MINISTRY OF EDUCATION AND TRAINING MINISTRY OF JUSTICE HANOI LAW UNIVERSITY HOANG VAN THANH REGULATIONS ON THE TRADING IN BAD DEBTS RESULTING FROM CREDIT INSTITUTIONS LENDING ACTIVITIES IN VIETNAM SUMMARY OF THE DOCTORAL THESIS IN LAW HA NOI, 2019 The work was completed in: HANOI LAW UNIVERSITY Scientific supervisors 1: Ass.Prof.Dr Nguyen Thi Anh Van 2: Dr Le Dinh Vinh Reviewer 1: Reviewer 2: Reviewer 3: The thesis was defened at the Council of thesis assessment of Hanoi Law Univeristy at on ./ / The thesis can be further referred at the: National Library Library of Hanoi Law University INTRODUCTION The rationale of the topic In the operation of credit institutions, bad debts arising from lending activities to customers tend to increase in recent years although credit institutions have tightened lending conditions and applied different risk prevention measures In response to this negative trend, credit institutions have been forced to promote solutions to handle bad debts, in which, selling bad debts to organizations and individuals who are interested in is considered as the most feasible solution Although asset management companies under credit institutions (abbreviated as AMC) have been established and operated early, the writing off of NPLs were ineffective and insystematic Therefore, on May 18, 2013, the Government issued Decree No 53/2013/ND-CP on establishing Vietnam Asset Management Company for credit institutions (abbreviated as VAMC) Since its establishment in October 2013 to December 31, 2017, VAMC purchased VND 277,755 billion of 26,221 bad debts from 16,269 customers at credit institutions with the total principals of VND 307,932 billion, thereby bringing the NPL ratio of the banking sector down from 3.61% in 2013 to 2.18% at the end of 20171 Along with VAMC and AMCs, Vietnam Debt and Asset Trading Corporation (DATC) is also a special entity participating in the trading of bad debts However, the NPL trading capacity of DATC is not significant As reported by DATC, the company purchased and resolved more than VND 7,132 billion of bad debt and nearly VND 7,000 billion in 20172 Those figures were remarkable; however compared to the huge scale of bad debts in the whole system which was about VND 600,000 in 2016 and VND 566,000 in 2017, the role of DATC is still very small The trading of bad debts in the market is not really effective and hasn’t resolved the root of the problem which mainly stems from current law provisions There have been so many different Vietnamese laws regulations on the bad debt trading between credit institutions as sellers and VAMC and other entities as buyers that it has lead to uncertainties and controversy Even for many provisions it’s difficult to apply in practice, such as Decree 34/2015/ND-CP on bonds and special bonds which include many limitations for credit institutions to hold Also there still lacks of a guarantee mechanism of the Government or SBV Another is Resolution No 42/2017/QH14 allowing VAMC to buy bad debt at market value and pay in cash, however there still lacks of effective plans to mobilize capital for VAMC Along with that, a number of legal documents have been issued by competent state agencies to diversify entities participating in buying and selling bad debts in the market, in addition to professional debt trading companies, credit institutions are allowed to buy and sell bad debts of other credit institutions, domestic and foreign organizations and individuals Especially a legal mechanism for the establishment of a business model specialized in trading bad debts has been introduced, however, regulations on legal capital and conditions for managers and executives when Report on year operation of VAMC Fianancial statements in 2016, 2017 of DATC National Financial Supervisory Commission: Financial Supervison Reports in 2016, 2017 establishing a debt trading service enterprise in Decree 69/2016/ND-CP are not suitable in reality Those regulations are generally barriers to bad debt trading activities, puttiting pressure on credit institutions to choose a suitable plan to sell bad debts to VAMC or other entities Therefore, in order to promote the role and effectiveness of VAMC and other debt buyers in practice, it is necessary to develop a legal system to regulate the relationship of bad debt buying and selling synchronously and completely, thereby improving the enforcement effectiveness of those regulations Based on the above reasons, selecting the topic “Regulations of trading in bad debts resulting from credit institutions lending activities in Vietnam” as a doctoral thesis is necessary and meaningful in both theorical and practical aspects Research purposes and tasks 2.1 Research purpose The research purposes are to clarify fundamental theoretical issues about bad debt trading and regulations on the trading of bad debts from lending activities of credit institutions which therefore serves as a basis for assessing the appropriateness as well as limitations of existing legal provisions on the trading of bad debts from lending activities of credit institutions in Vietnam; pointing out causes of such limitations of effective laws, thereby proposing solutions or measures to improve legal regulations taking into account the conformity between the law and practical requirements of trading bad debts from lending activities of credit institutions in Vietnam 2.2 Research tasks - Analyzing and clarifying criteria for classification of bad debts, the role of entities involved in buying and selling bad debts, prices, trading methods and payment instruments in NPL transactions - Assessing the legal status of the trading of bad debts from lending activities of credit institutions in Vietnam and practical application of legal provisions of trading bad debts from lending activities of credit institutions over time - Proposing solutions or measures to improve the law and improve the effectiveness of law enforcement on the trading of bad debts from lending activities of credit institutions in Vietnam in the coming time Object and scope of the research 3.1 Object of the research - Legal scientific views on trading bad debts from lending activities of credit institutions; - Current