Giải pháp tăng cường xử lý nợ xấu tại VAMC

ĐẠI HỌC QUỐC GIA HÀ NỘI
KHOA QUẢN TRỊ VÀ KINH DOANH

---------------------

VŨ NGỌC MINH

SOLUTION TO STRENGTHEN BAD DEBT
PROCESSING AT VAMC
GIẢI PHÁP TĂNG CƯỜNG XỬ LÝ NỢ XẤU
TẠI VAMC

LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH

HÀ NỘI - 2020


ĐẠI HỌC QUỐC GIA HÀ NỘI
KHOA QUẢN TRỊ VÀ KINH DOANH

---------------------

VŨ NGỌC MINH

SOLUTION TO STRENGTHEN BAD DEBT
PROCESSING AT VAMC
GIẢI PHÁP TĂNG CƯỜNG XỬ LÝ NỢ XẤU
TẠI VAMC
Chuyên ngành: Quản trị kinh doanh
Mã số: 60 34 01 02
LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH

NGƯỜI HƯỚNG DẪN KHOA HỌC: PGS. TS. PHẠM THỊ THANH HÒA

HÀ NỘI - 2020


DECLARATION
The author confirms that the research outcome in the thesis is the result of
author’s independent work during study and research period and it is not yet
published in other’s research and article.
The other’s research result and documentation (extraction, table, figure,
formula,and other document) used in the thesis are cited properly and the
permission (if required) is given.
The author is responsible in front of the Thesis Assessment Committee,
Hanoi School of Business and Management, and the laws for above-mentioned
declaration.


ACKNOWLEDGEMENT
I have gained huge knowledge, skill and insights from my MBA course. The
course raises my capacity of administration and management up to the next level. I
am now very confident in my position of management. I would like to extend my
sincerest thanks and appreciation to all those who have made this Thesis to be
possible.
I woud like to express my great gratitude to my supervisor Pham Thi Thanh
Hoa for her useful comments, remarks and engagement during my process of doing
this master thesis.
Sincere thanks are extended to the Faculty of International Training Vietnam National University, Hanoi for equipping me with huge knowledge and
skills through various interesting and practical subjects. I also would like to thanks
my classmates for their friendship and reciprocal encouragement to make our class

time to be unforgettable time.
Lastly, I would like to give my great thanks to my wife, my kids, and my
family who always standby me during the past two years and encourages me to
keep moving from the beginning of my study.


SOLUTIONS TO IMPROVE THE MODEL AND ENHANCE
THE HANDLING OF BAD DEBTS FOR VAMC

1. Summary of the results
The study of solutions to improve the model and enhance the handling of bad debts
for VAMC has achieved some research objectives as follows:
Firstly, systematize the theoretical basis for bad debts, trading bad debts, focus on
presenting the contents and factors affecting bad debt trading activities at AMCs. In
addition, the study also highlights AMC's experience in handling bad debts in some
countries in the world and from that draw experience for AMC in Vietnam.
Secondly, analyze the status of dealing with bad debts at VAMC for the period of
2016-2018, thereby making comments and assessments of the actual management of bad
debt trading at VAMC, indicating the achieved and surviving results as well as the root
causes of the problems in trading, handling bad debts at VAMC during the past time.
Thirdly, based on the results of the situation analysis, the study proposes solutions
to enhance the handling of bad debts at VAMC until 2025. The proposed solutions include:
Restructuring the organizational structure, improving efficiency results of VAMC; Human
resource development; Upgrading information technology infrastructure; Solutions on
capital and financial capacity; Solutions to perfect the picture of trading and handling of
bad debts of VAMC.
2. Applicability in practice
In the context that Vietnam does not use budget capital, VAMC has been the most
effective and feasible tool to handle bad debts, contributing to solving difficulties for
enterprises with debt restructuring and interest rate reduction and exemption, even

accessing loans of credit institutions. As a newly established institution with many
difficulties, the initial results of VAMC have supported to accelerate the handling of bad
debts. In the next phase, VAMC needs to focus all its efforts on debt settlement (selling
debts, selling assets, etc.) and buying debts at market prices for newly arising bad debts,
gradually reducing debt purchase by special bonds. VAMC operates in a centralized debt
management model. Finding solutions to strengthen the management of bad debt trading at
VAMC is a practical requirement.


