Classification and Handling of Overdue Debt

International best practices are beginning to be applied in these policies. Solving capital problems for banks first focuses on the following solutions:

Firstly , commercial banks need to increase their charter capital to ensure real financial potential for these banks, to improve their finances and stand firm before integration. It can be generally stated that the increase in charter capital of commercial banks comes from the pressure of a number of new policies. As for Decision 457/2005/QD-NHNN dated April 19, 2005 on ensuring safety ratios in the operations of credit institutions (CIs), a series of best international practices on risk management at banks based on the Basel 1 and Basel 2 Agreements have begun to be applied. In particular, to ensure a minimum capital safety ratio of >8%, the capital factor includes Tier 1 capital and Tier 2 capital, in which the main part is still the charter capital, which plays a key role in determining the level of completion or non-completion of this ratio according to the regulations of each bank.

Second : According to Decree 166/ND-CP of the Government, commercial banks are allowed to set aside a reserve fund to supplement their charter capital annually at 5% of their net profit. However, due to the low profit rate, the allocation rate is low, so it is necessary to consider increasing this allocation rate to about 7% or a maximum of 10% within the next 3 years to help banks quickly increase their charter capital to be competitive and expand credit activities to serve economic growth targets.

Maybe you are interested!

• Classification Table of Overdue Debt Ratio by Collateral of Seabank
• Law on handling overdue debt in lending activities of commercial banks in Vietnam - 1
• On Handling Bad Debt With Market Solutions:
• Definition of Bad Debt and Overdue Debt
• Solution Group on Bad Debt Monitoring and Handling Violations of Vietnam's Commercial Banking System

Third : Equitize some State-owned commercial banks to increase capital for these banks, at the same time increase competitiveness and improve management organization while the State still holds controlling shares. In the immediate future, it is possible to equitize the Foreign Trade Bank through issuing shares to the outside, including to foreigners within certain limits. Immediately prepare conditions for listing shares of the Foreign Trade Bank on the Stock Exchange. It should be noted that equitization will only be carried out after separating policy lending from the functions of State-owned commercial banks. The next equitization subject could be the Industrial and Commercial Bank according to the same principles as applied to the Foreign Trade Bank.

Fourth: The State issues non-transferable bonds to raise money to provide additional capital for State-owned commercial banks. This is a temporary solution due to the lack of State financial resources.

The country is still limited. Non-transferable bonds allow the government to pay only annual interest on loans without or with little increase in the amount of money in circulation, limiting possible currency fluctuations. However, to prevent financial distortions caused by the issuance of this type of bond, it is necessary to balance the amount of this bond in the total annual debt of the Government and limit the type of bond to 5 years, and at the same time have a plan to arrange financial resources to prioritize the payment of this type of bond when conditions permit.

Fifth: ensure autonomy for commercial banks as stipulated by the Law on Credit Institutions, reduce government intervention in bank lending decisions. Only then will the asset quality of commercial banks be improved, creating conditions to achieve the goal of increasing the ratio of equity capital to total risk-adjusted assets. This is a conditional solution, consistent with the above 6 solutions, and at the same time stipulates the implementation capability of all four groups of solutions below.

3.2.2. Handling overdue debt

Clause 2, Article 13 of Decision 127/2005/QD-NHNN dated February 3, 2005 stipulates: “For loans that are not repaid on time, which are assessed by the credit institution as being unable to repay on time and are not approved for restructuring the repayment period, the principal balance of that credit contract is overdue debt and the penalty for late payment of overdue debt and loan interest debt shall be agreed upon by the two parties on the basis of provisions of law.

From the effective date of Decision 127, debt extension shall be carried out in accordance with the written regulations of each credit institution, in accordance with the provisions of Clause 6 of Decision 127. For loans after being classified into debt groups considered overdue debt, if during the following period, the borrower properly fulfills the debt repayment commitments and is assessed as having good reputation with the credit institution, then the customer's debts may be adjusted into debt groups with better debt quality, in accordance with the regulations on debt classification of the State Bank.

