The role of the banking system is often likened to the lifeblood of the entire economy. The operations of the banking system help financial resources circulate, allocate, and be used efficiently, thereby stimulating strong and sustainable economic growth. In recent years, due to slow economic development and sales pressure, most banks have adopted policies to relax lending mechanisms. As a result, many overdue and non-performing loans have emerged after a period, causing losses and blocking credit flows in the economy. Overdue debts and non-performing loans have become a top priority issue, posing concerns not only for borrowers but also for the safety of banking operations.

Understanding Overdue Debts and Non-Performing Loans

Lending is a key and important operation for banks and financial companies. However, when lent principal and interest are unable to be paid back when due as agreed in credit contracts, the debts become overdue, or delinquent. If payment then exceeds a further given time frame, the debts are considered non-performing. Oftentimes, the bank must burden the debts unless further action can be taken. Examples of commonly overdue and non-performing loans include mortgage loans, unsecured loans, and installment loans.

Overdue Debts: Generally, when borrowing capital, the bank and the borrower (individual or organization) sign a loan agreement. The contract specifies the loan amount, duration, interest rate, specific regulations, and the agreed repayment schedule for principal and interest. However, due to various reasons, if the borrower is unable to repay the principal and interest on time as agreed in the contract, it is called overdue debt. Overdue debts are divided into two types:

– Overdue Secured Debts: These are debts where the borrower cannot repay the principal on time as per the contract. However, these loans are secured by collateral such as houses, land, or vehicles, so the bank can still recover the initial loan capital.

– Overdue Unsecured Debts: Also known as unsecured loans, these are debts where the borrower has not provided any form of collateral. As a result, the bank risks not recovering the initial loan capital.

Overdue debts become non-performing loans when the principal and interest are not paid on time as specified in the contract. Depending on the severity, banks classify non-performing loans into groups 3, 4, and 5.

Non-Performing Loans (NPLs): According to Clause 8, Article 3 of Circular 11/2021/TT-NHNN on asset classification for risk management in credit institutions and foreign banks, non-performing loans are on-balance-sheet debts belonging to groups 3, 4, and 5 as specified in Article 10 of Circular 11/2021/TT-NHNN, which includes substandard debts, doubtful debts, and potentially irrecoverable debts. In other words, non-performing loans are debts overdue by more than 90 days, and commercial banks classify these loans based on the borrower’s repayment capacity.

Classification of Overdue and Non-Performing Loans

According to Articles 10 and 11 of Circular 11/2021/TT-NHNN, overdue and non-performing loans are classified into five groups:

• Standard Debts: These are current debts assessed as fully recoverable in terms of both principal and interest on time. Debts that are overdue by less than 10 days are assessed as fully recoverable in terms of overdue principal and interest and remaining principal and interest on time.
• Debt Groups Requiring Attention: These are debts that have been overdue for up to 90 days as per the credit contract. Debts in this group have been rescheduled for the first time within the term by the credit institution or bank branch. Alternatively, debts in this group may belong to higher or lower debt groups but meet the following conditions: the borrower has fully repaid the overdue principal and interest, and the principal and interest of subsequent repayment periods from the date they started fully repaying the overdue principal and interest, or they have complete documents proving the borrower has repaid, or they have the ability to fully repay the remaining principal and interest on time.
• Substandard Debts: This group includes debts that are overdue between 91 and 180 days. Debts that have been rescheduled for the first time but are overdue by less than 30 days as per the rescheduled repayment term. Debts with waived or reduced interest because the borrower cannot pay the full interest as agreed in the credit contract. Debts that need to be recovered according to an early recovery decision by the credit institution or foreign bank branch due to the borrower’s breach of agreement, have not been recovered within 30 days from the decision date.
• Doubtful Debts: This group has very low creditworthiness and includes debts that are overdue between 181 and 360 days. Debts that have been rescheduled for the first time but are overdue by up to 90 days as per the rescheduled repayment term. Debts that have been rescheduled for the second time but are still within the term. Debts that need to be recovered according to inspection conclusions but have not been recovered within 60 days from the conclusion date. Debts that need to be recovered according to an early recovery decision by the credit institution or foreign bank branch due to the borrower’s breach of agreement, but have not been recovered within 30 to 60 days from the decision date.
• Potentially Irrecoverable Debts: This group has a very low likelihood of debt recovery and includes debts that are overdue by more than 360 days. Debts that have been rescheduled for the first time but are overdue by 90 days or more as per the rescheduled repayment term. Debts that have been rescheduled for the second time continue to be overdue as per the rescheduled repayment term. Debts that have been rescheduled for the third time or more. debts that need to be recovered according to inspection conclusions but have not been recovered within 60 days from the conclusion date; Debts that need to be recovered according to an early recovery decision by the credit institution or foreign bank branch due to the borrower’s breach of agreement, but have not been recovered within 60 days from the decision date.