3. Further research orientations
If there are further research conditions, the author will focus on further research on
debt settlement procedures of VAMC, combined with the collection and aggregation of
additional VAMC activity data to expand the research results.


INDEX
INDEX ................................................................................................................................... i
LIST OF ACRONYMS ...................................................................................................... iv
TABLES ............................................................................................................................... v
CHART AND IMAGES..................................................................................................... vi
INTRODUCTION................................................................................................................ 1
1. Urgency of the research ..................................................................................... 1
2. Research overview ............................................................................................. 2
3. Research objectives ........................................................................................... 6
4. Research subject and scope ............................................................................... 6
5. Research methodolody ...................................................................................... 6
6. Research structure .............................................................................................. 7
CHAPTER 1: BASIC ISSUES ON BAD DEBT AND BAD DEBT TRADING,
HANDLING ACTIVITIES OF ASSET MANAGEMENT COMPANIES ................... 8
1.1. Overview of bad debts in the commercial banks............................................ 8

1.1.1. Definition of bad debts ........................................................................... 8
1.1.2. Bad debt characteristics ......................................................................... 9
1.1.3. Causes of Bad debts ............................................................................. 11
1.1.4. Impacts of Bad debts ............................................................................ 12
1.2. Basic issues on bad debt purchasing, selling handling of AMCs ................ 13
1.2.1. Definition of bad debt purchasing and selling ..................................... 13
1.2.2. Significance of bad debt purchasing and selling.................................. 14
1.2.3. The main contents of purchasing, selling and handling Bad debts at
AMCs ........................................................................................................................ 16
1.2.4. Factors affecting bad debt trading ........................................................ 21
1.3. International experience and lessons for Vietnam........................................ 23
1.3.1. Experience of some countries in the world .......................................... 23
1.3.2. Lessons learned for Vietnam in trading, dealing with bad debts ......... 25
i


CHAPTER II: CURRENT SITUATION OF THE MODEL AND MECHANISM OF
TRADING AND HANDLING OF BAD DEBT IN VAMC ......................................... 28
2.1. Overview of VAMC's characteristics, models and performance ................. 28
2.1.1. Background of foundation and development of VAMC ..................... 28
2.1.2. Main activities and right of VAMC ..................................................... 29
2.1.3. VAMC's responsibilities and roles....................................................... 30
2.2. Current situation of VAMC's model, activities of buying, selling and
handling bad debts..................................................................................................... 31
2.2.1. Situation of legal framework, organizational model and structure of
VAM.......................................................................................................................... 31
2.2.2. Actual situation of trading, dealing with bad debts at VAMC ............ 39
2.2.3. Results of trading, dealing with bad debts of VAMC .......................... 52
2.3. Assess the status of the model and mechanism of trading and handling Bad
debts of VAMC ......................................................................................................... 60

2.3.1 Achievements ........................................................................................ 60
2.3.2. Limitations ........................................................................................... 61
2.3.3. Cause of the limitation ......................................................................... 62
3.1. Orientation and operational goals of VAMC to 2025 and vision to 2030 ... 68
3.1.1 Operational orientation of VAM ........................................................... 68
3.1.2 Operational objectives of VAMC ......................................................... 70
3.1.3 Requirements in operation management of VAMC ............................. 72
3.2. Solutions to strengthen trading, handling bad debts for VAMC .................. 75
3.2.1. Restructuring the organizational structure, improving the operational
efficiency of VAMC ................................................................................................. 75
3.2.2 Human resource development ............................................................... 77
3.2.3 Upgrade information technology infrastructure.................................... 79
3.2.4 Solutions on capital and financial capacity ........................................... 80
3.2.5 Solution to complete the picture of trading and handling bad debts of
VAMC ....................................................................................................................... 81
ii


