Recent years have seen players in the Vietnamese banking sector making extensive efforts to recover non-performing loans (or bad debts). The Government has issued new regulations to improve the processes for recovering and handling bad debt in Vietnam and has implemented a framework to facilitate the trading of bad debt in a secondary market. Partner Linh Bui and Associate Dang Vu report on the key issues.
Resolution 42/2017/QH14, which took effect on 15 August 2017 (Resolution 42), aims to facilitate the sale of debt by providing incentives to stimulate bad debt trading in a secondary market and to provide improved measures for enforcement of collateral security.
Prior to Resolution 42, bad debt accumulated by Vietnamese credit institutions was traded and settled by the Vietnam Assets Management Company under the management of the State Bank of Vietnam (VAMC) and more than 20 other asset management companies associated with Vietnamese credit institutions. Transactions relating to the bad debts of state owned enterprises were overseen by the Vietnam Debt and Assets Trading Corporation under the management of the Ministry of Finance.
Resolution 42 will be effective for five years as a pilot program. It took effect on 15 August 2017 and applies to debts classified as bad debt before 15 August 2017 or debts that were created before 15 August 2017 and become 'bad debt' within the effective period of the Resolution (that is, within the next five years).
Resolution 42 also sets out criteria that are required to be met for a debt to be classified as a bad debt, and which include a range of quantitative and qualitative thresholds. The underlying debt itself must be debt accounted for on or off the balance sheet of Vietnamese credit institutions (including foreign bank branches) or the VAMC and must have arisen from certain specified credit activities (which include lending, finance leasing, factoring and bond trades).
The major change introduced by Resolution 42 is that VAMC is now permitted to sell bad debt to any legal entity, individual or enterprise (whether licensed as a debt trader or not). This move allows both local and foreign investors and foreign invested enterprises (FIEs) to purchase bad debt from the VAMC without needing to obtain licences for debt trading activities.
In other measures that facilitate the development of a debt trading market, Resolution 42 permits the sale of bad debt at a price lower or higher than the principal debt (ie aligned with the market price) and prescribes that all bad debt trading must be made in a 'public and transparent' manner.
In addition, the State Bank of Vietnam has issued further guidance specifying that VAMC may sell bad debt by way of direct sale, auction or through a competitive bid process.
Resolution 42 allows Vietnamese credit institutions, foreign bank branches and VAMC to directly seize assets securing bad debt held by a debtor or a third party after making a public disclosure. Police and local authorities may assist with the seizure of secured assets if necessary. The VAMC recently exercised its rights under Resolution 42 to seize the collateral of a prominent real estate project in Ho Chi Minh, Saigon One Tower, after the complex owner failed to pay debts and hand over the building. However, further guidance will be required in relation to the process of registering the new owners of the seized assets if the debtor does not cooperate to complete the relevant registration procedures.
Where secured assets are immoveable property (for example, land use rights or construction works on land), the purchaser of the bad debt is entitled to receive transfer of the mortgage and to register as the mortgagee of the underlying property. However, as the current Law on Land restricts any person other than credit institutions from being the mortgagee of property, further detailed guidance is required to clarify the process for non-bank investors registering and enforcing a mortgage over immoveable property.
Vietnamese credit institutions, foreign bank branches and VAMC are also permitted to transfer secured assets, being real estate projects, to other persons who satisfy certain conditions as transferees of a real estate project under the Resolution and who commit to continue to implement those projects. As a comparison to the conditions for transfer of a real estate project under the Law on Real Estate Business, Resolution 42 has eased the transfer conditions to allow enforcement in relation to the collateral securing bad debt. In particular, completion of the land clearance process and the payment of compensation are not necessary as conditions precedent to the transfer, nor is it essential that the transferor hold a land use right certificate prior to the transfer.
Claims relating to collateral may be resolved through a fast-tracked procedure. Under civil proceeding law, a fast-tracked case is usually heard in a first instance court within about six weeks, compared with five to eight months for a normal case.
Although Resolution 42 has gone some way to facilitating a debt trading market in Vietnam, foreign investment in the debt trading market is likely to remain limited until the government releases further specific guidance.
A foreign buyer can expect to encounter the following issues when purchasing bad debt in Vietnam:
- It remains unclear whether foreign investors and FIEs are permitted to engage in debt trading as a line of business (ie the purchase and resale of bad debt), or whether they may only participate in debt trades sporadically in the capacity of a purchaser.
- There is no clear basis for foreign investors to acquire onshore bad debts in Vietnam. In particular, it remains unclear whether foreign investors would be considered as offshore lenders of the debtor once they acquire the bad debt. If this were the case, the debt acquired would be required to be registered with the State Bank of Vietnam as a foreign loan and currently there is no mechanism for such registration.
- While a market is in its infancy, it may be difficult for both buyers and sellers of bad debt to ascertain the 'market price' for the debt. In transactions involving VAMC as purchaser and a Vietnamese credit institution as seller of the bad debt, Resolution 42 requires that the parties to the transaction agree on the selection of independent valuers to determine the market price for the debt. This requirement does not apply for transactions involving a foreign entity as buyer of bad debt from VAMC (although the parties are free to reach agreement on the appointment of an independent valuer nonetheless).
- Under the current Law on Land, foreign investors and FIEs are restricted from receiving the transfer of real property or taking security over real property. Therefore, it appears that foreign investors cannot enforce their rights over the secured assets when purchasing bad debt secured by mortgage/pledge of real property in Vietnam.
- In conditional business sectors where restrictions on foreign investment or a cap applying to foreign ownership may apply, foreign investors and FIEs may face difficulties converting debt into equity if the debt is secured by shares or equity interests in companies whose business is in a conditional sector.
- As the bad debt market in Vietnam is in its infancy, it may be difficult for buyers to obtain information about the loan book being acquired, such as the history of the debt and debt transactions, debt collection, debt liquidity and information of the debtors.
Despite the above challenges, Resolution 42 is a major step in opening up the secondary debt trading market in Vietnam to both local and foreign investors. In order to encourage the development of this market, the Government is currently working to address the issues considered in this article. We are optimistic that such matters will be sufficiently addressed in the near future, and, as a result, we expect to see more activities by foreign investors on the secondary debt trading market in Vietnam in the coming years.