Vietnamese laws on trading bad debts from lending activities of credit institutions; - Practical implementation of the provisions of Vietnamese law on trading bad debts from lending activities of credit institutions; - Experiences in developing legal regulations and practical implementation of such regulations on trading bad debts in order to resolve increasing NPL ratio in the banking system in some Southeast Asia and East Asia countries with conditions and circumstances similar to Vietnam 3.2 Scope of the research - Content: The thesis studies fundamental theoretical issues about trading bad debts from lending activities of credit institutions and current legal provisions of Vietnamese laws on trading bad debts from lending activities of credit institutions Specifically, the thesis defines: Firstly, to focus on studying bad debts arising from lending activities of credit institutions to customers Secondly, to focus on studying trading transactions of bad debts between credit institutions (as sellers) with organizations and individuals purchasing bad debts (as buyers), which is the relationship of trading bad debts in the primary market - Time: The thesis focuses on studying the current legal provisions on trading bad debts from lending activities of credit institutions - Place: The thesis studies the laws and regulations on trading bad debts from lending activities of credit institutions in Vietnam Additionally, during the research process, when needed, corresponding legal provisions and law enforcement experiences of some countries with conditions similar to Vietnam such as Thailand, Korea, China will be referred to in order to clarify some remaining problems related provision in Vietnamese law Research methods In order to clarify the research purposes and tasks, the thesis is based on the methodology of Marxism - Leninism and Ho Chi Minh thought to study fundamental theoretical issues of the trading of bad debts, transcation subjects, prices, trading methodsand payment instruments in the relationship of trading bad debts Additonally, during the research process, the thesis uses some of the following specific research methods: - Method of analysis - Statistical method - Expert consultancy method - Comparative law method Contributions of the thesis Firstly, the dissertation fully and comprehensively addresses some fundamental theoretical issues on bad-debts trading and the regulations of trading in bad debts resulting from credit institutions’ lending activities (hereinafter, bad debts) Secondly, the dissertation clearly identifies the conceptual differences between bad debts and nonperforming loans, and also points out that quantitative and qualitative criteria for defining bad debts under the Vietnamese laws almost reach international standards of bad debts as recognized by the IMF and Basel Thirdly, the dissertation points out the role, strength and weaknesses of entities, including professional-debt-trading companies such as VAMC and DATC, enterprises providing debt trading services, and domestic and foreign institutional and individual investors, who engage in the business of bad-debts-trading in the primary market Fourthly, the dissertation clarifies the need to develop a plan of trading in bad debts at their market value at the time of purchase, thereby defines the nature of trading relation in market economy in order to reduce risks for debt buyers, especially for VAMC, who uses fund from the state budget to buy bad debts Fifthly, the dissertation proves the leading role of the negotiation method in the formation of bad-debt-trading contracts and in accelerating the VAMC process of "collecting" bad debts from credit institutions Finally, the dissertation point out the limitations and shortcomings of payment tools such as bond and special bond used in bad-debts-trading as well maintains that such payment tools should be replaced by cash if those transactions entered into by credit institutions and VAMC Theoretical and practical significance of the thesis - The thesis is a systematic and comprehensive scientific research work addressing fundamental theoretical issues about trading bad debts and regulations on trading bad debts from lending activities of credit institutions - The thesis is a useful resource for competent state agencies in assessing the effectiveness of legal provisions on trading bad debts from lending activities of credit institutions, as a basis to improve related regulations in the coming time - The thesis is also a valuable source of materials for scientific research, teaching and learning on trading bad debts and regulations on trading bad debts from lending activities of credit institutions Structure of the thesis For defined research purposes and tasks, in addtition to the introduction, conclusion, list of published works related to the thesis, references, abbreviations, appendices, the thesis is structured into four chapters as follows: - Chapter 1: Overview of research on regulations on trading bad debts from lending activities of credit institutions - Chapter 2: Fundamental theoretical issues about trading bad debts and regulations on trading bad debts from lending activities of credit institutions - Chapter 3: Current situation of regulations on trading bad debts from lending activities of credit institutions in Vietnam - Chapter 4: Solutions to improve the law on trading bad debts from lending activities of credit institutions in Vietnam CHAPTER 1: OVERVIEW OF RESEARCH ON REGULATIONS ON TRADING BAD DEBTS FROM LENDING ACTIVITIES OF CREDIT INSTITUTIONS 1.1 Overview of domestic and foreign research 1.1.1 Domestic research Most researchers have demonstrated the similarity of Vietnamese law with international standards for classification of bad debts, as well as the need to establish a debt trading company with working capital funded by the State budget Also, when assessing valuation methods for bad debts and payment instruments, researchers all said that trading bad debts at book value by issuing special bonds would help to accelerate the writing off of bad debts as this measure ensures full benefits of credit institutions when selling bad debts to the state debt trading company