The restructuring of credit institutions system in Vietnam from 2011 to present
Monetary and banking activities are sensitive field which impacts tremendously on all socio-economic aspects and meanwhile are strongly influenced by economic fluctuations. Therefore, the restructuring of credit institutions is an inevitable and on-going process after each cycle of economic development in order to overcome the shortcomings and innovate consistently with a new phase of economic development.
From 2011 till now, in order to prevent the financial system instability caused by the uncertainties of domestic and international economies, as well as the long accumulated difficulties and weaknesses of the banking system, the CIs in Vietnam have implemented deep and broad restructuring process with the intensive participation of the entire banking industry and the positive support of regulatory authorities. At the end of the restructuring for 2011-2015 period, the banking system basically fulfilled the objectives set out in the Plan of restructuring credit institutions for 2011-2015 period, the safety of banking system was ensured, the risk of bank failures was minimized, bad debts were gradually settled, the management capacity of credit institutions was strengthened; the quality and efficiency of the operation were gradually improved. However, the shortcomings and weaknesses of the credit institutions system have not been fully addressed and therefore, more radical restructuring solutions are needed, in which the removal of regulatory obstacles is an urgent need.
Thanks to the attention of National Assembly and the Government, the difficulties were basically untied when the 14th National Assembly passed two important legal documents, including: Resolution No. 42/2017/QH14 on pilot settlement of NPLs of CIs (effective from 15th August 2017) and Law amending and supplementing a number of articles of Law on Credit Institutions (effective from 15th January 2018):
The Resolution No. 42/2017/QH14 allows the application of various policies on resolution of NPLs, collateral assets of bad debts, dealing with difficulties in NPLs resolution of CIs, and thereby accelerating the process of NPLs settlement of CIs system, enabling CIs to better promote their role of providing capital for production and business activities of the economy.
The Law amending and supplementing a number of articles of the Law on Credit Institutions creates a clear, transparent and specific legal framework on powers and early intervention measures for the restructuring of problem CIs. Accordingly, there are 5 plans that maybe applied to a CI under special control, including: (i) recovery plan; (ii) plan for merger, amalgamation, transfer of 100% of shares/stakes; (iii) dissolution plan; (iv) mandatory transfer plan; (v) bankruptcy plan.
These two important legal documents establish a premise to accelerate the process of restructuring and NPLs settlement in order to achieve the objectives set out in the Project on restructuring credit institutions system in association with the settlement of NPLs for 2016-2020 period approved by the Prime Minister at the Decision No. 1058/QD-TTg dated 19th July 2017 (Project 1058); and contribute to creating a healthy CIs system in accordance with international practices and market mechanism; ensuring the rights of depositors and banking system stability. In addition, they also make clear the rights and obligations of the DIV by enhancing its role in supporting, accelerating the process of restructuring CIs and its role as an important tool for the State Bank of Vietnam (SBV) to supervise the operations of CIs, ensure the safety and stability of the banking system.
The role of DIV in the process of restructuring CIs in Vietnam
After the financial crisis in 1997, together with the trend of establishing deposit insurers around the world and the increasing international economic integration of Vietnam, it was extremely necessary for Vietnam to establish a deposit insurer. In that circumstance, the DIV was established under the Decision No. 218/1999/QD-TTg dated 9th November 1999 by the Prime Minister and officially came into operation on 7th July 2000 as a State owned financial institution operating for the objectives of protecting depositors, assisting CIs in difficulty, monitoring risks in banking activities, and contributing to ensure the safe and sound development of the banking industry. The legal framework regulating the deposit insurance scheme was stipulated in Decree No. 89/1999/ND-CP dated 1st September 1999 of the Government (amended and supplemented in Decree No. 109/2005/ND-CP) on deposit insurance, and Decision No. 75/2000/QĐ-TTg dated 28th June 2000 of the Prime Minister on the Charter of the organization and operation of the DIV.
In 2012, there was an important milestone for the accomplishment of legal framework for the deposit insurance scheme when the 13th National Assembly passed the Law on Deposit Insurance on 18th June 2012 (effective from 1st January 2013). The Law on Deposit insurance grants the DIV a number of basic powers, such as: to grant and revoke certificates of deposit insurance participation; to calculate and collect deposit insurance premium; to manage, use and preserve the deposit insurance fund; to make deposit insurance payouts; to monitor and examine the compliance with legal regulations on deposit insurance and make recommendations to the SBV on dealing with violations; to collect, analyze and process information on insured institutions in order to detect and report to the SBV so that it can timely deal with violations of the prudential regulations on banking operations and risks of insecurity to the banking system; to participate in the process of special control, management and liquidation of assets of insured institutions.
After the Law amending and supplementing a number of articles of Law on Credit institutions was passed by the 14th National Assembly in late 2017, the role of DIV was enhanced to engage deeper in the process of restructuring problem CIs with additional powers to better protect legitimate rights and interests of depositors, including:
(i) To provide special loans to credit institutions under special control in order to: (1) offer liquidity assistance when a credit institution is facing insolvency or has become insolvent which threaten the stability of the system while the credit institution is placed under special control, including the case when the credit institution is implementing an approved restructuring plan; (2) assist the recovery of CIs according to an approved recovery plan or mandatory transfer plan.
(ii) To purchase long-term bonds issued by the assisting credit institutions (which are appointed to manage, control or assist the credit institutions placed under special control) upon the decisions of the SBV to financially support the assisting credit institutions.
