On Handling Bad Debt With Market Solutions:

“… To circumvent the law, they put the money in the names of their children, grandchildren, relatives, and acquaintances, going through many rounds, making it impossible for the bank to control, and even the State Bank Inspectorate cannot control it, and only the investigation agency can clarify that matter. ” (Le Xuan Nghia, 2013).

This assessment is very well-founded, because as analyzed, cross-ownership creates incentives for banks to ignore requirements on credit appraisal and customer monitoring, because the bank's interests are closely tied to the interests of the affiliated enterprise itself, while the risks are shared equally among all bank shareholders, including minority shareholders and shareholders who do not have control over the bank.

Bad debt is currently clogging the blood vessels of the economy and bad debt settlement is considered a key task that the State Bank is urgently carrying out. There are some doubts about the feasibility of this bad debt settlement measure, a topic beyond the scope of this study. The problem here is that if overlapping ownership is considered one of the causes of high bad debt in the banking system, then in order for bad debt to be settled completely, the overlapping ownership situation must be resolved. In other words, bad debt settlement must be accompanied by stronger and more substantial measures to restructure banks, especially the issue of overlapping ownership must be handled with a series of tougher and more effective measures than what the Government and the State Bank are currently implementing.

4.3.5. On handling bad debt with market solutions:

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Unlike China, which has formed quite complete primary and secondary markets for the purchase and sale of bad debts, these markets in Vietnam have not yet been clearly formed, both in terms of legal framework and in practice. Therefore, direct solutions to handle bad debts are not effective in practice:

(i) Proposing that existing shareholders seek new shareholders to contribute additional charter capital to compensate for the decrease in equity when fully setting aside provisions for bad debt risks : in reality, domestic shareholders do not have real money to contribute additional capital, but in essence, borrow from other credit institutions to maintain control; while foreign shareholders are still restricted by the limit on share ownership.

Even if these restrictions are relaxed, foreign shareholders will only be willing to buy large stakes if they gain real governance rights, not just nominal board participation.

(ii) Issuing secondary debt in the form of convertible bonds to increase tier 2 capital : in reality, investor demand for this type of security is very limited when the potential for stock price increase in general and bank stocks in the Vietnamese stock market in particular is not much.

(iii) Debt reduction solutions, auctioning debt reduction rights, repurchasing bad debts through negotiation and at market prices, securitization and debt swaps, and using private debt restructuring companies : are not feasible in practice because the private debt trading market is still underdeveloped and for state-owned commercial banks, selling debt to a private organization at a discounted price is impossible without the consent of the State Bank because they may be held responsible for "loss of state assets".

(iv) Bankruptcy of weak commercial banks : the enforcement of bankruptcy law in Vietnam is very complicated and tends to protect debtors, especially debtors who are organizations instead of creditors. Specifically, proposals to amend regulations on the mechanism of judgments on the return of mortgaged assets by the court, limit the reasons for appeal by debtor organizations during the enforcement process, and strengthen measures to deal with bad debtors who conceal assets have been proposed but not implemented. Therefore, up to now, there has not been a single case of restructuring bank debt of state-owned enterprises using bankruptcy procedures. Therefore, from the perspective of Vietnamese commercial banks, if debtors go bankrupt, the possibility of recovering the loan is not much, so these commercial banks also limit the use of bankruptcy mechanisms for enterprises to recover debts.

4.3. Some policy recommendations for Vietnam in the upcoming restructuring period of the commercial banking system from the experience of reforming the Chinese banking system:

From the perspective of theory and experience in reforming China's banking system in the recent period, it can be seen that the process of restructuring banks and handling bad debts in the Vietnamese system is still in its early stages and mainly focuses on short-term solutions. In the coming time, Vietnam needs to accelerate

The process of handling current bad debts in the banking system (through perfecting the legal framework and strengthening the capacity of VAMC; developing the debt trading market...) as well as paying more attention to handling systemic causes (through bank restructuring measures, applying modern risk management standards; combining with reforms in other economic sectors...) to prevent new bad debts from forming in the future, ensuring the sustainability of the restructuring process and solutions.

4.3.1. Regarding the legal framework for commercial banks to carry out restructuring:

Based on the experience of applying financial support policies, cost reduction and roadmap for compliance with safety regulations in China during the process of reforming the country's banking system, Vietnam can consider applying:

Firstly, there should be policies and regulations on reasonable tax and fee exemptions and reductions related to the purchase and sale of bad debts and assets securing loans; exemptions and reductions of corporate income tax for a number of years for commercial banks after acquisitions, mergers and consolidations; tax and fee exemptions and reductions to encourage commercial banks to actively participate in the process of handling "weak" commercial banks, supporting these commercial banks to reduce the financial burden in the process of restructuring and handling bad debts.

