Providing special loans - International experiences and current situation in Vietnam
Providing special loans is a form of lending in accordance with the Law on amendments and supplements to a number of articles of the Law on CIs to provide liquidity support to CIs placed under special control when they are at risk of insolvency or are insolvent, threatening the stability of the system during the period when the CIs are being placed under special control or supported to recover for the CIs placed under special control according to the approved recovery plan or the compulsory transfer plan.
Experiences from deposit insurers around the world show that financial support is one of the tools to ensure the operation of CIs; prevent bankruptcy causing systemic risks; temporarily avoid the cost of resolution and protect the interests of depositors.
In the US, the Federal Deposit Insurance Corporation (FDIC) acquired and provided financial support to the Bank of New England which was at risk of bankruptcy due to cumulative losses of more than 450 million USD, greater than its capital of 255 million USD. As a result, depositors were not harmed by the bank failure and the FDIC did not have to pay depositors.
In Indonesia, financial support is also one of the important methods applied to all failed banks, whether systematically important or non-systematically important. After providing financial support, the Indonesia Deposit Insurance Corporation will hold shares of the failed bank for a certain period of time and sell the shares to recover the used capital.
In Vietnam, before the enforcement of the Law on Deposit Insurance, the DIV provided financial support to insured institutions at risk of insolvency, but not to the extent of special control in the form of supportive loans. During the period from 2005 to 2009, the DIV provided loans to 05 people's credit funds with a total amount of 6,932 million VND. As a result, 4/5 people's credit funds had returned to normal operation and paid off all its debts to the DIV.
Along with the introduction of the revised Law on CIs in 2017 and guiding documents under the Law, in addition to the operations performed by the DIV to support CIs such as on-site examination, supervision, participation in special control, communication, the DIV was tasked with a new operation, which is providing special loans to CIs placed under special control.
On the basis of the provisions of the law, the DIV has developed and issued the Regulation on providing special loans to CIs placed under special control and its implementation Guidance to unify the implementation process throughout the system. Every year, the DIV also develops a reserve fund for providing special loans plan to ensure that it has sufficient financial resources and is ready to provide loans when requested in accordance with regulations. Thereby, the DIV will participate further in the process of supporting and recovering CIs and the restructuring of weak CIs. This will enhance the role and position of the DIV in the national financial-monetary system which would positively affect the operations of CIs and strengthen depositors' confidence.
Diagram of the process of providing special loans to support liquidity by the DIV
Through providing special loans to CIs placed under special control, the DIV can access documents on actual the situation of CIs; evaluate and analyze operations of CIs; assess collateral, propose an appropriate plan for providing special loans to the CIs placed under special control and implement the lending operation as prescribed. Thereby, the capacity and qualifications of staff in charge of providing special loans are increasingly enhanced.
The DIV's objects for providing special loans were also expanded. Previously, the DIV was allowed to provide special loans to people's credit funds only . However, under the new regulations, the DIV is allowed to provide special loans to commercial banks, people's credit funds, financial companies, and microfinance institutions. The DIV not only indirectly participates in the process of supporting the recovery of weak CIs through the purchase of long-term bonds from supporting CIs, but also directly participates in supporting weak CIs by providing special loans.
In addition, the DIV not only provides special loans to CIs placed under special control before the restructuring plan is approved, but also to CIs that are implementing the approved recovery and restructuring plan. Thus, the scope of the DIV’s lending operation is spread throughout the restructuring process of CIs placed under special control.
Difficulties, suggestions and recommendations
Beside opportunities, the DIV also faces many difficulties and challenges:
Firstly, regarding the legal basis, the revised Law on CIs in 2017 and Circular No. 08/2021/TT-NHNN stipulated the forms and principles on providing special loans of the DIV. However, it has not yet fully and detailedly defined the requirements, criteria, order and procedures for handling losses in case the DIV is unable to recover the special loan.
Secondly, the objects of lending are CIs placed under special control. When providing loans to these CIs, the DIV will face many risks, including the possibility of not being able to recover the loan, potentially leading to capital loss. This necessitates a waiver mechanism for staff participating in the lending operation, especially when they have fulfilled their assigned responsibilities.
Thirdly, because this is a new operation and the borrowers are CIs with very poor performance, in early stages of implementing the task, the DIV may be passive and lack the resources needed to provide special loans; the experience and professional qualifications of staff involved in providing special loans are still lacking and need to be improved.
Fourthly, the communication between the SBV and the DIV on CIs placed under special control is still limited. This creates certain difficulties for the DIV in the process of appraisal and decision-making when granting special loans.
In order for the DIV to participate further and more effectively in the process of restructuring weak CIs, we would like to present a number of suggestions:
Firstly, the DIV continues to actively coordinate and communicate with the SBV on topics relating to CIs restructuring and CIs placed under special control to better perform the duty of providing special loans.
Secondly, the DIV’s objects of the providing special loans operation involves CIs that have been placed under special control, posing a significant risk of capital loss. Therefore, explicit regulations on the use of the DIV's professional reserve fund when the loans cannot be recovered, and the authority to decide on this, should be in place.
Thirdly, for staff engagement in the providing special loans operation, there should be provisions on immunity from material liability when they have fully performed their assigned responsibilities. At the same time, the DIV needs to continue to pay attention to and support staff professional development through domestic and international training courses./.