3.2.6 Creating a centralized bad debt trading market in which VAMC plays a
central role of the market .......................................................................................... 83
3.3. Proposals ....................................................................................................... 84
3.3.1. Proposals to the National Assembly .................................................... 84
3.3.2. Proposals to the National Assembly .................................................... 85
3.3.3. Proposals to the Ministries/Branch Departments ................................. 86
CONCLUSION .................................................................................................................. 89
REFERENCES ................................................................................................................... 90

iii

LIST OF ACRONYMS
1
2
3
4
5

VAMC

Viet Nam asset management company

GDP

Gross domestic product of goods and services

EU

European Union

AEG

The Advisory Expert Group

WTO

World Trade Organization

iv

TABLES

Table 2.2: Total value of issued special bonds ................................................................. 53
Table 2.3: Total value of remaining special bonds being monitored .............................. 54
Table 2.4: Classify collaterals from purchased debts ....................................................... 55
Table 2.5: Bad debt trading result at VAMC's market price ........................................... 56
Table 2.1: Result of dealing with bad debts after trading of VAMC .............................. 58

v


CHART AND IMAGES

Image 2.1: Operation model of VAMC ............................................................................ 35
Image 2.2: Flowchart of the process of buying debt by special bonds ........................... 39
Image 2.3: Flowchart Debt purchase proposal ................................................................. 43
Image 2.4: Flowchart The process of restructuring debt purchase by secured bonds.... 46
Image 2.5: Flowchart Proposal for debt sale .................................................................... 49
Image 2.6: Flowchart of the process of selling collateral of secured debts .................... 51

vi


INTRODUCTION
1. Urgency of the research
Nowadays, in the crisis and stagnant economy context due to rapid increase
in the ratio of bad debts it is ineffective to let the credit institutions and enterprises
handle the problems themselves. A large amount of capital shall be lost from the
economy then since the capital cannot be turnaround, the cash flow cannot be
circulated, the banking system continues to face difficulties in liquidity. This will

threat the sustainable development of the national financial system. Once bad debts
exceed the permitted level, there should be measures to handle the problem from
various sides, including measures from the State management agencies. According
to international experience, the establishment of a national asset management
company (AMC) to stimulate the handling of bad debts is really necessary. The
model and mechanism of dealing with bad debts of credit institutions through AMC
have been studied and applied by many countries in the world. However, there is no
common AMC model for all the countries. Based on the socio-economic
characteristics, financial systems, laws and historical conditions of different
countries, each country will have its own model, mechanism of operating and
dealing with bad debts through AMC. According to scientific studies, even with the
countries with very similar AMC, the results of dealing with Bad debts are still
different. This implies that the study of models and mechanisms to handle Bad
debts through AMC still need to be improved more.
In Vietnam, during the period of 2011-2013, the economy faced numerous
difficulties, in which the constantly increasing Non-performing loan (BAD DEBT)
ratio and existing credit risks did seriously affect liquidity and safety of the Credit
Institution System. Bad debts of the Banks are considered as a "blood clot", causing
blockages of capital flows, leading the capital flow among sectors of the economy
to be delayed, especially capital flows into production and business sectors.
Therefore, dealing with Bad debts is no longer the task of the banking sector. The
political system has also managed to handle Bad debts of the credit institutions. On
May 18th, 2013, the Government issued Decree No. 53/2013/NĐ-CP establishing
1


Vietnam Asset Management Company (VAMC) to focus on Bad debts on the credit
system system at the national level. During the operation, the legal regulations on
operational mechanisms and professional regulations by VAMC have been
constantly improved to suit the reality. As a good result, after one year of operation,