However, published research still has many limitations and shortcomings as many authors have been confused between “bad debt” and “doubtful debt” In addition, researchers have not yet demonstrated the role of such factor in forming a market for future bad debt trading And there haven’t been any insight into the importance of private debt trading companies 1.1.2 Foreign research Research works by foreign authors have initially pointed out the 90-day overdue mark as a basis to place a debt on the group of bad debts, and those works also emphasized the role of establishing an asset management company with working capital funded capital from the state budget and support of the Government When studying trading prices, published works have shown that there are two methods selected by countries: one is trading at book value, the other is trading at market value Accordingly, depending on the target of dealing with bad debts by each country, a trading method by book value or market value will be chosen Research on payment instruments in trading bad debts, it is believed that in order to reduce pressure on the state budget, it is necessary to issue bonds as payment instruments in the trading of bad debt between stated funed debt trading companies with banks, instead of paying directly in cash like normal asset trading 1.2 Overview of research activities related to the basic contents of the thesis First, published research works related to the objects of the bad debt trading relationship Most research works share the same view in classifying bad debts Accordingly, a bad debt basically is determined based on two factors: a debt overdue more than 90 days and suspicious ability to repay the debt Secondly, published research works related to the subjects involved in trading bad debts Current researches expose conflicting views on the subjects participating in bad debt trading as to what subjects can participate, the role of each entity in the debt trading market; debt trading companies set up by the state should be in form of a jointstock company or a one-member limited liability company; where are operation fundings for those companies Thirdly, published research works related to methods to determine a purchase price of bad debts It is agreed in published research works of different authors that there are two methods to determine a purchase price of bad debts, including bad debt trading at market value and at book value Each method plays its own role Fourthly, published research works related to trading methods of bad debts Published research works of domestic and foreign authors have shown two basic methods that parties can choose including negotiation and auctions The selection of trading method is greatly influenced by chosen valuation methods of bad debts along with capital used for payment in the transaction Fifthly, published research works related to payment instruments Most domestic and foreign published research works share the same view which is instead of directly paying in cash to banks selling bad debts, debt trading companies shall issue special bonds for payment to banks 1.3 Research questions and hypothesis 1.3.1 Research questions Research was done to find the answer to question: " Do legal provisions on trading bad - debt from lending activities of credit institutions in Vietnam have limitations that need to be overcome to ensure that this law really promotes the resolution of bad - debt thoroughly and effectively in the system of credit institutions in Vietnam?” To find answers to this question, the thesis will be researched to find answers to some of the following small questions: - Bad - debt is formed directly from lending activities of credit institutions to customers, however, are all principal and interest that customers cannot fully pay become bad - debt when they are due? Need to base on criteria for overdue repayment period or based on credit institution's assessment of customer's ability to repay to determine it as a bad - debt? - When deciding to sell bad - debt to recover capital and bring bad - debt to a minimum level of safety; can credit institutions choose to sell bad - debt to any entity that has appropriate or suitable financial needs and must bad - debt be sold to stateowned asset Management Company? - In order to protect the interests of parties in bad - debt trading, the price of trading bad - debt in all transactions needs to be determined according to market value or case by case, the parties can choose a flexible way method of determining prices according to book value or market value? - In order to establish the relationship of trading bad - debt, is choice of negotiation or auction method decided by the parties or according to the direction of the State? - In order to ensure that bad - debt trading and purchasing relationship is completely and thoroughly resolved, bad - debt of credit institutions is completely settled, should payment documents (money or valuable documents) be used flexibly in bad - debt trading transactions or have to use money payment tool in any case? 1.3.2 Research hypothesis Based on study of the State Bank Law, the Law on Credit Institutions, the Civil Code and the Commercial Law and documents guiding the implementation of these laws, the thesis sets up two research settlements to cover all possibility may occur as follows: (1) In order to effectively resolve the situation of bad – debt in lending activities of credit institutions, it is necessary to have appropriate legal regulations to adjust this activity, accordingly: overdue bad - debt of more than 90 days and debts owed by credit institutions assessments are unable to fully recover principal and interest should be considered bad - debt; all organizations and individuals with needs and financial capacity are allowed to participate in trading bad - debt; book value or market value of bad - debt can be flexibly used as purchase price of bad - debt in each case; the parties have the right to choose the method of agreement or auction to establish the relationship of trading bad - debt; Payment instruments (money or valuable papers) are flexibly used in transactions of trading bad – debt (2) In order to effectively