Formalising law to remove NPL barriers

Formalising law to remove NPL barriers

The continued codification of regulations under the existing legal system is expected to facilitate the resolution of bad debts, as well as remove obstacles that undermine credit institutions.

The absence of a clear legal system has hindered debt trading entities and credit institutions, photo Le Toan

Speaking at a banking credit promotion conference last week, Deputy Governor of the State Bank of Vietnam (SBV) Dao Minh Tu stated that the prime minister had approved the central bank’s proposal to draft a law adapting certain provisions of the 2024 Law on Credit Institutions.

This amendment will incorporate key provisions of Resolution No.42/2014/QH14 on the pilot handling of non-performing loans (NPLs) by credit institutions.

“The government is expected to submit the draft for consideration in May. If it is not ready in time, it will be presented in September. This is positive news for commercial banks struggling with unresolved bad debts. Moreover, it will provide banks with greater confidence in loan disbursement while ensuring better credit quality control,” said Tu.

The upgraded resolution will be elevated through legal codification within the amended Law on Credit Institutions. This includes granting banks enhanced authority over asset recovery, liquidation, and foreclosure, particularly for collateral assets that have undergone judicial resolution and are in the enforcement phase.

As the drafting body, the SBV submitted the draft to the government in early March. It stressed that formalising Resolution 42’s provisions into law will create a comprehensive legal framework for NPL resolution, removing barriers for lenders and debt traders while improving capital circulation and credit access.

“The absence of clear legal provisions has significantly hampered debt trading entities and credit institutions from enforcing collateral recovery. In many cases, asset owners refuse to cooperate or deliberately create legal disputes to delay asset liquidation,” an SBV representative explained.

The draft amendment to the Law on Credit Institutions has yet to be included in the legislative agenda for this year. However, the prime minister has instructed the SBV to expedite the drafting process for submission in May. The SBV has also proposed a fast-tracked legislative procedure to ensure the law takes effect as soon as possible.

Dr. Can Van Luc, member of the National Financial and Monetary Policy Advisory Council, expressed strong support for codifying the new resolution.

“It has proven effective in reducing bad debts significantly. Furthermore, NPLs are an ongoing challenge, not just a problem arising during economic downturns,” Luc said. “In international banking practices, a 2-3 per cent NPL ratio is generally acceptable. Therefore, a robust legal framework for NPL resolution is essential to prevent debt accumulation from creating systemic risks in the national economy.”

Last week, the Vietnam Banking Association (VNBA) provided feedback on the proposed amendments to the Law on Credit Institutions to codify certain provisions of Resolution 42.

In its statement, the association endorsed the SBV’s proposal, emphasising the necessity of incorporating three key policies from the resolution into law to address challenges in NPL resolution and collateral asset management. This would facilitate access to credit for businesses and individuals.

“If the SBV’s policy proposals are approved, the NPL resolution process will accelerate, thereby unlocking credit flows in the economy,” a VNBA representative noted.

Based on feedback from member organisations, the VNBA provided specific recommendations on the proposed policies, including the legal codification of asset enforcement rights, the return of collateral assets used as evidence in criminal cases, and regulations governing administrative violations.

On March 14, Deputy Minister of Justice Nguyen Thanh Tinh chaired an appraisal council session on the proposed amendments to the Law on Credit Institutions. The council agreed on the urgent need to draft and enact the law to codify Resolution 42.

“After seven years of implementation, Resolution 42 has significantly eased regulatory challenges for the SBV and enhanced commercial banks’ operational efficiency. However, legal concerns, particularly regarding third-party rights, must be thoroughly examined,” said Tinh.

Regarding the legal codification of collateral asset seizure rights, Tinh noted that enforcement should only be executed when explicitly stipulated in collateral agreements and the enforcement process must adhere to strict procedures to ensure transparency, allowing businesses and individuals to fully understand their rights related to asset ownership.

Nguyen Anh Quan, financial institutions rating director at FiinRatings, noted that Resolution 42 was introduced as a special mechanism to expedite NPL resolution, helping banks manage non-performing assets more effectively.

“Codifying it will provide a stable legal framework, ensuring a clear and long-term basis for NPL resolution. This will enhance banks’ efficiency in handling bad debts and boost investor confidence. However, the codification process must be carefully executed to balance the interests of banks and borrowers while preventing legal loopholes that could be exploited,” added Quan.

VIR