Mr. Truong Thanh Duc, Chairman of the Legal Affairs Forum at the Vietnam Banks Association, tells VET about the reality of handling bad debts from a legal standpoint.
What are the current prospects for the handling of bad debts?
Bad debts can be viewed as like goods in inventory. For them to be sold, or handled, there must be a market. But such a market doesn’t exist in Vietnam. The manufacturing and real estate sectors are yet to recover, so a debt market is still to appear.
While many domestic investors are financially exhausted, foreign investors don’t see much potential in a bad debt market because of complicated legal barriers.
All in all, the book value of bad debts appears to be better but the actually situation is essentially a different story.
Can you give specific examples of how the legal framework is an obstacle to handling bad debts?
The greatest legal obstacles for banks in collecting bad debts can be divided into four groups: conflicting laws, inadequate laws, the application of the wrong laws, and defiance of laws.
For example, 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.
Therefore, the amendments to Decree No. 163/2006/ND-CP, which give creditors more rights to access collateralized assets, have little practical application.
One bank recently seized the collateral of a debtor but there was a great deal of negative public reaction to the move. How would you comment on this?
Under the provisions of Decree No. 163, 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.
So a financial institution has the right to make such a move.
If a financial institution took the option of seizing property, what would be the responsibility of the local government in such a case?
Local authorities will receive notification of any asset seizure relating to property. Police can become involved to ensure that financial institutions can safely exercise their rights.
More specifically, if a debtor refuses to hand over collateral such as a house, is it possible for banks to change the locks and deny them access?
It depends on the contract between the two parties and the contents of the regulations for Decree No. 163. When a debtor has not paid their debts, financial institutions have the right to block access to a house that was put up as collateral.
But few banks choose this route, as any negative reaction among the public may affect their reputation, and Decree No.163 provides them with little support. Financial institutions can’t handle this by themselves; it needs the involvement of the political system because handling bad debts is not only in the interest of banks but also in the interest of the economy.
In cases where financial institutions exercise their right to seize property without the presence of the debtor, are they and local authorities potentially guilty of violating private property rights?
It is a matter of the law and what it permits. This issue is not specifically covered by any law. It is only mentioned in legal documents pertaining to laws, which makes it difficult for financial instructions to exercise their rights.
In the US, when loans are not repaid a bank can immediately seal a house that was put up as collateral. In Vietnam, financial institutions must invite the police, central authorities, and local authorities, and even film the process, but few choose to proceed with seizures.