In the issue of handling overdue debt, it must be implemented synchronously for 3 subjects: commercial banks - enterprises - State, in which the State plays a decisive role. In the memorandum of understanding on Vietnam's economy and finance with the IMF, overdue debt of

State-owned commercial banks will be resolved through the Asset Management Company (AMC) of State-owned commercial banks and the Loan Workout Unit (LWU). To resolve overdue debts, State-owned commercial banks will apply the following processes and procedures:

Restructuring or sale of assets with a predetermined percentage of overdue debts in AMCs or LWUs.

Borrowers including state-owned enterprises (SOEs) will have their debts forgiven, reduced or rescheduled if they fully meet the conditions of their commitments to restructure the enterprise. State-owned enterprises that are being equitized, sold or dissolved will be given priority for debt reduction, debt forgiveness and rescheduled.

AMCs will handle overdue and outstanding debts to clean up their balance sheets according to the following mechanism:

 For outstanding debts with secured assets: Banks continue to base on Decision 149/2001/QD-TTg TTLT No. 02/2002/TTLT/NHNN, AMC will sell secured assets at market value to recover debt. In case the selling price is higher than the value of the loans, the difference will be included in income. On the contrary, if the value of the loan is higher than the selling price, it will be handled in the following two directions:

If the debt is subject to policy lending, the difference is covered by government funding.

If the debt is a regular loan, the source to cover the difference will be taken from the risk reserve fund of commercial banks.

 For overdue debts without collateral and no debtors such as dissolved, liquidated, bankrupt enterprises, deceased or missing individuals, etc., the debt will be cleared in the following direction:

If the debt is subject to policy loans, the difference will be offset by State financial resources.

If the debt is a regular loan, use the risk reserve fund to compensate.

cover

 For outstanding debts without collateral but the debtor is still operating, AMCs must focus on applying measures to recover the debt. In case the customer cannot pay the debt, the enterprise must be liquidated. If the liquidation value is lower than the loan value, the following measures shall be taken:

If the debt is subject to policy loans, the difference will be offset by State financial resources.

If the debt is a regular loan, use the risk reserve fund to compensate.

cover

Sources of capital to handle bad debt:

1. Annual risk reserve of commercial banks

2. Sources from the State Bank have previously refinanced commercial banks according to the targets.

such as loans for debt restructuring, debt forgiveness, overcoming natural disaster consequences, loans as directed by the government

3. Sources from WB and IMF loans to restructure commercial bank debt

4. The Government allows the State Bank to issue bonds to handle overdue debts for commercial banks.

The principle of debt settlement is:

 Grasp and classify debts to handle according to different subjects; creditors and debtors proactively organize debt collection and repayment according to current regulations; both provide unified and centralized direction, perfect policy mechanisms and take measures to improve corporate finance; form intermediary debt trading organizations to release outstanding debts for businesses.

 For bad debts due to objective reasons (including having sufficient evidence of being uncollectible or overdue for more than 5 years), they are accounted for in business results (if the enterprise is profitable) or the enterprise value is reduced (if the enterprise is not profitable).

 For bad debts due to subjective reasons for which responsibility has been determined, they must be strictly handled according to current law provisions; the remaining loss (not collected due to objective reasons) is handled as debt due to the above-mentioned objective reasons.

 For budget debts, enterprises must develop a debt settlement plan, mobilizing all available resources to offset budget-appropriated debts. If there are not enough resources to offset, enterprises must report to the competent authority for settlement.

 For bank debts, enterprises must develop a debt repayment plan and mobilize existing capital sources to repay bank loans. In case of extreme difficulties, discuss and agree with the bank to extend the debt, request the bank to consider reducing interest, writing off interest, and writing off debt according to regulations or convert the loan capital into bank capital contributed to the enterprise. Bank losses due to writing off or writing off debt for state-owned enterprises are handled in the following directions: accounting for business operating expenses, using the bank's Risk Compensation Fund, deducting from the State Bank's refinancing debt or receiving support from the State budget when banks do not have enough resources to compensate.

 For foreign debts guaranteed by local ministries, the guarantor agency shall preside over negotiations with creditors to reduce the debt to the lowest level and arrange the budget to repay the debt. The enterprise shall be responsible for repaying the budget.

 Promote the establishment of a company to buy and sell corporate debts and assets to thoroughly handle corporate debts and unnecessary assets, creating conditions for corporates to improve their finances and ensure effective production and business.

