Vietnamese Banks Will Benefit from Improved Collateral Repossession Rules: Moody’s

Tuan Minh

10:15 28/08/2017

BizLIVE - A new rule that enables Vietnam's bad debt bank to repossess collateral will help accelerate the bad debt handling process in the country. 

Vietnamese Banks Will Benefit from Improved Collateral Repossession Rules: Moody’s

The stalled Saigon One Tower in downtown Ho Chi Minh City. Photo: VnExpress

The speedy repossession of collateral is a credit-positive step for Vietnamese banks, which continue to grapple with legacy asset-quality issues caused by rapid credit growth and loose underwriting standards of the past decade, Moody’s Investors Services has said in a note seen by BizLIVE.
Under previous rules, it took the banks a number of years to repossess collateral given the cumbersome and lengthy legal process.
The state-owned Vietnam Asset Management Company (VAMC) on August 21 repossessed the Saigon One Tower in downtown Ho Chi Minh City, the first repossession of collateral for a non-performing loan (NPL) using the country’s new Resolution 42, which allows banks and the VAMC to rapidly repossess collateral in the event of a borrower default. 
Investors kicked off the Saigon One Tower project in 2007, and construction was slated for completion by 2009 at a cost of 5 trillion dong ($220 million at current exchange rate). The building was set to the third-highest building in the city with 195 meters. 
Its construction came to a standstill in 2011 when 80% of the process was completed. The investors of the project had around 7 trillion dong ($308 million) in debts.
Sluggish resolution of bad debt  
The Vietnamese government remains committed to addressing banks’ asset-quality challenges, but measures implemented so far have been ineffective in cleaning up bank balance sheets, Moody’s said. 
The government established the VAMC in 2013, and the State Bank of Vietnam required all banks to transfer NPLs in excess of 3% of total loans to the VAMC in exchange for zero-yielding VAMC bonds that had to amortize over five to 10 years.
However, the cumulative NPL recovery rate by the VAMC has been low at approximately 20%, in part because of a lack of clarity on collateral repossession in Vietnam’s civil code, which has undermined efforts to recover collateral owing to a cumbersome legal process that can last around three years. 
Given such a slow process and piling bad debts, the National Assembly, the country’s supreme legislative body, on August 15, 2017 enacted Resolution 42 to allow banks and state-owned organizations to handle NPLs by rapidly repossessing collateral.
“The ability to repossess collateral is a critical next step in resolving NPLs and we expect Resolution 42, which removes previous legal impediments, to help improve the rate of collateral repossession by banks and the VAMC,” the credit rating agency noted. 
The effectiveness of the new regulation was apparent in VAMC’s first repossession of collateral for an NPL, which it completed just one week after Resolution 42 took effect. The new regulation also rebalances the bargaining power of banks and the VAMC vis-à-vis borrowers.
However, a tangible effect on banks’ asset quality and profitability will materialize only after the sale of the repossessed collateral. 
Although banks can reduce their reported NPLs by offloading problem loans to the VAMC, asset quality and profitability can only improve if and when the VAMC successfully sells the repossessed assets, Moody’s noted that.