Draft amendments to the Law on Credit Institutions 2024: Multi-dimensional impact on businesses

After more than 6 years of implementation, Resolution No. 42/2017/QH14 dated June 21, 2017 ("Resolution No. 42/2017/QH14") has shown effectiveness in removing obstacles in handling bad debts and creating a foundation for the completion of the current Law on Credit Institutions ("Law on Credit Institutions 2024"). Under the direction of the Prime Minister on February 11, 2025, the State Bank is tasked with developing legal documents to legislate some contents of this Resolution, ensuring the inheritance and promotion of achieved results. In particular, strengthening bad debt management and risk diversification is the central goal of the process of amending the Law on Credit Institutions 2024. In fact, the Law on Credit Institutions 2024 has not overcome the limitations and fully met the requirements for handling bad debts. Therefore, the amendment aims to establish a synchronous bad debt settlement mechanism and create a solid legal corridor for credit institutions in the coming time. The Draft Amendment to the Law on Credit Institutions 2024 (the "Draft") is gathering public comments so that it can be promulgated and implemented soon in the near future.

Supporting credit institutions in recovering bad debts

Within the framework of this adjustment, the Draft is focused on adding three key policies to remove obstacles in practice.

First, the right to seize collateral ("collateral") is codified in order to overcome the current limitation when the asset holder is used to secure a loan that is not delivered on time, forcing credit institutions ("credit institutions") and debt processing units to initiate lawsuits and rely on the judgment to be enforced in practice. On the basis of the current law, Article 301 of the Civil Code 2015 only intervenes when the property holder does not hand over the property and does not clearly stipulate the right to seize the secured party, so if the property owner refuses to cooperate or deliberately delays or prolongs the time limit for handing over the fixed assets,  The seizure process will be delayed and increase the pressure on provisions, suspending interest collections as well as capital mobilization costs. Therefore, the right to seize fixed assets is legalized in Article 1 of the amended Law, by adding a number of articles of Article 198a to Article 1 of the Law on Amendments and Supplements to a number of articles of the Law on Credit Institutions 2024[1],  allowing credit institutions to be proactive in handling bad debts without relying too much on the decisions of the authorities. It should be recognized that the right to seize fixed assets will be concretized on the basis of the agreement in the security contract between the parties, this request does not allow credit institutions to arbitrarily seize fixed assets but must comply with regulations on the scope and conditions for application of this measure in order to avoid abuse of rights of credit institutions and buying and selling organizations.  debt settlement.

Secondly, the National Assembly specifies the distraint of fixed assets carried out by the judgment enforcement agency in order to protect the interests of creditors of credit institutions in the process of judgment enforcement, detailing the content of supplementing Article 198b to Article 1 of the Law amending and supplementing a number of articles of the Law on Credit Institutions 2024. According to Article 90 of the Law on Civil Judgment Enforcement (amended and supplemented), if the judgment debtor has no other assets or has assets but not enough for judgment enforcement, the judgment enforcement agency has the right to distraint and handle the pledged or mortgaged assets[2] when their value exceeds the amount of guaranteed obligations plus enforcement costs. This regulation can significantly affect the interests of the secured party, even increasing the ratio of bad debts in the financial system. In particular, for assets formed from loans from credit institutions and used as fixed assets to ensure customers' debt repayment obligations, being distrained and handled according to regulations may cause credit institutions to lose important sources of fixed assets. This direction of regulation not only reduces the ability to collect debts but also increases the rate of bad debts, seriously affecting the financial situation of credit institutions. Therefore, the State Bank proposes that fixed assets are used to ensure that the bad debts of the judgment debtor are not distrained for any obligations other than the debt repayment obligation in accordance with the provisions of the law on civil judgment enforcement, except for the case of judgment enforcement,  decisions on alimony and compensation for damage to life and health or with the written consent of the parties concerned.

Thirdly, in criminal cases, after the fixed assets are used as evidence, it is necessary to supplement clear regulations on reimbursement to credit institutions to continue handling bad debts. Currently, Clause 3, Article 106 of the Criminal Procedure Code only stipulates the return of seized and temporarily seized assets without clarifying the regime of return of fixed assets after determining whether such fixed assets are considered material evidence or not. Similarly, Clause 1, Article 126 of the Law on Handling of Administrative Violations only stipulates that for material evidences and means of administrative violations that are confiscated but have registered mortgage security interests, the mortgagee may receive back the material evidences and means or the value equivalent to the secured obligations without stipulating the case where the competent authority the right not to apply the measure of confiscation, the fixed assets must be returned to the secured party, leading to the risk of the fixed assets being returned to the asset owner and causing damage to the credit institution. Therefore, it is necessary to supplement regulations on the return of fixed assets used as material evidence in criminal cases and the return of fixed assets as material evidences and means of administrative violations.

