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| At a transaction office of Vietcombank in Hanoi__Photo: VNA |
The State Bank of Vietnam (SBV) is gathering public input on a draft law revising the 2024 Law on Credit Institutions, which proposes the legalization of three policies piloted under Resolution 42/2017/QH14, with a focus on strengthening the management of non-performing loans (NPLs) and dispersing risks.
Supporting credit institutions in the recovery of NPLs
The draft law introduces three key policies aimed at addressing obstacles in the recovery of NPLs.
Firstly, it codifies the right to seize collateral—particularly in cases where the asset holder fails to hand over assets as scheduled.
Under Article 301 of the 2015 Civil Code, the secured party may receive the collateral as a substitute for the securing party’s obligation if such an arrangement is agreed upon at the time of establishing the security transaction. The securing party is required to carry out the legal procedures for transferring ownership of the asset to the secured party. However, the Code does not explicitly provide for the right of the secured party to seize the asset. As a result, if the asset holder refuses to cooperate or intentionally delays handover, the asset repossession process will be postponed, leading to increased provisioning pressure, suspension of accrued interest, and higher capital mobilization costs. This situation forces credit institutions and debt settlement companies to initiate lawsuits and rely on the enforcement of court judgments.
To address this, the draft law proposes to revise Article 198a of the 2024 Law, enabling credit institutions to proactively handle NPLs without being overly reliant on decisions from authorities. It should be emphasized that the right to seize collateral must be based on mutual agreement within the security contract. This provision does not grant credit institutions unrestricted authority to repossess collateral but requires them to comply with applicable regulations.
Secondly, under current regulations, the distraint of collateral is carried out by the judgment enforcement agency. If the judgment debtor has no other assets or if their assets are insufficient to fulfill the judgment, the enforcement agency has the authority to distrain and dispose of pledged or mortgaged assets when their value exceeds the amount of the secured obligation plus enforcement costs. This regulation may significantly affect the rights of secured creditors and could even lead to an increase in the ratio of NPLs in the financial system. In particular, if assets formed through loans from credit institutions and pledged as collateral for repayment obligations are seized and disposed of as currently prescribed, credit institutions may lose crucial collateral. Such a regulatory approach not only reduces the likelihood of successful debt recovery but also increases the NPL ratio, posing serious risks to the financial health of credit institutions.
The SBV proposes that collateral used to secure NPLs owed by judgment debtors should not be subject to distraint for any obligations other than repayment obligations as prescribed by the law on civil judgment enforcement—except in cases involving enforcement of judgments or decisions on alimony, compensation for loss of life or health, or where there is written consent from the relevant parties. If approved, this provision would protect the rights of credit institutions as creditors during enforcement proceedings.
Thirdly, to better protect the rights and interests of credit institutions, the draft law adds provisions on the return of collateral assets used as exhibits in criminal cases, as well as collateral assets that serve as exhibits or means in administrative violations.
Article 106.3 of the Criminal Procedure Code provides for the return of seized or temporarily held assets but does not specify whether—and how—collateral, once identified as evidence, is to be returned. Similarly, Article 126.1 of the Law on Handling of Administrative Violations states that in cases where administrative violation-related exhibits or means of violation are subject to confiscation but have been registered as secured assets, the secured party is entitled to receive the asset or a value equivalent to the secured obligation. However, the law does not address situations in which the competent authority decides not to apply confiscation measures, potentially resulting in the collateral being returned to the asset owner and causing losses to credit institutions.
Possible impacts on businesses
The upcoming amendments to the 2024 Law on Credit Institutions are expected to have significant impacts on business operations.
A sound and efficiently functioning banking system plays a crucial role in maintaining a stable flow of capital throughout the economy. When NPLs are resolved, credit capital is no longer tied up in irrecoverable debts, enhancing liquidity and optimizing financial circulation. As a result, businesses with legitimate borrowing needs may benefit from more favorable lending conditions, including potentially lower interest rates, as banks reduce the burden of provisioning for bad debts.
Moreover, the recovery of delinquent debts allows banks to allocate capital more proactively and flexibly. Instead of being constrained by unrecoverable loans, credit institutions will have greater capacity to direct resources into promising production and business sectors. As NPL-related risks decline, competition among credit institutions may intensify, leading to preferential credit packages and more flexible lending terms. Consequently, businesses may benefit from easier access to capital, improved financial efficiency, and opportunities for expansion.
However, as analyzed by lawyers Cao Nguyen Bao Lien and To Kien Luong from HM&P Law Firm in an article published in Banking Review, businesses should pay close attention to the terms of collateral and credit contracts. Under the new draft law, credit institutions may repossess collateral without court proceedings if such a provision is included in the contract. Although safeguards are in place, borrowers risk losing key assets quickly in the event of a breach. To mitigate this, businesses should adopt prudent borrowing strategies and prepare contingency plans to avoid legal and financial setbacks.- (VLLF)
