legal documents, then even in a crisis, there is no fear of losing capital because there are collateral assets. With production-business loans, if the company goes bankrupt, the bank will be left with assets such as machinery and equipment that it doesn’t know what to do with. As for cash flow-based loans, if the company goes bankrupt, there is a high likelihood that the bank will lose its capital.

Meanwhile, the current legal framework is more inclined towards protecting the borrower rather than the lender.

Regarding the forecast of bad debts in the coming period, SSI Research experts believe that the bad debt ratio may increase in the first half of 2024 when credit growth slows down and there are no clear signs of improvement in macroeconomic factors. By the end of 2024, the bad debt ratio is expected to be at 1.68% as banks will strongly write off bad debts and the economy may recover more strongly.

The basis for SSI Research to make this forecast is the credit management regulations issued from late 2022 to now, mostly allowing banks to defer recognition and provisioning. Besides, additional time has been granted to real estate investors to resolve upcoming debt obligations.

However, the values of bad debts and watchlist debts at many banks at the end of 2023 are still 40% and 24% higher than at the beginning of the year, respectively. Accordingly, the bad debt and watchlist ratio of banks studied by SSI Research increased by 1.68% and 1.99% in the period from the beginning of the year to the end of Q4-2023.

With the assumption that restructured debts did not change significantly in Q4-2023, SSI Research estimates that the problematic loans are equivalent to 4.48% of total outstanding loans.

Regarding the situation, VNDirect Securities’ experts note that problematic debts need to continue to be closely monitored. In addition, if the Draft Circular amending and supplementing some articles of Circular No. 16/2021 of the SBV on the purchase and sale of corporate bonds is passed, loosening the restrictions on banks’ investment in corporate bonds. This can easily lead to a return of credit risks to banks that are actively buying back corporate bonds.

In another aspect, the deep-seated cause of bad debts is the legal status of many incomplete real estate projects. This issue cannot be resolved quickly because the three new laws passed by the National Assembly are the 2023 Housing Law, the Business Real Estate Law, and the Land Law 2024, which will only take effect from early 2025.

How to deal with bad debts?

Bad debts are tending to increase, but the lack of legal corridors, due to the fact that the right to retain secured assets of borrowers is no longer inherited from Resolution No. 42/2017 of the National Assembly, is forecasted to make bad debt resolution more difficult.

Mr. Nguyen Duc Vinh is concerned about the bad debt risk in 2024, especially in the context of the expiration of Resolution No. 42/2017. At the same time, most of the contents of this Resolution have not been institutionalized in the newly passed Credit Institution Law.

“This will be a difficulty for credit institutions in the coming time. Debt recovery is currently very difficult, especially consumer loans. Many debt collection officers have resigned, and the efficiency of debt recovery by banks and financial companies has declined sharply. Inconsistent policies will make it difficult for the consumer finance industry,” Mr. Vinh said.

Similarly, Lawyer Truong Thanh Duc, Director of ANVI Law Firm, also expressed regret that the right to retain secured assets, one of the most important provisions in Resolution No. 42/2017, was not accepted in the new laws.

According to Mr. Duc, the law allows the acceptance of a real estate or any project as a secured asset as legal and valid. However, if a situation arises where a project does not meet transfer conditions, it will be very difficult to resolve.

Similarly, although the law is not in effect, banks must take into account the possibility of difficult debt recovery in the future, especially when the economy faces more difficulties with many loans extended, deferred, and kept in the same group since the Covid-19 pandemic until now.

Meanwhile, Mr. Nguyen Quoc Hung, Vice Chairman of the Vietnam Banks Association (VNBA), assesses that potential bad debts are very high. Therefore, debt recovery in the future will be very difficult without more effective solutions when borrowers intentionally default on their debts. In the long term, credit institutions will have to reconsider and impose tight conditions that make it more difficult for individuals and businesses to access capital.

To solve the difficulties, Lawyer Duc believes that the management agencies need to change their approach to the problem. Bad debts are not only a matter of the banking sector but need to be resolved for the benefit of the whole economy. Because banks provide loans to serve the economy and ensure the growth target.

Adding to this perspective, Mr. Nguyen Quoc Hung believes that when the laws are amended, naturally the Civil Code must also be amended. Because it is unacceptable that borrowers have the ability to repay but deliberately do not repay and have assets but do not hand them over for the bank to handle.

Mr. Hung also said that when there is a law to protect consumer rights, there must also be a law to protect product suppliers, specifically banks. In that case, individuals and enterprises that violate repayment obligations deliberately must have strong measures to deal with them. In addition to requiring bad debt resolution, it is also necessary to develop a stable capital market, so that organizations and businesses have more channels to mobilize capital for production and business.

Van Phong

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