What is debt trading? Regulations on bank debt trading

Debt trading is a form of transferring debt collection rights between parties, helping to solve financial problems for organizations and businesses. Debt trading not only helps banks pay off bad debts but also creates opportunities for related parties to handle bad assets. The article below will help customers clearly understand the bank’s debt trading regulations, ensuring transparency, and legality and protecting the interests of the parties involved in the transaction.

What is Debt trading?

According to the provisions of Clause 1, Article 3 of Circular 09/2015/TT-NHNN of the State Bank of Vietnam, debt trading is a written agreement on the transfer of debt claims for debts arising from lending transactions, payment in lieu of guarantee transactions, according to which the debt seller transfers ownership of the debt to the debt buyer and receives payment from the debt buyer.

According to this regulation, debt trading activities are understood as agreements to transfer debt collection rights between parties, in which:

• The debt seller transfers all ownership of the debt;
• The debt buyer receives the transfer of the rights and obligations to recover the debt;
• Transactions are made in writing, complying with legal regulations.

The main goal of debt trading is to optimize debt portfolio management, minimize financial risks and increase capital recovery for credit institutions.

Principles for carrying out debt buying and selling activities

According to the provisions of Article 5 of Circular No. 09/2015/TT-NHNN, specifically amended and supplemented in Clause 3, Article 1, Circular 18/2022/TT-NHNN stipulating principles for implementing debt buying and selling activities including:

• Debt buying and selling activities are not contrary to the provisions of the credit contract and security contract signed between the debt seller, customer and guarantor;
• Debt buying and selling activities are agreed upon by the parties, complying with the provisions of this Circular and relevant laws;
• Credit institutions and foreign bank branches considered and approved by the State Bank for debt purchasing activities must have a bad debt ratio of less than 3% according to the most recent classification period according to the State Bank’s regulations on classification. Assets, level of deduction, method of setting up risk provisions and use of provisions to handle risks in the operations of credit institutions and foreign bank branches before the time of requesting approval for operations Buy debt, except for credit institutions under special control. Credit institutions and foreign bank branches selling debt do not have to ask for permission from the State Bank;
• Credit institutions and foreign bank branches are only allowed to purchase debt when the State Bank approves debt purchase activities in the License for establishment and operation of the credit institution, the License for establishment of the foreign bank branch (hereinafter referred to as the License) and has a bad debt ratio of less than 3% according to the most recent classification period according to the State Bank’s regulations on asset classification, provisioning level, method of setting up risk provisions and the use of provisions to handle risks in the operations of credit institutions and foreign bank branches before the time of signing the debt purchase contract, except for the cases specified in Clause 12, Article 5 of Circular No. 09/2015/TT-NHNN supplemented by Clause 3, Article 1 of Circular 18/2022/TT-NHNN;
• Before purchasing and selling debt according to regulations, credit institutions and foreign bank branches must issue internal regulations on debt buying and selling activities (including clear regulations on decentralization of authority according to regulations). Principles of division of responsibilities between appraisal and decision to buy and sell debt; method of buying and selling debt; debt buying and selling process; debt valuation process and methods; Risk management for debt buying and selling activities;
• Credit institutions and foreign bank branches purchasing debt must comply with legal regulations on ensuring safety in the operations of credit institutions and foreign bank branches;
• The debt seller does not buy back the sold debt, except in some specific cases;
• A credit institution is not allowed to sell debt to its own subsidiary, except in the case of selling debt to the debt management and asset exploitation company of the parent credit institution according to the approved restructuring plan; The credit institution is the compulsory transferee and must sell qualified debt to the commercial bank that is subject to the compulsory transfer according to the approved compulsory transfer plan;
• Debt management and asset exploitation companies that are subsidiaries of credit institutions are only allowed to buy debt from other credit institutions or foreign bank branches when the parent credit institution has a bad debt ratio of less than 3%, except in the case of debt purchase under an approved restructuring plan;
• In case of selling a part of a debt or selling a debt to multiple debt buyers, the debt seller and the debt buyers shall agree on the participation rate, implementation method, rights and obligations of each party, division of the value of secured assets (if any) for the debt purchased or sold and other specific contents in the debt purchase and sale contract in accordance with regulations;
• Debts purchased and sold must be monitored, accounted for and reported statistically according to regulations;
• Credit institutions and foreign bank branches are not allowed to grant credit to customers to buy debt owned by that credit institution or foreign bank branch;
• Credit institutions are not required to meet a bad debt ratio of less than 3% when purchasing debt in some specific cases specified in Clause 12, Article 5 of Circular No. 09/2015/TT-NHNN supplemented by Clause 3, Article 1 of Circular Circular 18/2022/TT-NHNN.

Business conditions for debt buying and selling activities

According to the provisions of Clause 3, Article 5 of Circular No. 09/2015/TT-NHNN to be allowed to conduct debt buying and selling, credit institutions must meet:

• First, organizations participating in debt buying and selling must have a low bad debt ratio, not exceeding 3% of their total outstanding debt according to the most recent debt classification results. This proves that the organization is maintaining a good level of risk control and has the ability to effectively collect debt. A low bad debt ratio is an important factor to ensure the financial stability of the organization and the safety of debt trading transactions.
• Second, organizations that want to participate in the field of debt trading must be licensed to operate by the State Bank. This license is granted based on the organization fully meeting legal and financial requirements and having a clear business plan in handling and trading debt.
• Third, organizations participating in debt trading must always ensure compliance with capital safety requirements according to regulations of the State Bank. This includes maintaining a minimum capital adequacy ratio, ensuring solvency and handling debts in all situations.
• Fourth, organizations must have a professional and comprehensive risk management process to identify, evaluate and control risks related to debt trading activities. This process includes applying financial analysis tools and assessing debt collection capabilities, identifying bad debts, as well as establishing debt prevention and settlement measures. In addition, organizations need to have a continuous monitoring system to detect and promptly respond to possible risk situations, helping to protect the interests of both debt buyers and sellers.

Important notes when buying and selling bank debt

To effectively buy and sell bank debt and avoid unnecessary risks, customers need to pay attention to some key points:

• Organizations are not allowed to sell debt to their subsidiaries or affiliated companies to avoid conflicts of interest and ensure transparency in transactions;
• Banks are not allowed to extend credit to customers for the purpose of purchasing the bank’s own debt to prevent fraud and reduce financial risks;
• Organizations must fully account for debt trading transactions in accounting books and report promptly and transparently to authorities to ensure accuracy and legality;
• Transfer of debt rights must comply with clear contracts, complete terms and be approved by authorities, ensuring legality and transparency in transactions.

>>> See more: Instructions for registering to establish a debt trading service company.

Intensive Consulting Services at Long Phan

At Long Phan, our team of professional and experienced experts will accompany customers in the process of conducting fast debt trading, ensuring speed and compliance with current regulations.

Long Phan provides consulting services including:

• Review current conditions for debt trading according to current regulations;
• Support customers with consulting and appraisal of debt trading conditions;
• Support customers in preparing and completing debt purchase and sale documents;
• Representing customers to carry out related debt purchase and sale transactions.

Debt trading is a complex activity that requires high expertise and strict compliance with current regulations. Long Phan is ready to accompany you in every stage of implementation. If you need in-depth advice and support on debt trading, please contact us immediately via the hotline: 0906735386 for the most professional and timely support!