The Ministry of Finance established the State Asset Management and Debt Settlement Company to resolve the volume of overdue debts of SOEs to commercial banks, first of all to state-owned commercial banks. Only this Company has the ability and authority to handle State assets related to overdue debts, especially overdue debts arising from policy loans or under the direction of the Government. A principle that needs to be thoroughly understood throughout the process of handling overdue debts of the State Asset Management Company as well as of commercial banks is not to allow moral hazard to appear, meaning that banks and debtor enterprises take advantage of shifting all responsibility for overdue debts onto the State to clean up their balance sheets and continue to cause new overdue debts in the hope that the State will bear the burden. Therefore, AMCs have a policy of converting debts and assets in the financial market.

Use:

Below is the process of classifying and handling overdue debt that is being considered for use.

Diagram: Classification and handling of overdue debt

Is the loan still valid?

Are not

BANK

Mortgage or not

Debt collection department of the bank

AMC

No Yes No

Swap for non-transferable government bonds

3.2.3 Strengthening loan management

To reduce the proportion of debts and profitability, the focus of commercial banks is to strengthen loan management (customer classification, lending principles, loan security conditions such as mortgages) while still ensuring to contribute to providing enough capital for the economy, promoting high and stable growth. If increasing capital for banks and handling overdue debts are the main measures to make commercial banks healthy, then loan management

, risk provisioning and strengthening financial supervision are measures to prevent the emergence of new bad debts. Decision 127/2005/QD-NHNN dated February 3, 2005 has created a favorable legal environment for credit activities. Together with the new mechanism on debt classification, risk provisioning and use, this Decision aims to create positive changes for credit activities in the following aspects:

Firstly, credit activities continue to expand but with emphasis on improving and strictly controlling credit quality.

Second, the credit structure is shifted towards expanding lending to small and medium enterprises, collective and individual economies, as credit institutions have complete autonomy to consider and decide on lending, restructure debt repayment terms, exempt or reduce loan interest, and simplify lending procedures...

Third, the level of business safety and competitiveness of credit institutions are improved.

Fourth, credit institutions must review and revise policies and business management mechanisms to improve credit quality and risk management.

Fifth, credit institutions invest more in human resource training, apply new technologies to develop banking services and manage credit risks.

To minimize credit risk, before deciding to lend, banks need to evaluate the effectiveness and risk of that loan. The popular method in the world today is to analyze credit according to 5 criteria:

o Capital is the most important factor showing the financial potential of the customer. When evaluating the financial strength of the borrower, it is necessary to evaluate the financial status of the borrower and their expected income.

o Debt repayment ability determines credit quality. When evaluating repayment ability, it is necessary to analyze cash inflows and outflows, evaluate future income and profits of customers to confirm debt repayment sources based on analysis of customers' asset summary tables.

o Characteristics related to the customer's independence. The customer must have a high level of independence in business, have business capacity but not be too risky.

o Conditions are internal and external factors that can affect the customer's performance, which can be directly related to the risk of the loan. Credit analysts must predict the worst case to anticipate the risks that may arise during the loan period, especially for medium and long-term loans.

o Collateral is a guarantee for loans to increase customer responsibility and is also a price to guarantee the credit granted by the bank.

The above indicators are quantified and the bank bases on them to decide whether to lend or not. In addition, there must be a system including appraisal and lending that must be carried out by two different departments, independent and checking each other from the time of receiving the project to the time of approving the loan contract. To ensure loan safety, limit risks and losses, banks in developed countries often select loan objects and closely monitor the process of using loan capital of customers. New customers or customers who are not trustworthy enough to borrow must have highly liquid collateral or deposits. On the contrary, in developing countries, mortgaging assets seems to be mandatory and popular to avoid risks due to incomplete regulations on bankruptcy and bankruptcy insurance. In addition, there is a tendency to promote lending to state-owned enterprises backed by the State rather than lending to the private sector. The principles of lending management that commercial banks operating under market mechanisms need to strictly comply with are:

1. Screening and monitoring customers: collecting information about customers, classifying their creditworthiness. Lending specialization creates favorable conditions for banks to grasp and understand their customers. Continuous monitoring ensures that customers comply with the terms of the credit contract.

2. Long-term customer relationships and credit rules: Banks know more information about customers, the risk is reduced because both want to maintain long-term relationships and customers can enjoy incentives from the bank, including loans at low interest rates.