Ngo Thai Ninh (Daniel), Nguyen Phuoc Anh Tram and Dang Hoang Nguyen
Baker McKenzie Vietnam
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| Customers conducting transactions at the Operations Center of BAOVIET Bank__Photo: Tran Viet/VNA |
The settlement of non-performing loans (NPLs) has long been a thorn in the side of Vietnam’s banking system. In a bid to tackle this persistent issue, the National Assembly in 2017 introduced Resolution 42, a pilot mechanism that gave credit institutions, foreign bank branches, and debt trading entities the authority to take the initiative in seizing secured assets. Originally effective from August 15, 2017, to August 15, 2022, the resolution was later extended through December 31, 2023, under Resolution 148/NQ-CP to buy more time for reform. With that extension now expired, lawmakers have moved to permanently enshrine and strengthen the asset seizure framework in the Law Amending the 2024 Law on Credit Institutions (the Law). Slated to take effect on October 15, 2025, the Law marks a turning point in Vietnam’s legal approach to bad debt recovery. This article unpacks the rationale behind the reform, its key provisions, and what it means for the financial sector going forward.
Long-standing enforcement challenges
For years, the enforcement of security interests and the seizure of secured assets in Vietnam have faced persistent practical hurdles. These challenges largely stem from difficulties in implementation, particularly in cases involving uncooperative securing parties or the absence of clear mechanisms for coordination with local authorities.
Securing parties’ non-cooperation
Most defaulting securing parties refuse to voluntarily hand over secured assets, especially when those assets are residential or income-generating. In the case of immovable assets (such as land use rights or houses), enforcement is frequently delayed by claims of family hardship, the initiation of legal disputes, or even physical obstruction. Movable assets (like vehicles or equipment), meanwhile, are often intentionally hidden, transferred, or sold to third parties despite being under encumbrance. Securing parties may also resist inspection attempts by enforcement officers from credit institutions or foreign bank branches.
In practice, to manage this risk of non-cooperation, credit institutions and foreign bank branches often require securing parties to sign a contract of mandate in advance, authorizing them to enforce security interests and seize the assets once an enforcement event occurs. However, under Article 569 of the 2015 Civil Code, such authorization is typically revocable at will by the grantor (i.e., the securing party), regardless of any agreed remuneration. While parties may contractually agree on irrevocability, the enforceability of those terms remains legally unclear. Local authorities are often reluctant to accept such authorization as a valid basis for asset seizure without a court ruling, resulting in widely inconsistent enforcement in practice.
Another contractual safeguard commonly used by credit institutions and foreign bank branches is to obtain written notices from securing parties, along with corresponding acknowledgments from third parties holding or managing the secured assets. These third parties may include account banks, contractual counterparties to mortgaged rights, insurers, target companies whose shares or capital contributions are secured, and depository members. The notices typically confirm that the third parties are aware of the security arrangements and agree to cooperate with the credit institutions or foreign bank branches in the event of seizure or enforcement, for instance, by transferring control of the assets, releasing funds to the secured parties, or refraining from following conflicting instructions.
In practice, however, the effectiveness of these instruments can be limited. Third parties may become hesitant to comply when disputes arise or when conflicting contractual obligations exist between them and the securing parties. A tenant of a mortgaged house, for example, may delay vacating the premises despite having acknowledged the secured party’s rights, citing unresolved rent disputes or informal side agreements. Such situations frequently result in enforcement bottlenecks, delaying or obstructing the ability of credit institutions and foreign bank branches to recover secured assets.
Administrative limitations
Local authorities are often hesitant to intervene in enforcement activities when credit institutions and foreign bank branches request support. This reluctance can take several forms. For example, the commune-level People’s Committee may refuse to sign seizure minutes as a witness to the proceedings; the local police may decline involvement, citing the seizure of secured assets as a civil matter between lenders and borrowers; and administrative agencies may delay routine tasks, such as verifying a securing party’s address or household information, thereby stalling the entire enforcement process.
Social backlash
Even when enforcement is legally justified, credit institutions and foreign bank branches may hesitate to proceed due to reputational concerns and the risk of public backlash. This is particularly the case when the securing party is a vulnerable individual, such as an elderly person, a low-income earner, or someone with dependents, or when the secured asset is their only home. In such situations, seizure actions can provoke strong public reactions, discouraging lenders from following through.
