Tiếng Việt
中文 (中国)
Bad debt is no longer a strange concept to the citizens of Vietnam. Nearly every citizen in Vietnam must have heard this term at some point in their life, especially individuals and organizations that need or have borrowed money from a bank or a credit institution. So, what is the note about bad debt in Vietnam?
Bad debt in Vietnam
Bad debt, also known as “nonperforming loan”, “sour loan” or “soured credit”, is a term used to describe debts that are past due for interest or principal payment beyond a specified time (usually 90 days).
Each bank or credit institution will base on the customer’s solvency to determine the time to pay principal or interest. Individuals and organizations that fall into the group of bad debts and overdue debts will appear on CIC – a Credit Information Center under the State Bank of Vietnam.
The Credit Information Center CIC
The Vietnam National Credit Information Center is a public non-business organization under the State Bank of Vietnam, performing the following functions:
- National credit registration;
- Collecting, processing, storing, and analyzing credit information;
- Preventing and limiting credit risks;
- Scoring and credit rating of legal entities and natural persons in the territory of Vietnam to serve the requirements of state management of the State Bank;
- Providing credit information products and services in accordance with the State Bank’s regulations and laws.
Vietnam National Credit Information Database managed by CIC stores information of nearly 47 million borrowers, with the participation of 100% of credit institutions operating in Vietnam, more than 1200 people’s credit funds and microfinance institutions as well as other organizations inside and outside the banking system on the basis of periodic and irregular updates based on modern technology and advanced and automatic information collection and processing solutions.
Regarding bad debts, all information about bad debtors including past loans, current loans, overdue debt periods, etc. will be saved on CIC within 03 – 05 years after the borrower has fully paid both interest and principal.
In addition, the information will also be saved on PCB (Private Credit Bureau – Vietnam Credit Information Joint Stock Company) which is another place where credit institutions take information from.
Principally, CIC is a center under the State Bank, established for the purpose of statistics and monitoring the level of stability and safety of the national financial system.
Meanwhile, PCB is a company established with the sole purpose of trading credit information and developing other related services such as profit distribution, on the basis of market supply and demand and the interests of the parties involved.
Once listed in the list(s), the bad debtors will face many difficulties when they want to continue to borrow money the next time, especially within the next 5 years. During that period, they will not be able to borrow at banks or credit institutions in the market.
Causes of bad debt in Vietnam
There are many reasons for individuals and organizations to incur bad debts, primarily as follows:
- Borrowers forget to pay the debt, leading to late payment of both principal and interest;
- Borrowers are insolvent, losing the ability to repay the loan when it is due because of the lack of control over the amount of money or the loan source is used inappropriately;
- Borrowers do not care about payment deadlines, disregard late payment of penalty fees.
Classification of bad debt groups
According to the provisions of Article 10 of Circular 02/2013/TT-NHNN, as amended by Article 1 of Circular 09/2014/TT-NHNN, credit institutions shall classify debts into 05 groups as follows:
Group 1: Qualified debt
These are debts for which the borrower is assessed as being able to fully recover both principal and interest on time. At the same time, this debt is overdue debt with a period of fewer than 10 days and must pay overdue interest of 150%.
Group 2: Debts needing attention
These debts are those that need to be paid attention to. There are 03 different types, of which the most common and typical are debts that are overdue from 10 to 90 days and debts that have been adjusted the payment schedule for the first time;
Group 3: Subprime debt
These are sub-standard debt which includes 05 different types, of which the most common and typical are overdue debts from 91 to 180 days and debts that have been extended for the first time.
Group 4: Debts suspiciously loss of capital
These are doubtful debts which include 06 different types, of which the most common and typical are overdue debts from 181 to 360 days and debts which have been rescheduled for the second time.
Group 5: Debts likely to lose capital
These are potentially losing capital debts which include 08 different types, of which the most common and typical are debts that are overdue for more than 360 days and debts that have been rescheduled for the third time or more.
