Developing capital resources of the Deposit Insurance of Vietnam to participate in restructuring credit institutions – some issues to be addressed

10:28-21/12/2021

After 20 years of operation, from 1,000 billion dongs of capital provided from the State budget to 30/9/2021, the total capital of the Deposit Insurance of Vietnam (the DIV) achieved about 80 trillion dongs. With the current financial capacity, the DIV can well meet the dual goals of both implementing the public policy of deposit insurance, and participating in restructuring credit institutions (CIs) according to the current regulations. But to directly participate in restructuring CIs more deeply, the DIV should have a long-term plan for capital growth to continue enhancing financial capacity, especially through effective management and use of capital.

Capital growth and participation in restructuring CIs are different concepts which have close relations in term of the roles of deposit insurers in the safety of the banking operations. Capital growth to strengthen financial capacity will help to ensure the deposit insurer to be able to participate in the restructuring; and participate in restructuring, helping deposit insurers to improve their capacity of financial management, forecasting, evaluation as well as accumulate practical experiences in suitable allocation of resources and establishment of effective capital use.

Financial resources and potential of the DIV

The draft of “Development strategy of the DIV towards 2025 with orientations to 2030” which is being submitted to the Prime Minister by the State Bank of Vietnam (the SBV) for approval has set the common goal of enhancing the financial capacity of the deposit insurer through 04 specific objectives: (i) increasing charter capital to 10,000 billion dongs by 2025 from its own accumulated capital; (ii) diversifying forms of investment and investment portfolio; ensuring revenue from deposit insurance premiums; and (iv) setting up a mechanism of accessing capital support in case of temporary  capital shortage for pay-out.

Not to mention feasibility of the mechanism of accessing supported capital, diversifying forms and investment portfolio can support the plan of increasing charter capital; while ensuring revenue from premiums (with collection of due principals, interests to circulate for re-investment) is an important basis for availability of inputs for investment.

For the last 20 years, the DIV has made its efforts to use its capital effectively with the direction of not wasting idle capital. Annual capital growth stood at 25-27%. On average after every 5 years, the fund of the DIV has increased by more than twice. Investment has been made as legally regulated, ensuring the objective of capital preservation and growth on the basis of reasonable investment decisions in each period toward harmonizing investment-liquidity-profit. In the period of 1999-2012, over 95% of the capital was invested mainly in term deposits at commercial banks due to high interest rates, bringing more than 99% of revenues; in the period of 2013 up to now since the Law on Deposit Insurance came into effect, the investment portfolio changed fundamentally in the way that 99% of capital has been invested in buying Government bonds, bringing more than 99% of revenues thanks to higher interest rates than those of treasury bills and deposits at the SBV. Investment activities have not resulted in overdue debts; mature principals and interest rates were fully paid, contributing to stable profit earning to timely supply idle capital for re-investment. By 30/9/2021, the total accumulated investment was over 77 trillion dongs since the annual invested capital increased stably at the average rate of 28%. Through investment, the DIV timely supplemented for the Operational Provision Funds (73 trillion dongs by the end of 2020), helping it to ensure resources for deposit insurance pay-out and participation in “restructuring the system of CIs”.

However, profitability of invested capital (a financial indicator used to measure the ability to generate profit relative to investment), which is calculated by accrued interest divided by the total invested capital, has been on a decreasing trend.

Legal practices of participating in restructuring; opportunities and challenges to the DIV

From documents at the Decree level and the Law on Deposit Insurance…

In the period of 1999-2012, the highest legal document governing deposit insurance operations was the Decree 89/1999/ND-CP and the Decree 109/2005/ND-CP amending, supplementing the Decree 89 of the Government. The DIV fully implemented operations, including providing financial support to insured institutions; monitoring, requesting liquidating groups at dissolved CIs to recover capital. From 2013 to now, deposit insurance operations were firstly adjusted by a specialized law (the Law on Deposit Insurance). The fundamental difference between two periods is that the mandate of providing financial support to insured institutions is replaced by participating in special control over CIs, complying with new requirements of banking operations. Specifically, the item 13, Article 13, the Deposit Insurance Law stipulated the DIV “to participate in the process of special control over insured institutions as stipulated by the State Bank; to participate in the management and liquidation of assets of insured institutions as regulated by the Government”. In fact, in this period the DIV has not yet paid out to depositors since there has not been any bank failure.