Resolution 42 and its impact
It was Resolution 42 that helped address many of the long-standing barriers to asset enforcement. As a pilot legal framework, it marked a significant move to allow credit institutions and foreign bank branches to seize secured assets once enforcement conditions were met, without requiring a court judgment or ruling. Over its seven-year implementation, the resolution contributed to notable improvements: Voluntary repayment rates rose, more NPLs were resolved through sales, auctions, and asset disposals, and the average monthly volume of settled NPLs increased from around VND 3.52 trillion during the 2012-17 period to VND 5.8 trillion by the end of 2023.[1]
Despite these gains, the expiration of Resolution 42 on December 31, 2023, has created a temporary legal vacuum. In the absence of a statutory framework, credit institutions and foreign bank branches in Vietnam are now forced to navigate lengthy court proceedings to enforce asset seizures, thus driving up collection costs and provisioning burdens, particularly for retail-focused lenders. As a result, credit growth has slowed, and the scope to lower lending rates has become increasingly limited.[2]
As of July 2024, signs of stagnation in NPL settlement have begun to surface. The on-balance-sheet NPL ratio climbed to 4.75 percent, up from 4.55 percent at the end of 2023 and 2.03 percent at the close of 2022. By January 2025, the ratio had edged down to 4.3 percent but remained elevated, reflecting the lingering impact of the regulatory vacuum left by the expiration of Resolution 42.[3]
From pilot to permanent reform
Salient provisions of the Law
The Law preserves the core enforcement mechanism established under Resolution 42, while introducing key refinements aimed at improving its effectiveness. One major development is the formal recognition of the right of credit institutions and foreign bank branches to seize secured assets, now backed by the involvement of commune-level People’s Committees and local police to help maintain public order during enforcement. Crucially, this right applies only when explicitly provided for in the security agreement and remains subject to notification and disclosure requirements. Delegation of seizure authority is allowed but limited: Credit institutions may assign this power only to their internal asset management companies (AMCs), while debt purchasers may delegate it solely to the selling credit institution or its AMC. In case of mandatory transfers, the right may be assumed only by the acquiring credit institution or its AMC.
To address the obstacles encountered during the implementation of Resolution 42, the Law introduces a series of additional safeguards and procedural enhancements. Secured assets must now satisfy further conditions to be detailed in forthcoming regulations of the Government. If the assets are subject to a stay under bankruptcy proceedings, seizure will be postponed until the legal process concludes. The Law also streamlines the delivery of seizure notices, aiming to minimize delays caused by outdated or inaccurate address information. Additionally, credit institutions and foreign bank branches are now required to adopt internal policies governing the seizure process, including clearly defined delegation protocols. Most significantly, the Law broadens the scope of the seizure right to cover all NPLs, regardless of when they arose,[4] a departure from Resolution 42, which limited its applicability to NPLs incurred prior to August 15, 2017.[5]
Implications and outlook
The Law marks a significant step in institutionalizing asset enforcement in Vietnam’s banking sector, offering much-needed legal clarity around the seizure of secured assets.
For credit institutions and foreign bank branches, it provides tangible benefits in enhancing debt recovery. Market observers anticipate the reform could help bring the system-wide NPL ratio below 3 percent. A faster resolution of bad debts is expected to ease provisioning burdens, reduce legal costs, and mitigate credit risks, ultimately enabling lenders to lower interest rates and improve credit access for both consumers and businesses. Institutions with a retail lending focus, particularly those handling high volumes of small or auto loans, stand to benefit most. Meanwhile, acquiring banks involved in the mandatory transfer of distressed lenders, such as MB, HDBank, Vietcombank, and VPBank, may find the new framework critical to accelerating turnaround efforts.
The reform also helps ease pressure on the judiciary by reducing the number of cases that require litigation to enforce the seizure of secured assets, thereby improving system efficiency and conserving judicial resources. It also has important implications for risk management. A clear and enforceable seizure regime enhances transparency, enables more accurate credit risk assessment, and strengthens internal governance standards.
However, the strengthened right to seize assets must be balanced with adequate protections for vulnerable borrowers, such as individuals or small- and medium-sized enterprises, who may lack bargaining power or legal awareness, particularly in cases involving disputes or force majeure events. Enhanced enforcement authority without corresponding safeguards could subject weaker securing parties to undue pressure or procedural disadvantages. Many may not fully grasp the legal consequences of default or the implications of contractual clauses permitting seizure. Others may face legitimate hardship, such as pandemic-related losses or natural disasters, that call for flexible handling rather than immediate enforcement. As such, equitable procedures and proper oversight are critical to prevent abuse and uphold public trust.
While the law represents a significant legal advancement, it does not fully resolve the entrenched enforcement challenges faced by credit institutions and foreign bank branches. Although it places obligations on commune-level People’s Committees and local police to support enforcement efforts, the absence of implementing decrees or inter-agency protocols renders those obligations largely discretionary. As a result, enforcement may still hinge on local interpretation, resource availability, and other factors. In practice, credit institutions and foreign bank branches continue to face inconsistent responses from local authorities. The lack of uniformity across provinces risks ongoing delays and legal uncertainty, potentially undermining the very purpose of codification. This underscores the urgent need for detailed implementation guidance, including clear procedures for coordination, standardized reporting mechanisms, and enforcement timelines. The guidance should also establish administrative accountability measures and sanctions in case of unjustified refusal or failure to provide assistance.
Furthermore, despite the codification, credit institutions and foreign bank branches may still hesitate to initiate asset seizures in case social backlash is likely, due to reputational concerns. This pressure can dilute the intended impact of the Law and prolong the resolution of NPLs. Clear public communication strategies and standardized enforcement protocols could help mitigate this risk and reinforce lender confidence in applying the Law.-
[1] Report summarizing the implementation of Resolution 42, Chapter XII and some provisions of the 2024 Law on Credit Institutions, Section II. 2.2 (iv).
[2] Report summarizing the implementation of Resolution 42, Chapter XII and some provisions of the 2024 Law on Credit Institutions, Section II. 2.3 (a).
[3] Report summarizing the implementation of Resolution 42, Chapter XII and some provisions of the 2014 Law on Credit Institutions, Section II. 2.3.
[4] The 2024 Law on Credit Institutions, Article 195.
[5] Resolution 42, Article 4.1.
