Finalising legal framework on bad debt settlement

tung lAM

Experts say a law on bad debt settlement should be put in place, which helps unlock the capital source for economic recovery and development.

As of end-2021, the banking system had settled over VND1.3 quadrillion (USD57 billion) worth of bad debt, of which nearly VND370 trillion (USD16.3 billion) had been settled under the National Assembly’s Resolution 42 on piloting the settlement of bad debt of credit institutions (Resolution 42).

Resolution 42 had helped banks settle bad debts at a faster pace. with the resolution, bad debts in the banking system were handled at an average rate of VND7.15 trillion (USD315 million) per month, much higher than the rate of VND3.63 trillion (USD160 million) per month previously. At the end of 2016, bad debt ratio was recorded on the balance sheet at 2.5 percent and gross bad debt was at 10.1 percent in the banking sector. In September 2017, both bad debt on the balance sheet and gross bad debt improved significantly, down to 2.34 percent and 8.61 percent, respectively. In 2019, these ratios continued to decrease to 1.6 percent and 4.4 percent, respectively.

Mr. Nguyen Quoc Hung, General Secretary of Vietnam Banks Association, said: “The bad debt settlement results have affirmed the significance of Resolution 42 in the process of restructuring the credit institutions system in association with handling bad debt of credit However, the Covid-19 pandemic, which has developed complicatedly, has deeply affected the entire economy, causing negative impacts on the business activities and solvency of enterprises. In fact, to cope with the negative developments of bad debt, credit institutions have actively classified debts and made provisions for risks. However it is undeniable

institutions, contributing to the effective handling of bad debt for credit institutions, meeting capital needs for production and business activities of the economy”.

Restructuring the credit institution system in association with handling bad debt is a key task of the banking sector in the 2016-2020 period.

that bad debt still poses potential risks which are burdens for the credit institutions system.

Mr. Can Van Luc, chief economist at BIDV, is concerned that Resolution 42, which regulates the settlement of bad debt in the banking sector will soon expire (in August 2022). He believes a law on bad debt settlement should be introduced to create a legal foundation for handling bad debt, or unregulated bad debts will pile up, destabilizing the economy. “Bad debts are expected to soar in the second half of 2022 and continue to rise faster in the following years unless a legal mechanism for bad debt settlement is put in place,” said Mr. Luc.

The economist proposed a two-step plan to facilitate the rollout of such a law. First, it is necessary to extend the resolution, for about three more years, to have enough time to prepare for a draft as well as address shortcomings. Second, lawmakers formulate the law in line with international practices and, simultaneously, make it suitable for the banking system.

Despite Resolution 42 has stepped up the settlement of bad debt over the last five years, there remained some shortcomings. One of the major problems when dealing with bad debts currently is the handling of collateral. The right to seize security assets of a credit institution is one of the key contents in Resolution 42, but it does not specify regulations if the borrowers do not cooperate.

BIDV’s total outstanding credit and investment in 2021 reached VND1.65 quadrillion (USD72.7 billion); of which loan balances hit VND1.33 quadrillion (USD58.6 million), up 11.8 percent compared to 2020, accounting for more than 13 percent of the credit balance of the whole economy. The NPL ratio according to Circular 11/2021/TT-NHNN was controlled at 0.81 percent, decreasing by 0.73 percent compared to 2020. Group 5 debt ratio was 0.42 percent, down 0.82 percent compared to 2020. BIDV has made full provisions for risks according to regulations. The bad debt coverage ratio reached 235 percent - its highest level ever in recent years.