The foregoing circumstance highlights the importance of promptly filling the legal vacuum in dealing with bad debt, particularly the power to seize commercial banks' collateral.

Lack of legal basis

Despite the fact that credit institutions have aggressively adopted various methods to deal with bad debts in recent years, their NPL ratio remains high.

According to statistics from the State Bank of Vietnam, the Vietnam banking system's NPL ratio would have climbed to 4.56% by the end of June 2024. If we consider potential future bad loans, bad debts sold to Vietnam Asset Management Company (VAMC), and so on, the NPL ratio rises to 6.44%.

Even according to banking experts, the aforementioned data do not accurately reflect the actual picture of commercial banks' bad debts because many loans are presently being restructured for repayment conditions under Circular 02/2023/TT-NHNN, which may develop into bad debts in the future.

Bad debt is on the rise, but dealing with it is proving tough. Part of the reason is that the Vietnam real estate market is slow, prompting commercial banks to postpone auctions of secured assets to collect loans. Many collaterals have had to be heavily discounted, yet they remain unsellable.

Furthermore, the Law on Credit Institutions 2024 does not include the ability to take banks' secured assets.

"The expiry of Resolution 42/2017/QH14 has left a legal void, resulting in a lack of options for financial institutions to take secured assets. Localities and relevant agencies no longer have a legal basis to sustain the previous treatment of collaterals. Many business and individual clients refuse to cooperate with credit institutions when it comes to returning secured assets and dealing with bad debts.

Thus, if consumers do not provide collateral, commercial banks must address bad debts by pursuing legal action against them. However, legal action is highly complex, time-consuming, and expensive for both sides. Dr. Nguyen Quoc Hung, Vice Chairman and General Secretary of the Vietnam Banking Association, stated that as a result, commercial banks continue to handle bad debts on their own.

A need to finalize the legislative framework shortly

According to banking experts, the accumulating bad debts will form a "blood clot," preventing loans from banks in the economy. Banks will also tighten lending standards to avoid bad loans. Banks will need to enhance loan loss reserves, leading to demand for interest rate increases. This will exacerbate the difficulties that many firms are currently facing.

Ms. Nguyen Thi Thu Hang, Deputy Director of the National Registration Agency of Secured Transactions - Ministry of Justice, added that the handling of secured assets is critical in ensuring creditors' ability to recover capital, contributing to the reduction of the NPL ratio, and ensuring creditors' safety in funding, including credit institutions.

However, Ms. Hang believes that the legal system for dealing with secured assets, particularly secured assets of bad debts, remains flawed. As a result, it is critical to complete the legislative framework as quickly as possible to further safeguard the right to manage secured creditor assets, therefore promoting bank loans to fulfill Vietnam's economic and social growth and international integration requirements.

Mr. Pham Duc An, Chairman of Agribank's Board of Members, further advised that ministries, sectors, and relevant authorities swiftly examine and support credit institutions in dealing with bad debts and confiscating collateral for bad debts. Legal actions in courts at all levels, as well as the implementation of rulings, should be completed quickly and efficiently.

Another option for expediting bad debt resolution is to establish a debt market as soon as possible. As a result, the Ministry of Finance must complete debt market regulations that encourage entities to participate in the debt market; develop a set of criteria for pricing bad debts; regulate the establishment and operation of organizations tasked with appraising bad debts; develop preferential tax exemption/reduction policies for credit institutions' bad debt trading; and organize debt market management and supervision.

However, financial professionals believe that the most fundamental method to dealing with bad debts is to avoid bad debt in the first place. To accomplish so, banks must scrupulously adhere to lending restrictions and maintain tight credit quality controls.