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Effective investment helps improve financial capacity
The investment activities of temporarily idle capital of DIV have been implemented since its establishment. The deposit insurer invests in the portfolios as prescribed under the legal documents. Before 2013, the investment portfolio of the DIV included government bonds; bills of the State Bank of Vietnam (SBV); deposit money at the State Treasury and the SBV; deposit money, buy bonds and bills of state commercial banks and joint stock commercial banks rated A by the SBV.
Since 2013 when the Law on Deposit Insurance took effect, the investment portfolio of the DIV has included Government bonds, SBV bills and deposits at the SBV. Currently, government bonds are the only safe and effective investment channel for DIV. Investment in government bonds is carried out on both primary and secondary markets according to orientation and regulation.
During more than 20 years of operation, the investment activities of DIV have made positive contributions to the accumulation and increase of the capital of the DIV. From the initial charter capital of 1,000 billion VND, up to now, it has increased to 5,000 billion VND. As of December 31, 2022, the total capital of the DIV reached VND 95.7 trillion, an increase of 15.8% compared to the same period in 2021. In particular, the annual profit income from DIV investment activities also grew, which actively and effectively supported the turnover of capital for reinvestment. Basically, idle capital is carefully invested in both primary market and secondary market, ensuring good implementation of safety and capital development goals. Effective idel capital investment not only helps DIV to preserve and maintain the real value of its capital, but also helps to improve its financial capacity to ensure liquidity provision for reimbursement, processing and support for the restructuring of credit institutions. In accordance with the law, DIS is allowed to invest in low-risk assets to ensure safety of capital, maintain liquidity and control risks.
Difficulties in using temporarily idle capital
The basic difficulty in using the temporary idle capital of the DIV now is the reduced profitability compared to the period before the Law on Deposit Insurance took effect: in 2012 the profit margin was 11%, in 2018 it was about 5-6%. This stems from the following basic reasons:
Narrowed investment portfolio: As mentioned above, before 2013 (without the Law on Deposit Insurance), the investment portfolio of DIV was more diversified including government bonds; SBV bills; deposit money at the State Treasury and the SBV; deposit money, buy bonds and bills of state commercial banks and joint stock commercial banks rated A by the SBV.
From 2013 up to now (when the Law on Deposit Insurance took effect), the investment portfolio of DIV includes Government bonds, SBV bills and deposits at the SBV. Meanwhile, there are still shortcomings with respect to the types of investments that the DIV is allowed to make. In buying government bonds, the DIV is allowed to buy government bonds on both primary and secondary markets. The proportion of investment in the primary market accounts for nearly 90%, although it is safe, it depends entirely on the issuance schedule of the State Treasury; term and volume of bids; interest rate movements in the market and investment needs of commercial banks. On the secondary market, prices are not uniform; goods are scarce, depending on the seller, the market's demand and expectations, especially the strict regulations and conditions for making investments with the DIV, have lost many opportunities and reduced investment efficiency.
The Law amending and supplementing the Law on Credit Institutions allows the DIV to participate more deeply in the restructuring process of credit institutions, namely: Special lending to credit institutions placed under special control and buying long-term bonds from supporting credit institutions, participating in assessing the feasibility of the credit institution recovery plan, and participating in the formulation of the bankruptcy plan of the specially controlled credit institution. However, at present, there is no legal guidance document and a lack of specific regulations on the use of capital for restructuring, especially the lack of regulations on the limitation of capital used for purposes other than reimbursement, and on the role of the DIV in deciding on the use of non-reimbursement capital.
Solutions to improve the efficiency of using DIV’s idle capital
An effective capital investment mechanism is an important content to ensure the financial stability of the deposit insurer. In order to improve the efficiency of the use of the deposit insurance funds in the direction of safety, growth and efficiency, in the coming time, the deposit insurer needs to implement solutions as well as propose to relevant agencies to guide and issue specific regulations to deal with the above problems in order to effectively use capital sources for the process of restructuring credit institutions and diversifying investment channels.
The deposit insurance development strategy to 2025, with orientation to 2030 identifies the first important task to improve financial capacity as "research, propose to the competent authority to amend, supplement relevant legal provisions, ensuring sufficient legal basis to implement 2 solutions: Increasing the charter capital of the DIV to VND 10,000 billion by 2025 and VND 15,000 billion by 2030 from self-accumulation and other legitimate sources; strengthening financial capacity by allowing the DIV to diversify investment forms and portfolios. This task associates the amendment and supplementation of the Law on Deposit Insurance with the following proposed solutions:
Firstly, it is only allowed to use available resources for investment (instead of operating capital as prescribed in Article 5 of Circular No.20/2020/TT-BTC amending and supplementing a number of articles of Circular No.312/2016/TT-BTC that regulates the financial regime for DIV). This is to ensure that the amendment of the Law on Deposit Insurance both inherits Article 31 of the Law on Deposit Insurance (deposit insurer is allowed to use the idle capital to buy government bonds, SBV bills and deposit money at the SBV), while helping to reduce risks when the scope resources used for investment by idle capitle are smaller than operating capital.
