Guiding documents for calculation and payment of deposit insurance premiums need to be completed soon

 Over the last 10 years since the establishment of the DIV, authorized agencies and DIV have strived to build a system of guiding documents for calculation and payment of DI premiums which is proper, complies with international practices and matches Vietnam’s conditions  in order to encourage insured institutions to improve their performance and to ensure the easy and correct calculation of DI premium.

The results from the implementation of the calculation and payment of DI premium under the Decree No.89 and the Decree No.109

The Decree No.89/1999/NĐ-CP dated 1/9/1999 (Decree No.89) on deposit insurance is the first legal document stipulating the calculation and payment of deposit insurance premiums and is the basis for DIV to guide insured institutions to calculate and pay premiums. Under the Decree, insured deposits are personal deposits in Vietnamese dong at insured institutions with the DI premium of 0.15% per annum calculated on the average balance of the deposits and applied to all insured institutions regardless of their size and performance. This calculation method is simple and easy to apply, particularly when there is no agency to assess and classify credit institutions. This method, therefore, has been chosen by many deposit insurance organizations in the world in their initial operational phase.

Decree No.109/2005/NĐ-CP dated August 24th, 2005 (Decree No.109) amending and supplementing some articles of decree No.89 stipulates that insurable deposits are those in Vietnamese dong deposited with insured organizations by individuals, households, cooperative teams, private enterprises and partnerships, with the unchanged flat premium rate (0.15% per annum). Compared with decree No.89, decree No.109 extents the insurable deposits. Therefore, the guiding documents for calculating and paying the flat rate have basically been completed. Insured institutions have well observed the regulations, which restrained errors. As a result, the total amount of the collected premiums has grown about 30% a year and been added to the operation fund, partly improving the financial capability of the DIV.

DI premiums paid by insured institutions from 2006 to 2012

Unit: million dongs

(Source: Debt settlement department, DIV)

Some amendments to the calculation and payment of premium under the Law on DI

The Law on DI was passed by the National Assembly and came into effect on January 1st , 2013. It is the highest legal document which brings the operation of DIV in general and the calculation and payment of DI premium in particular into a new phase. Accordingly, the significant changes regarding DI premium are:

First, Insurable deposits

Under the Law, insurable deposits are those in Vietnamese dong deposited with insured organizations by individuals. Hence, deposits of households, cooperative teams, private enterprises and partnerships are excluded in comparison to the previous Decrees No.89 and No.109. 

It is justifiable that the Law does not insure the above mentioned deposits. They just represent an insignificant part of depositors whose deposit balance is often small. Moreover, the target of deposit insurance policy is to protect the small and retail depositors like savers.

Second, DI premium

Under the law, there is a fundamental change from the flat rate system (insured institutions pay the same premium rate calculated on the average balance of insurable deposits) to the risk-based premium system, in which, premium is determined based on risks faced by the insured institution. Therefore, those who have a low risk level will pay a low premium rate. This will create more equality among insured institutions, encouraging them to enhance their performance to enjoy a low premium rate.

Current difficulties in premium calculation and payment

The law on deposit insurance has come into effect for a year. The Law does not set a fixed rate or frame for premiums. Instead, the Prime Minister shall determine a deposit insurance premium frame on the proposal of the State Bank of Vietnam. Based on this frame, SBV shall stipulate specific premium rates for credit institutions upon assessing and classifying these institutions. However, SBV has yet to issue any guidance on the risk-based premium. Therefore, the previous regulations on premium calculation and payment are still effective.

Hence, the assessment and classification of the insured institutions and the premium calculation depend solely on SBV. It will definitely take a long time to apply the risk-based premium system as there are many difficulties in designing the criteria to assess the operation of the insured institutions. With the current capacity and conditions of the commercial banking system in Vietnam, the application of Basel II on risk management system is regarded appropriate even though it is technically difficult and costly to approach Basel standard. However, in the context of international integration and the opening of the finance markets, it is an urgent need to adopt Basel standard step – by – step in order to enhance the capacity and reduce the risks of commercial banks.

Considering the experience of some deposit insurers that apply risk-based premium such as Canada or Taiwan, premium rates are classified into three or four levels with little differences. In Taiwan for example, there are three levels, namely 0.05%, 0.055% and 0.06%. High differences among levels may lead to depositors’ desire to only deposit at those institutions which have low risk level and low premium rate. Premium may also be flexible in accordance with the economy condition or the credit institution assessment by SBV.

Even though the Law on deposit insurance has come into effect, guiding documents have not been issued. Therefore, in order to avoid interruption, DIV issued the official document No.11/CV-BHTG115 dated January 14th, 2013, which gives instruction of premium calculation and payment, and penalties if delayed.

Recommendations

To the SBV:

SBV should promptly issue the circular to guide the implementation of the law on deposit insurance, in which some following contents should be included:

- Premium rates

+ A different premium rate should be applied to each insured institution, and adjusted annually or biennale.

+ Premium rate can also be adjusted for each institution if the SBV concludes that there is a positive or negative change on the performance of the insured institution.

- Resolving violations

+ Under the law, insured institutions shall pay premiums to the deposit insurance organization no later than the 20th day of the first month of the following quarter. An  insured  institution  which  violates  the  deadline  of  premium payment  shall  be  subject  to  a  penalty  of  0.05%  of  the  overdue amount for each day of the deferred payment. It is recommended that if the deadline falls on holidays or weekend, the deadline should be put off until the next working day for the sake of the effective capital use of credit institution.

+ Considering the exemption of penalty for the institution if causes of delay are force majeure such as: IT software failure, money transferring errors, etc... If the institution submits explanation in writing to DIV, the exemption could be considered.

 To insured institutions:

 Insured institutions should update new guiding documents in a timely manner and follow the guidance provided by the government, SBV and DIV to calculate and pay premiums correctly.

To   DIV:

 + DIV should guide insured institutions through the premium calculation and payment as soon as SBV issues the circular guiding the implementation of the Law.

 + Regularly monitoring the operation of insured institutions and find out their and difficulties in calculating and pay premiums and take proper measures in accordance with the law;

+ Supervising and getting the insured institutions to well comply with the reporting regime and procedure for premium payment.

References:

- Decree No.89/1999/ND-CP  dated 1/9/1999

- Decree No. 109/2005/ND-CP dated 24/8/2005

- Circular No. 03/2006/TT NHNN dated 25/4/2006

- Deposit insurance premium report (Supervision Department II –DIV)

- DI premium payment  report (Debt settlement department - DIV)

- www.vnba.org.vn