Second, there is a lending policy, supporting capital with reasonable interest rates in the form of recapitalization for commercial banks participating in restructuring "weak" commercial banks from the money supply of the State Bank to ensure payment capacity and create capital for expanding operations.

Third, allow commercial banks participating in handling "weak" commercial banks to implement a roadmap for setting up risk provisions according to regulations to support commercial banks in overcoming financial problems as well as supporting commercial banks in restructuring, merging, and consolidating to reduce pressure on time for handling losses.

Fourth, allowing commercial banks to participate in handling "weak" commercial banks (through mergers and consolidations) is maintained and there is a roadmap for handling some violations arising from mergers, consolidations, and restructuring such as share ownership, credit granting, etc. exceeding the limit, not fully meeting the operational safety ratios.

4.3.2. Regarding the agency handling bad debt in the banking system :

Based on the experience in implementing the bad debt settlement roadmap and the practical operations of AMCs in China, Vietnam can consider building a bad debt settlement roadmap for VAMC and AMCs as follows:

Firstly, it is necessary to develop a suitable roadmap for each group of banks for the application of asset classification and risk provisioning: With a specific roadmap for each group of healthy and weak banks, the application of Circular 02/2013/TT-NHNN dated January 21, 2013 and Circular 09/2014/TT-NHNN dated March 18, 2014 of the State Bank of Vietnam will not shock the market, avoiding damaging market confidence due to repeated postponements of effectiveness.

Second, develop a process for evaluating enterprises before publishing on the Credit Information Center of the State Bank of Vietnam (CIC): It is necessary to have a process for comprehensively evaluating the current situation of each enterprise for each loan and each investment project before determining the debt group of the enterprise at the Credit Information Center (SBV), to avoid causing difficulties for enterprises facing temporary risks for certain projects.

Third, develop a decentralized bad debt handling model in parallel with the centralized model : The centralized model is a short-term bad debt handling model within 5 years, while the decentralized model is a long-term operating model both during and after restructuring. Therefore, developing both models in parallel will help maintain and promote the results of the bad debt handling process, even after the restructuring period has ended.

Fourth, propose a special mechanism for VAMC: VAMC needs to have special powers such as a separate law on bad debt handling, helping to minimize obstacles in handling bad debt and speed up debt trading, such as: (i) the right to handle bad debts in the position of the lender and without the need for approval from debtors during the debt trading process; (ii) the right to appoint a special administrator to handle debts for businesses in difficulty and unable to repay debts; (iii) sufficient power to confiscate collateral, including real estate, without having to go through the court; (iv) have representatives from the Ministry of Finance, the State Bank, the private sector, and the foreign investment sector participating in the VAMC's executive board; (v) Need to increase charter capital to increase the confidence of foreign investors.

Fifth, there should be specific guidelines on handling bad debts for commercial banks . First of all, it is necessary to issue specific guidelines on VAMC's authorization for commercial banks in handling bad debts. At the same time, issuing specific guidelines on handling bad debts (discount rates, handling time) will also help banks be more proactive in removing bad debts from financial statements.

Sixth, build policies to attract foreign investors. Experience in handling bad debt successfully in Korea and failure in Japan shows that foreign investors play a very important role in the process of handling bad debt, in which, the important and urgent thing is to adjust and amend the Land Law and the Real Estate Business Law to ensure the rights of foreign investors according to international practice.

Seventh, build a debt trading market. A real debt trading market including both primary and secondary markets will help mobilize diverse domestic and foreign resources to participate in handling bad debts. Therefore, it is necessary to synchronize debt trading processes and internationalize accounting standards for the debt trading market to operate effectively. Establishing a direct relationship between VAMC and AMCs of commercial banks to create a market is also a necessary requirement in the current period.

Eighth, develop the bond market and create a legal corridor for securitization of bad debts. Build a deep capital market with various tools, especially the establishment of a bond market to create an alternative capital mobilization channel for banks (such as simplifying the bond issuance process with regulations on classifying bonds according to risk levels suitable for investors, insurance for the bond market, etc.).