VAMC purchased 275,331 billion dongs of outstanding principal balance.
However, purchasing outstanding principal balance still faced many difficulties due
to various reasons. Decree 53/2013/NĐ-CP and Decree No. 34/2015/NĐ-CP
(amended) stipulating the operation scope of VAMC cover quite a lot of contents.
However, due to some other relevant regulations, VAMC still does not have enough
power and adequate mechanisms to implement. In addition, buying, managing and
handling purchased Bad debts of VAMC still remain many problems (many
mechanisms and policies on handling security assets still faces dificulties without
creating favorable conditions to deal with Bad debts, protecting the legitimate
interests of the creditors; Besides, procedures of initiating lawsuits, adjudicating and
executing civil judgments are complicated, slow and prolonged).
Due to above reasons, it is necessary to study solutions to improve the model
and enhance the handling of Bad debts for VAMC.
2. Research overview
Dealing with Bad debts and the mechanism to handle Bad debts in credit
institutions have been studied by many authors in various materials sofar. However,
the solutions to enhance bad debt handling at Asset Management Company have not
been widely mentioned. Therefore, when conducting research on this topic, the
author has consulted a number of writing articles, dissertations on the resolution of
Bad debts through VAMC and overseas experience as well as a number of
researches on completion of the model of the Asset Management Company,
specifically as follows:
- Research by Pham Huyen Anh on “Irrecoverable debt issues – Current
situation and solutions”. Beside giving the concept of bad debts, the introduction of
irrecoverable debt as well as summarizing the impact of irrecoverable debt on the
operation of credit institutions and the banking system in general, the author also
2


identified 05 root causes of debt generation and pointed out 3 consequences of bad

debt.
- In his research in 2012 on “Handling systematic bad debts during the
process of economic restructuring in Vietnam", Dinh Tuan Minh pointed out two
specific characteristics of bad debts in Vietnam. Firstly, the overdue debts in
Vietnamese credit institutions are not equal. Secondly, bad debts in Vietnam are
closely linked to the real estate sector.
- Research by a research group of the Banking Academy on the topic
"Analysis of banking activities in 2012 and some policy recommendations in 2013"
reclassified six main causes of bad debt in Vietnam.
- Research on the topic "Vietnam under pressure from bad debts" by the
research group of Wall Street magazine found that the root cause of bad debt
stemed from the rapid growth of credit in the period of 2008 - 2009, when the
government bumped money to stimulate the economy.
- According to Tran Thi Hong Hanh in her research in 2007 on the topic
"System of solutions to enhance debt management of Vietnam commercial banks in
the context of international integration", that the lending organization applies a
system of measures to ensure the loans are used effectively, ensuring the ability to
recover until the due date is called debt management. At the micro level, this study
shows that current debt management models of the commercial banks consist of two
main parts, including debt management policy and debt management process.
In his research on “Handling bad debts in the process of restructuring
Vietnamese commercial banks”, To Ngoc Hung analyzed comprehensively types of
handling bad debt at both micro and macro levels. Handling bad debts at the micro
level includes the following measures: restructuring debts and converting debt into
capital for the clients with prospects of future recovery; Trading bad debts or
directly handling collaterals to quickly recover business capital; Using the provision
fund to write off bad debts that are hard to recover in order to strengthen the asset
balance sheet; and some other measures.

