EFFECTIVE SOLUTIONS FOR HANDLING BAD DEBTS IN VIETNAM

Bad debt is a significant issue in the financial sector, impacting the overall economy. In Vietnam, the bad debt situation is on the rise. Recognizing its importance, the government has introduced various mechanisms and policies to accelerate the bad debt resolution process, creating a favorable legal framework for debt recovery and the handling of collateral assets.

What is Bad Debt?

Bad debt refers to loans where borrowers are unable to repay the principal and/or interest as agreed in the credit contract. According to regulations, bad debt is classified into three categories (from Group 3 to Group 5) based on the level of risk and the overdue period:

• Group 3 (Substandard Debt): Overdue from 91 to 180 days.

• Group 4 (Doubtful Debt): Overdue from 181 to 360 days.

• Group 5 (Loss Debt): Overdue for more than 360 days.

This classification helps banks assess risk levels and implement appropriate handling measures.

Legal Framework for Bad Debt Resolution

Bad debt handling in Vietnam is governed by several legal documents, including the Law on Credit Institutions, Resolution 42/2017/QH14, government decrees, and guidelines from the State Bank of Vietnam (SBV). Key regulations include:

• Law on Credit Institutions: Governs bad debt handling, collateral seizure, debt trading, and debt restructuring.

• Resolution 42/2017/QH14: Allows collateral seizure, promotes debt trading, provides tax incentives, and simplifies asset handling procedures.

• Decree 53/2013/ND-CP: Regulates the operations of VAMC in purchasing, restructuring, and recovering bad debts.

• Civil Code and Law on Civil Judgment Execution: Provides guidelines on handling collateral and enforcing debt recovery judgments.

• SBV Circulars: Set forth regulations on provisioning, debt classification, and restructuring repayment terms.

• Decree 94/2020/ND-CP: Governs bad debt handling during enterprise bankruptcy, allowing credit institutions to engage in restructuring or asset liquidation.

Improving the legal framework for bad debt resolution is essential to protect the rights of credit institutions and ensure the sustainable development of Vietnams financial system.

The Role of VAMC in Bad Debt Resolution

The Vietnam Asset Management Company (VAMC) was established to assist banks in resolving bad debts. VAMC acquires bad debts from credit institutions, then restructures, sells, or handles collateral to recover debts.

VAMCs Operation Process:

1. Debt Purchase: VAMC acquires bad debts from credit institutions, reducing bad debt ratios on bank balance sheets.

2. Debt Management and Resolution: After acquisition, VAMC manages, restructures, or sells these debts to recover capital.

Through this mechanism, VAMC plays a crucial role in cleaning up bank balance sheets and supporting financial system stability.

Bank Bad Debt Resolution Process

Commercial banks typically follow a structured process to resolve bad debts, including the following steps:

1. Debt Classification: Based on risk levels and overdue periods, debts are categorized from Group 1 to Group 5, with Group 5 being the highest risk of capital loss.

2. Information Collection: Banks gather and assess information about the borrower, financial situation, and causes of bad debt.

3. Resolution Planning: Based on collected information, banks propose measures such as debt restructuring, extending repayment periods, seizing and selling collateral, or initiating legal action to recover debts.

4. Implementation and Monitoring: Execute planned measures and monitor progress to ensure effective debt recovery.

Adhering to this process helps banks mitigate risks and optimize debt recovery capabilities.

Effective Solutions for Bad Debt Resolution

• Debt Recovery: Credit institutions may directly recover debts from borrowers, including initiating legal proceedings.

• Debt Sale: Credit institutions can sell bad debts to professional debt trading organizations.

• Collateral Disposal: Credit institutions can seize and dispose of collateral to recover debts.

• Debt Restructuring: Credit institutions may restructure debts by adjusting repayment terms or interest rates.

• Risk Provisioning: Credit institutions use risk provisions to offset non-recoverable bad debts.

Principles for Bad Debt Resolution

• Transparency: The bad debt resolution process must be conducted openly and transparently.

• Legal Rights Protection: Ensure the legal rights of all parties involved, including credit institutions and borrowers.

• Market Compliance: Bad debt handling must align with market mechanisms.

• Prudence and Safety: Ensure the safety of the financial system without causing adverse impacts on credit institutions operations.

VALUATION OF DEBT FOR BAD DEBT HANDLING

Debt valuation involves determining the actual value of bad debts and related collateral to establish a reasonable starting price for auctions, asset liquidation, or transfers. According to Decree 61/2017/ND-CP dated May 16, 2017, the valuation process must comply with detailed regulations on methods and procedures.

Accurate debt valuation helps credit institutions and VAMC make informed decisions in bad debt resolution, safeguarding stakeholders rights and optimizing debt recovery. It also aids in determining collateral value for dispute resolution or facilitating mergers and acquisitions.

With over 23 years of experience, Indochina International Valuation and Investment JSC (SunValue) offers a comprehensive range of asset valuation services, including real estate, machinery, enterprises, intangible assets, stocks, and bonds. Our services cater to debt resolution, loan assessment, mergers, and acquisitions.

We are committed to delivering high-quality, accurate, and objective valuation services in compliance with the International Valuation Standards (IVSC). Our team consists of experienced and certified valuation experts, ensuring professional and reliable assessments.

Indochina International Appraisal and Investment JSC (SunValue)
Address: Indochina International Appraisal System
Hotline/Zalo: 081 519 8877
Website: inavn.vn
Email: contact@sunvalue.vn
Facebook: Indochina International Appraisal and Investment 

Conclusion

Debt valuation plays a critical role in the bad debt resolution process in Vietnam by accurately determining the actual value of collateral, ensuring transparency and fairness in asset transactions. Given the increasingly complex bad debt market, improving valuation quality and enhancing the legal framework are key factors in facilitating swift and sustainable bad debt resolution.