Industry insiders agree that the legal framework needs attention before bad debts can be handled properly.
Bad debts have plagued the banking sector for a number of years already and affect the safety of the system and the economy as a whole. Bad debts have been handled at least in part due to positive measures from the government but they still represent an unpredictable risk, according to Mr. Cao Sy Kiem, Chairman of DongA Bank.
He pointed to the legal framework as being one of the major causes of the slow progress in bad debt handling, as it contains insufficient links between judicial and executive agencies, creating bottlenecks in capital flows and bad debt handling.
Many put the blame for Vietnam’s bad debt situation squarely at the feet of banks but this is an unfair assessment, according to Mr. Can Van Luc, senior advisor to the Chairman of BIDV.
“Moral hazard is an extremely serious problem in handling bad debts for both bank and customers,” he said. “Many customers tried to take advantage of banks and the banks were also poor in their evaluation and approval processes. Many debtors owe money but refuse to repay their debts. They still roam around, changing cars and taking holidays, but don’t make any repayments. They cannot be held to account, as dealing with this type of debtor requires coordination with police agencies. In a case involving the BIDV branch in Phu Yen province, a local judge issued an order but the debtor could not be found.”
Legal conditions “tie” creditors’ hands
“Even if we had sufficient funds we would still be unable to handle all bad debts,” said Mr. Nguyen Quoc Hung, Chairman of the Vietnam Asset Management Company (VAMC). He also identified the legal framework as being the culprit. “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 debtors sell their assets, but when they refuse there is nothing more the creditor can do.”
The law has not kept pace with problems arising in handling bad debts, according to Ms. Tran Thi Hong Hanh, Secretary-General of Vietnam Banks Association.
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.
Lawyer Truong Thanh Duc, Chairman of the law firm Basico, agreed that a major stumbling block in handling bad debts is the legal framework, with conflicting laws allowing debtors to postpone repayments.
Mr. Nguyen Huu Nghia, Head of the Banking Supervision Agency at the State Bank of Vietnam, said there are many regulations in the civil law, the civil procedure law, civil law enforcement, the land law, and the construction law that hinder the handling of bad debts by financial institutions and the VAMC and these must be addressed.