(iii) To coordinate with the Special Control Board in evaluating the feasibility of the recovery plans of microfinance institutions, financial companies; to coordinate with the Special Control Board and the Cooperative Bank of Vietnam in evaluating the feasibility of the recovery plans of people’s credit funds (PCFs). To coordinate with the Special Control Board and the credit institution placed under special control in developing a bankruptcy plan and submit it to the SBV after the Government decides bankruptcy procedures of such credit institutions.
The experiences of other countries in the world show that, deposit insurers have an important role in the process of restructuring the financial and banking system. Specifically, the deposit insurer protects the legitimate rights, interests of depositors and strengthens the confidence of people in the banking system. Apart from the function of protecting legitimate rights and interests of depositors, each country’s legislature gives additional functions to the deposit insurer so that it can participate in the restructuring process and deal with problem credit institutions depending on its practical conditions. For example, many countries give the deposit insurer a financial assistance function in order to ensure the liquidity and participate in the process of developing and implementing the restructuring and bad debts settlement plans. The Korea Deposit Insurance Cooperation (KDIC) is one of the organizations that has been given the above-mentioned powers and it has successfully helped Korea quickly overcome the financial crisis in 1997-1998, as well as following periods. The financial resources used by KDIC to support problem banks are mobilized from KDIC’s government-guaranteed bonds issuance. The issuance of government-guaranteed bonds has helped KDIC promptly mobilize sufficient financial resources to participate effectively in the process of restructuring and dealing with bad debts. With these resources, KDIC has performed very well its role of supporting restructuring process and bad debts settlement.
The international experience shows that, we are on the right track when the Law on amending, supplementing a number of articles of the Law on Credit Institutions gives the DIV more powers and responsibilities to deal with the problem credit institutions in order to speed up the process of restructuring the credit institutions. The question is that how the Government, the SBV, the DIV and other relevant agencies will specify these regulations and realize these new functions in order to promote the efficiency as expected.
The DIV’s duties when implementing new roles
At present, the DIV protects deposits worth 4 trillion dongs (nearly 190 billion US dollars) of depositors at 1,275 insured institutions, including 93 commercial banks, 1 Co-operative Bank, 1,177 people’s credit funds and 4 microfinance institutions. Since its establishment, the DIV has reimbursed depositors at 39 people’s credit funds. It also conducted on-going on-site examination and off-site supervision of the insured institutions to detect shortcomings and violations. Basing on the examination and supervision results, the DIV makes recommendations to the SBV for corrective actions.
With the new duties as stipulated in the Law on amending, supplementing a number of articles of the Law on Credit Institutions, the DIV needs to have appropriate strategies and roadmaps to promote the roles of the deposit insurer in the process of restructuring credit institutions system in general, and thoroughly dealing with problem credit institutions in particular, ensuring legitimate rights and interests of depositors, as well as the safe and sound development of Vietnam’s banking system. The key duties should be focused as follows:
Firstly, the DIV should actively coordinate with relevant authorities in completing the legal framework, for guiding documents for the implementation of its new functions and duties of providing special loans, purchasing long-term bonds of the assisting credit institutions, participating in special control process, exempting from deposit insurance premiums for credit institutions under special control.
Secondly, the DIV needs to improve the quality of its operations, aiming to apply international practices in its operations to meet the requirements for new functions and duties. Accordingly, the DIV should improve the quality of deposit insurance operations such as: (i) to enhance the effectiveness of supervision, early warning system in order to detect and make recommendations to the SBV so that it can, in a timely manner, deal with violations of the prudential regulations on banking operations, violations of deposit insurance regulations and risks to the banking system; (ii) to enhance the effectiveness of on-site examination of the compliance with legal regulations on deposit insurance, including the verification of the accuracy of insured deposits information at insured institutions in order to implement deposit insurance policy. (iii) to closely coordinate with the SBV before, during and after the special control process to ensure the interests of depositors; (iv) to enhance the effectiveness of reimbursement, to diversify payment methods with the goal of shortening the time of payment, to build up the contingency plans for reimbursing depositors in the shortest possible time; (v) to participate actively in the process of liquidating the assets of insured institutions in order to maximize recovery values.
Thirdly, the DIV needs to improve its financial and institutional capacity to participate in resolving, restructuring problem credit institutions together with dealing with non-performing loans and minimizing risks for the credit institution system. The DIV needs a roadmap, plans on enhancing financial and institutional capacity to resolve problem credit institutions quickly, and at the same time, has a suitable mechanism in place for dealing with risks involved in this process.
Fourthly, the DIV needs to conduct comprehensive training programs to build up qualified human resource equipped with good knowledge of professional and legal issues and career ethics, so as to enhance organizational structure to meet the requirements of the new tasks.
Fifthly, the DIV should promote dissemination of deposit insurance policy in general and its new roles in the process of restructuring the credit institutions system in particular, to enhance public confidence and to contribute to ensure the banking system safety.
In addition, the DIV should effectively apply modern information technology systems to support the exploitation, sharing and management of information in order to early warn of and timely deal with risks which may affect legitimate rights and interests of depositors.
With the opportunities and challenges of new duties as stipulated in new Law, the DIV needs to develop its internal resources and take advantage of opportunities to enhance its role and position in ensuring the security and safety of banking industry, in order to increasingly integrate international standards and practices./.