Vietnamese banks' asset quality expected to improve with new collateral repossession rules

Banks can now speedily repossess collateral for a nonperforming loan.

The state-owned Vietnam Asset Management Company completed its first repossession of collateral for a nonperforming loan (NPL) last Monday using the country’s new Resolution 42, according to Moody's. The new rules allow banks and the VAMC to rapidly repossess collateral in the event of a borrower default. 

Here's more from Moody's:

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. Under previous rules, we understand that it took the banks a number of years to repossess collateral.

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.

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.

On 15 August 2017, the government 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 effectiveness of the new regulation was apparent in VAMC’s first repossession of collateral for an NPL, which it completed the same month that Resolution 42 was enacted. 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.