Draft decree on collateral leaves banks in a paradox

According to data from Wichart, the outstanding balance of non-performing loans at listed banks had surged by more than 16.2 per cent by the end of Q2, reaching $10.7 billion. How do you view claims that regulatory factors have been a key driver behind this sharp rise? Tran Minh Hai, managing partner of BASICO Law Firm

The banking sector has long been caught between two conflicting legal frameworks. On one hand, the secured transactions regime that grants banks full authority to dispose of collateral; on the other hand, a complex set of restrictive legal provisions that may impose sanctions on banks should they unilaterally enforce collateral collection to recover loans. These two parallel legal realities do exist, creating significant challenges for banks in resolving non-performing loans (NPLs).

Furthermore, certain provisions of the law directly obstruct banks’ debt recovery process. For example, Article 301 of the Civil Code is a major barrier, as it stipulates that if the party holding the collateral refuses to hand it over, the secured party can only file a lawsuit with the court for resolution. This provision effectively strips financial institutions of alternatives. They cannot seize or liquidate the collateral, but must instead litigate.

Decree 21, which provides implementing guidance, attempted to mitigate the burden of Article 301 by introducing liability for damages in cases where the collateral provider fails to deliver the collateral. However, it still cannot fully eliminate the barrier created by the law itself.

The State Bank of Vietnam has just released a draft decree to operationalise Article 198a of the Law on Credit Institutions 2024, as amended and supplemented by Law No. 96/2025/QH15. What is your assessment of this development?

The purpose of Article 198a is entirely necessary and appropriate for banks and secured creditors. However, the draft decree’s provisions regarding the conditions under which collateral for NPLs may be repossessed require careful reconsideration.

Specifically, the draft decree stipulates that collateral for NPLs may be repossessed if it meets both the conditions set out in Article 198a and the following additional requirements. The collateral must not be the guarantor’s sole residence, and the collateral must not be the guarantor’s principal or sole means of livelihood or production.

The fundamental rationale of taking collateral is to provide banks with a legal mechanism to recover debts in cases where borrowers default.

The draft provisions, however, would create a paradox. While the law still allows such assets to be pledged as collateral in secured transactions, it would simultaneously prohibit their repossession and enforcement in the event of default. This inconsistency would give rise to a legal contradiction that is difficult to justify, leaving the banking sector questioning if repossession is prohibited, then what is the practical purpose of allowing such assets to be accepted as collateral in the first place?

Assuming that the secured creditors’ right to repossess collateral is restricted in line with the draft decree, what would be the potential implications for the banking sector?

The impact will arise right from the stage of taking collateral, without having to wait until the stage of collateral enforcement. To comply with this draft provision, banks would be forced, at the very moment of establishing the secured transaction, to ensure that the collateral is neither the guarantor’s sole residence nor their principal or sole means of livelihood. However, determining such conditions in practice is by no means straightforward.

Although the draft introduces a mechanism requiring the guarantor to declare and commit to the status of the collateral at the time of signing the contract, such confirmation is logically of little significance.

If the asset owner declares that the collateral falls within the categories prohibited from repossession, the bank would almost certainly refuse to accept it as collateral. As a result, many credit demands would effectively be cut off from access to financing.

Conversely, if the asset owner confirms that the collateral is not their sole residence or their primary or sole means of livelihood, banks are likely to remain highly sceptical. Practical experience in debt resolution shows that once loans become non-performing, asset owners often resort to every possible means to evade enforcement against their collateral.

In such cases, they could very well deny their earlier declaration and seek to prove that the collateral is indeed their only home or sole means of livelihood. Should this occur, banks would face heightened risks of litigation and even adverse rulings.

What is the underlying objective of this decree, and what solutions could be adopted to balance the interests of both lenders and borrowers?

It is likely that, from the perspective of the drafting authority, the intent is to safeguard social welfare in cases where asset owners are protected by provisions excluding the secured creditor’s right of repossession.

However, from the standpoint of individuals, even if the collateral is their sole residence or their primary or only means of livelihood, they still require the ability to pledge such assets to obtain loans to meet legitimate financing needs.

The draft regulation has, in effect, indirectly deprived them of this right.

It is therefore necessary to return to the fundamental purpose of secured transactions, which is to ensure that the value of obligations can be enforced through collateral if those obligations are not duly performed. For banks, this mechanism is essential to maintaining credit quality and managing credit risk.

Beyond that, it is crucial for safeguarding the security of deposit mobilisation activities, as effective credit risk management ensures banks can fulfill their obligations to depositors. As such, this core objective must be consistently reflected across all related legal and regulatory frameworks.

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