Concept, Characteristics, Role of Securitization of Bad Debts of Commercial Banks

overdue less than 90 days but there are strong reasons to doubt that the loan will be fully paid”. Accordingly, bad debt will be determined based on two factors: overdue more than 90 days; and doubtful ability to repay the loan [33].

The Basel Committee on Banking Supervision (BCBS) defines in its guidelines on credit risk management: a loan is considered to be non-performing when one or both of the following conditions occur: the bank finds that the borrower is unlikely to repay the loan in full when the bank has not taken any action to attempt to collect; the borrower is more than 90 days overdue. According to the guidelines, non-performing loans will include all loans for which the borrower is unlikely to repay the loan in full in the future or loans that are 90 days overdue and show signs of non-performing loans [30].

The International Monetary Fund (IMF) defines a loan as non-performing when principal or interest payments are 90 days or more past due; when interest payments that are 90 days or more past due have been capitalized, restructured, or delayed by agreement; when payments are less than 90 days past due but there are clear signs that the borrower will not be able to repay the loan in full (bankruptcy). Once a loan is classified as non-performing, it or any replacement loan should remain non-performing until the loan is written off or the principal and interest on that loan or the replacement loan is recovered [45].

According to the European Central Bank (ECB), bad debts are loans that are not recoverable, such as: expired debts or debts with no basis for compensation from the debtor; or debtors who are absconding or missing, with no assets to pay the debt; or debts for which the bank cannot contact the debtor or cannot find the debtor; or debts that the debtor has terminated.

ceasing business operations, liquidating assets, or operating at a loss and the remaining assets are not sufficient to pay debts [29, p.9].

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Non-performing loans are loans that may not be fully repaid to the bank. This means that the bank cannot fully recover the debt because the debtor has difficulty making a profit from the business, or the debtor has not contacted the bank to make payments, or circumstances indicate that a large part of the debt will not be recoverable. According to Euro Central Bank, these include: debts for which the debtor has agreed to pay in the past, but the remaining part cannot be compensated, or debts in which assets have been transferred for payment but the remaining value is not enough to pay the entire debt; debts in which the debtor has difficulty paying and requests an extension of the debt but does not compensate the debt within the agreed time; debts in which the collateral is insufficient to pay the debt or the collateral at the bank is not legally accepted, resulting in the debtor being unable to fully repay the bank; debts in which the court declares the debtor bankrupt but the compensation is less than the outstanding debt.

Vietnamese law has early established regulations on bad debt. Decision No. 149/2001/QD-TTg on approving the project to handle outstanding debts of commercial banks does not introduce the concept of bad debt, but it can be understood that bad debt includes outstanding debts arising before December 31, 2000 and with no ability to repay. Regulations on bad debt in Circular 02/2013/TT-NHNN on classification of assets, provisioning levels, methods of establishing risk provisions and the use of provisions to handle risks in the operations of credit institutions and foreign bank branches are as follows: Bad debt (NPL) is debt in groups 3, 4, 5. Specifically, debt in group 3 is substandard debt; debt in group 4 is doubtful debt; debt in group 5 is debt with the possibility of losing capital.

Group 3 debt (substandard debt) includes: debt overdue from 91 days to

180 days; first-time extended debt; debt exempted or reduced interest due to the customer's inability to pay full interest under the credit contract; debt being recovered according to the conclusion of the inspection. In addition, group 3 debts fall into one of the following cases: debt of the customer or guarantor being an organization or individual that is not eligible for credit by credit institutions or foreign bank branches according to the provisions of law; debt that violates the provisions of law on credit granting, foreign exchange management and safety ratios for credit institutions or foreign bank branches;...

Group 4 debt (doubtful debt) includes: debt overdue from 181 days to 360 days; debt with restructured repayment term for the first time overdue less than 90 days according to the first restructured repayment term; debt with restructured repayment term for the second time; debt that must be recovered according to inspection conclusions but has been overdue for 60 days and has not yet been recovered.

Group 5 debt (debt with potential loss of capital) includes: debt overdue for more than 360 days; debt with the first restructured repayment term overdue for 90 days or more according to the first restructured repayment term; debt with the second restructured repayment term overdue according to the second restructured repayment term; debt with the third restructured repayment term or more, whether not overdue or overdue; debt that must be recovered according to the inspection conclusion but has been overdue for more than 60 days and has not yet been recovered; debt of customers being credit institutions announced by the State Bank to be placed under special control, foreign bank branches with capital and assets frozen.

1.1.2. Characteristics of bad debt

Bad debt is recognized by the following characteristics:

Firstly , bad debts of commercial banks arise in the lending activities of commercial banks. These loans are often of large value, established between two entities: commercial banks and individuals and organizations that need to borrow capital from commercial banks.

Usually, because the value of these loans is large, they need to be secured by assets such as real estate or personal property.

Second , bad debt is substandard debt. That is, bad debt is debt that is overdue for more than 90 days and is not able to be paid.

Third, the commercial bank must have solid evidence that the debt is irrecoverable. In other words, there are clear signs that the debtor is unable to pay the debt due to business losses, bankruptcy, asset disposal, procrastination, overdue debt payment, etc.

There are many different causes of bad debt, the most prominent of which are the following:

Firstly, the political-economic instability in the world as well as the impact of economic cycles and crises in the international financial and economic markets have a strong impact on domestic production and business activities. Meanwhile, the domestic economy is still facing difficulties and the quality of economic growth is not high, public debt is increasing rapidly. Vietnamese enterprises are currently heavily dependent on bank loans, production efficiency is still low, so when there are fluctuations from inside and outside, it directly affects the operating efficiency of borrowing enterprises, thereby indirectly and directly causing bad debt.