… to the Law amending, supplementing some articles of the Law on Credit Institution

The Law No. 17/2017/QH14 (promulgated on 20/11/2017, effective on 15/01/2018) amending, supplementing some articles of the Law on Credit Institution No 47/2010/QH12 stipulated “the SBV makes decision on the DIV’s purchase of long-term bonds issued by supporting CIs” (item c, clause 3, Article 146). Before that, the Project on restructuring the system of CIs attached with resolving bad debts period 2016-2020 (issued under the Decision No. 1058/QD-TTg dated 19/7/2017) emphasized necessity for amendment, supplementation of the Law No. 47 to correct shortcomings and create legal basis for restructuring in the new period, thereby requiring: i) supplementing regulations permitting the DIV to participate in restructuring weak CIs attached with resolving bad debts; and ii) to enhance financial capacity of the DIV so that it can participate in resolving, restructuring and reducing systemic risks (firstly focusing on PCFs, microfinance institutions).

Opportunities and challenges to the DIV

If objective factors which can directly affect capital resources like (1) reducing revenues (since CIs under special control are exempted from deposit insurance premium as stipulated in clause 4 Article 146đ Law No. 17) and (2) decrease in capital (due to special lending without ability to recover at the preferred interest rate of up to 0% applied for CIs under special control which are financial companies, PCFs and microfinance institutions as stipulated in item đ clause 1, item b clause 2 Article 148b) can be removed, buying long-term bonds issued by supporting CIs – especially buying at the market price – will facilitate the DIV to participate in restructuring CIs since it is a feasible direction in relation to commitment of assurance and support from financial resources of the DIV. Whereby:

Buying long-term bonds will help to diversity forms of capital use, thereby ensuring both investment and participation in restructuring, contributing to add more purchasable debt instruments. When the benefit of participation in restructuring is to restore operations of weak CIs, buying long-term bonds (a special type of bonds) will allow the DIV to give direct support to supporting CIs so that they have more resources to restructure CIs under special control. In general, when buying long-term bonds, the DIV can give direct support to supporting CIs and indirect support to CIs under special control, contributing to safe and stable development of the banking system.

Buying long-term bonds of supporting CIs which are commercial banks with good business performance as regulated will create premises for consultation and establishment of mechanism allowing the DIV, in the future, to actively participate directly in restructuring as recommended and agreed with CIs. In the medium-term, the DIV aims to buy debt instruments of well-ranked commercial banks that helps the DIV to be an effective instrument of the SBV – thereby to recommend buying derivatives in the long-term.

Buying long-term bonds will help the DIV to use capital effectively in the way of suitable division between the task of restructuring and investment, which lays a basis for better projection, establishment of capital investment plans for different priority objectives in each period. Buying long-term bonds will help the DIV to accumulate practical experiences to ensure the capacity and commitment to maintain confidence of depositors, and then improve images and positions of the DIV.

On the contrary, if the DIV must buy long-term bonds according to the option of interest rate support, it can face risks of capital loss and late payment of principals and interests.

Some set issues and solutions

After 4 years since the Law No. 17 came into effect, the DIV has not participated in restructuring through buying long-term bonds. This does not result mainly from financial capacity or resources of the DIV, but mainly from the fact that legal basis and premises are insufficient and asynchronous, together with some other objective and subjective difficulties.

Firstly, a general asynchrony lies in that there is not regulation on long-term bond purchase in the Deposit Insurance Law (promulgated 4 years before the Law No. 17).

Secondly, although the Law No. 17 came into effect since January 15th 2018, till now, there is not yet a document guiding its implementation. In the context that the DIV has been making efforts to set up the draft Regulation on long-term bond sale and purchase of supporting CIs to realize its roles of participation in restructuring, long-term bond purchase under the decisions of the SBV will comply with the legal procedure directly from the Law down to the internal Regulation.

Thirdly, regarding capital use, the DIV has been facing a lot of difficulties, including:

Over 99% of idle capital invested in Government bonds in the principle of “buying and holding up to maturity date” and only selling them only in case the provision fund is not adequate for deposit insurance pay-out, the DIV cannot be flexible to sell Government bonds to buy long-term ones. The principle of “buying and holding” can increase risks attached with interest rate rise/fall and value of held assets due to no plan of selling when prices go up and obligations of pay-out require the DIV to sell Government bonds.