resolve the situation of bad - debt in lending activities of credit institutions, it is necessary to have appropriate legal regulations to adjust this activity, whereby all overdue debts that debtors cannot pay both principal and interest should be considered as bad - debt; in addition to state-owned debt trading companies, other individuals and organizations are not allowed to purchase bad - debt of credit institutions; methods of determining market value trading must be considered in all bad - debt transactions; the state intervenes in all bad - debt transactions, forcing the participants in the transaction to use the auction method to establish bad - debt trading relations; and valuable papers are the only payment instrument allowed to use in the purchase and sale of bad - debt CONCLUSION OF CHAPTER CHAPTER 2: FUNDAMENTAL THEORETICAL ISSUES ABOUT TRADING BAD DEBTS AND REGULATIONS ON TRADING BAD DEBTS FROM LENDING ACTIVITIES OF CREDIT INSTITUTIONS 2.1 Fundamental theoretical issues about trading bad debts and regulations on trading bad debts from lending activities of credit institutions 2.1.1 Definition of bad debts from lending activities of credit institutions Bad – debt from lending activities of credit institutions is a type of property right formed when repayment obligations of customers to credit institutions are not implemented or implemented insufficiently after a certain period of time or are determined by credit institutions that customers are no longer have the ability to fulfill their repayment obligations 2.1.2 Definition of trading bad debts from lending activities of credit institutions Trading bad debts from lending activities of credit institutions is transfer of bad debts arising from customer lending activities of credit institutions (as seller) to individuals and organizations wishing to purchase debts (as buyer) at prices and in payment methods agreed upon by the parties in accordance with legal provisions 2.1.3 Characteristics of trading bad debts from lending activities of credit institutions Firstly, in essence, trading bad debts is a separate activity of the market economy Secondly, the object of trading bad debts from lending activities of institutions is always bad debts arising from customer lending activities of credit institutions Thirdly, subjects participating in transactions of bad debts from lending activities of credit institutions always include credit institutions owning bad debts (as seller) and organizations and individuals in need of buying bad debts (as buyer) Fourthly, trading bad debts from lending activities of credit is a high-risk activity Fifthly, trading bad debts from lending activities of credit institutions follow market principles with intervention of the State Sixthly, participants all aim to generate profits and lower the bad debt ratio of the banking system Seventhly, the legal form of the relationship of trading bad debts from lending activities of credit institutions is a bad debt purchase contract 2.1.4 The role of trading bad debts from lending activities of credit institutions a For the subjects of trading bad debts Firstly, for sellers: (1) Credit institutions can reduce pressure from bad debts, clean their balance sheets; (2) Credit institutions have an opportunity to improve their credit ratings; (3) Writing off bad debts helps to accelerate available capital turnover of credit institutions, increasing capital use efficienc and liquidity of the whole banking system Secondly, for buyers: Although bad debts present potential high risks, it is likely that they can also bring big profits for buyers, and it is a solution to quickly resolve bad debts of the system b For the economy From a macroeconomic perspective, buying and selling bad debts of credit institutions plays an important role in removing bottlenecks for the economy, facilitating capital flows and promoting business entities to develop 2.2 Fundamental theoretical issues about regulations on trading bad debts from lending activities of credit institutions 2.2.1 Legal concept of trading bad debts from lending activities of credit institutions Regulations on trading bad debts from lending activities of credit institutions is a system of legal regulations issued by the State to regulate the relationship of buying and selling bad debts among credit institutions (acting as sellers) with professional debt trading companies, organizations and individuals buying bad debts (acting as buyers) in order to resolve the rising bad debt trend in the banking system, directing bad debt trading activities to objectives set by the State From the above definition, it can be seen that regulations on trading bad debts from lending activities of credit institutions are featured by following basic characteristics: Firstly, regulations on trading bad debts from lending activities of credit institutions is a part of regulations on general asset trading in civil relations Secondly, regulations on trading bad debts from lending activities of credit institutions contributes to creating a level playing field for parties to buy and sell bad debts, thereby protecting legitimate interests of the parties and ensuring their obligations to be fulfilled Thirdly, regulations on trading bad debts from lending activities of credit institutions ensures that debt trading companies focus on properly and transparently using allocated state capital Fourthly, regulations on trading bad debts from lending activities of credit institutions naturally help to clean up and reorganize the debt trading market 2.2.2 Factors affecting regulations on trading bad debts from lending activities of credit institutions Firstly, impacts by economic factors Secondly, impacts by political factors Thirdly, impacts by benefit factors Fourthlly, impacts by ingreation trend 2.2.3 Main contents of regulations on trading bad debts from lending activities of credit institutions Firstly, regulations on the transaction object The object of bad debt transaction is bad debts, a kind of property rights Bad debts are subprime debts, overdue payment of principal and interests and are in doubt of repayment and recovery ability In particular, to understand this concept