Bad debt settlement yet to see 'light at end of tunnel': expert

Bad debt remains a major issue for the Vietnamese economy in 2023 as the number of bankruptcies increases, credit growth remains low, and obstacles regarding collateral settlement and market operations linger, according to banking expert Dr. Nguyen Tri Hieu.

The bad debt ratio increased significantly in the first quarter of 2023, as reported in the financial statements of most Vietnamese banks. This situation has persisted since the 2022 fiscal year. What is your assessment of the bad debt situation in the banking sector this year?

Bad debt is a major issue facing the Vietnamese economy in 2023, as people and businesses suffer negative impacts, both externally and internally. Bankruptcies doubled in the first quarter of 2023 compared to the previous year, which signals the situation will be difficult to resolve.

Simply speaking, the banking sector relies on the existence and development of people and businesses. When businesses face difficulties, credit slows down, and debt collection becomes more challenging. Bad debt settlements have yet to see a light at the end of the tunnel.

The government has submitted to the National Assembly the draft revised Law on Credit Institutions, which includes a separate chapter on handling bad debt. Is this an opportunity to resolve bad debt, in your opinion? Do you have any additional proposals for the legalization of Resolution 42 dated June 21, 2017 on settlement of bad debts after its five-year trial period?

Resolution 42 will expire soon, and we may need a stronger legal framework for bad debt settlement. Resolution 42 has proven effective but it lacks sufficient legality and needs to be legalized to become part of the regulations governing banking operations.

One of the biggest obstacles in dealing with bad debt is enforcement. Currently, legal measures are not stringent or effective enough for banks to settle their bad debts. A prominent issue is the transfer of collateral, so I propose a new chapter to deal with this. The regulations must be designed in a flexible manner so that even notaries can understand them.

Currently, it is very difficult to notarize the transfer of collateral, especially real estate. It should be understood that a mortgage contract alone is enough for notarization. In other words, borrowers use their assets as collateral for loans, so when they are unable to repay, they must accept the recovery of that collateral. The mortgage contract serves as a legal basis for banks to recover secured assets for debt settlement.

In the U.S and some developed countries, there is a form of insurance for property ownership. With this type of insurance, when someone wants to buy a property and use it as collateral for a bank loan, the first step is to work with an insurance company. The insurance company will investigate the property to assess its legal status and discuss with both the seller and the buyer. Once all issues are resolved, the insurance company is ready to insure the ownership rights on that property, and the buyer can ask a bank for a loan. The bank bases its decision on the documentation provided by the insurance company to grant the loan.

This mechanism ensures safety for the buyer, the seller, and the bank. Currently in Vietnam, there are no ownership insurance policies that cover this. Therefore, if developers fail to deliver properties on schedule, there is no intermediary insurance company to provide compensation. Hence, we should consider a type of property ownership insurance similar to those in other countries.

Resolution 42 has a chapter on the debt trading floor, but its operation remains limited as it has not yet developed into a national debt trading platform. We need to elevate the status of the debt trading floor for both bad and good debts. Those in need of money should sell their debts, while those with money can purchase debts as assets. The debt trading floor needs to have an open and simple legal framework to allow the participation of all economic sectors.

As we move towards a more modern economy, we can consider the packaging (securitization) of debts. In the U.S., debts ranging from hundreds of thousands to millions of dollars can be packaged into billion-dollar bundles through an intermediary company or broker for sale. During the transaction, the seller is responsible for transferring the collateral and issuing securities when the debt involves real estate. The packaged debts can then be sold to investors, including insurance funds, pension funds, and insurance companies, and the money is collected by the banks. This creates a faster circulation of cash flow when real estate loans are long-term.

Apart from objective factors, one notable reason for high interest rates is the increasing bad debt ratio. What do you think about this?

Banks operate on the principle of high risk, high returns. It means that when operating in a high-risk environment, interest rates must be increased. Interest rates serve as compensation for risks, and can be seen as a reward for accepting those risks.

In fact, bad debts, liquidity, and interest rates always form a vicious cycle. The liquidity shortage is partly caused by the increasing bad debt ratio, which means loans do not return to banks, forcing them to raise capital at high interest rates to compensate for the liquidity shortfall. High deposit rates push up lending rates, thus paralyzing the economy and forcing many businesses into shutdown or bankruptcy. It forms a spiral: business difficulties lead to bad debt and late debt repayments; bad debt and debt repayment postponement lead to interest rate hikes to mobilize new deposits to pay off old ones. Eventually, crises and recessions will materialize.

This also explains why credit growth was very low in the first quarter of 2023 despite improvements in liquidity. According to SBV Governor Nguyen Thi Hong, in the year to April 25, total credit in the economy increased by 2.75% compared to the end of 2022. Currently, businesses are facing huge difficulties in expanding their production, especially export-import activities. They have lost a lot of orders. Even though banks have excess capital, they will choose to hold on to the money rather than lending if loans potentially become bad debts.

How else can we resolve the current bad debt problem?

To solve the problem of bad debt in the current context, a comprehensive solution is needed to revive the economy, not only focusing on the three sectors closely related to the banking industry, namely securities, real estate, and bonds, but also on the stability of import-export activities and the development of other economic sectors.

Reducing interest rates can only be seen as a short-term solution. The key is to restore the economy comprehensively and fix the fractures. As the markets gradually recover and economic risks ease, interest rates fall.

Regulatory agencies are facing a three-way intersection: managing interest rates, promoting credit growth, and ensuring effective control of systemic risks.

In order improve the quality of the draft revised Law on Credit Institutions, particularly regarding the legal framework for handling bad debts, on May 17, The Investor will hold a seminar entitled “Settlement of bad debts in the revised Law on Credit Institutions”.

The event is expected to welcome officials from the State Bank of Vietnam, Ministry of Justice, Supreme People's Court, National Financial Supervisory Commission, National Assembly members, financial experts, legal experts, and representatives from the Vietnam Banks Association and commercial banks.