Investment through buying Government bonds and long-term Government bonds in the coming time to participate in restructuring uses temporarily idle capital arising annually, idle capital from premium collection mainly focused in the 06 first months (over 60%) and gradually decreased in the third quarter.  If in the period of 2015-2020, the DIV had stable idle capital and higher capital growth, which is expected to decrease in the next period (not stable growth, even decrease in certain years) since collection of principals, interest in the next years depend on annual interests, principals in previous years (now recorded decrease from 8.27% per year in 2013 down to only 2.99% per year in 2020; for the first 9 years of 2021 decreased to 2.91% per year) -  not to mention market interest rates continue to decrease or fluctuate; and expectation of realizing the plan is putting pressure on the next period.

The Law on Deposit Insurance narrows the investment portfolio of the DIV against the period before 2013 (from 06 groups of instruments permitted in the period of 2000-2004 or 07 groups of instruments in the period of 2005-2012, to only 03 types of investment now, of which only Government bonds are profitable, so the DIV must put all available idle capital for investment. Even when regarding long-term bonds as an investment tool, the list of capital use of the DIV has not been expanded both legally and practically. As the Law on Deposit Insurance has not permitted sale or the Circular No. 20 has permitted sale of Government bonds when the provision fund is not enough for pay-out and the DIV is not flexible to sell on demand-supply, the DIV is less proactive in balancing its capital.

Fourthly, buying long-term bonds in accordance with options of interest rate support or buying at lower interest rates than rates of investment will affect capital growth and revenue plans. The DIV is only entitled to buy long-term bonds to participate in restructuring with amount, term and interest rates in accordance with the recovery plans and decisions of the SBV, which makes the DIV be less proactive in allocating and taking advantage of resources flexibly. Consequently, the DIV cannot buy bonds and fulfil its plan when it has available idle capital. This leads to excess and/or shortage of capital, affecting effectiveness of capital use. The lengthened period for establishment of recovery plans and submission for approval by the SBV also causes difficulties in participation in restructuring.

Fifthly, since establishment, the size of the Deposit Insurance Fund has always grown increasingly through years. However, the ratio of the Deposit Insurance Fund/insured deposit balance recorded decreasing tendency and was lower than the rate of minimal capital of 3-5% of the total insured deposit balance as internationally recommended. In the context the deposit insurance coverage will be upgraded to 125 million dongs since 12/12/2022 under the Decision No. 32/2021/QD on October 20th, 2021 by the Prime Minister. The lack of regulation and establishment of mechanism of setting up target fund and risk-based premium collection will cause difficulties to capital accumulation.

In the context that the financial resources of the DIV has continuously increased positively, the list of capital use limited only to “buying and holding Government bonds to maturity date” can bring in revenues, and no entitlement of buying long-term bonds is a waste of resources, lessening its roles of participation in restructuring. To agree with the current regulations, laying basis for the DIV to improve its financial capacity, amending and supplementing the Law on Deposit Insurance should be synchronous with the Law No. 17 and other related documents in the following direction:

Firstly, to permit expansion of investment portfolio (medium-term) to such instruments as local government bonds, Government-guaranteed bonds, deposits and sales of bonds issued by A-ranked commercial banks; and buying safe derivatives (long-term);

Secondly, there is a regulation which allows the DIV to be proactive in term of period of holding for each term at different times, and then harmonize capital rate for investment and long-term bond purchase, avoiding to concentrate capital on sensitive or highly dependable assets, contributing to reducing pressures on increasing terms for criteria fulfilment.

Thirdly, to update tasks, powers, responsibilities more clearly of the DIV in participation in restructuring; the type of capital used is operating capital to optimize all available resources to realize many objectives at the same time;

Besides, to bring into full play the roles of the DIV in participation in restructuring, there should be an option which ensures the deposit insurance system to have strong enough financial capacity through increasing deposit insurance premiums periodically and/or establishing a mechanism of risk-based premium collection, options – plans of using revenues effectively, setting up a specific, realistic revenue-expenditure plan, management & supervision on economical expenditure to have the best provision and not affect idle fund.

Research and International Cooperation Department