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The role of the DIV in restructuring credit institutions
Deposit insurance is critical in sustaining stability and ensuring the safe and sound development of credit institutions worldwide. It provides a framework for cross-checking among agencies within the financial safety net, allowing for early warnings, timely intervention, and direct involvement in the restructuring of weak credit institutions. This helps to deal with incidents, manage risks, and reduce losses for depositors as well as the financial system and the economy.
In Vietnam, the DIV’s role is defined in the Law on Deposit Insurance No. 06/2012/QH13 and the Scheme for "Restructuring the credit institution system together with handling non-performing loans for the 2021-2025 period", which stipulate that one of resources for restructuring credit institutions is the DIV's Operational Provision Fund. This role has been institutionalized and strengthened in terms of scope and coverage by the Law on amendments and supplements to some articles of the Law on Credit Institutions (Law No. 17/2017/QH14), and most notably, the Law on Credit Institutions No. 32/2024/QH15.
The laws specify the DIV's role through various activities, such as evaluating the feasibility of plans for recovery, mergers, consolidations, and transfer of entire member-contributed capital of people's credit funds (PCFs). The DIV is also responsible for providing special loans to commercial banks, cooperative banks, PCFs, and microfinance institutions in accordance with regulations on deposit insurance; purchasing long-term bonds issued by credit institutions designated to acquire commercial banks as decided by the State Bank of Vietnam (SBV); participating in the development of bankruptcy plans for credit institutions placed under special control; and coordinating with credit institutions to reimburse depositors in line with approved bankruptcy plans, etc.
Over the years, the DIV has actively engaged in restructuring credit institutions together with handling non-performing loans. It has issued the Regulation, attached to Decision No. 593/QD-BHTG dated September 7, 2018, on providing special loans to credit institutions placed under special control, and Guideline No. 1327/HD-BHTG dated October 29, 2019. The DIV has also issued temporary guidelines for participating in the special control of PCFs and provisions for Emergency Handling Teams to deal with problem PCFs. Additionally, it has provided guidelines for evaluating the feasibility of recovery plans for PCFs and microfinance institutions placed under special control, etc.
The DIV has been involved in monitoring PCFs’ operations and implementing plans to rectify and strengthen them, especially in supervising PCFs’ detailed data, monitoring their asset fluctuations, deposit balances, insured deposits, debt classification, and debt recovery capacity to assess their solvency. The DIV has also addressed arising situations, given feedbacks on the plans for handling PCFs placed under special control, conducted reconciliation, verification, and compilation of depositor lists, as well as participated in public relations efforts and provided other forms of support to PCFs, etc.
On a yearly basis, the DIV has set reserve fund levels for special loans to credit institutions placed under special control to proactively ensure the financial resources, maintaining preparedness to provide special loans to credit institutions placed under special control that met the eligibility criteria for borrowing. At the same time, the DIV has proactively participated in assessing the feasibility of recovery plans upon request of the SBV and proposed proper solutions as stipulated in the Law on Credit Institutions.
The DIV’s current financial capacity
Deposit insurance premiums are the primary source of revenue for the Operational Provision Fund. Currently, an annual premium rate of 0.15% of the average total balance of insurable deposits is applied to all insured institutions.
To ensure financial resources for protecting depositors at 1,278 insured institutions, the DIV has proactively compelled and guided these institutions to submit insurable deposit balance reports (for the purpose of assessing and collecting deposit insurance premiums). The DIV has carried out the assessment and collection of deposit insurance premiums in accordance with regulations and promptly resolved arising issues to minimize late payments, overpayments, or underpayments.
Total deposit insurance premiums collected in 2023 amounted to VND 10,614 billion, 10.3% higher than the plan assigned by the SBV. Premiums totaling VND 755.8 billion were waived for several insured institutions placed under special control as stipulated by regulations.
As of the end of June 2024, the DIV’s total capital surpassed VND 117 trillion, increasing by nearly 15% compared to the same period in 2023 and more than 7% compared to December 31, 2023. This serves as a resource to ensure timely reimbursement to depositors when necessary and to effectively participate in restructuring the credit institution system through financial support operations.
In recent years, the DIV’s investment activities have been conducted in compliance with legal regulations, ensuring safety and capital growth. The annual cumulative investment during the 2015–2022 period grew at an average rate of approximately 21%. The ratio of cumulative investment to total capital remained stable at 93–96%. The DIV’s total revenue comprises income from investment activities and other sources (e.g., office leasing and training services for insured institutions). Of this, investment income accounted for over 99%, while other sources contributed less than 1%. The average growth rate of investment revenue during 2015–2022 was about 11%, contributing to accumulating capital, enhancing the DIV’s financial capacity, improving its position and ensuring the achievement of deposit insurance public policy objectives.
