by Apra Law

According to Article 3.8 Circular No.11/2021/TT-NHNN issued on July 30th, 2021 by State Bank of Vietnam, Non – Performing Loan (NPL) is NPL on the balance sheet, including loans in group 3, 4 and 5, in which loans in group 3, 4 and 5 are stipulated in Article 10.1 of this Circular that overdue for payment of 90 days or more. 

Converting NPL into contributed capital means the commercial bank instead of recovering the loan lent to the enterprise, will take that NPL to “buy” the enterprise’s own shares at the same price or under agreement between the two parties and become a part owner of the enterprise to deal with NPL.

Regulations on banking area

Decision No. 1058/QD – TTg issued on 19/07/2017 (“Decision 1058”) stipulates: “For NPL of SOEs: representative of  SOE owner is responsible for determining the direction of the enterprise’s operations in order to take appropriate handling measures, including: Complete settlement of the loan’s security assets (if any); In case of keeping operating, the credit institution is allowed to convert loan into contributed capital or supplement capital sources for the enterprise to have a source of loan repayment to the credit institution; make enterprises go bankrupt so that credit institutions can recover related loans”. Thus, commercial banks are allowed to convert NPL into contributed capital for NPL of SOEs. However, when converting, commercial banks must comply with the regulations on the limit on the rate of capital contribution and share repurchase in Clause 1, 2 and 6, Article 129 of the Law on Credit Institutions 2010, revised in 2017. In addition, this issue is regulated in more detail in Circular No. 51/2018/TT – NHNN (“Circular 51”), stipulating conditions, dossiers and procedures for approval of contributions. capital, purchase shares of credit institutions, based on the provisions of Article 103 and Article 110 of the Law on Credit Institutions 2010.

Regulations on securities area

Article 3.10 of Decree 155/2020/ND-CP guiding the Securities Law (“Decree 155”) gives the following definition: “10. Issuance of shares for converting is the issuance of additional shares in exchange for shares, contributed capital in other enterprises to swap loans of the issuer towards creditors.

This provision means that the law allows commercial banks to swap NPL into shares of joint stock companies to deal with NPL. The swap of NPL into shares is carried out according to the procedure of private placement of shares. On July 16th, 2017, the Ministry of Finance issued Decision No.2071 to implement the Project “Restructuring the credit institution system in association with handling NPL in the period 2016-2020“, while studying and building a legal framework for securitization of NPL activities that create a legal basis for the conversion of NPL into securities for public and transparent trading at an appropriate time. Thus, under this scheme, NPL will be converted into bonds or stocks to be dealt with by a specialized institution and the securities market is secured by collateral or by a credit institution or regulatory agency.

Converting NPL into contributed capital has in fact been applied by many commercial banks and has brought positive results over the years, creating a very good capital mobilization channel for enterprises, especially those in crisis. In particular, with the conversion of NPL into contributed capital, enterprises can have the flexibility to change their financial structure to balance the possibility of rapid growth and sustainable development in the face of different market situations.

However, there are mostly mixed opinions. Many economists believe that banks are financial intermediaries, specializing in providing capital and services then owning shares, such investments will face many risks in other areas that are not the specialty and forte of the bank. Moreover, about the proportion of capital that commercial banks are owned at enterprises as well as the proportion of capital that commercial banks are allowed to contribute capital to enterprises. By providing that commercial banks not owning more than 11% of the charter capital of the enterprise receiving contributed capital and having to consult the SBV if the enterprise receiving contributed capital is not in areas such as insurance, securities, remittances, consumer credit…, while they become shareholders, it will be difficult to play a dominant role and run the business. Thus, the ability for commercial banks to be deeply involved in business restructuring will be difficult to achieve the initiative and get expected results. This is a huge barrier for commercial banks to actively handle NPL through capital contributions at enterprises.


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