Handling Overdue Debts and Non-Performing Loans According to Legal Regulations

Handling overdue debts and non-performing loans is a process burdened by the bank. Although the law does not set out the handling of overdue debts, banks must follow a set of guidelines on handling methods and operations. Typically, the process of handling overdue debts is based on the following legal bases:

– General regulations by the State Bank on handling overdue debts.

– Specific regulations in the bank’s charter, loan agreements, and loan security contracts.

The legal bases are established according to the Civil Code 2015 and Circular 11/201/TT-NHNN. Notable provisions for debt handling include:

Article 299 of the Civil Code 2015: Cases of handling secured assets:

– When the due date for fulfilling the secured obligation is reached, and the obligor does not fulfill or improperly fulfills the obligation.

– The obligor must fulfill the secured obligation before the due date due to a breach of obligation as agreed or as per legal regulations.

– Other cases as agreed by the parties or as per legal regulations.

Article 303 of the Civil Code 2015: Methods of handling pledged or mortgaged assets:

– The secured party and the secured creditor may agree on one of the following methods of handling pledged or mortgaged assets: auctioning the assets, the secured creditor selling the assets themselves, the secured creditor accepting the assets to replace the performance of the secured obligation or another method.

– If there is no agreement on the method of handling secured assets, the assets will be auctioned unless otherwise stipulated by law.

Article 304 of the Civil Code 2015: Sale of pledged or mortgaged assets:

– The auctioning of pledged or mortgaged assets is conducted according to the law on auctioning assets.

– The self-sale of pledged or mortgaged assets by the secured creditor is conducted according to the asset sale regulations in the Civil Code.

Can Bank Debts Be Sued? How Long Until They Are Sued?

According to the Civil Code 2015 and practical implementation by banks, lending activities are always established through loan agreements. The borrower’s debt is classified as non-performing after the overdue period specified by law. If the borrower cannot repay the principal or interest when due as agreed in the loan agreement, the borrower must bear legal responsibility. The bank can sue the borrower at this point. However, in practice, banks do not sue immediately but apply internal measures for handling overdue debts before seeking external intervention.

The litigation option is not always applicable or effective, especially for small debts or unsecured debts. The bank aims to recover the capital, thus allowing the borrower more time to fulfill their repayment obligations or use valuable assets to recover the debt. According to Article 275 of the Civil Code, the repayment period is 36 months. If the borrower does not fulfill their repayment obligations within 36 months, the bank will initiate legal procedures and take the case to court for resolution, using enforcement measures to recover the debt. Therefore, if the debt is overdue for 36 months without repayment, the borrower will be sued by the bank.

Handling non-performing loans is a challenging issue for both banks and indebted businesses or individuals. It is essential to raise awareness about borrowing, especially to repay interest and principal on time, use borrowed capital effectively, and strive to resolve debts to avoid legal violations. For more in-depth insights, follow our subsequent articles. Don’t forget to stay updated with more useful information on our website. If needed, contact us for detailed guidance: info@letranlaw.com.