4.3.3. On developing the bad debt trading market in the banking system:

Based on the similarities and differences between the Vietnamese and Chinese banking systems, some policy recommendations can be drawn for Vietnam in developing the bad debt trading market to mobilize resources from economic sectors to participate in bad debt handling as follows:

Firstly , in terms of viewpoint, it is necessary to put the issue of developing the bad debt trading market in the overall project of handling bad debt and restructuring credit institutions, considering this as a solution that is both immediate and indispensable for VAMC and AMCs.

Commercial banks operate effectively, are long-term, and create an infrastructure to respond to the risk of bad debt crises in the future.

Second , although this is a market solution, the State needs to play a pioneering role in building a legal framework for the bad debt trading market to operate, and at the same time have timely policies to regulate the supply and demand of this market. The bad debt trading market consists of two levels, the primary market (where transactions take place between credit institutions and bad debt handling organizations) and the secondary market (where transactions take place between bad debt handling organizations and investors and between investors themselves). Therefore, each market needs a different appropriate development and regulatory policy framework. At the same time, because the bad debt trading market is related to many different areas of state management, there needs to be a unified management agency for this market, avoiding overlapping management as experienced in China.

Third , in the primary market, it is necessary to simultaneously develop a centralized processing system (VAMC) and a decentralized bad debt processing system (AMCs) to handle bad debts more thoroughly; at the same time, the State needs to have regulations to promote credit institutions to speed up the process of handling bad debts (such as increasing the mandatory provisioning ratio if after a certain period of time credit institutions have not resolved the declared bad debts, not allowing credit institutions to pay dividends if they do not make adequate risk provisions...).

Fourth , the secondary market is where bad debts are actually handled (sold to investors), so it is necessary to build a policy framework that ensures feasibility and effectiveness in practice (reducing transaction costs, taking advantage of resources from private investors, especially foreign investors). Specifically, it is necessary to (i) standardize the process of valuation, debt trading (and transfer of related collateral) according to international practices; (ii) have preferential policies on taxes and fees for investors;

(iii) amend some current regulations that are barriers to foreign investors (such as ownership limits for foreign investors, regulations related to real estate transfer and use, etc.); (iv) have a policy to select foreign investors with financial capacity and experience in handling bad debt (through developing a set of criteria and conditions for participating in the secondary debt trading market) to avoid risks from speculative activities and market manipulation.

Fifth , it is necessary to quickly complete the legal basis for bad debt securitization activities . This, along with the development of the secondary bad debt trading market, will help the debt restructuring process and the sale of (securitized) debts reach more investors.

Sixth , China's theory and experience show that the bad debt market is closely related to the real estate and securities markets and the operations of the SOE sector. Specifically, most bad debts are directly or indirectly related to real estate; the securities market reflects the business status of enterprises - the main debtors of banks; SOEs account for a large proportion of total bad debts as a result of development finance credits with poor commercial performance accumulated over many years. Therefore, in order for the bad debt market to operate effectively and prevent new bad debts from arising, it is necessary to have policies to restore the real estate and securities markets as well as to promote reform of the SOE sector.

4.3.4. On the purchase, merger and consolidation of commercial banks:

Experience from delays and shortcomings in the purchase, merger and consolidation of weak commercial banks in China shows that to successfully carry out this process, Vietnam needs to:

Firstly, legal documents need to unify the concept of credit institution acquisition. Specifically, credit institution acquisition should be understood as purchasing all assets, rights, obligations and legitimate interests of the acquired credit institution. After the acquisition, the acquired credit institution becomes a subsidiary of the acquiring credit institution.

Second, there should be additional regulations on the protection of minority shareholders and the rights and obligations of indirect entities involved in the merger and acquisition of credit institutions. In addition to requiring credit institutions to repurchase their shares, strategic shareholders of credit institutions before being acquired, merged, or consolidated can request the company to issue additional shares to them to ensure their previous holding ratio. In addition, legal documents need to supplement indirect entities involved in the merger and acquisition of credit institutions (law firms, auditing firms, brokerage firms), along with strict conditions for these entities to participate in the merger and acquisition of credit institutions in Vietnam.

Third, legal documents need to study and develop regulations on asset valuation when implementing acquisitions and mergers of credit institutions. It is necessary to fully reflect the tangible and intangible values of credit institutions. Valuation of a credit institution does not necessarily use a specific method, but can apply many methods depending on the conditions of each credit institution. Practice shows that in M&A transactions, there is always a conflict of interest between the buyer (wanting to buy the credit institution at a low price) and the seller (wanting to sell the credit institution at a high price), so many M&A transactions fail mainly due to the problem of not being able to determine the appropriate price between the parties. Therefore, asset valuation when implementing M&A needs to be regulated to be assigned to an independent intermediary such as an auditing company or a professional valuation organization, in order to ensure objectivity in determining the appropriate price.