3

Nguyen Thac Hoat, 2003, Improving the mechanism of handling loan
security assets in credit activities of Vietnamese commercial banks confirms the
establishment of debt trading company of the banking industry (AMC) is an
important solution to complete and accelerate the process of special loan settlement
of commercial banking system. This AMC will be a state-funded, state-owned
enterprise (possibly having non-controlling commercial banks) with the goal of
cleaning up the bank's balance sheet and specializing in collecting bad debts for
Commercial banks, make healthy financial market money Vietnam.
In 2012, To Ngoc Hung conducted a research on "Dealing with bad debts in
the process of restructuring Vietnamese commercial banks". According to his
research, AMCs can be divided into two categories: (1) AMC established to solve
difficulties and accelerate the process of corporate restructuring; (2) AMC
established to handle Government-acquired assets during the crisis period (mainly
bad debts), or emergency asset handling agency. In addition, the author analyzed
experience in dealing with bad debts and restructuring commercial banks of China,
Korea, Japan, Malaysia, Hungary, Ireland, especially focusing on the advantages
and disadvantages in the AMC models in those countries, from which giving
lessons for Vietnam.
In her research on “Issues to be paid attention in handling Bad debts in
Vietnam”, Dao Thi Ho Huong summarized the experience of handling Bad debts
during restructuring the banking systems of other countries in the world. The results
showed that the countries did handle above problem through the following basic
directions: (i) Direct support from the Government through capital injection; (ii)
Establishment of asset management companies to purchase Bad debts; (iii) Creating
agreement mechanism to deal with Bad debts between the credit institutions and the
borrowers. The author also gave some basic content about the operational
framework of the asset management companies.
Nguyen Thi Kim Thanh, 2012, pointed out three requirements for the

handling Bad debts in Vietnam. The first requirement is the role of the State and the
capital source in handling Bad debts. Through observing handling Bad debts of the
4


countries around the world, it can be seen that regardless of the operation mean,
success or failure, during the process of handling Bad debts, there is always
financial support of the Government in the form of bonds and securities
underwriting or cash; The second requirement is development of a mechanism for
pricing the bad debt publicly and transparently; The third one is that the solutions to
handle Bad debts should be selected in accordance with the development level of
the financial market.
Nguyen Thi Kim Thanh, in her research on the topic of "Choosing a model
for handling Bad debts in Vietnam", proposed that the process of handling Bad
debts in Vietnam needs to comply with the following requirements: (i) The role of
the State and funding sources for handling Bad debts. Through observing handling
Bad debts of the countries around the world, it can be seen that regardless of the
operation mean, success or failure, during the process of handling Bad debts, there
is always financial support of the Government in the form of bonds and securities
underwriting or cash; (ii) Development of a mechanism for pricing the bad debt
publicly and transparently; (iii) Solutions to solve Bad debts should be selected in
accordance with the development level of the financial market.
Doan Thai Son, in his research on the topic of “Improving the legal
framework for dealing with insolvency and protecting creditors' rights of the credit
institutions” in 2015, suggested the solutions to amend, supplement and complete
regulations on dealing with debts such as debt purchasing and selling, converting
debts into contributed capital and law on AMC's organization and operation in the
direction of creating favorable conditions for the parties to purchase and sell debts,
convert debts into contributed capital and at the same time empower AMC
companies with asset handling.

Thus, through researching, the author found that there have been no
researches on the solutions to enhance the handling of Bad debts at VAMC.
Therefore, the author's thesis is relatively new, necessary without overlapping with
published studies and has significant theoretical and practical significance because
it fills the "gaps" of the previous research.
5


3. Research objectives
The purpose of the research is to propose solutions to enhance the handling
of Bad debts at VAMC. To achieve this goal, the thesis undertakes the following
research tasks:
- Research the theoretical basis and experience in buying, selling and dealing
with Bad debts through the operation of asset management companies / debt trading
companies, including both domestic and oversea companies to summarize BAD
DEBT settlement models, the operational solution of each model, from which
assessing the advantages and disadvantages of the models and giving lessons for the
Asset Management Company of Vietnamese credit institutions;
- Assess the actual status of the models, operational mechanism and activities
of buying, selling, handling Bad debts purchased by VAMC, from which describing
the operational mechanism of VAMC, the results of debt purchase, debt
management, and debt recovery activities of VAMC as well as the difficulties and
obstacles during the operation process - Based on the assessment and analysis of the
operational status of VAMC, the research propose solutions to improve the capacity
to handle Bad debts due to VAMC.
4. Research subject and scope
Subject of the research is handling Bad debts purchased by VAMC by
special bonds at market prices. To clarify handling Bad debts, the research focused
on the VAMC process in dealing with Bad debts, including bad debt trading and
bad debt handling.

