Benefits of raising deposit insurance coverage limit

11:30-13/10/2021

Many agreed that raising the coverage limit to VND 125 million  is of significance to better protect rights of depositors, enhance the confidence of the public in deposit insurance policy, the system of credit institutions (CIs) as well as banking operations.

The State Bank of Vietnam (the SBV) submitted to the Government the proposal of raising the deposit insurance coverage limit to VND 125 million from the current VND 75 million applied since 2017. If approved by the Prime Minister, the new coverage limit is projected to provide full protection to 90.94% of the depositors. This coverage limit is supposed to approach the international practices; and at the same time to be tailored to the socio-economic development conditions, performance of the CIs system of in Vietnam.

Appropriate coverage limit well protects the rights of depositors

Standing Deputy Director of the SBV, Mr. Dao Minh Tu said that an appropriate deposit insurance coverage limit will well protect the rights of depositors, thereby contributing to enhancing the confidence of people in the system of CIs, and then making it possible for CIs to operate more safely and effectively.

“The International Association of Deposit Insurance (IADI) recommended that the coverage should be limited, credible and fully cover 90-95% of depositors. However, with the current coverage limit of VND 75 million  in Vietnam, it only covers about 87.72%, lower than that recommended by IADI” – stated by Deputy Director Dao Minh Tu.

According to Dr. Can Van Luc – Member of the National Financial and Monetary Policy Advisory Council, deposit is an important factor in ensuring the safety, soundness and effectiveness of banking operations. Therefore, setting up an appropriate deposit insurance mechanism will help to enhance confidence of the depositors in the banking system.

“I suppose that the coverage limit of VND 75 million  is still low against the international practice. It is time for us to consider raise this limit to a certain level which can meet aspirations of depositors” – said Mr. Luc.

Regarding the size of deposits of people at CIs, many heads of CIs said that now a lot of clients have deposits worth hundreds of million dongs, even billions of dongs and more, thus it is necessary to increase the coverage limit to raise confidence of depositors in CIs.

Evaluating the current coverage limit of VND 75 million, Professor. Dr. Tran Thi Thanh Tu – Vice Principal of Vietnam-Japan University, Hanoi National University stated that the current coverage limit is lower than the common level of individual deposits, which may affect the people communication and motivation activities when dealing with incidents in banking operations, thereby reducing the confidence of depositors in the operations of Cis. Therefore, considering increasing the coverage limit is a necessary requirement in the current context.

Agreeing with the above opinion, Mr. Le Cong Thanh – Director of the Ben Tre Branch of the SBV also proposed that it is necessary to implement research on raising the coverage limit in accordance with the socio-economic development, income per capita of the people as well as the growth rate of savings size.

Being a long-time depositor at a People’s Credit Fund in Hung Yen, Ms. Nguyen Thi Phuong stated that if the Deposit Insurance of Vietnam researches and submits to the Government, the SBV the proposal of raising the coverage limit of VND 75 million  like now, long-time depositors like her will feel more secure when depositing at People’s Credit Funds (PCFs).

Raising the coverage limit – enhancing confidence of depositors

For the deposit insurance to promote its role as “a public safety tool” of the Government and the SBV, contributing to maintaining safety, soundness of the national financial system, the stability and socio-economic development of the country, increasing the coverage limit is a necessary requirement.

According to the Deputy Governor Dao Minh Tu, the coverage limit of VND 125 million will be as twice as the average GDP per capita (in 2020), and at the same time the new coverage limit will provide full protection to 90.94% of depositors as recommended by IADI.

Besides, with the coverage limit of VND 125 million, the operational provision fund of the Deposit Insurance of Vietnam is still capable of ensuring reimbursement for 100% depositors at PCFs. “This coverage limit is also in accordance with the international practices and standards, socio-economic development prerequisites as well as performance of the CIs system in Vietnam” –Deputy Governor Dao Minh Tu affirmed.

Commenting on the option of the deposit insurance coverage limit of VND 125 million , Dr. Le Xuan Nghia – Member of the Financial and Monetary Policy Advisory Council said that this coverage limit is basically inline with the rise in income of almost all depositors, especially middle class which have been developing fast in Vietnam. Moreover, it is according to quite rapid growth rate of assets of CIs, especially possible risks of bad debts in difficult times caused by the Covid-19 pandemic.

Agreeing with raising the coverage limit, Mr. To Duy Lam – Former Director of the Ho Chi Minh Branch of the SBV, appraised that the new coverage limit of VND 125 million upon coming into effect will make active contributions in improving the effectiveness of communication of deposit insurance policy, thereby contributing to enhancing the confidence of depositors in the roles of the deposit insurance organization and performance of the banking system; contributing to attracting more idle capital of the people to CIs.

Mr. Ninh Quoc Chinh – Director of Bao Tin PCF, Ha Giang province revealed that people in areas are mainly small businesses, operating in multi-sectors with a decent income. According to the statistics at funds, deposit accounts with outstanding amount of over VND 75 million now accounts for about 70%. Therefore, considering the common level, the coverage limit of VND 125 million can provide full protection for almost all depositors at PCFs, thereby contributing to enhancing the confidence of the people in the operations of the Fund.

“As far as I know, the coverage limit of VND 125 million is being considered for approval. I believe that this level is in accordance with the aspirations of the majority of small depositors like me. We feel more secure when depositing our savings accumulated for many years at PCFs” – Ms. Nguyen Thi Phuong – a depositor in Hung Yen showed her confidence.

The policy of raising the coverage limit to VND 125 million is a step forward in protecting depositors as well as approaching the international practices of deposit insurance and meeting practical requirements of Vietnam now. With the new coverage limit, confidence of depositors will be enhance more and more, contributing to attracting more idle capital of the people in the CIs system, thereby contributing to creating incentives for growth, especially when the Covid-19 pandemic has had adverse impacts on the economy.

Research and international cooperation department