The consequences of bad debts
When individuals and organizations have bad debt, the bank loan depends a lot on the capacity, reputation as well as actual debt group (From 1-5).
If the borrower is in debt groups 1 and 2, they need to pay off all previous debts. Not only that, but they must also have to prove their income, financial ability, having their assets secured, or guarantors.
If the borrower is in debt groups 3, 4, and 5, it is not possible to apply for a loan at any banks or reputable credit institutions on the market at that moment. They will need to wait at least 2 to 5 years for their CIC scores to return to normal or delete bad debt information before they can continue to borrow. In addition, the borrowing of money after being in debt groups 3, 4, and 5 is also quite troublesome, i.e. it depends on the regulations of each bank.
Regulations to ‘delete’ bad debt
All bad debtors want to have their bad debt information deleted from the system. In most cases, this can be done following the 2 circumstances according to the regulations of the law:
- For loans under 10 million: The State Bank will stop providing credit history for overdue loans under 10 million VND which have already been settled. Thus, if there is a loan of less than 10 million VND that has been paid off, the bad debtor does not need to worry about their bad credit history (Clause 1, Article 11 of Circular No. 03/2013/TT-NHNN)
- For loans over 10 million: All information about credit history will be updated monthly. After 12 months from the date of payment of a bad debt, the borrower’s credit history will be eligible to meet the bank’s lending criteria.
Notes need attention in order to avoid bad debt in Vietnam
To avoid a bad debt situation that makes it difficult to get a loan later, businesses should reassess their own repayment capacity to decide if they have what it takes to pay off that debt in the future according to the time stipulated in the contract.
At the same time, businesses should make a specific plan for a loan payment schedule to avoid unexpected events that will likely happen.
Furthermore, when receiving the loan, businesses should use the loan capital in a reasonable way to help pay off debt quickly.
Lastly, the businesses should take extra notice of the time to pay debts, as prescribed in the contract. If, for any reason that the businesses are unable to pay the debt on time, they shouldn’t try any measures to avoid the bank but instead, cooperate in goodwill to try to reschedule the payment terms.
Regulations on suing businesses in bad debt status
In bad debt settlement solutions, litigation is almost the last option of banks. The banks in Vietnam usually only conduct a lawsuit when the customers lack goodwill and do not cooperate with them because, as in many other aspects, pursuing lawsuits will take a lot of time, effort, and cost. Accordingly, the bank will minimize the form of lawsuits to low-value loan contracts.
Nonetheless, most of the banks will file a lawsuit if the borrower refuses to cooperate, no matter the number of troublesome procedures or the costs needed. This is due to the fact that some minor problematic issues about fees or other matters are nowhere near important as the bank’s reputation to upstanding its policy.
Depending on the policy of each bank, the time taken for bad debt to be sued in court will vary. However, in case the borrower (individual or organization) cannot pay off the debt (both principal and interest) to the bank by the deadline stated in the signed contract, they will become a bad debtor and consequently, the bank can sue them in accordance with the law.
According to article 429 of the Civil Code 2015, the statute of limitations for initiating a lawsuit to request the Court to settle a contract dispute is 3 years from the date the person with the right to claim knows or should know that his/her lawful rights and interests have been infringed. The time to initiate a lawsuit applies to the collection of interest, while the time limit for filing a lawsuit to collect the principal is never expired.
Banks will have different solutions to deal with bad debts based on the customer’s goodwill and ability to compensate.
Specifically, for customers who have goodwill and expect to have a source of debt repayment, the bank can consider supporting and extending the loan term for customers.
For customers with goodwill but are unable to repay at the moment, the bank will coordinate to handle collateral.
Currently, in the penal code, there is no crime of bad debt. Therefore, by law, if an individual has bad debt, he/she will not be prosecuted for criminal liability.
However, individuals may still be criminally prosecuted for acts of fraud to appropriate property or abuse of trust to appropriate property according to the provisions of the Penal Code.
ASL LAW is the top-tier Vietnam law firm for Banking & Financial Services. If you need any advice, please contact us for further information or collaboration.
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