In recent years, irrecoverable debt has become an anxious issue in our country. Under statistics, by the end of 2016, the number of irrecoverable debt sold by credit institutions to VAMC reached 224 thousands of billion VND (equivalent to 85% of the total debt purchased by VAMC and about 4,3% of the total credit of the banking system). Further to the aforementioned, the number of doubtful debt between enterprises may be even higher. The quantity of bad debt is deemed as “clotted blood” obstructing the flow of capital and increasing the risk of credit operations. Due to the increase of provision for bad receivables, Banks are forced to maintain a high lending interest rate to save deficit covering, that created a barrier for free competition among the banking system. On the enterprise side, the higher interest rate and deficit covering offered by banks have increased the cost for utilization of fund, thus, increased cost price, decreased competitive power of goods, service and business production efficiency.
Up to now, the operation of debt trading has been centralized to VAMC, DATC and Companies for management of debt and exploitation of assets affiliated to Credit Institutions. Other enterprises can only participate in the auction of collaterals opened by VAMC or Credit Institutions. Due to such closing substance, the bad debt trading market has never been truely formed in Vietnam. Because the major of banking bad debt are being settled by VAMC and DATC, it is difficult to ensure transparency of such operations, in contrary, there are negative actions leading to losses incureed by banks and asset of bank as well as of corporation loaner.
(VAMC – the company specializing in buying bad debt of banks at present)
Many financial experts states that the current situation can only be resolved definably if a competitive market is truly created by the participation of different entities and which strictly organized and controlled by the State. Especially, new mechanisms are required for the possibility of deep participation of private organization and foreign investors in this field, thus, overcome existed inadequacies as well as attract foreign capital flow into the process of restructuring bad debts of domestic enterprises.
In response to the aforesaid requirement, on July 1st 2016, Decree No. 69/2016/ND-CP has been issued to make a push for the formation and stabilized development debt trading market in the direction of allowing the participation of enterprises and credit institutions. However, from the time of promulgation, a number of regulations and their feasibility as are surrounded by controversy, even doubful.
First of all, the applicable subjects as regulated in Decree 69 including enterprises and other entities in need of running debt trading services (Article 2), is narrow. Meanwhile, a number of entities operating in debt trading service are currently dismissed from the applicable subjects and have to wait for being adjusted in other provisions, such as: Credit institutions; Branches of foreign banks operating debt trading activities under law on credit institutions; Organizations and individuals carrying out bond trading activities under law on securities; Asset management company of Vietnam credit institutions trading debt under regulations on establishment, organization and operation of Asset management company of Vietnam credit institutions; Vietnam debt trading limited company operating debt trading activities under regulations of establishment and operation of Vietnam debt trading limited company; Stock exchange organizing securities trading under law on securities. According to experts opinions, this regulation is unable to cover remaining issues regarding debt trading activity needed to be settled.
According to Decree 69, debt trading activities is the transfer of a part or the whole rights of collecting debt and other related-rights from the seller to the buyer, thus, the debt buyer shall pay the debt seller. Therefore, the trading of debt service is the interrupted execution of one or certain activities related to the debt trading for profit purpose, including debt sale and purchase, brokerage, consultancy and trading floor services.
Regarding requisite conditions required for debt trading, individuals and organizations who intend to operate in debt trading service are obligated to establish a company with the minimum charter capital is VND 100 billion (Article 4.1 and 7.2); Whereas VND 5 billion required for Debt brokerage and debt consultancy enterprises; VND 500 billion required for debt trading floor services (Article 8.2). In addition, enterprises trading debt services also have to comply with other requirements and must register its business in the sector of debt trading service in accordance with the law.
Other limitation as stated in Decree 69 is “An enterprise running debt trading service is not allowed to be granted banking credit to buy debt from customers of issuance bank” (Article 7.5). The purpose of this regulation is to prevent the ability of buying outstanding borrowings to create new debt from the issuance bank (refunding operation). However, there is disagreements to the foregoing provision by giving an example to prove its limitations as follows: In case an enterprise trading debt is granted credit to buy a debt of customers outside of the issuance credit institution, the borrowing needs of such enterprise is certainly suitable with market rule because such enterprise will take responsible for any obligation arose from independent loans. Moreover, with a charter capital limited to VND 100 billion, credit institutions will face to many difficulties due to the exhibition of being granted credits.
One of the most expectations of enterprises running bad debt trading service is conditions of purchased of bad debt owned by VAMC or other Debt and asset management companies affiliated to credit institutions. Because most of bad debt of banks, credit institutions were practically transferred to VAMC for management and treatment, and the majority of these debts are collateralized, the aforementioned is expected as a huge lucrative merchandise for enterprises operating in bad debt trading service, but it is still ignored in the Decree 69.
In addition, the permission to foreign individuals and organizations to offer debt trading is also expected, because under the current regulations regarding establishment and operation of VAMC, the calling for foreign capital in the field of debt trading seems to be impossible due to the lack of detailed regulation of asset ownership of foreign organizations and individuals. Meanwhile, by fully obtaining legal documents in relation to bad debts, VAMC and banks are entitled to hold auctions to retrieve capital, contrarily to domestic enterprises having unsufficient financial capacity. Foreign organizations and individuals should be allowed to participate the market, however, this is not stipulated in Decree 69.
Although Decree 69 was issued in order to push up the formation and sustainable development of debt trading and resolve remaining issues of bad debt trading in Vietnam, but there are knots needed to be unlocked.
Lawyer Dinh Tran Nhat Minh – Vietthink Law Firm