or determine bad debts, it can be based on qualitative and quantitative methods through criteria of overdue repayment term and debt recovery ability, including: (1) overdue repayment of principal and interests; (2) customer loans are assessed by credit institutions as incapable of repayment Secondly, regulations on the transaction subjects Firstly, sellers: To become a debt seller, an entity must satisfy the following two conditions: (1) the debt seller must be a credit institution; (2) owning bad debts arising from lending to customers Secondly, buyers: Depending on how the current bad debt trading market is developing and how bad debts are growing in the banking system, the buyer includes the following subjects: - Professional debt trading companies Debt trading companies established by the State Individuals and organization interested in purchasing bad debts Thirdly, debtors, brokers, auction organizations: In addition to the sellers and the buyers, debtors, brokers and auction organizations also participate and have certain contributions to the trading process, such as making contact, establishing and implementing the trading relationship between the seller and buyer Thirdly, regulations on transaction prices Trading prices are normally defined by two following methods: Firstly, the method of valuation at market value of bad debts Accordingly, buying and selling prices are determined according to the actual value of bad debts at the time of trading, taking into account the ability to recover principals in order to limit risks of buyers Secondly, the method of valuation at book value of bad debts This method is mainly applied to transaction with participation of state debt trading compaies which are established to implement state political objectives and monetary policies Accordingly, bad debts are sold at their book value, regardless potential risks or the ability to recover principals Fouthfly, regulations on trading methods Normally, in order to conduct the purchase and sale of bad debts, the parties may agree to choose one of the following methods: 10 Firstly, the method of buying and selling bad debts through a negotiation mechanism Accordingly, the parties shall negotiate and come to an agreement on establishing a purchase contract Secondly, the method of buying and selling bad debts through auctions Accordingly, credit institutions will conduct auctions of bad debts by themselves or through a professional auction organization tovalue bad debts which shall be act a basis for transferring bad debts from sellers to buyers Fifthly, regulations on payment instruments Firstly, payment by bonds, special bonds issued by the buyers The nature of the payment by issuing bonds and special bonds is that credit institutions are not allowed to pay directly in cash when selling bad debts but only receive special bonds and bonds issued by debt trading companies Secondly, payment in cash This payment instrument is mainly applied in transactions between credit institutions and debt-buying organizations and individuals However, in some special cases, when bad debts are assessed with high recovery ability and meeting other special conditions, centralized debt trading companies can buy debts and pay in cash to credit institutions rather than bonds and special bonds CONCLUSION OF CHAPTER CHAPTER 3: CURRENT SITUATION OF REGULATIONS ON TRADING BAD DEBTS FROM LENDING ACTIVITIES OF CREDIT INSTITUTIONS IN VIETNAM 3.1 Regulations on the transaction object 3.1.1 Definition of bad debt According to the Circular No 02/2013/TT-NHNN amended by Circular No 09/2014/TT-NHNN, there are two basic criteria for identifying bad debts, which are debts overdue 91 days or more; or debts assessed by credit institutions as incapable of recovering principal and interests when due From current provisions on bad debts, some issues can be drawn as follows: Firstly, there is a fundamental difference between the concept of bad debts and Nonperforming loans (NPLs) Secondly, there are similarities in the criteria for identifying bad debts in Vietnam with standards recognized by international financial institutions Article 10, 11 Circular 02/2013/TT-NHNN 11 3.1.2 Conditions of a bad debt Firstly, records, invoices and related documents of the purchased debt, a guarantee contract (if any) provided by the seller must fully and accurately reflect the current status of the debt in accordance with the law Secondly, there is no written agreement on not buying or selling the debt Thirdly, the debt cannot be used to secure a civil performance obligation at the time of debt purchase or sale, unless the secured party agrees in writing on the sale of debt 3.1.3 Transfer of rights and obligations related to bad debts When selling bad debts, credit institutions simultaneously transfer rights and obligations related to bad debts, but this provision is in conflict with the Land Law 2013 According to Articles 174, 175 and 176 of the Law Land 2013, land use organizations can only use land use rights and assets attached to the land to apply for for mortage loans at credit institutions licensed to operate in Vietnam This provision unexpectedly caused difficulties for collecting collateral assets by debt buyers because the buying party in this relationship varies from credit institutions to non-credit institutions such as VAMC, DATC, debt trading companies and organizations and individuals who aren’t functioning at debt trading 3.2 Regulations on the transaction subjects 3.2.1 Debt sellers According to Article of Circular 09/2015/TT-NHNN, a debt seller is a credit institution that owns bad debt arising from lending activities Only credit institutions are entitled to participate in the primary debt trading market as debt sellers Selling bad debts is the right of credit institutions who own bad debts This power of the debt seller is expressed in terms of: (1) the right to choose which bad debt to be sold to buyers and (2) the right to choose suitable buyers However, this right is restricted by law under certain circumstances Firstly, credit institutions are not allowed to sell debts to their own subsidiaries, except for selling debts to their asset management company under an