Five Categories of Non-Performing Loans Under Circular 31/2024/TT-NHNN: Understanding Them Correctly to Avoid Legal and Financial Risks

In banking activities, debt classification is not only a risk-management requirement but also an important legal basis for determining borrowers’ obligations, credit institutions’ responsibilities, and the overall safety of the financial system. Circular 31/2024/TT-NHNN establishes a mechanism for debt classification based on quantitative methods, thereby enhancing credit transparency and limiting the formation of bad debts.

1. Legal Basis for Debt Classification under Circular 31/2024/TT-NHNN

Clause 1 Article 10 of Circular 31/2024/TT-NHNN provides for debt classification using quantitative methods, dividing debts into five groups, from standard debt (Group 1) to potentially irrecoverable debt (Group 5). This regulation directly affects:

• Borrowers’ rights and obligations;

• Banks’ provisioning policies;

• Assessments of corporate financial health;

• Customers’ access to future financing.

These criteria are mandatory for banks and non-bank credit institutions.

2. Detailed Analysis of the Five Debt Groups

2.1. Group 1 – Standard Debt: “Good Credit Health”

Legal basis: Point a, Clause 1, Article 10 of Circular 31/2024/TT-NHNN.

Includes:

• Debts that are within the due date and assessed as fully recoverable (principal + interest).

• Debts overdue for fewer than 10 days but still considered fully recoverable.

• Debts eligible for inclusion in Group 1 under the reclassification mechanism in Clause 2, Article 10.

Group 1 reflects the highest level of creditworthiness. Notably, debts overdue for fewer than 10 days may still be classified as Group 1, a new customer-friendly point that prevents minor delays from negatively affecting credit history.

2.2. Group 2 – Debts Needing Attention: “Early Warning Signals”

Legal basis: Point b, Clause 1, Article 10.

Includes:

• Debts overdue up to 90 days.

• Debts with the first repayment schedule adjustment but still within the modified due date.

• Debts classified into Group 2 under Clauses 2 and 3.

Group 2 is a “grey zone” with potential risks. Many businesses underestimate its impact because Group 2 is not considered bad debt. However, once classified as Group 2:

• Customers face reduced access to credit;

• Banks may impose tighter lending conditions;

• Customers are subject to stricter monitoring.

Five Categories of Non-Performing Loans Under Circular 31/2024/TT-NHNN: Understanding Them Correctly to Avoid Legal and Financial Risks

2.3. Group 3 – Sub-standard Debt: “Beginning of Bad Debt Classification”

Legal basis: Point c, Clause 1, Article 10.

Typical cases:

• Debts overdue 91–180 days.

• Debts extended for the first time.

• Debts with interest exemptions or reductions due to insufficient repayment capability, except in special cases.

• Debts violating Articles 134, 135, and 136 of the Law on Credit Institutions.

• Debts ordered to be recovered under inspection conclusions but still within the recovery timeframe.

From Group 3 onward, debts are considered bad debts. Group 3 indicates that the borrower’s financial balance has deteriorated and partial loss of capital may occur.

Importantly, Circular 31 tightens criteria: debts involving legal violations (Articles 134–136 LCI) must be classified as Group 3 even before becoming heavily overdue.

→ This shows a shift toward behavior-based risk management, not just time-based.

2.4. Group 4 – Doubtful Debt: “High Risk of Capital Loss”

Legal basis: Point d, Clause 1, Article 10.

Includes:

• Debts overdue 181–360 days.

• Debts restructured for the first time but overdue up to 90 days.

• Debts restructured for the second time but not yet overdue.

• Debts ordered for recovery but unrecovered after 30–60 days.

Group 4 debts pose a high risk of capital loss and may exceed the borrower’s financial capacity. Banks must:

• Allocate high risk provisions;

• Intensify debt collection measures;

• Review the legal status of collateral.

2.5. Group 5 – Potentially Irrecoverable Debt: “Highest Risk Level”

Legal basis: Point đ, Clause 1, Article 10.

Includes:

• Debts overdue more than 360 days.

• Debts restructured for the first time but overdue more than 91 days.

• Debts restructured for the second time and overdue.

• Debts restructured for the third time or more.

• Debts of customers who are credit institutions under special control.

• Debts unrecovered after 60 days from the recovery decision.

Group 5 represents the loss zone, often leading to:

• Litigation, collateral enforcement, compulsory recovery;

• 100% provisioning by banks;

• Borrowers losing access to credit for many years.

3. Regulations on Downgrading and Upgrading Debt Groups: Flexible but Strict

Clause 2 Article 10 allows debts to be reclassified into lower-risk groups only when the borrower:

• Has fully repaid overdue principal and interest for at least 1–3 months;

• Provides sufficient supporting documents;

• Is re-evaluated by the bank as having adequate repayment ability.

This rule provides a “way out” for good-faith borrowers but requires strict proof, protecting banks while still offering opportunities for customers.

Conversely, Clause 3 Article 10 allows banks to increase a borrower’s debt group when the customer:

• Fails to provide complete information;

• Shows signs of financial deterioration;

• Is administratively sanctioned for credit-related violations.

This reflects a proactive risk-management approach, not solely dependent on overdue days.

4. Legal and Practical Implications for Customers and Banks

For customers

• Significant negative impact on CIC credit records, making future borrowing difficult.

• Possibility of early loan recall according to credit agreements.

• Higher likelihood of collateral enforcement.

• Businesses may lose commercial reputation with partners.

For banks

• Debt classification directly influences provisioning levels.

• Helps banks detect risks early and prevent bad debt formation.

• Provides a legal basis for litigation and collateral enforcement.

5. Conclusion and Recommendations from VietLink Lawyers

Circular 31/2024/TT-NHNN establishes a stricter and more transparent debt assessment system to safeguard the financial system. However, borrowers should pay special attention to:

• Avoid allowing loans to fall into Group 2 or higher;

• Proactively provide financial information to banks;

• Seek legal advice when their loans are at risk of being reclassified.

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