At a meeting with government officials on September 21, representatives of Vietnam’s leading commercial banks voiced their concerns about the legal barriers hindering the efficient handling of bad debts.

The meeting, held to discuss solutions for economic development, saw proposals aimed at enhancing the financial sector’s ability to deal with non-performing loans.

Speaking at the event, Dang Khac Vy, Chairman of VIB Bank, pointed out that one of the biggest challenges banks face is the lack of legal authority to seize collateral when dealing with bad debts.

According to Vy, although Resolution 42 of the National Assembly, which previously allowed banks to seize collateral, has expired, the new Law on Credit Institutions does not contain any provisions granting banks this right.

“Even when banks have agreements in place with borrowers regarding collateral seizure, and those agreements are in line with the Civil Code 2015 and Decree 21 of 2021, we are still unable to act without going through lengthy legal procedures,” Vy explained.

This reliance on court proceedings and asset auctions during the execution phase means that banks often face long delays in resolving bad debts. During this time, banks must set aside risk provisions and suspend interest collection while continuing to bear the cost of raising capital.

The situation is particularly challenging for retail-focused banks, which tend to have numerous small loans spread across wide geographic areas. These banks face high operating costs in debt recovery, further complicating their efforts to boost lending and manage their bad debt portfolios.

Vy urged the government to issue regulations granting banks the legal authority to seize collateral in cases where contracts specify that right. He emphasized the need for such regulations to clearly outline the process banks should follow when reclaiming assets, ensuring that all legal requirements are met.

Clarification needed on real estate collateral

On a related note, Tran Hung Huy, Chairman of ACB Bank, called for clearer guidance on the use of certain types of real estate as collateral.

He highlighted the issue of leased industrial land, which, under current laws, can only be mortgaged if the lessee owns the property on the land. The law does not cover the right to mortgage leased land itself.

Huy argued that this gap in the law limits banks' ability to assess the full value of leased land as collateral, especially in the industrial sector. Allowing companies to mortgage their leasehold rights would enable them to access additional capital and make better use of their land assets.

Vy also underscored the need to support the recovery of the real estate market, noting its crucial role in the broader economy and in ensuring the health of banks' loan portfolios, where property serves as a significant source of collateral.

Credit growth reaches 7.26%

In a report presented at the meeting, Deputy Governor of the State Bank of Vietnam, Pham Quang Dung, highlighted that as of September 16, 2024, credit growth across the banking sector had reached 7.26%, up from 5.73% in the same period of 2023.

Private banks led the charge, achieving an 8.48% growth rate and accounting for 45% of the market.

Despite this progress, the sector’s bad debt rate also showed signs of rising. As of July 2024, the internal bad debt ratio across credit institutions had climbed to 4.75%, up from 4.55% at the end of 2023.

In particular, the bad debt ratio for private commercial banks reached 7.77% by June 2024, with a total of VND 633 trillion in bad loans.

The increase in bad debt has prompted calls for tighter regulations and more effective solutions to ensure the stability of the financial sector.

As the banking sector continues to face challenges, including a growing volume of bad debts, leaders are calling on the government to implement policies that balance credit expansion with financial stability. Vy stressed the importance of maintaining strict lending criteria to avoid negative repercussions in the future, warning that excessive credit growth could lead to a surge in bad debts and declining profits for banks.

The meeting concluded with a focus on improving regulatory frameworks to help banks manage bad debts more effectively and strengthen their role in supporting economic growth.

Tuan Nguyen