Increasing the coverage limit: the impetus for the development of the banking system and depositor protection


On October 20, 2021, the Prime Minister promulgated Decision No.32/QD-TTg on deposit insurance coverage limit, adjusting it from VND 75 million to VND 125 million for each individual’s deposit at a credit institution participated in deposit insurance system. Thus, from December 12, 2021 (the effective date of Decision No.32/QD-TTg), in case a credit institution becomes insolvent or goes bankrupt, depositors will be compensated 125 million VND maximum, including principal and interest.

Increase the deposit insurance coverage limit in line with international practices

Deposit Insurance of Vietnam (DIV) informed that the coverage limit of 125 million VND meets the following factors at the same time: matching with the financial capacity of the deposit insurance organization, aiming to fully protect 90% to 95% of depositors as suggested by the international practices. In addition, the deposit insurance coverage limit also needs to suit the macroeconomic development of Vietnam, in line with the income per capita and the growth of income per capita.

With the coverage limit of 125 million VND, DIV fully protects the deposits of about 91% of depositors in the banking system, in line with the financial capacity of the DIV and at the same time meeting international practices.

According to the DIV, the financial resources of this organization are constantly growing. By the end of September 2021, the total assets of DIV reached nearly 80 trillion VND, of which the professional reserve fund reached more than 73,6 trillion VND. With this fund, the DIV can make immediate payments if necessary.

The International Association of Deposit Insurers (IADI) recommends that the coverage limit should be re-evaluated periodically, about every 5 years. Therefore, since the application of the coverage limit of 75 million VND in 2017 until now, DIV has regularly assessed the appropriateness of the coverage limit in Vietnam and reported to the competent authorities for consideration. The Prime Minister's decision to adjust the coverage limit at this time is in line with international practices on deposit insurance, including the assessment and adjustment of the limit according to changes in macroeconomic factors, the development of the banking system as well as the resources of the DIV.

Effects of the increase in coverage limit

The coverage limit is an important tool of the deposit insurance policy that directly protects the interests of depositors.

However, international experience shows that the deposit insurance coverage limit not only determines the amount that a depositor receives when the insurance payment obligation arises, but also affects the depositor rights under normal market conditions. Reasonable coverage limit helps depositors feel more secure when depositing at banks, thereby contributing to maintaining the stability of the banking system in particular and the economy in general.

According to IADI, deposit insurance coverage limit should be limited, reliable, and fully protect the majority of depositors. Thereby, the coverage limit plays the role of a policy tool to contribute to building market discipline, promoting credit institutions to operate safely and compete fairly with each other.

Meanwhile, a large enough coverage limit will contribute to maintaining depositors' confidence in the banking system, thereby encouraging people to put their savings in banks, promoting the growth of capital mobilization of the whole system.

Depositors are protected by all of deposit insurance expertise

According to the DIV, this organization is protecting depositors' deposits at 1,283 credit institutions (including 97 banks and foreign bank branches, 1,181 people's credit funds, 1 cooperative banks and 4 microfinance institutions). The increase in the coverage limit enhances the protection of depositors, but also puts a certain pressure on the deposit insurer when the deposit insurance premium is not adjusted accordingly. DIV said that the increase in deposit insurance premiums could increase the burden on credit institutions. Therefore, raising the coverage limit but not raising the premium requires the DIV to manage and invest idle capital in a safe and effective way, ensuring good liquidity and the readiness to protect depositors.

It should also be noticed that it is not until the payout is handled that the DIV protects depositors. Payment is considered as a last resort when the credit institution has been already put under special control and unable to recover  to normal operations. Meanwhile, during the establishment and operation of the credit institution, the deposit insurer grants the certificate of participation in deposit insurance right from the time the credit institution is established, and carried out on-site inspection as planned and under the direction of the Governor of the State Bank of Vietnam (SBV), off-site supervises 100% of the credit institutions participating in the deposit insurance system. When detecting errors and problems, as well as risks and weaknesses, the DIV reports to the SBV for timely correction and handling.

When the credit institution encounters problems and is placed under special control, the DIV appoints personnel to join the special supervisory board under the direction of the SBV. DIV also makes special loans to support liquidity when credit institutions are at risk of insolvency that threatens systemic stability, buy long-term bonds from supporting credit institutions, supports, controls and supports financial ability and operation of specially controlled credit institutions. The DIV has participated in the development and assessment of recovery plans for people's credit funds and microfinance institutions on the basis of coordination with the Special Supervisory Board and the Cooperative Bank. These tasks contribute to risk prevention, minimization of failures that cause damage to depositors, economic and social instability.

The Prime Minister's adjustment to increase the coverage limit reinforces the Government's strong commitment in protecting the legitimate rights and interests of depositors. The DIV also informed that in the coming time, they will regularly monitor and evaluate the suitability of the coverage limit to report to the SBV and the Prime Minister for adjustment if suitable.

Communication Department