VAMC - New tool to resolve bad debts
The much expected Decree on setting up Vietnam Assets Management Company (VAMC) was finally issued on 18 May 2013 and will take effect from 9 July 2013. VAMC is expected to play a major role in resolving the massive amount of bad debts accumulated by Vietnamese banks. However, a quick review of the Decree indicates that in order for VAMC to be up and running many steps and decisions remain to be taken.
The Basic
VAMC is a non-profit State-owned enterprise and incorporated as a single-member limited liability company. VAMC has a chartered capital of VND 500 billion. The SBV is the representative of the State capital in VAMC.
How it works
Decree 53/2013 establishes a quite complicated mechanism to deal with bad debts of Vietnamese banks. Below is an example of how such mechanism works:
- Borrower B mortgages its house to borrow a loan of VND 100 billion (Secured Debt) from Bank A. Borrower B fails to repay the Secured Debt and the Secured Debt becomes bad debt of Bank A. Bank A has not set aside any reserve for the Secured Debt..
- VAMC issues special bonds (VAMC Bond) according to an issuance plan to be approved by the State Bank of Vietnam (SBV). VAMC Bond has a term of five years and carries no interest.
- Bank A sells the Secured Debt to VAMC in exchange of VND 100 billion VAMC Bond. This step requires the Secured Debt and Borrower B to satisfy certain conditions. As a result of the transfer, VAMC will become the owner of the Secured Debt and be entitled to the mortgage over the house of Borrower B (the Mortgage). The transfer is made by way of a contract between VAMC and Bank A. In some cases, the SBV may even force Bank A to sell its bad debts to VAMC if Bank A does not cooperate with VAMC.
- Bank A pledges VND 100 billion VAMC Bond with the SBV to obtain a recapitalisation loan from the SBV (SBV Loan). The amount and interest of the SBV Loan is subject to separate regulations.
- During the term of the VAMC Bond, Bank A needs to establish a reserve (Bank Bond Reserve) of at least 20% of the value of VAMC Bond each year.
- After taking over the Secured Debt and the VAMC will either directly or authorise Bank A to deal with Borrower B. Decree 53/2013 seems to offer substantial legal supports for VAMC to enforce the Mortgage. For example, Decree 53/2013 requires all competent authorities to cooperate with VAMC to allow VAMC to enforce the security interests that it holds.
- VAMC authorises Bank A to enforce the Mortgage and recover VND 50 billion (Recovered Amount) and VND 50 billion remains to be unpaid (Remaining Debt).
- Within five business days after the earlier of (1) the last day of the term of VAMC Bond or (2) the date on which the aggregate of the Bank Bond Reserve and the Recovered Amount is equal to VND 100 billion, Bank A must (2) repay the SBV Loan and get back the VND 100 billion VAMC Bond, and (3) sell back VND 100 billion VAMC Bond to VAMC in return of the Remaining Debt. VAMC will also return the Recovered Amount less the enforcement expenses and a haircut (to be decided) for VAMC to Bank A.
- After Bank A gets back the Remaining Debt and returns the VAMC Bond to VAMC, Bank A will need to use the Bank Bond Reserve to resolve the bad debt resulted from the VAMC Bond and to continue resolve the Remaining Debt.
On 28 December 2018, the State Bank of Vietnam (SBV) issued Circular 42 amending current foreign currency borrowing regulations (in Circular 24 of the SBV dated 8 December 2015, as amended from time to time (Circular 24/2015)) (Circular 42/2018). Circular 42/2018 will take effect from 1 January 2019.
Changes to permitted lending purpose
Vietnamese banks only lend in foreign currency for a few limited purposes. Circular 42/2018 has following changes to these purposes:
On 20 June 2018, the Ministry of Justice issued Circular 8 on the registration and provision of information on security interest and contracts (Circular 8/2018). Circular 8/2018 will replace Circular 5/2011 on the same subject from 4 August 2018.
Name of the object of the registration
The object of registration under Circular 5/2011 is secured transactions (giao dịch bảo đảm), which is in line with the Civil Code 2005. However, the term “secured transaction” is almost removed from the Civil Code 2015 and the registration is now the registration of security interest (biện pháp bảo đảm). Circular 8/2018 adopts such approach and determined the object of registration is security interest to be consistent with the new Civil Code 2015.
The Ministry of Finance has released a latest draft amendment to the Securities Law 2006 (https://tinyurl.com/ydc44zyd), which is scheduled to be passed in the second half of 2019. It looks like that any major law in Vietnam will need to undergo major changes in every 10 years whether or not the changes are necessary. The draft amendments include the following major changes regarding capital raising process:
In December 2018, the Government issues Decree 163/2018 to replace Decree 90/2011 on private issuance of corporate by Vietnamese companies from February 2019. Decree 163/2018 introduces certain new important points as follows:
· To be able issue bonds, a company is no longer required to be profitable in year before the proposed issuance. Instead, the company only needs to operate for at least one year and its financial statement is audited by a qualified auditor. Issuer who has undergone certain restructuring (e.g., merger, conversion or division) may rely on the historical operation of other related companies to meet the one year operating test;
· Secondary trading of privately-issued bonds is limited within up to 100 investors excluding “professional investors” within one year from the issuance date. The new limitation seems to aim at the practice of issuing bonds privately at the first place and reselling the same to public investors in secondary market;
Vietnamese banking regulations do not provide for a clear definition of a financial lease (cho thuê tài chính). The lack of a clear definition may result in unnecessary legal risks for parties to a cross-border lease transaction (e.g., an aircraft lease). For example, if a cross-border lease is regarded as a financial lease, then the lease may need to be registered with the State Bank of Vietnam as a foreign loan.
Under the Law on Credit Institution 2010, the act of finance leasing is defined to be (1) the extension of medium and long-term credit; (2) on the basis of a finance leasing contract; and(3) satisfying one of the following conditions:
upon expiry of the lease under the contract, the lessee may take over ownership of leased assets or may continue to lease them under the agreement of the parties; or
upon expiry of the lease under the contract, the lessee shall have the priority right to purchase the leased assets at a nominal value less than the actual value of the leased assets as at the date of purchase; or
the minimum term of the lease of any single asset must equal at least 60% of the period necessary for depreciation of such leased asset; or
the total rent for any single asset stipulated in the finance lease contract must be equal at least to the value of such asset at the signing date of the contract.
The core business of a bank (a Bank) is to take monies (Deposits) deposited by its customers (Depositors) and to lend such monies to its borrowers. Therefore, legally, it is important to determine who owns the Deposits. Unfortunately, Vietnamese banking law is not clear whether after the Depositors make a Deposit with the Bank, the Bank or the Deposit owns the Deposit.
The case for the Bank
The most logical conclusion is that:
· the Bank is the owner of the Deposit;
· the Depositor is not the owner of the Deposit, but the Depositor has a contractual right to request the Bank to return the Deposit to the Depositor in accordance with the terms of the Deposit; and
· the borrower will own the Deposit after it borrows the same from the Bank.