Credit Relationships: Are Borrowers Always at the ‘Mercy’ of Lenders?

Addressing Inequality

Delving into the root causes of bad debt and defining the specific roles of each party involved to reduce it was the most discussed topic at the workshop “Bad Debt Treatment: What’s the Harmonious Solution?” hosted by Tien Phong Newspaper on the morning of May 27 in Ho Chi Minh City.

As of May, real estate credit outstanding in Vietnam exceeded VND 1,560 trillion, an increase of about VND 260 trillion compared to the end of 2024, equivalent to a 20% increase. If the credit growth of the whole system reaches the target of 16% this year, the total real estate credit outstanding could reach VND 3.8-3.9 quadrillion.

Speaking at the workshop, many experts argued that the entire responsibility for the rising bad debt ratio in recent years cannot be placed on borrowers. Responding to the National Assembly’s questioning about bad debts, the State Bank explained that the cause of bad debts was the impact of the COVID-19 pandemic, which severely affected all aspects of life, society, businesses, and people’s livelihoods, making it more difficult for businesses and people to reduce their income and, consequently, their debt repayment capacity.

However, lawyer Le Trung Phat, Director of Le Trung Phat Law Firm (Ho Chi Minh City Bar Association), opined that the COVID-19 pandemic, geopolitical fluctuations, and tariff risks are common economic challenges that no one could have foreseen. Still, we are witnessing an imbalanced picture where lenders always profit, while borrowing businesses are “struggling” because they cannot repay their debts and face asset liquidation. ”

At the workshop, a business representative argued that businesses are entirely disadvantaged in their dealings with banks. The first step in accessing loans is for businesses to provide secured asset documents, and banks then proceed with the valuation. This process is mostly carried out by the bank or a third party with significant intervention from the bank.

In the second step, after the loan proposal is approved and the contract is signed, the credit contract and mortgage contract are also drafted by the bank. And the mortgage contract always includes an authorization agreement, allowing the bank to handle the asset in the event of bad debt. Thus, from the moment the borrower agrees to sign the credit contract, they have to give up their protective rights to obtain the loan.

Next, during the disbursement process, the bank has the right to stop disbursement if the enterprise does not meet the conditions, many of which are not within the bank’s decision-making authority. For example, lending to real estate projects according to the legal progress of the project, the legal steps of the projects in the past years have been interrupted due to legal adjustments or the investigation and arrest of state officials.

These risks are objective, but the sudden disruption of cash flow will affect the entire production and business activities of the project and the enterprise, thereby generating bad debts. If this were an equal relationship, enterprises would have the right to sue banks for compensation, but so far, no enterprise has dared to sue banks on this issue.

Finally, in the worst-case scenario of bad debt and secured asset liquidation, the bank decides on the selling price and timing because, from the outset, when signing the contract, the borrower has authorized the bank. In reality, this process has created many disadvantages for the borrower, as the selling price does not reflect the market value.

“An enterprise’s collateralized asset is worth VND 10 on the market, but the bank’s valuation is a maximum of VND 6, and the loan value is only about 60% – so only VND 3.6 can be borrowed. Suppose a few years later, the enterprise cannot repay the debt, and the principal and interest accumulate to VND 10. In that case, the bank will auction and collect all the assets. Not to mention that over time, the value of real estate assets will increase, but in reality, rarely any assets auctioned by banks are sold at market prices,” said the business representative.

Seeking Harmonious Solutions

Speaking at the workshop, Mr. Le Hoang Chau, Chairman of the Ho Chi Minh City Real Estate Association (HoREA), acknowledged that the situation of bad debts in real estate is becoming increasingly complex, significantly impacting the stability of the financial market and businesses’ health. Without a comprehensive and breakthrough solution, numerous projects will continue to be “shelved,” causing a chain of problems for banks, investors, and workers.

“We support the joint efforts to reduce bad debts, but we are also concerned that, according to the draft amendment to the Law on Credit Institutions under discussion, the first condition for credit institutions to have the right to seize collateral is the agreement of the parties in the mortgage contract. In reality, when signing the mortgage contract, the bank requires the enterprise to sign an authorization agreement, giving the bank full authority to handle the asset if it cannot be repaid. This is unreasonable. Therefore, we propose that this agreement should be established when bad debt occurs, and both parties should negotiate to resolve it,” said Mr. Chau.

From a legal perspective, lawyer Le Trung Phat suggested that currently, all credit contracts and mortgage contracts are signed according to the bank’s template, dozens of pages long, with numerous complicated clauses that borrowers cannot fully understand or foresee the risks when signing.

“Therefore, I propose that the competent authority issue a model credit contract and mortgage contract applicable to the entire banking system, similar to the model real estate transfer contract recently issued together with Decree 96/2024/ND-CP guiding the implementation of the 2023 Law on Real Estate Business,” said Mr. Phat.

Discussing whether increasing the bank’s right to seize collateral is a long-term solution or just a temporary fix for bad debt treatment, economist Do Thien Anh Tuan from the Fulbright School of Public Policy and Management argued that this is also just a last resort when an unwanted situation occurs for both the borrower and the lender. Therefore, we need to find the root cause of bad debts to address them comprehensively.

The ideal measure is to minimize bad debts, which means accepting bad debts but limiting them to a certain risk ratio, and the role of the State is very important. The state needs to manage the macro-economy and create a stable business environment for enterprises through tools, policies, legal frameworks, and monetary policies.

“When the State accompanies and supports enterprises in overcoming difficulties, creating a favorable investment and business environment for healthy enterprise development, bad debts will also be reduced. These are also the most practical actions in line with the spirit of Resolution 68,” said Mr. Tuan.