Scope: The research focused on analyzing and assessing the status of the
model and mechanism of buying, selling and handling Bad debts purchased by
VAMC from its foundation to October 2018 to give the achievement and existenc as
well as the reasons in order to propose solutions to improve the handling Bad debts
at VAMC in the following years.
5. Research methodolody
In the research, the author used a combination of the following research
methods:
6


Synthesis method: The synthesis method is used by the author to collect
information on scientific documents, articles, magazines and previous studies. The
synthesis method is used to write an overview of the research and build a theoretical
basis for the topic.
Method of sociological investigation (interview): The method of sociological
investigation was implemented by the departments at VAMC and some credit
institutions. The purpose of the survey method is to determine the effectiveness of
the solutions that VAMC applied to handle bad debt as well as support the
businesses.
Expert method (interview): When conducting the study, the author consulted
the ideas from the experts, including teachers and leaders of VAMC as well as
leaders of the State Bank who directly manage handling bad debt activities in
general and operation of VAMC in particular.
6. Research structure
In addition to the table of contents, abbreviated tables, list of tables,
references, main contents of the Project include:
Chapter 1: Basic issues on bad debts and bad debt trading, handling activities
of Asset Management Companies
Chapter 2: Actual situation of bad debt trading, handling of VAMC

Chapter 3: Solutions to strengthen bad debt handling of VAMC

7


CHAPTER 1: BASIC ISSUES ON BAD DEBT AND BAD DEBT TRADING,
HANDLING ACTIVITIES OF ASSET MANAGEMENT COMPANIES

1.1. Overview of bad debts in the commercial banks
1.1.1. Definition of bad debts
The Advisory Expert Group (AEG) in the United Nations believed that the
definition of non-performing loans should not be used with descriptive function but
should only be used as a guide for the banks (AEG, 2004). AEG agreed on the
definition “Basically, A loan is bad debt when payments of interest and/or principal
are past due by 90 days or more, or at least 90 days or more of interest payments
have been capitalized, refinanced or delayed by agreement, or payments are less
than 90 days overdue, but there are other good reasons to doubt that payments will
be made in full.” In other words, bad debt is determined based on two factors: (i) 90
days overdue; and (ii) doubts about solvency. In fact, the concept of bad debt is not
completely homogeneous in different countries. Currently, in addition to the
concept of Bad debts by the countries, some international organizations have also
mentioned this concept. Some typical cases can be mentioned as follows:
IMF’s Compilation Guide on Financial Soundness Indicators summarized
bad debt as follows: “A loan is nonperforming when payments of interest and
principal are past due by 90 days or more, or at least 90 days of interest payments
have been capitalized, refinanced or delayed by agreement, or payments are less
than 90 days overdue, but there are other good reasons to doubt that payments will
be made in full.”
The Basel Committee on Banking Supervision (BCBS) does not give
specific definitions of Bad debts. However, in the guidelines on common practices

in many countries on credit risk management, BCBS determined that the debt is
considered as insolvent when either or both of the following conditions occur: (i)
the bank finds that the borrower is unable to fully repay the loan when the bank has
not taken any action to attempt to recover the example of mortgage (if holding) (ii)
the borrower are 90 days or more past due. BCBS particularly emphasizes the
8


