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.
Trang 1MINISTRY 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
Trang 2The work was completed in:
HANOI LAW UNIVERSITY
Scientific supervisors 1: Ass.Prof.Dr Nguyen Thi Anh Van
Trang 3INTRODUCTION
1 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 small3
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
1
Report on 5 year operation of VAMC
2
Fianancial statements in 2016, 2017 of DATC
3 National Financial Supervisory Commission: Financial Supervison Reports in 2016, 2017
Trang 4establishing 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
2 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
3 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
Trang 53.2 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
4 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
5 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
Trang 6Fourthly, 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
6 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
7 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
Trang 7assessing 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 joint-stock 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
Trang 8Fourthly, 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 state-
owned 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?
Trang 9- 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 1
Trang 10CHAPTER 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