Impact of the Draft Amendments and Supplements  to the Law on Credit Institutions 2024 on enterprises

Certainly, the adjustments of the Law on Credit Institutions 2024 in the coming time will greatly affect the business activities of enterprises. In this context, businesses need to proactively re-evaluate the processes of managing and handling fixed assets, promptly update legal changes to be able to adapt to these new changes. 

Source: Báo Chính phủ

Positive influence

A healthy and efficient banking system plays an important role in stabilizing the capital flow of the economy. When bad debts are handled, credit capital is not trapped in loans that are difficult to recover, helping to increase liquidity and optimize financial flow. At that time, businesses will take advantage of the benefits when there is a legitimate need for loans, because lending interest rates can be adjusted in a more reasonable direction when banks reduce the pressure of risk provisions from bad debts.

In addition, the recovery of bad debts and bad debts also helps banks allocate capital more proactively and flexibly. Instead of being passive in the face of loans that may be irretrievable, credit institutions will have the opportunity to focus resources to expand credit in potential production and business fields. Once the banking system reduces the risk of bad debts, competition among credit institutions may increase, contributing to promoting preferential credit packages or more flexible loan conditions. As a result, businesses can not only access capital more easily, but also take advantage of beneficial credit policies to optimize financial costs, improve operational efficiency, and expand business scale.

Negative effects

Security contracts and credit contracts are important legal bases for credit institutions to exercise the right to dispose of collateral, enterprises need to pay special attention to before signing, especially for terms related to the handling of fixed assets. Because according to the provisions of the Draft on the basis of the terms agreed between the borrower and the credit institution, the credit institution can seize the collateral without going through the adjudication mechanism. This is a noteworthy point for businesses in the role of borrowers. Although, according to the provisions of the Draft, credit institutions are required to strictly comply with current regulations on the order and procedures for seizure of fixed assets. However, in order to limit risks, businesses need to prepare a response strategy and an appropriate loan use strategy to avoid having their assets recovered if a violation unfortunately occurs. Because according to the provisions of the Draft, in case of violation of the loan contract, the enterprise will be at risk of losing the collateral quickly without going through the trial of the Court or arbitration.

What solutions for businesses if the Draft is approved

On the basis of the practice of Resolution 42/2017/QH14, allowing credit institutions to seize fixed assets has proven effective in shortening the time for handling bad debts and reducing the ratio of bad debts in the credit system. The concretization of the right to seize fixed assets in the Law on Credit Institutions 2024 does not only change from a pilot policy to a legal norm in accordance with current regulations such as Article 301 of the Civil Code 2015 and the provisions of the law on enforcement of civil judgments. Therefore, enterprises are forced to focus on establishing and signing security contracts or credit contracts with contents related to fixed assets to ensure that the terms are fair for the parties involved and not too detrimental to the business when participating in the bank's credit activities. To fulfill this requirement, businesses need to be aware and take reasonable steps from the beginning, especially in the process of negotiating contracts as well as loans with credit institutions. Because businesses must understand that the credit contract along with the loan guarantee agreement is the basis for the parties to implement future agreements. In many cases, the risk of losing collateral when a credit institution handles bad debts without going through a judicial agency is very large. Therefore, enterprises need to strengthen supervision and provide timely contingency measures for themselves before entering into any contract with credit institutions, terms related to fixed assets need to be adjusted in the direction of balancing the interests of borrowers and lenders.

Agreeing and recording reasonable terms of the contract is one of the effective and practical solutions for businesses to protect their assets to ensure when the amended Law on Credit Institutions is passed. However, businesses are not easy to implement in practice. Because normally, credit contracts and security contracts with credit institutions are established on the basis of contracts issued by these credit institutions, borrowers who wish to borrow capital will sign with the existing content and have little opportunity to adjust or be accepted for adjustment requests. Communicating with credit institutions to amend the contract becomes difficult if the credit institution does not approve the borrower's request. At that time, considering the choice of other capital mobilization solutions is less risky. In addition, businesses need to develop appropriate financial strategies, including debt restructuring, debt deferment negotiations or looking for liquidity-supporting investment funds to avoid the risk of asset seizure. In case of asset seizure by credit institutions, enterprises should actively negotiate the most beneficial handling plan, such as selling assets themselves to ensure optimal recovery value or applying legal measures if their rights are infringed upon, rather than waiting until the credit institution exercises the right to recover fixed assets to handle debts.

The development of the law amending and supplementing a number of articles of the Law on Credit Institutions 2024 is developed with the goal of completing the legal framework for handling collateral, thereby moving towards a more stable and effective legal environment. In this context, although the reforms help shorten the processing time of fixed assets and reduce legal costs, borrowers should note that a more convenient process of handling collateral also means that asset ownership needs to be carefully considered. This requires businesses to be proactive in assessing risks and establishing appropriate protection measures, ensuring the rights and safety of their assets during the implementation of loan contracts.