concept of "possible future losses" when evaluating a loan. Based on this guide, Bad
debts cover all loans that are 90 days past due and show signs that the borrower is
unable to repay. However, some countries reported some loans of 31 days or 61
days past due as Bad debts. Since the 90 day past due timeline is a fairly common
but not completely agreed criterion, the assessment and comparison of bad debt data
among the countries need to be implemented carefully with thorough evaluation of
specific qualitative and quantitative regulations in each country.
International Accounting Standard IAS 39 defined that a loan is considered
as impaired loan if is predicted that the recovery amount shall be less than the initial
loan. In case the loan amount is depreciated, the recorded asset value will be
reduced accordingly due to losses from bad debt quality. The Basel Committee also
mentioned that devalued loans will occur when the ability to recover payments from
the loan is not possible. The value of losses caused will be recorded by reducing the
value of the loan through a provision and will be reflected in the income statement
No.17 of the bank. Thus, the interest rates of the loans will not accrue and will only
appear as actual cash received. Basically, IAS 39 focuses on the ability to repay the
loan regardless of 90 days past due or not. The method of assessing a customer's
ability to repay is usually analyzing the future discounting cash flows or ranking of
a customer's loan. This system is considered to be theoretically correct. However,
the practical application faces a lot of difficulties. Therefore, it is still being revised
by the International Accounting Standards Committee.
Thus, Bad debts are usually determined based on two main factors: overdue

time or customers' ability to repay. It can be generally understood that Bad debts
are the loans assessed as incapable of being fully and timely repaid by
commitments.
1.1.2. Bad debt characteristics
Firstly, bad debts of the commercial banks arise through credit supply
activities and are often of great value.
In credit supply activities, a commercial bank is a financial institution that
grants the right to use capital to another entity in the economy through a contract,
9


loan agreement, from which generating profits, and suffer all the risks incurred.
Different from normal civil transactions, credit loans through lending operations of
commercial banks are often of great value. Because the basic economic function of
the bank is to lend and advance capital to the entities of the economy. Especially,
for the large investment projects, it will not be possible to implement without the
support from the banks.
Secondly, Bad debts of the commercial banks are loans that are difficult to
recover boths the loans and interest.
According to international practice and specific provisions of national laws,
Bad debts are identified through both aspects: the overdue time limit of the loan and
the forecast of debt recovery. For each country, that which factors are more
important is considered based on the level of development of the currency market as
well as the legal tradition of that country. However, regardless of the perspective,
bad debt is agreed on the basis of the borrower's ability to repay. Accordingly, bad
debts are those that are overdue for a specified period of time or show signs that the
borrower is unable to fully repay the loan (for example, when the borrower goes
bankrupt, the borrower is in a decrease in business efficiency, debt repayment
income). In other words, Bad debts are those that are either recovery impaired or
irrecoverable.

Thirdly, Bad debts of the commercial banks are determined according to
specific standards and complicated procedures.
Commercial banks are the entities that carry out currency trading activities a specific business activity which is the most strictly controlled in the conditional
business system. Therefore, the assessment and determination of Bad debts must be
based on specific provisions of the law and compliance with operational safety
criteria. Before performing the lending business, the commercial banks must
develop internal regulations on debt classification and specific bad debt
identification standards, update and strictly comply with legal provisions.

10


1.1.3. Causes of Bad debts
It is a fact that, no matter how strictly and thoroughly the loan approval
process for the credit officers at the commercial banks is, risk of bad debt is
inevitable. Therefore, causes of bad debt in the commercial banks derive from two
sides, including subjective reason from the bank and objective reason from the
borrowers, specifically as follows:
Subjective reasons from the commercial banks.
Due to the incapability of the credit officers' qualifications, they are not able
to identify the risks. The credit managers and employees have moral declin with
lack of sense of responsibilit. They take advantage of powers for self-interest. The
effectiveness of governance is poor, the credit policies are unreasonable, not timely
or do not keep up with reality. The information transmission system is still slow and
incomplete, leading to false appraisal and analysis, wrong assessment of customers'
ability to repay the loans and economic development trends.
The process of credit grant is unreasonable, violate the four-eyes
principle.The credit officers abuse of their authority, perform superficial or
improperly with the regulations on lending, wrongly assess the ability to use capital
and repay of the customers. The effectiveness of the Bank's internal organization,