Secondly, recognize and define the "investment function" of the DIV in the direction of supplementing the clause about the deposit insurer "managing and using the idle capital to invest safely and effectively in order to develop and recover capital". Article 13 of the current Law on Deposit Insurance does not have a separate provision on investment functions. Therefore, it is necessary to amend Article 13 to ensure that it accurately reflects the functions, duties and principles of the use of capital of the DIV, so that it is consistent with and in sync with Article 5 of Circular No.20. Practices shows that unvestment activities are an important function of the deposit insurer. The provision of this function in the revised Law on Deposit Insurance will affirm the indispensable role of investment activities in deposit insurance professional activities, helping to perfect the institution of investment capital, and tighten the discipline of using idle capital in the direction of preservation and development. The ratio of accumulated investment to total capital for the period of 2013 to now has always been at 95-96%, reflecting the efforts of the DIV in managing and using capital in the direction of not wasting available cash for investment, revolving capital for reinvestment. Regulations on the investment function will create a premise for the DIV to grow and develop capital more responsibly.
Thirdly, diversify investment forms and portfolios to enhance financial capacity. Article 31 of the Law on Deposit Insurance stipulates that “the deposit insurer is allowed to use their idle capital to buy government bonds, SBV bills and deposit money at the SBV”. Since 2013, the investment portfolio of the DIV has undergone a radical change in the direction that more than 99% of the idle capital are invested in buying government bonds and less than 1% depositing money with the SBV. Due to the very low interest rate (0.8-1.2% per year), the DIV only deposits money to the SBV when there is no Government bond bidding session or the primary government bond bid has not been won, or the secondary government bond has not been purchased. DIV has not purchased SBV bills because the bidding period is short and does not coincide with the time when there is idle money while the bills are not sold before maturity. In addition, Circular No.16/2019/TT-NHNN only allows DIV to buy secondary SBV bills with very short maturities, low interest rates and very few offering units. Thus, the Law on deposit insurance has narrowed the investment portfolio (from 6 investment instruments in the period 2000-2008, 8 instruments in 2008-2012 to 3 instruments - with only government bonds still able to bring in revenue).
Thus, the investment activities of the DIV have been facing many difficulties due to the narrow investment portfolio. Amending and supplementing the Law on Deposit Insurance to allow DIV to diversify its investment portfolio is necessary so that DIV can use the idle capital to invest in accordance with the orientation proposed in the Deposit Insurance Development Strategy.
Specifically, in addition to investment instruments being implemented according to current regulations, it is necessary to add new forms and channels of on-going investment instruments to ensure consistency among legal documents, especially in sync with Circular No.20; propose to continue to allow investment instruments that were made previously; propose to add some unrealized investment tools in line with the Deposit Insurance Development Strategy, in which the proposed investment portfolio is divided into 2 phases. In the period of 2021-2025, there are 6 groups of tools - channels - forms of investment including buying and selling Government bonds; Buying SBV bills from credit institutions (buying SBV bills on the secondary market); Depositing at the SBV, withdrawing money from the SBV; Depositing at commercial banks, withdrawing deposits from commercial banks; Buying bonds and bills of commercial banks and selling bonds and bills of commercial banks; and buying and selling promissory notes, certificates of deposit of commercial banks. In the period from 2025, there will be a group of tools - channels - forms of investment such as buying and selling local government bonds.
Fourthly, increase the charter capital to VND 10,000 billion by 2025 and VND 15,000 billion by 2030 to ensure the finance for the DIV to best perform its tasks as well as have more resources to carry out the newly assigned political tasks in participating in the restructuring, thereby helping to strengthen the financial capacity, enhance the position - contributing to maintaining the confidence of depositors. This is consistent with the Development Strategy of Deposit Insurance as well as with the general development trend of the banking industry. According to calculations, in the period of 2021-2030, the Investment and Development Fund (used for the purpose of increasing charter capital) is expected to accumulate only about 800 billion VND and thus will reach a value of about 1.1 trilion dong in 2025 and about 1.6 trillion dong in 2030. If including the current charter capital of 5 trillion dong, by 2030, the Investment and Development Fund will only reach about 6.6 trillion dong – much lower than the targets of VND 10 trillion and VND 15 trillion.
In order to realize the set targets and ensure that there are strong enough financial resources to meet the development requirements in the medium and long term, the DIV must be allowed to deduct 100% of the revenue from the investment activities of idle capital into income to generate accumulation source to supplement charter capital as prescribed before the Law on Deposit Insurance. It is possible to calculate the division plan for 2 funds, including Investment and Development Fund (to increase charter capital and increase equity size) and Professional reserve fund to reimburse in case of failure. Based on this option, DIV calculates that by 2025, the accumulated investment and development fund will be about VND 6.5 trillion; by 2030 is about 16 trillion VND - meeting the target of increasing charter capital according to the content proposed in the Deposit Insurance Development Strategy; In addition, it contributes to supplementing idle capital for investment and performance of tasks.
The above-mentioned proposed solutions are both fundamental in the short term and ensure sustainability in the medium and long term based on a reasonable implementation roadmap, which will help the DIV realize its development objectives. That maintains and strengthens public confidence, contributes to ensuring the safe and healthy development of banking activities in line with the orientation of the Deposit Insurance Development Strategy.
