Dao Thi Thien Huong, partner in the Business Restructuring Services at PwC Vietnam, shared her thoughts on the restructuring of banks and settlement of bad debts in Vietnam, and provided ideas and recommendations to speed up this process.

SBV is planning to propose a law to boost bank restructuring and settle bad debts which will be approved by the government and the National Assembly. Based on your insight, which major issues should be tackled by this law?

This initiative means that SBV will continue to prioritise the issue of settling bad debts. 

It is obvious that this law must tackle the remaining challenges, which include an improper legal framework for settling bad debts, and a lack of proper guidance on post-merger integration to boost the quality of management and the value of property of banks, as well as guidance on banks’ risk management capability.

The progress of settling bad debts in credit institutions (CIs) and Vietnam Asset Management Company (VAMC) has encountered a number of obstacles, such as the vast amount of time needed to retrieve mortgaged assets via a legal process and the lack of a legal framework for VAMC to proactively investigate borrowers to speed up the whole bad debts’ settling process.

Furthermore, we also need a detailed legal framework that provides guidance on how to transfer mortgaged assets to foreign investors 

The current law still demonstrates limitations on the direct transfer of mortgaged assets which are rights to use land and properties on land to foreign investors. 

Further limitations include foreign investors’ lack of ability to change the purpose of land usage and to transfer benefits for mortgaged assets which are real estates.

The securitisation of bad debts is also not supported according to the current law, which hindered VAMC and CIs when approaching specific groups of investors. 

Another obstacle is that CIs are still not allowed to allocate losses from the selling of bad debts at market price.

In the region, are there any successful cases of a legal framework concerning bad debts settlement? What is special about them?

Having a “special” law to settle bad debts is a common practice in countries where non-performing loans are being effectively handled, like Malaysia, Japan, and South Korea. 

These countries issued specific laws to support and grant privileges to their respective Asset Management Company (AMC) to settle bad debts.

In Malaysia, the national AMC (named “Danaharta”) was supported by the Danaharta Law, which was issued by the government. 

Danaharta was granted a number of special legal and administrative authorities to settle bad debts, such as the right to instantly retrieve and auction mortgaged assets without any court procedure, the right to appoint a representative to supervise the operation of the borrowers, and the right to share the profit resulting from the settlement of bad debts with banks. 

The Danaharta Law also provided a framework to exempt the liability of Danaharta’s executives from financial losses during a bad debts’ settlement process based on objective reasons.

In Thailand, TAMC was also founded and has been operating under the TAMC law. Similarly, this law allowed TAMC to retrieve and liquidise mortgaged assets without a court procedure. 

TAMC also has the right to modify deadlines and the interest rate of debts, the right to convert debts into invested capital, and the right to share the profit resulting from the settlement of bad debts with banks. 

In addition, the TAMC law also provided a framework to exempt the liability of TAMC’s executives from financial losses based on objective reasons.

To boost the trading of bad debts at market price, what are the specific solutions for VAMC that shall be introduced by this new law from SBV?

At the moment, the process of bad debts’ settlement is done by either CIs collecting debts themselves or by selling these debts to VAMC. 

Though the latter option has been chosen in many cases, the actual debt volume collected by VAMC through this channel is still very limited. 

Clearly, VAMC needs to be supported in terms of frameworks and regulations regarding the liquidation of mortgaged assets and the selling and restructuring of debts.

The most important mission is to boost VAMC’s capability to trade bad debts at market price. In my opinion, this mission can be accomplished sooner if SBV allows VAMC to experiment with the selling of a number of specifically chosen bad debts. 

This way, VAMC can proactively approach different groups of investors, to learn how investors evaluate bad debts and the price they can offer, as well as their terms and conditions when buying bad debts. 

This should be a good starting point for VAMC to boost their practice of bad debts’ trading at market price.

VIR