inspection and supervision is not tight, incomplete and not independent. Those
actvities are performed with wrong functions or intentionally committed violations;
There is no strict binding responsibility for credit executors and the sanctions are
not strict or less transparent.
Commercial banks too focus on profit targets, causing rapid credit growth.
The race to mobilize interest rates raise the lending rates, causing indifference of the
strong enterprises when they could use other cheaper capital sources. The remaining
customers were put into doubt about management and business ability to repay the loan.
Objective reasons from the customers
Customers’ production and business management skills are limited since
they use their loans for improper purposes. As a result, the loans cannot help
promote business activities of the enterprises, leading to enterprises' ineffective
11


business result and the debt amount increased. The enterprises do not have goodwill
to repay debts, intentionally fail to provide sufficient information or conceal
information during the process of applying for loans and using loans, and taking out
loans at many credit institutions. The financial situation of the enterprises is poor,
lacking transparency in handling accounting papers and books.
The enterprises are at risks in their business activities, including natural
disasters, fires, wars, etc. and especially the impact of economic crisis in the region
and the world. As a result, the uses of the loans are ineffective, the enterprises may
completely lose capital. The enterprises encounter unpredictable business changes
such as changes in prices, market demand, inflation, exchange rates, interest rates,
changes in the legal environment or policies. Government has put businesses in
financial difficulties that cannot be overcome.
1.1.4. Impacts of Bad debts
1.1.4.1. On the commercial banks
First of all, bad debt reduces the profit of the commercial banks. Bad debts

limit the ability to expand and increase credit and business capabilities of the
commercial banks. When Bad debts increase, bank's income decreases, even, profits
can no longer be generated due to failing to recover debts while additional provision
expenses, management costs, bad debt handling and other related expenses are
incurred.
Secondly, Bad debts will reduce the reputation of the bank. If the bad debt
ratio is too high, exceeding the safe limit in accordance with international practice,
the reputation of the domestic and international commercial banks will be seriously
reduced.
Thirdly, Bad debts adversely affect the solvency and business plan of the
bank. The principal activities of the commercial banks are to accept deposits and
loans. If the credit is at risk, the debt recovery will be difficult, recovery of loan
principal and interest will be irrevocable or incomplete. Meanwhile, the bank still
has to pay in full and on time for the deposits. The above imbalance greatly affects
the liquidity of the bank and affects the bank's business plan.
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Fourthly, Bad debts hinder the integration process of the commercial banks.
Bad debts directly affect the financial capability of the commercial banks when
analyzing and assessing the financial situation of banking activities, which is an
unfavorable factor in competition, integration and development.
1.1.5.2. On the economy
Commercial banks are special businesses in the economy. Therefore, Bad
debts of the commercial banks greatly affect the economy. The impact of BAD
DEBT on the economy is indirectly presented through the organic relationship,
including Bank - customer - economy. Accordingly, Bad debts affecting business
activities of the banks will also affect the development of the economy. The ability
to exploit and meet capital and ability to provide banking services to the economy
will be limited when Bad debts arise. On the other hand, Bad debts arising from

inefficient customers and businesses will affect the whole economy, affecting the
growth and development of the economy due to stagnant capital, production and
business activities.
1.2. Basic issues on bad debt purchasing, selling handling of AMCs
1.2.1. Definition of bad debt purchasing and selling
bad debt trading is a type of service through which financial instruments are
used to trade a particular type of product - bad debt, whereby the debt seller
transfers ownership of the debt to the debt purchaser and receive payment from the
debt buyer. Trading of Bad debts of the commercial banks is the transfer of
creditors' right for the loans which are currently outstanding or are being monitored
off-balance-sheet by the banks lending the domestic or foreign organizations or
individuals. The debt transfer is carried out simultaneously with the transfer of the
obligations of the debtor and the related parties. A debt may be sold totally, sold to
multiple debt buyers and may be purchased or sold multiple times.
Dealing with Bad debts through purchasing and selling method is used by the
banks to recover all the Bad debts, overcome and deal with outstanding debts, make
clean and healthy the balance sheet, ensure safety, efficiency and sustainability
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