Second, the inadequate legal environment is also a contributing factor to bad debt. The legal corridor governing the operations of commercial banks, individuals, organizations, and enterprises has inadequacies and overlaps between legal regulations, creating difficulties for commercial banks in handling bad debt and collateral. In addition, the Government intervenes in the credit market as a way to help commercial banks and enterprises, increasing the ability of commercial banks to handle bad debt. Banks will tend to lend to state-owned enterprises because the government will almost always guarantee the risks.

Third, the capital market has not yet developed adequately, so the banking system is still the main funding channel for investment and development. Therefore, the risks of the financial system are also the risks of the banking system. At the same time, because the growth model for many years still depends on extensive investment and the use of borrowed capital, the bad debt of the economy is mainly the bad debt of the banking system.

Fourth, the credit procedures of some organizations are not strict, creating loopholes for bank staff and customers to take advantage of. In some credit institutions, risk management capacity is still limited. Internal inspection and control work is not good, compliance with regulations is not high, ethical standards for bank credit staff are not given attention, leading to risks in lending.

Fifth, the inspection and supervision work of the State Bank is still limited and has not fully met the development requirements of the credit institution system in the new situation. The capacity and qualifications of a number of banking inspection officers are still inadequate, and there are still a few cases where banking inspection and supervision officers have allowed violations of the law to occur.

1.2. Concept, characteristics, and role of securitization of bad debts of commercial banks

1.2.1. Concept of securitization of bad debts of commercial banks

Securitization is defined in many different ways. The US Securities and Exchange Commission defines it as follows:

Securitization is the creation of securities based on the fixed or recurring cash flows of a segregated set of receivables or financial assets. These securities, depending on their maturity structure, will be converted into cash within a specified period of time, along with other benefits and rights to the assets used for

ensure the repayment of debts or the periodic distribution of proceeds to the holders of securities [57].

According to Singapore law:

Securitization is essentially a process in which assets or interests in assets are sold or transferred to Specialized Vehicles (SPVs) that raise capital by issuing securities primarily backed by those assets [55].

According to the definition of OECD countries in 1995: Securitization is the issuance of marketable securities secured not by the issuer's ability to pay, but by the expected revenues from special assets.

In short, securitization can be understood as a process of creating a marketable financial instrument by merging or grouping financial assets into a group in the form of different types of bonds or stocks, and these securities can be secured by mortgages or a reputable financial institution or a government agency and traded on the market.

Securitization of bad debts of commercial banks is the process of collecting and packaging bad debts of commercial banks by a specialized intermediary organization (SPV) after being determined by credit rating organizations, then used as security to issue securities. Money from buyers of these securities will be transferred to financial intermediaries providing mortgage loans so that these intermediaries can lend money to people who mortgage their assets.

In essence, any asset can be securitized. However, securitization is typically applied to

loans and other assets that generate receivables such as consumer or commercial debts. Debts may include contractual debt such as system loans, credit card obligations, etc.

1.2.2. Characteristics of securitization of bad debts of commercial banks

Securitization has the following characteristics:

Firstly , the subject of securitization is bad debts, specifically bad debts of commercial banks. In other words, these are debts that are not able to be paid, overdue debts that are not able to be paid. These debts are secured by mortgaged assets or a reputable financial institution.

Second , non-performing loans or loans that are commonly securitized include: residential mortgages; consumer loans; commercial loans. These loans vary in the level and credit risk verification of the loans. Initially, the majority of assets securitized were typically mortgage loans, but more sophisticated forms of securitization have emerged since the credit crisis. Mortgages have low credit risk and are easy to verify credit risk because most mortgages are secured. Consumer loans typically suffer from medium to high credit losses. The credit risk verification of credit loans is also relatively high because consumer loans are homogeneous and standardized loan products. Banks typically securitize all of their consumer loans that meet specific criteria, which significantly reduces the problems with banks moving some loans to retain versus securitization. Meanwhile, commercial loans have relatively high credit risk and are more difficult to verify credit risk because they are large, less standardized and non-uniform loans.

The credit risk assessment for this loan is relatively low [58].

Third , the subjects participating in securitization include: the Originator, the specialized securitization intermediary organization (or “the Securitisation Special Purpose Entity”), the Underwriter, the Credit Rating Agencies, the Investors, the Servicer, the Trustee, the Asset Management Organization, and the Sponsor [40].

Fourth , securitization is the process of restructuring a unified entity by grouping assets into groups according to the cash flows that this group of assets generates. These groups of assets must be relatively homogeneous and transferable, generating cash flows at certain times in the future; at the same time, these assets must be relatively large, including many assets in which the risk of one or a few assets does not affect the value of that group of assets; the right to receive cash flows generated from the above group of assets does not depend on the existence or bankruptcy of the original owner of the assets. These groups of assets will be sold on the market at a certain face value in the form of securities. The issued securities can be secured by a real asset (mortgage) or unsecured (receivables).

Fifth , there are many different types of securitization products created, of which the two main products are ABS and MBS. ABS (Asset-backed securitization) is a security (bond) issued on the basis of a security secured by an asset or a cash flow from the issuer's underlying asset pool (for example, interest from a credit card account...). This security is sold to investors where the principal and interest depend on the cash flow generated by the underlying financial asset pool. ABS often have structures

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