Understanding “Bank Debt Restructuring and Settlement” Accurately

Authors: Van Dao and Nhi Tran

Amidst ongoing instability in both domestic and international economies, there have been an increasing number of organizations and individuals (clients) struggling to meet their credit obligations as set forth in their credit contracts with the banks. In such circumstances, clients may either act on their initiative or seek advice and support from legal counsel to renegotiate with banks to resolve these distressed debts to ensure a fair balance of the legitimate interests of all parties involved.

As part of our effort to share practical insights with the community and emerging legal practitioners, we are initiating a series of articles that explore fundamental concepts, key issues, and prevailing approaches typically adopted by lenders when handling debt settlement with clients. To begin this series, we will delineate the distinctions between “Bank Debt Restructuring” and “Bank Debt Settlement” in order to equip readers with a comprehensive and clear conceptual foundation for practical application.

It is common for the concepts of “bank debt restructuring” and “bank debt settlement” to be understood as equivalent. However, within the financial and banking system, for the purpose of effective credit management, although both approaches aim to manage credit cash flows, the concepts of bank debt restructuring and bank debt settlement differ significantly in nature, objectives, implementation methods, and implications for relevant parties.

Overview of Debt Restructuring and Debt Settlement in Banking Operations

Bank Debt Restructuring

Under Vietnamese law, bank debt restructuring is not explicitly defined in a standalone legal provision. Instead, it is commonly understood as an agreement between the bank and the borrower to adjust the terms of the credit contract, aimed at supporting the borrower in continuing to fulfill their repayment obligations.

In essence, bank debt restructuring is a supportive process, reflecting the bank’s flexibility in adjusting credit terms to align with the borrower’s financial situation. It is a “preventive” solution rooted in the philosophy of maintaining long-term credit relationships and assisting clients in overcoming temporary difficulties, thus reducing the risk of bad debts for the bank.

As such, debt restructuring is typically applied by banks to clients whose loans have not yet been classified as bad debts (the definition and classification of bad debts will be elaborated in later articles) and are still being repaid periodically from sources outlined in the loan plan or credit contract. At this stage, the loan may not yet be classified as requiring special attention (i.e., loans overdue by fewer than 90 days) (the concept of potentially risky debt will also be discussed in later articles on debt classification).

Debt restructuring typically involves one or more of the following measures (detailed explanations of each measure will be provided in later articles):

• Rescheduling repayment terms;
• Providing additional credit to maintain operations while gradually reducing outstanding debt; and
• Other financial support measures to generate cash flow for repayment.

Each measure is thoroughly regulated by banks, with detailed provisions on eligible parties, applicable conditions, and implementation processes. These will be further explored in greater depth in later articles.

Bank Debt Settlement

Under the Vietnamese legal system, bank debt settlement is specifically interpreted as the measures implemented by banks, credit institutions, or relevant authorities to recover or manage debts (including principal, interest, and related fees) when clients fail to fulfill their repayment obligations under the credit contract.

Under the prevailing provisions of the Law on Credit Institutions, bank debt settlement entails applying legal, financial, or administrative measures aimed at:

• Recover debts from borrowers (whether individuals or enterprises) when the debts have become bad debts (overdue or difficult-to-recover debts) or are at risk of non-recovery;
• Mitigate financial risks for the credit institution; and
• Safeguarding the legitimate rights and interests of all relevant parties.

Debts subject to settlement typically fall into bad debt categories as defined by the State Bank of Vietnam (Circular 31/2024/TT-NHNN), including:

• Group 3 debt (substandard debt): overdue from 91 to 180 days;
• Group 4 debt (doubtful debt): overdue from 181 to 360 days; and
• Group 5 debt (potentially irrecoverable debt): overdue beyond 360 days.

Debt settlement typically involves one or a combination of the following measures (detailed discussions on each measure will be provided in subsequent articles):

• Interest reduction or exemption (collectively referred to as “interest relief”): typically applied to debts in Group 3 or higher, with the prerequisite that the client must fully repay the principal and demonstrate genuine financial difficulties with no repayment sources. Clients may receive partial interest reduction or full exemption, depending on the bank’s policies and assessment of their repayment situation;
• Handling collateral assets: clients may either sell the collateral themselves or authorize the bank to sell it to offset the outstanding debt;
• Sale of the debt;
• Initiating legal action or requesting bankruptcy proceedings against the borrower or guarantor;
• Out-of-court mediation;
• Debt-to-equity conversion;
• Handling debts in special cases;
• Releasing collateral upon debt repayment: the client or guarantor repays the debt and retrieves the collateral from the bank;
• Debt recovery from alternative sources: such as compensation, indemnification, or refunds.

Table of distinction: “Bank Debt Restructuring” vs. “Bank Debt Settlement”

To facilitate a clearer understanding of the distinctions between debt restructuring and debt settlement in banking operations in Vietnam, the following table has been presented:

Conclusion

The distinction between Debt Restructuring and Debt Settlement in banking operations underscores not only the divergent approaches to credit management techniques, but also the bank’s operational philosophy in client relationships. Debt restructuring embodies flexibility and partnership, whereas debt settlement serves as a final recourse to safeguard financial interests. A comprehensive understanding of this distinction empowers stakeholders to adopt appropriate solutions and illustrates how Vietnam’s banking system balances economic goals with social responsibility in the prevailing context.