Fourth, it is necessary to standardize the sample contracts for the purchase and sale of credit institutions. The sample contract for the acquisition and merger of credit institutions needs to be researched and developed and regulate specific areas such as (i) conditions for acquisition and merger,

(ii) rights and obligations of the parties, (iii) Coordination in resolving outstanding debts of the acquired/merged credit institution, (iv) other provisions such as dispute resolution and labor plan ( in addition to the contents stated in the Enterprise Law and Circular 04/2010/TT-NHNN) .

Fifth, it is necessary to specify the time of information provision when buying and selling, merging credit institutions. To limit the negative impact/fluctuation in the operations of credit institutions participating in buying and selling, merging, the time of announcement of the regulation should be stipulated after the credit institutions have been approved by the State Bank. It is necessary to add a provision that the merger contract can only be signed when the parties have been approved by the State Bank to Clause 4, Article 8 of Circular 04/2010/TT-NHNN. In addition, it is necessary to clearly stipulate the contents of the merger contract that must be announced to creditors and employees and the contents that must not be announced.

Sixth , it is necessary to issue special tax incentives for credit institutions that acquire or merge weak credit institutions within a certain period of time.

4.3.5. On handling cross-ownership issues

Violations of operational safety regulations of commercial banks related to cross-ownership have been identified by the State Bank (2012) as "interest groups and cross-ownership".

between very large credit institutions, causing very high systemic risks if a bank encounters difficulties or collapses ", " by many different techniques, many subjects do not comply with regulations on credit safety activities " and "the inspection and examination to detect and handle cross-ownership issues is very difficult due to the lack of legal evidence ". Despite such identification, the State Bank has not yet provided specific and legally valid evidence, and the State Bank has not yet confirmed whether these acts are illegal or not. Experience in reforming the Chinese banking system shows that these difficulties partly stem from loopholes and inadequacies in current legal regulations related to the definition and identification of overlapping ownership as well as sanctions that are gradually becoming ineffective against systemic violations. This requires, on the one hand, amending and perfecting current legal regulations related to banking operations and supervision, and on the other hand, enhancing the effectiveness of compliance and sanctions. Therefore, Vietnam needs a specific legal framework to limit the negative impacts of cross-ownership as analyzed in the past, specifically:

Firstly, regarding the regulations on information disclosure on share ownership ratio , in order to detect cross-ownership relationships, it is necessary to expand the subjects of information disclosure, especially the group of subjects who are related persons, and at the same time, it is necessary to reduce the ratio of bank shares held by the owner in which information must be disclosed. Specifically, the subjects that must disclose information on bank ownership ratio are: (i) Shareholders with a joint stock commercial bank ownership ratio of 1% or more; (ii) related persons of shareholders who must disclose information with a joint stock commercial bank ownership ratio of 1% or more, in order to make it easier to identify cross-ownership relationships.

Second , supplement the scope of regulations on related persons, ultimate owners and expand the subjects that must disclose information on ownership ratios . To overcome difficulties in management and supervision of ownership and cross-investment, it is necessary to complete the current regulations on clearly defining "related persons", supplement regulations on "ultimate owners" and give the Banking Inspection and Supervision Agency the right to determine "ultimate owners" based on statutory principles.

Third , regarding the regulations on the composition of the board of directors and the executive board: it is necessary to stipulate the number of members of the board of directors of commercial banks according to international practice : for example, the board of directors must have a minimum of 5 members and a maximum of 11 members.

in which approximately 1/3 of the members must be independent members and not part of the bank's executive board (IFC, 2011). Independent members have strict criteria such as the individual is not working for the bank, or a company affiliated with the bank, or has worked for the bank or a company affiliated with the bank for a certain period of time; has no relationship with related persons who own a certain amount of shares of the bank... because these members have the role of making objective decisions and limiting negative impacts on small shareholders caused by major shareholders, shareholders with control rights of commercial banks through cross-ownership.

It is also necessary to clearly separate ownership and control, thereby not allowing members of the board of directors or board of members of a bank to concurrently hold positions in the executive board. It is necessary to clearly stipulate that a legal entity cannot be a member of the board of directors even though an individual representing that legal entity can be elected to the board of directors. Thus, an individual elected to the board of directors of a commercial bank can only act as a member of the board of directors, not as a representative of the legal entity, that is, that individual must act in the interests of all shareholders, not just for the interests of the legal entity represented by that individual. Similarly, there should be regulations on the executive board of a commercial bank to limit the possibility of cross-ownership, such as the general director/director cannot concurrently be the general director/director of another enterprise. According to international practice, the general director/director should not participate in any business activities other than those related to the role of managing and operating the enterprise and the administration of the bank's subsidiaries.