approved restructuring plan Secondly, in certain cases, credit institutions are forced to sell bad debts to a buyer specified by the law to ensure the safety of such credit institutions in particular and the whole system in general Specifically, Clause of Article 21 of Circular 19/2013/TT-NHNN stipulates: “Credit institutions with the bad debt ratio to total outstanding debts of 3% or over, shall sell debts to Vietnam Asset Management Company (VAMC)” 3.2.2 Debt buyers a Credit institutions and foreign bank branches are allowed by the State Bank to implement purchase activities of bad debts 12 Credit institutions who satisfy the following conditions: (1) allowed by the SBV to carry out debt purchase activities in their business registration certificate and (2) having bad debt ratio below 3% can participate in buying bad debts of other credit institutions b Vietnam Asset Management Company (VAMC) Firstly, regarding the owner of VAMC: VAMC is a special state-owned enterprise, so a limitation of VAMC is that its operation is under the government’s control and intervention Secondly, regarding the legal form of VAMC: VAMC is a special enterprise operating in the form of a one member limited liability company, thus with limited capital scale Thirdly, regarding the operation of VAMC: (1): VAMC only buys bad debts classified in group 3, and (2): VAMC only buys bad debts incurred in the operation of domestic credit institutions and isnt’ allowed to buy bad debts of foreign credit institutions and of other non-credit institutions in the country Fourthly, regarding the operation purpose of VAMC: VAMC is a special tool of the government contributing to quickly resolve bad debts aiming to the national financial health c Vietnam Debt and Asset Trading Corporation (DATC) Although buying bad debts of credit institutions is one function of DATC, the agency’s capacity to buy bad debts is indeed very limited because of lack of legal basis for DATC to participate in the market of buying and selling bad debts of credit institutions d Asset management companies under credit institutions (called AMC) Activities of AMCs are very fuzzy, mainly resolving bad debts of mother banks and it’s difficult for them to access debts of other credit institutions e Enterprises dealing in debt trading services It’s too strict when it comes to conditions for the establishment of a debt trading service enterprise as stipulated by the law, which has hindered related goals set by the Government and the State Bank For example, there is a requirement of charter capital, investment capital which is VND 10 billion at least or there are qualification requirements for managers of debt trading service enterprises, which are “having university or higher education degrees in one of following fields: economics, business administration, laws or other expertises to undertake” f Other individuals and organizations It’s limited for domestic and foreign organizations and individuals to participate in the purchase and sale of bad debts due to a lack of incentives from the State and lack of interest of credit institutions themselves 13 3.3 Regulations on methods to determine a purchase price of bad debts 3.3.1 Valuation at book value According to a report on operation and development investment from 2013 to December 31, 2017, VAMC has bought VND 307,932 billion of principals at a cost of VND 277,755 billion With those results achieved, VAMC has made an important contribution to resolving bad debts of credit institutions However, how this method works in practice depends very much on the payment instrument that VAMC uses to pay credit institutions when buying bad debts 3.3.2 Valuation at market value Firstly, in the relationship of bad debt trading between credit institutions (sellers) and VAMC (buyers) Clause 2, Article 14 of Decree 53/2013/ND-CP stipulates: “Vietnam Asset Management Company shall purchase a non-performing loan from a credit institution at the market value on the basis of agreement and revaluation of such loan” When trading bad debts at market value, VAMC and credit institutions agree to select an independent valuation agency On that basis, the selling price is the price valued by the independent advisor The participation of the independent in determining the selling price ensure bad debt is assessed independently and objectively, close to market value in order to avoid self-interest or brackets between VAMC and credit institutions selling bad debts Secondly, in the relationship of bad debt trading between credit institutions (sellers) and other buyers Clause 1, Article 12 Circular 09/2015/TT-NHNN stipulates that the debt purchase and sale price shall be determined based on the book value of the debt and interest that the debtor shall pay in future, classification of debt group, recoverability of the debt and value of collateral assets 3.4 Regulations on trading methods 3.4.1 Negotiation method In order to conduct purchases in this method, the seller and the buyer will directly meet, contact and negotiate basic contents of the contract such as: specific debt to be traded, purchase and sale price, payment method, or through a broker to bridge the seller and buyer In the relationship of buying and selling bad debts between credit institutions and VAMC, the negotiation method is attached to the method of valuation at book value as specified in Article of Decree No 53/2013/ND-CP 3.4.2 Auction method The auction method shall be conducted by the debt seller who shall hire a professional auction organization according to legal provisions on asset auction or organize the auction by itself Then through auction activities by the professional agency, the value of collateral assets will be assessed objectively and close to market value 14 3.5 Regulations on payment instruments 3.5.1 Payment through the issuance of bonds and special bonds Firstly, VAMC issues special bonds to swap bad debts In Vietnam, the initial capital allocated to VAMC was VND 500 billion, then was raised to VND 2,000 billion, however, the amount was still too small compared to the scale of bad debts in the whole system, and therefore buying bad debts by issuing special bonds is the most feasible