Establishing the deposit insurer – maintaining the confidence of depositors
Reminiscing about the establishment of the Deposit Insurance of Vietnam (the DIV), Mr. Nguyen Van San – the Former Head of Preparatory Committee of the DIV (1999-2000), the Former Chairman of the DIV’s Board of Directors (2000-2001) shared: “In the late 1990s, the economic crisis spread all over the world and had a strong impact on Vietnam. The immature banking sector faced a series of problems such as: credit activities facing big challenges, high inflation facing the risk of returning, bad debts increasing. People’s Credit Funds (PCFs) were experimentally established and have operated since 1993. At that time, many of PCFs faced the risk of insolvency, causing lack of confidence of people and affecting social security in some provinces. In that context, international financial institutions like the International Monetary Fund (IMF), the World Bank (WB), the Asian Development Bank (ADB) also recommended and urged Vietnam to restructure the banking sector, set up a deposit insurance regime. Complying with the Government’s policy, the State Bank of Vietnam (the SBV) established the Preparatory Committee of the DIV in mid-1999.
The Preparatory Committee of the DIV quickly carried out research or surveys on deposit insurance models which were in place throughout the world, recommending the SBV to submit to the Prime Minister for approval of the establishment of the deposit insurer. After preparation, on November 9th 1999, the Prime Minister issued Decision No 218/1999/QD-TTg on the establishment of the DIV. Thereby, Article 1 of the Decision clearly stated: “Establishing the Deposit Insurance of Vietnam to protect legitimate rights and interest of depositors, contributing to maintaining the stability of the insured institutions and the safety and soundness of banking operations.” The charter capital of the DIV was 1000 billion dongs provided by the State, then supplemented from the annual premium collection and other resources.
Mr. Nguyen Van San remembered: “At that time, there were some doubts as it was a new area, the situation was very urgent, the banking system was threatened to fall into crisis, while the newly-established deposit insurer had limited resources. However, we affirmed that the establishment of the DIV was firstly a “mental medicine” which helped to restore the confidence of people, especially small-scaled depositors at PCFs.”
The DIV officially came into operation on June, 7th 2000. Right from the beginning, the immature deposit insurer had to participate in setting up the legal framework, operational mechanism, internal regulations, process, etc. and at the same time, it had to immediately study, evaluate problem credit institutions, especially PCFs facing the risk of failure to prepare for support, rescue or resolution options. In 2001, the DIV paid out to depositors at Rach Soi and Giong Rieng PCF in Kien Giang province and some PCFs in other localities.
The bright spot of depositor protection is that the DIV has timely paid out to the right person with the adequate amount of money according to the prescribed coverage. Especially, the DIV recovered enough financial resources from asset management, liquidation of failed credit institutions to continue paying out to depositors the amount of money exceeding the coverage, ensuring their nearly ultimate rights. Prompt and timely pay-out has calmed depositors down and reinforced their confidence, avoiding chain effects on the banking system as well as ensuring social order and security in localities.
To be worthy of trust and expectation
Today, the DIV is the sole deposit insurer in Vietnam, operating in the form of a one-member Limited Liability Company with 100% State-owned charter capital. From the initial capital of 1,000 billion dongs, as of the end of September 2021, the total assets of the DIV achieved nearly 80 trillion dongs, including the Operational Provision Fund with nearly 74 trillion dongs. The DIV set up its network including its headquarter in Hanoi and 8 branches in key economic areas to closely follow the development of credit institutions. Now the DIV has been protecting deposits of depositors at 1,283 insured institutions, including 97 banks and branches of foreign banks, 1,181 PCFs, 01 Cooperative Bank, and 04 microfinance institutions.
The development strategy of the Vietnamese banking sector up to 2025, vision up to 2030 approved by the Prime Minister clearly stated that the developmental direction of the DIV in the coming years is to apply the model of a one-member limited liability company with 100% State-owned charter capital, with the State Bank of Vietnam acting as the ownership representing agency; realize the goal of protecting legitimate rights and benefits of depositors, contributing to maintaining the stability of the credit institution system, ensuring the safe and sound development of banking operations.
The above-mentioned strategy affirmed that it was necessary to enhance financial capacity, operational capacity, improve the organizational model, upgrade staff skills, apply modern technology to well undertake the task of supervision, examination, participation in special control, detection, early warnings of implicit risks on insured institutions. Participating in restructuring is effective for weak credit institutions; calculating and collecting deposit insurance premium, managing investment capital, raising public awareness of deposit insurance policies; paying out deposits in accordance with the international practices and legal regulations of Vietnam.
Especially, the roles of the DIV in ensuring operational safety, reinforcing the system of PCFs were emphasized in Directive No 06 issued by the Prime Minister on March 12th 2019. Specifically, the DIV will enhance cooperation in participating in, supporting the State Bank with its supervision, examination on PCFs; proactively take part in resolving weak PCFs or those with signs of insolvency; study to recommend amendment of the Deposit Insurance Law to use the deposit insurance premium balance to resolve weak credit institutions.
The roles of the DIV in the coming time are very important. The Government, the State Bank and actual requirements not only require the DIV to be always ready to make pay-out when obligations arise, but also ensure to well undertake the operational activities like granting and revoking Certificates of deposit insurance participation, collecting deposit insurance premiums, examining, supervising, participating in special control, providing financial support, etc. to minimize the possibility of failure of credit institutions.
In the coming time, the DIV will review, evaluate the implementation process of the Deposit Insurance Law since its promulgation to report to the authorities for review, submission to the National Assembly about amendment and supplementation of this Law. The legal basis for deposit insurance activities in Vietnam should come towards the international practices, upgrading the position and roles of the DIV so that it can participate more deeply and effectively in restructuring the system of credit institutions to protect legitimate rights and benefits of depositors better and more timely. The Deposit Insurance Law should be amended and supplemented in the way that difficulties, obstacles in implementation will be removed, and at the same time, the Deposit Insurance Law will be consistent with other related laws.
Besides, the Deposit Insurance Law should have specific regulations on the DIV’s cooperation in participation in, supporting the State Bank with their examination and supervision on PCFs; proactive participation in resolving weak PCFs or those with signs of insolvency; use of deposit insurance premium balance to resolve weak credit institution, etc. To legalize these regulations will ensure a legal corridor for the DIV to bring into full play its roles of protecting depositors, contributing to the stability of the banking system in particular and the economy in general.
As for its part, to continue maintaining and lifting the trust of depositors in the banking system, the DIV should continuously develop its financial, human and system resources to be parallel with the development of the banking system. At the same time, the DIV coordinated with the State Bank in raising public awareness, communicating and disseminating legal policies of the banking sector, deposit insurance, thereby laying a foundation for a transparent, effective finance-banking market, ensuring market disciplines. Therefore, the DIV will bring into full play its role of being an effective instrument of the Government, the State Bank which effectively protects depositors and maintains the safety of the banking system, so that the flame of public trust continues to burn endlessly.