Fourth , it is necessary to separate the functions of investment banks and commercial banks . The law needs to add more regulations related to financial groups, and at the same time, the management agency needs to have sanctions to limit commercial banks from performing activities such as securities investment trust.

Fifth , the law has provisions on the maximum share ownership ratio of individuals as well as organizations in commercial banks . However, to make this provision more effective, the law should supplement more specific provisions on the maximum share ownership ratio for each type of shareholder (for individual shareholders, it can be divided in more detail such as: individuals participating in management, individuals not participating in management... and for organizational shareholders, it can be divided into groups: financial organizations, non-financial organizations, organizations that are agencies, state-owned enterprises...).

Sixth , it is necessary to strictly prohibit the acts of taking advantage of cross-ownership to bypass regulations on ownership ratios, capital contribution limits, share purchases ; regulations on lending restrictions, credit limits as well as classification and risk provisioning. For detected violations, there should be a strict penalty mechanism including increasing administrative fines to increase discipline for other commercial banks.

4.3.6. On risk control from the “underground banking” system

The underground banking system in Vietnam has existed for many years alongside the traditional commercial banking system to provide credit capital for the economy when the traditional commercial banking system has not yet met its needs. In general, the underground banking system in Vietnam has not yet diversified its financial products; activities related to the securitization of loans in the banking system into debt securities for resale to other financial institutions have not yet developed, mainly including: margin lending at securities companies, repurchase contracts, mutual lending between commercial banks, lending at pawnshops, mutual lending between businesses and individuals in the economy and borrowing on the black credit market with high interest rates. Through the experience of managing the underground banking system in the United States, China, and Europe, some lessons can be drawn for Vietnam:

Firstly, in order to minimize the negative impact of the risks of the underground banking system on financial stability, it is necessary to strengthen control, risk management, and closely monitor the activities of entities in the underground banking system, especially the current securities lending activities of securities companies (margin lending) which will increase the financial leverage ratio leading to liquidity risks.

Second, the State Bank and the State Securities Commission have gradually controlled securities lending activities . 2 However, when the stock market fluctuates badly, declines sharply and rapidly like the period at the end of 2008 or 2011 - 2012, it may lead to a loss of control over bad debts of securities companies, leading to losses or bankruptcy, significantly affecting the financial market in general, including the commercial banking system.

Third , enhance transparency in the operations of the underground banking system through the collection of complete information data on the scale of total assets and credit supply to the economy to serve as a basis for making timely policy proposals to stabilize and develop the financial market. Currently, the unification of

Statistics on underground banking activities are limited and there are almost no annual statistics, leading to difficulties in the policy proposal process.

Fourth , develop a system to assess the ability to withstand shocks in the financial market to assess the risk tolerance or vulnerability of financial institutions and banks to adverse shocks through indicators of capital, loss level, and liquidity safety ratio to help policy makers and financial institutions proactively deal with risks.

4.3.7. On attracting foreign strategic investors

China's relatively successful experience in mobilizing resources from foreign strategic investors to serve the reform, modernization and competitiveness enhancement process for its banks may imply some policies for Vietnam, specifically:

Firstly , it is necessary to boldly expand the foreign capital limit for weak banks that are subject to mandatory restructuring and state-owned commercial banks that do not need to hold controlling shares , in the context of very limited domestic resources for restructuring. For weak banks that are subject to mandatory restructuring, it is possible to allow them to own a higher capital ratio, even up to 100% in some cases. Because it will not be easy to convince foreign investors to invest in rescuing weak banks if they are not given the right to operate and manage their capital, and once they hold controlling shares, foreign investors will not only contribute financially, but also support management, such as risk management, liquidity management, bad debt trading, etc.

Second , it is necessary to soon build a number of regional-scale banks with international competitiveness, fully meeting the world's risk management standards, and being ready for comprehensive integration, because with the current economic scale, within the next 5 years, to cope with the risk of foreign takeover.

4.3.8. Regarding risk management and ensuring operational safety of commercial banks:

Despite certain limitations, the experience of reforming the Chinese banking system shows that the early application of international safety and risk management standards is a prerequisite to promote the modernization of the banking system. The application and case of Vietnam can be seen as follows:

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