solution However, this tool has some limitations such as (1) the term of special bonds is maximum years, so after years, if VAMC cannot write off bought bad debts, VAMC will return them credit institutions; (2) credit institutions must make annual provisions against special bonds which are booked as operating expenses at a rate not lower than 20% of the bond value during the bond term; (3) Special bonds are locked for transfer Secondly, VAMC issues bonds to swap bad debts Compared to special bonds, bond issurance brings outstanding advantages for credit institutions as follows: (1) Bonds are transferred between SBV and credit institutions and among credit institutions; (2) Credit institutions owning bonds not have to make provisions against bonds; (3) The risk factor of bonds is 0% when calculating the minimum capital adequacy ratio (CAR) of credit institutions; (4) Bonds and special bonds are used to refinance at SBV in accordance with SBV's regulations; bonds can be traded in open market operations Although as stipulated in the law, some certain right have been extended for credit institutions owning bonds, however, the liquidity of this instrument is still limited Compared to cash payment, bond issuance is clearly not enough to attract credit institutions to sell bad debts to VAMC 3.5.2 Payment in cash This method is recognized as an effective solution to accelerate the bad debt settlement process at credit institutions, but there are still some barriers such as: Firstly, capital sources for VAMC to pay in cash to credit institutions is very limited, while the ability to access cooperative capital sources with international financial organizations is not simple Secondly, it’s not easy for credit institutions to satisfy requirements by VAMC to get payment in cash CONCLUSION OF CHAPTER CHAPTER 4: SOLUTIONS TO IMPROVE THE LAW ON TRADING BAD DEBTS FROM LENDING ACTIVITIES OF CREDIT INSTITUTIONS IN VIETNAM 4.1 Basic requirements of completing the law on trading bad debts from lending activities of credit institutions in Vietnam in the current period 15 4.1.1 Ensure compliance with legal provisions on the purchase and sale of bad debts from lending activities of credit institutions and government socio-economic development policies 4.1.2 Improve the law on trading bad debts closely based on and oriented to developing a debt trading market 4.1.3 Completing the law on trading bad debts is required not to put pressure on the state budget 4.1.4 Improving the law shall be on the basis of ensuring independence in the administration of the national monetary policy of SBV 4.1.5 Satisfy requirements and Vietnam’s commitments in international integration the banking sector 4.2 Some solutions to improve the law on trading bad debts from lending activities of credit institutions in Vietnam in the current period Firstly, amending provisions on the definition of bad debts stipulated in Circular 02/2013/TT-NHNN, amending and supplementing Circular 09/2014/TTNHNN Clause Article Circular 02/2014/TT-NHNN explains: “Bad debts are debts of groups 3, and 5” However, the abbreviation of NPL has caused confusion between the definition of bad debts and non-performing loans or NPLs Secondly, amending provisions of Articles 174, 175 and 176 of theLand Law 2013 on the right to seize collateral assets which are land use rights and assets attached to land Accordingly, it is necessary to consider amendments to provisions of Articles 174, 175 and 176 of the Land Law 2013 in a way that allows debt buyers of credit institutions to exercise the rights of credit institutions in seizing collateral assets which are land use rights and assets attached to land Thirdly, supplementing conditions on capital sources of credit institutions used to purchase bad debts of other credit institutions as stipulated in Clause 3, Article of Circular 09/2015/TT-NHNN Based on the principle stipulated in Clause 1, Article 103 and Clause 1, Article 110 of the Law on Credit Institutions 2010, it is necessary to regulate that credit institutions shall only use their own internal capital including charter capital and reserves and undistributed profits to buy bad debts of other credit institutions Fourthly, amending regulations on legal forms to increase capital mobilization capacity of VAMC in Clause 2, Article of Decree 53/2013/ND-CP In this case, attracting capital from international financial institutions or domestic and foreign investors through the equitization of VAMC can be a revolutionary solution However, in order to ensure the state regulating role, the equitization of VAMC should follow stages with different amounts of offering shares but remain the controlling share of the government in VAMC Fifthly, removing regulations on legal capital and standards and conditions for managers of debt trading enterprises in Decree No 69/2016/ND-CP 16 In order to facilitate the establishment of debt trading service enterprises, it’s necessary to remove the charter capital and investment capital requirement of minimum VND 100 billion in Clause 2, Article and Clause 2, Article of Decree 69/2016/NDCP At the same time, it’s recommended to remove debt trading services out of the List of conditional business lines stipulated in Item 36, Appendix issued with the Law No 03/2016/QH14 amending, supplementing Article and Appendix on the List of conditional business lines of the Law on Investment In addition, it is necessary to consider to remove Point b, c, Clause 3, Article of Decree No 69/2016/ND-CP on standards and conditions of managers of debt trading service enterprises Sixthly, removing the provision that allows VAMC to buy bad debts of credit institutions at book value in Decree No 53/2013/ND-CP After the early phase ends, the bad debt purchase and sale relationship should actually reflect the nature of the market, selling prices must be determined at market value Therefore, a focused measure needs to be quickly implemented by the Government and SBV in the current period is to remove the method of valuing bad debts at book value as stipulated in Decree 53/2013/ND-CP, accordingly force VAMC to buy bad debt at market value Seventhly, amending provisions exposing limitation of special