Deposit insurance policy and safe and sound development of People’s credit funds

15:19-09/09/2019

It is indispensable for any country striving to develop a robust economy to have a stable and sound finance-banking system, which, in turn requires the credit institutions (CIs) to constantly innovate and enhance their operational performance. In that trajectory, in the past years, the People’s credit fund (PCF) system has transformed themselves to catch up with market trends. Deposit insurance (DI) policy also plays an active role in this process, contributes to ensuring the safe and sound operation of PCFs.

Transformation of PCF system

As of December 2018, there were 1,282 CIs in Vietnam, including 94 commercial banks and foreign bank branches, 01 cooperative bank, 1,183 PCFs and 04 microfinance institutions, forming a network that provides monetary products and services to all production and business lines from urban to rural areas.

Although PCFs have outnumbered other types of CIs, their share of credit services is still small, mainly serving agricultural and rural markets. Small scale, low level of governance and management, monotony of services and products...are posing great challenges for PCFs to survive and develop in the context of other CIs constantly expanding their network as well as products and services.

The PCF model is characterized by mutuality among members who are organizations, individuals or households in small areas to jointly develop production, business and living standards. A PCF operates under the management and control of its members who have equal voting rights, with capital mobilized mainly from the members and the local community and only lent to the members themselves.

The DIV Hanoi branch attends the Opening Ceremony of Chau Giang Transaction Office

Although PCFs are often small in size compared to other advanced types of CIs, such weakness will become an advantage if they know how to make use of it in the operation process. Operation under the small-scale model in districts, communes and member communities helps PCFs to clearly know about borrowers, use of loans, debt recoverability and easily control the bad debt ratio. This advantage is a basis for PCFs to well implement lending procedures, timely support members and communities in rural areas to access credit sources and step by step eliminate "black credit", the "Hui schemes” (informal loan clubs),"tontine" that have been a persistent problem for ages. It is the simplicity, easiness, closeness and friendliness offered by PCFs that help them to win an indispensable role in providing credit to support agricultural and rural economic development - which is a clear advantage of PCFs over other types of CIs.

On the other hand, being aware of products and services as a key factor to attract customers, PCFs are constantly innovating, diversifying and improving the quality of products and services in line with the needs and characteristics of the agricultural and rural areas. For example, the development of new products is based on existing ones, improving domestic payment services, inter-bank money transfer, multi-purpose loans, car loans or consumption installment loans, paying electricity, water bills...

Besides, PCFs’ Managing Boards have also focused on training human resources, organizing intensive professional training courses with the support of the State Bank of Vietnam’s branches at cities and provinces and the Cooperative Bank to disseminate the banking credit regulations and laws to PCF’s staff, helping them to improve their professional expertise and contain errors in operation. Managing Boards have also encouraged the enhancement of accountability, business ethics and issued stricter regulations in management of PCFs to ensure operational consistency.

The DIV Hanoi Branch attends the Opening Ceremony of Transaction Office No. 1 – Ngoc Lu PCF

Role of deposit insurer in restructuring PCF system

In the past period, the State Bank of Vietnam (SBV) has focused on reviewing and rectifying the PCF system to ensure the safe and stable development of PCFs. In implementing the Scheme on strengthening and developing the system of PCFs, recently, some qualified PCFs have been allowed by the SBV and relevant authorities to expand their operation network by opening transaction offices in adjacent communes and take advantage of their closeness to local people. For instance, in Ha Nam province, a total of 7 new transaction offices have been opened by Yen Bac, Tien Noi, Ngoc Lu, Bo De and Nhat Tuu PCFs.

Along with changes in PCFs’ operation and raising depositors' awareness, the expansion of PCFs’ operation areas is now a very encouraging signal, contributing to boosting the rural and agricultural economy in our country, helping people easily and effectively access legal funds, bringing  benefits to production and people’s life.

However, the unequal development of PCFs is one of challenges for the expansion of the PCF system. Small-scaled PCFs will find it difficult to quickly adapt to market changes. Besides, limited investment in technology for banking operation also results in out of date information, significantly affecting performance of these PCFs. Therefore, based on the long-term strategic orientation for PCF system, the SBV should strengthen supervision and support of small-scale PCFs to achieve development progress.

Beside the support of the SBV, Deposit Insurance of Vietnam (DIV) is an organization that always accompanies PCFs in their development.

Through the implementation of deposit insurance operations such as off-site supervision, on-site examination, participation in special control, deposit insurance reimbursement, depositors' interests are protected, public confidence in the banking system is ensured, thereby strengthening the reputation and promoting the capital mobilization of PCFs.

When incidents occur at PCFs, or bank runs happen, the DIV coordinates with the SBV branches in local provinces and cities, local authorities to take measures to reassure the public and help the PCFs to strengthen and stabilize their operations.

In addition, the effective dissemination of DI policy also helps reinforce the trust of depositors. Through skits and reportages broadcasted on local radio and television channels, and public awareness conferences held at PCFs, people have had a better understanding of the role of the DI organization in protecting the rights of depositors, thereby contributing to changing their behavior, helping them to stay calm at false rumors, which may lead to a bank run and threaten the safety of the banking system.

The DIV is becoming an effective tool of the Government, the SBV with its mission to protect depositors, enhance public confidence and effectively contribute to the restructuring of credit institutions in general and PCFs in particular.

Research and International Cooperation Department