Property market slump prevents banks from selling collateral to recover bad debts

A bank in HCM City. Banks are struggling to sell collateral, mainly real estate, pledged by borrowers to recover bad debts. — VNS Photo Bồ Xuân Hiệp

HCM CITY — Banks are struggling to sell defaulting borrowers’ collateral, primarily real estate, to recover the debts since the property market is sluggish.

A State-owned lender recently decreased the reserve price of a 160sq.m house in Hà Nội’s old quarter to around VNĐ50 billion from the VNĐ70 billion it had sought in an auction in August 2022.

In the last two years, it has held numerous auctions but has not been successful in finding a buyer for the property.

Another lender is currently trying to auction land in a residential project in Nha Trang and slashed the reserve price by over VNĐ20 billion but it unable to find a buyer.

Various resort properties and hotels in sought-after locations such as Hội An, Đà Nẵng and Phú Quốc Island are also being offered at discounts by banks.

State-owned Vietinbank recently announced plans to auction 10 lots of land measuring over 1,400sq.m on Phú Quốc for a total of VNĐ27 billion.

They are owned by an unidentified local person.

Trần Khánh Quang, CEO of Việt An Hòa Company, said potential buyers are wary of the legal issues and possible disputes that could arise with property owners.

The analysts said the failure to sell high-value assets to recover bad debt is often due to banks setting high prices so that they could fully recover their loan, interest and penalties.

But this would not work when the market is in a slump, they said.

A regulation that prevents more than a 10 per cent reduction in asset prices from the previous auction poses a further challenge, they said.

New real estate developments in District 1 in downtown HCM City. Real estate makes up 70 per cent of collateral for bank loans. — VNS Photo Bồ Xuân Hiệp

With 70 per cent of its collateral comprised of real estate, the banking industry is grappling with non-performing loans worth VNĐ224.14 trillion as of the end of last March.

Adding to the challenges to selling mortgaged real estate was the arrest in late 2022 of Trương Mỹ Lan, the chairwoman of Vạn Thịnh Phát. She is now on death row for financial fraud and other crimes.

The Asian Development Bank has also warned of risks to the banking system from irregularities in the corporate bond and real estate markets.

Banks must resolve overdue debts promptly by liquidating collateral and creating bad debt reserves even if it means sacrificing some profits, analysts said. — VNS