The conflicting legal framework is a major factor in bad debts being handled so slowly.
Handling collateralized assets and determining the legal rights of financial institutions and the Vietnam Asset Management Company (VAMC) when seizing debtors’ collateral has been a hot topic of discussion in how to resolve outstanding bad debts in the banking system. According to Mr. Nguyen Quoc Hung, Chairman of VAMC, progress in handling bad debts remains slow and the collection of collateralized assets is still at a modest level.
One of the major reasons for the tardy nature of debt handling is the muddied legal framework. He said current regulations do not allow for juridical personalities to sue other juridical personalities, and the Court does not give VAMC the right to sue and this is one of the major reasons for the slow progress.
Room to escape
It’s not only VAMC having problems with handling bad debts, as commercial banks are also struggling to collect debts through collateralized assets. “I agree there are many legal obstacles with handling collateralized assets, but the law does actually state that banks can seize such assets,” the head of the debt collection department at one large bank said.
Under current regulations, the process for collecting bad debts involves financial institutions cooperating with local authorities and police in placing a notice of seizure on the property.
Where seizures are challenged, the police are responsible for calming down the situation. In reality, however, when debt collectors of financial institutions come to seize a property they are often attacked by the borrower. Many have been beaten or had their vehicles damaged. In regards to commercial property, the stock inside is also considered collateral, but after seizure notices are placed outside many debtors then go inside and remove all of the stock.
Mr. Truong Thanh Duc, Chairman of the Legal Affairs Forum at the Vietnam Banks Association (VBA), said that the provisions of Decree No. 163/2006/ND-CP dated December 29, 2006 clearly indicate that if a customer does not repay their debts then banks will inform them of the commitments made by the two parties, which includes the seizure of property or the sale of collateral when debts are unpaid. Financial institutions have the right to access collateral when there is an existing loan agreement between the two parties that becomes a bad debt. In reality, however, the financial institution cannot access a debtor’s collateral because such a process involves conflicting regulations on asset ownership in the Constitution, the Civil Law, the Law on Housing, the Land Law, the Law on Notaries, and others.
The law has failed to keep pace with problems arising from handling bad debts, according to Ms. Tran Thi Hong Hanh, Secretary-General of the VBA.
There is conflict between different laws, she explained. For example, the civil law allows land to be used as collateral but the land law does not permit it, which can lead to a credit agreement between a bank and a debtor being annulled in Court. Ms. Hanh also indicated that procedures on the role of police and people’s committees in terms of supporting financial intuitions seizing collateralized property are impractical. “The police only have the responsibility of maintaining security but there is no solution when debtors do not cooperate in handing over collateralized assets,” she said.
Another problem Ms. Hanh touched on is that relevant legal agencies do little or nothing to assist the financial institution. For example, notary agencies will not consider the right of financial intuitions to trade in such assets, so handling collateralized assets is fully reliant upon the cooperation of the debtor, and if they are unwilling to sign contracts and other legal documents then financial institutions have their hands tied.
Courts not the answer
According to economic expert Mr. Vu Dinh Anh, the general director of a commercial bank told him that banks are keen to address their bad debts but 60-70 per cent of collateralized assets are real estate. Even when the customer is willing to cooperate, however, a deal cannot be made because of a lack of guidance from the Ministry of Justice (MoJ). “Banks do not have the right to own property, as their functions do not include trading in real estate,” the general director told him. “We have sent many official documents to MoJ on receiving property, but because the MoJ does not agree the notary agency will not allow us to transfer real estate ownership.”
The legal framework is the major culprit in the trouble being experienced, Mr. Hung said. “There is a debtor in Ho Chi Minh City,” he said by way of example, “who borrowed trillions of VND to buy land. But when the bank came to collect the debt he refused to pay, even though he earns billions of VND each year from leasing the land. Banks require that debtors sell their assets, but when they refuse there is nothing more they can do. If all matters went to Court it would take VAMC about 50 years to collect all debts.”
Mr. Duc said that there are many ways borrowers can benefit from taking out loans and refusing to repay. “Some people took out loans when the interest rate was around 15-20 per cent or even 30 per cent per annum,” he explained. “When repayments weren’t forthcoming, financial institutions worked with debtors to find a solution, in many cases cutting the interest down to current levels. The maximum interest rate a Court can impose is 9 per cent per annum. Many customers are not afraid of not paying their debts, because they know they will come out ahead in the end.”
Banking expert Mr. Le Xuan Nghia said that banks have become “prisoners” of debtors, while Mr. Can Van Luc, Senior Advisor to the Chairman of BIDV, believes “victims” is the better term. The various laws involved create confusion and are to the detriment of banks.
Many economic experts have previously believed that the two biggest problems in handling bad debts in Vietnam are a lack of money and the absence of a debt trading market. But there is much more to the problem. “Even if we had sufficient funds we would still be unable to handle all the bad debts”, Mr. Hung said. What VAMC needs is the “right” to collect debts in the manner that was intended.