bonds specified in Article 21 of Decree 34/2015/ND-CP and Clause Article of Circular 14/2015/TT-NHNN Therefore, in order to increase the attractiveness of this instrument, it is required that the SBV should consider giving credit institutions the right to hold such instrument, such as: (i) being entitled to transfer special bonds with the SBV or with credit institutions; (ii) not having to book provisions against those bonds during the time holding them; (iii) special bonds can be used in open market operations Eightthly, supplementing provisions on the Government or SBV's guarantee for bonds and special bonds issued by VAMC When bonds and special bonds are guaranteed by the Government or SBV, benefits of credit institutions will be ensured In case VAMC fails to recover capital from purchased bad debts or recovery value is less than the cost, credit institutions instead of receiving bad debts back will be entitled to request for payment from the Government or SBV using bonds and special bonds Ninthly, supplementing cases allowing VAMC to pay in cash when buying bad debts of credit institutions However, this provision can only be put into practice when the relationship of trading bad debts ensures the following requirements: Firstly, the cash payment by VAMC to debt-selling credit institutions must be associated with the method of valuing bad debts prices at market value Secondly, the cash payment by VAMC to debt-selling credit institutions is only applied when VAMC has accumulated large capital raised froom international financial institutions and domestic and foreign investors, especially the capital collected from activities of writing off bad debts bought from credit institutions CONCLUSION OF CHAPTER 17 GENERAL CONCLUSIONS Through the research process on the topic “Regulations of trading in bad debts resulting from credit institutions lending activities in Vietnam” following conclusions can be drawn: Firstly, buying and selling bad debts from lending activities of credit institutions is a part of asset trading in economics However, unlike normal asset trading, the object of transfer in bad debt trading is bad debts arising from lending activities of credit institutions Secondly, it is necessary to study and evaluate impacts of factors such as the economy, politics, benefits and integration which shall act as a basis for considering the perfection of the current law and its appropriateness when applied in practice Thirdly, through the study on current Vietnamese legal provisions on the purchase and sale of bad debts from credit institutions, it can be seen that these regulations have inherited experience of other countries in the world and partly met practical needs However current regulations still reveal quite significant obstacles leading to uneffective application in practice Fourthly, to improve the effectiveness of the law on buying and selling bad debts from lending activities of credit institutions in Vietnam in the current period, it is necessary to focus on the following measures: (1) amending provisions on the definition of bad debts stipulated in Circular 02/2013/TT-NHNN, amending and supplementing Circular 09/2014/TT-NHNN; (2) amending provisions of Articles 174, 175 and 176 of theLand Law 2013 on the right to seize collateral assets which are land use rights and assets attached to land; (3) supplementing conditions on capital sources of credit institutions used to purchase bad debts of other credit institutions as stipulated in Clause 3, Article of Circular 09/2015/TT-NHNN; (4) amending regulations on legal forms to increase capital mobilization capacity of VAMC in Clause 2, Article of Decree 53/2013/ND-CP; (5) removing regulations on legal capital and standards and conditions for managers of debt trading enterprises in Decree No 69/2016/ND-CP; (6) developing a mechanism to encourage credit institutions to sell bad debts to VAMC; (7) removing the provision that allows VAMC to buy bad debts of credit institutions at book value in Decree No 53/2013/ND-CP; (8) amending provisions exposing limitation of special bonds specified in Article 21 of Decree 34/2015/ND-CP and Clause Article of Circular 14/2015/TT-NHNN; (9) supplementing provisions on the Government or SBV's guarantee for bonds and special bonds issued by VAMC; (10) supplementing cases allowing VAMC to pay in cash when buying bad debts of credit institutions 18 PUBLISHED RESEARCH WORKS OF THE AUTHOR RELATED TO THE THESIS Hoang Van Thanh (2013), “Some legal issues about debt trading contracts in banking activities”, Banking Science and Training Review, Vol 139, p.22-27 Hoang Van Thanh (2017), “Enhancing the role of bad debt buyers towards building a primary debt trading market in Vietnam”, Banking Science and Training Review, Vol 186, p.44-52 Hoang Van Thanh (2017), “Some issues on the mechanism of buying and selling bad debts of Vietnam Asset Management Company (VAMC)”, Journal of Social Sciences Human Resources, Vol 53, p.66-72 Hoang Van Thanh, Nguyen Minh Hang (2018), “Legislation on issuing bonds and special bonds of Vietnam Asset Management Company to buy bad debts of credit institutions”, Journal of Democracy and Law, Vol April (313), p.30-33 Hoang Van Thanh, Nguyen Hai Yen (2018), “Current regulations on resolving bad debts of credit institutions in Vietnam and measures to improve”, Journal of Law, Vol 7/2018, p.62-71 Hoang Van Thanh, Nguyen Minh Hang (2019), “Which solution for restructuring the banking system associated with handling bad debts and meeting the standards of Basel II to 2020”, Journal of Legal Profession, Vol 5/2018, p.38-43 19 ... INSTITUTIONS IN VIETNAM 3.1 Regulations on the transaction object 3.1.1 Definition of bad debt According to the Circular No 02/2013 /TT- NHNN amended by Circular No 09/2014 /TT- NHNN, there are two... definition of bad debts stipulated in Circular 02/2013 /TT- NHNN, amending and supplementing Circular 09/2014/TTNHNN Clause Article Circular 02/2014 /TT- NHNN explains: “Bad debts are debts of groups 3,... trading market in Vietnam”, Banking Science and Training Review, Vol 186, p.44-52 Hoang Van Thanh (2017), “Some issues on the mechanism of buying and selling bad debts of Vietnam Asset Management