However, the DIV’s investment activities have revealed certain limitations, as its investment portfolio consists of government bonds (comprising over 99% of the portfolio), SBV bills, and deposits at the SBV. In fact, there have been some challenges including low interest rates for deposits at the SBV, difficulties in finding trading partners for SBV bills, and the “buy-and-hold-to-maturity" principle of the DIV’s investment in government bonds - only allowing sales if the Operational Provision Fund is insufficient to meet reimbursement obligations. These may restrict the flexibility in the DIV’s cash flow management, thus affecting the liquidity required to fulfill reimbursement obligations when such responsibility arises for the DIV.
Some issues and solutions to enhance the DIV’s financial capacity for more effective participation in restructuring credit institutions
Deposit insurance premiums
Changes in policies related to deposit insurance premiums often have significant impacts on the system of insured institutions. This requires careful consideration when adjusting premium policies. Therefore, it is necessary to study and amend regulations on deposit insurance premiums to ensure clarity and alignment with the specific characteristics of Vietnam's credit institution system.
The 2024 Law on Credit Institutions provides that the DIV shall develop a plan to increase the deposit insurance premium rate to repay the special loans borrowed from the SBV in case the DIV’s Operational Provision Fund is insufficient to reimburse depositors under the application of an approved bankruptcy resolution plan. This is a new provision that requires further research and should be supplemented with regulations on the rights and obligations of the deposit insurer concerning the development of plans to increase the premium rate under the Law on Deposit Insurance.
Furthermore, in order for the DIV to have a sound legal basis for raising the premium rate, there should be specific provisions regarding cases and conditions under which the premium rate can be raised, as well as authority, processes, and procedures for increasing the premium rate, along with other related issues. These provisions should be included in proposed amendments and supplements to the Law on Deposit Insurance and its guiding documents.
The SBV’s special lending mechanism
The 2024 Law on Credit Institutions stipulates that the DIV is entitled to: (i) obtain special loans from the SBV in case the DIV’s Operational Provision Fund is insufficient to reimburse depositors in accordance with an approved bankruptcy plan; (ii) utilize repayments of special loans from credit institutions, revenues from the sale of securities held by the DIV, proceeds from the liquidation of assets of credit institutions receiving special loans, and collected deposit insurance premiums to repay special loans to the SBV as top priority.
This is a new regulation that requires specific provisions regarding the rights and obligations of the deposit insurer in relation to the obtainment of special loans from the SBV to ensure alignment with the 2024 Law on Credit Institutions. Additionally, it is necessary to clearly define circumstances, conditions, procedures, and processes for obtaining special loans from the SBV, as well as the source of funds for repaying these special loans.
Receiving financial support from the State budget on a repayable basis
The mechanism allows the DIV to receive funding from the State budget on a repayable basis as per the Prime Minister's decision, as stipulated in Clause 12, Article 13 of the Law on Deposit Insurance. The aim of this approach is to generate capital through such support to make payouts and participate in the restructuring process by purchasing long-term bonds issued by assuming credit institutions. Therefore, considerations can be given to applying an appropriate interest rate for the funds received from the State budget, thereby supplementing the DIV’s resources to protect the legitimate rights and interests of depositors at insured institutions and facilitating the DIV’s deeper involvement in the restructuring process.
Plan for borrowing from credit institutions or other organizations with government guarantee
The mechanism for the DIV to borrow from credit institutions or other organizations with government guarantee is also stipulated in Clause 12, Article 13 of the Law on Deposit Insurance. It is necessary to have specific regulations regarding the proportion of loans that the DIV can borrow from credit institutions or other organizations under government guarantee. At the same time, the DIV is responsible for monitoring the use of such loans and reporting the implementation status to the SBV. Upon the due date, the DIV shall repay the government-guaranteed loans in accordance with the regulations.
Conclusion
This article has presented four main groups of issues and suggestions aimed at enhancing the DIV’s financial capacity to strengthen its role and facilitate its more effective and active participation in the restructuring of credit institutions in the future. These recommendations involve the revision of the Law on Deposit Insurance in the coming time, as well as the implementation of the 2024 Law on Credit Institutions. The above-mentioned proposals are intended to offer fundamental and sustainable solutions to minimize risks in the credit institution system and realize the DIV’s further involvement in the restructuring of credit institutions.
National Assembly’s Economic Committee
Research and International Cooperation Department (translation)
