Under the Law on Credit Institutions 2024, debt trading has evolved into a strictly regulated activity for Foreign Bank Branches (“FBBs”) in Vietnam. While often viewed merely as a mechanism for asset restructuring, debt trading, specifically the purchase of debt, is legally classified as a conditional business activity. This classification implies that FBBs cannot engage in debt purchasing as a matter of course; rather, they must obtain specific approval from the State Bank of Vietnam (“SBV”) to amend their Establishment and Operation License.
The regulatory framework distinguishes sharply between the roles of a debt seller and a debt buyer. This distinction is critical for compliance strategies, as the obligations imposed on an FBB depend entirely on which side of the transaction they stand. To navigate this landscape, FBBs must understand the statutory definitions, the rigorous licensing conditions, and the procedural requirements for license amendments governed by the newly effective Circular No. 34/2024/TT-NHNN (“Circular 34”).
1. Definition and scope of debt trading
The legal definition of debt trading encompasses the transfer of the right to demand a debt, where ownership transfers from seller to buyer for a payment. However, the regulatory burden is asymmetrical. Selling debt is generally considered an inherent right of a credit institution to recover capital or resolve non-performing loans, and thus typically does not require a specific license amendment.
Conversely, acting as a debt buyer is treated as a commercial expansion into a riskier business line. For an FBB to lawfully purchase debt, the specific content “debt purchase” must be recorded in its License. Without this express authorization, purchasing debt remains legally restricted.
Furthermore, eligibility is restricted not just by the license, but by the nature of the debt itself. Not all debts are eligible for trading; the debt must satisfy strict legal conditions to be transferable. Specifically, the debt must be fully evidenced by credit contracts and disbursement records that accurately reflect the debt’s status. It must be free from any contractual prohibitions on transfer and must not currently be pledged as collateral for other obligations, unless the secured party consents in writing.
2. Prudential conditions for licensing
2.1. Non-performing loan (NPL) constraint
The most significant barrier to entry for FBBs wishing to enter the debt trading market is the requirement regarding asset quality. An FBB is only permitted to purchase debt if its NPL ratio is below 3%. Crucially, this prudential threshold applies strictly at two distinct junctures: upon applying for the license amendment and continuously prior to signing any debt purchase contract. This ratio is calculated based on the most recent classification period prior to the application. This threshold serves as a prudential safeguard, ensuring that the buyer possesses sufficient financial health and asset quality before acquiring potentially distressed assets from other entities.
2.2. Internal governance and localization
Beyond financial metrics, the SBV places heavy emphasis on internal governance. An FBB cannot simply rely on the global policies of its Parent Bank. The law mandates that FBBs must issue specific internal regulations on debt trading. These regulations must be localized to comply with Vietnamese law, covering authority delegation, payment methods, valuation methodologies, and comprehensive risk management protocols.
Furthermore, practical experience indicates that the SBV expects a clear organizational structure to support this activity. FBBs are legally mandated to establish a Debt Trading Council to approve debt trading plans, ensuring that decisions are not made unilaterally but through a collective risk-assessment body.
3. Licensing procedure and dossier requirements
3.1. The application dossier
The procedural mechanism for adding “debt trading” to an FBB license is governed by Circular 34. However, success lies in the preparation of the dossier.
A complete dossier must include the following key components :
(i) Application form: A formal request clearly stating the operation contents to be added, accompanied by a commitment to satisfy and maintain all prescribed conditions.
(ii) Parent Bank agreement: A critical document where the Parent Bank explicitly agrees to the FBB’s application. Crucially, this document must also confirm that the Parent Bank itself is permitted to conduct debt trading operations in its home country. This serves as a cross-border assurance of competency.
(iii) Internal regulations: The draft or issued internal regulations on debt trading, detailing risk management measures suitable to the added activity.
(iv) Proof of compliance: Reports or data demonstrating the FBB’s adherence to prudential ratios and the NPL threshold.
It is important to note that all foreign-issued documents (such as the Parent Bank’s authorization) must be consularly legalized, translated into Vietnamese, and notarized to be valid in Vietnam .
3.2. Processing timeline
The procedural mechanism for adding “debt trading” to an FBB license is governed by the newly effective Circular 34. The process is centralized and follows a strict timeline. Upon submission of a valid dossier – which must include consularly legalized documents for foreign components – SBV (or its designated branch) is required to review and issue a Decision to amend the License within 40 days.
The application dossier is not merely administrative; it is an audit of the FBB’s capacity. It requires the FBB to demonstrate that the new activity will not cause a breach of safety limits or capital adequacy ratios. Consequently, FBBs must treat the application as a strategic compliance exercise, ensuring that their credit growth limits and solvency ratios are robust enough to absorb the new business line.
4. Conclusion
As the Vietnamese financial market matures, debt trading offers FBBs a strategic tool for portfolio management and business expansion. However, the transition from a standard lender to a licensed debt trader requires rigorous preparation. FBBs must view the licensing process not just as a formality, but as a comprehensive review of their financial health, internal governance, and Parent Bank support. Immediate attention to NPL ratios and the localization of internal policies will be the deciding factors for successful market expansion.
