Recommendations for purchasing long-term bonds issued by assisting credit institutions – a means for DIV to participate in restructuring credit institutions under special control

The purchase of long-term bonds issued by assisting CIs as decided by the State Bank of Vietnam (SBV) is the way that DIV provides direct financial support to assisting CIs (banks with good performance results) in restructuring CIs that are being put under special control. Therefore, in that way DIV indirectly joins the restructuring of CIs under special control and this would gradually confirm the bigger role of DIV. 

Current legal framework

The Law No.17/2017/QH14 (the amendment and supplement of the Law on Credit Institutions No 47/2010/QH12) was passed by the National Assembly session XIV on 20 November 2017. The Law No 17 sets a firm legal basis for resolution of weak CIs, helps deal with shortcomings arising in the restructuring of CIs system. This Law also lays an important foundation for DIV to participating in realizing the Program 1058 on “restructuring CIs system attached with resolving bad debts for the period 2016-2020”.  Specifically,  Item c, Clause 3, Article 146 of the Law No. 17 stipulates that “the State Bank of Vietnam guides the Deposit Insurance of Vietnam in purchasing long-term bonds issued by assisting credit institutions”; and Clause 11 Article 148đ defines that “Assisting credit institutions may issue long-term bonds to the Deposit Insurance of Vietnam as regulated by the State Bank of Vietnam”.

Although the Law No.17 was enforced on 15 January 2018, DIV has not been able to implement the purchase of long-term bonds issued by assisting institutions so far. Apart from inconsistent legal framework, another important reason for the situation is the lack of detailed guiding documents for DIV to carry out the purchases. The Banking Supervision Agency (under SBV) has so far promulgated the Document No 2166/NHNN-TTGSNH dated 5 April 2018 on guiding the implementation of some contents of the Law No. 17. In the context that DIV has been accomplishing its entire system of documents on purchasing long-term bonds for the participation in CIs restructuring, and in case the purchases are realized at the SBV’s discretion, it would be the first time for a legal process to be executed straight downward from the law level to DIV’s internal regulation.   

DIV’s financial capacity

For over recent 20 years, DIV has strived to make best of its capital with the ultimate purpose of avoiding wasting the idle capital through its investment (ensuring legal obedience, conservation and development of capital thanks to proper investment decisions for each period in the direction of harmonizing the investment – liquidity – profitability).   

- During the time of 1999 – 2012, over 95% of the investment was focused on term deposits at commercial banks for high interest rates which brought about more than 99% of the revenue. Since 2013, upon the enforcement of the Law on Deposit Insurance, DIV’s investment portfolio has basically changed in that 99% of the investment has been poured into Government’s bonds which have made roughly over 99% of revenue thanks to higher interest rates than that into bills and deposits at the SBV. 

- The investment has never induced outstanding loans; the principals and interests have been fully settled at their maturity contributing to supplementing the idle capital for reinvestment. As of 31 December 2021, the total accumulated investment was more than 79.7 trillion dongs thanks to the stable annual growth of investment of 28% on average. This made up the Professional Reserve Fund of over 76.1 trillion dongs, helping improve DIV’s financial resource used in case of reimbursement of insured deposits.

The annual growth of capital has always been at around 25 – 27%. On an average, the DIV’s total capital has been more than doubled for every 5 year. As of 31 December 2021, the DIV’s total capital reached over 82,6 trillion dongs. With the current financial capacity, the DIV could definitely meet the dual target of realizing public policy of deposit insurance while purchasing long-term bonds issued by assisting CIs as stipulated by the Law No 17 in order to participate in the CIs system restructuring by effective management and utilization of idle capital. The consideration of challenges and favorable conditions as follows would help DIV build practical plans of “purchasing long-term bonds for the participation in the restructuring of credit institutions under special control”.

Challenges and favorable conditions of long-term bonds purchases

The inconsistency of existing legal documents 

The biggest inconsistency of the related legal framework is that the Law of Deposit Insurance (the highest legal document regulating the deposit insurance activities enforced in 2013) has no provisions on purchasing long-term bonds issued by assisting CIs. Besides, for 4 years since the promulgation of the Law No. 17, the SBV has not issued any detailed guidance on the DIV’s purchasing long-term bonds.

The Law on Deposit Insurance and Circular No 20/2020/TT-BTC regulating the financial regime for DIV (amending and supplementing some articles of the Circular No. 312/2016/TT-BTC) have an inconsistency in the “principle of capital usage”, specifically: The Article 31 of the Law on Deposit Insurance provides that the DIV may use its temporarily idle capital for buying Government’s bonds, SBV’s bills, and depositing money at the SBV. In the meanwhile, the Article 5 of the Circular 20 stipulates that DIV may use its operational funds to buy Government’s bonds, long-term bonds issued by assisting institutions at the discretion of the SBV, SBV’s bills and to have deposits at SBV. The regulation of the Circular No. 20 is consistent with the management and usage of funds at present (including debt instruments for investment and purchase of “long-term bonds” for participation in restructuring); as well as ensures the DIV’s optimal utilization of existing resources for both investment and participation in CIs restructuring.

The Circular 20 also provides an additional regulation that DIV may sell its long-term bonds in case its Professional Reserve Fund is insufficient to realize its payouts as stipulated in the Law No. 17. In the fact that DIV’s financial capacity has been constantly in growth, the regulation that DIV may carry out its fund’s management and usage with the only tool of “buying and holding government’s bonds to the maturity” is considered a huge waste of resource. It is clear that as long as DIV may not purchase long-term bonds, DIV may not take its part in the CIs restructuring. The inconsistency of relevant legal documents would apparently make a big gap between the law and the practice in case the SBV issues a decision on the DIV’s purchase of long-term bonds.   

Planning for allocation and usage of idle capital

At present, over 99% of DIV’s idle capital is invested in Government’s bonds under the regulation that DIV may only “buy & hold the government’s bonds to the maturity” and sell the bonds just in case the Professional Reserve Fund is insufficient for payouts. Therefore, DIV is not entitled to sell its Government’s bonds at its discretion for buying long-term bonds. Its idle capital would be used for purchasing both Government’s bonds and long-term bonds issued by assisting institutions.

In fact, the capital resource used for buying Government’s bonds for investment and long-term bonds for participation in CIs restructuring depends on the annually arising idle capital – (i) mainly coming from the revenue of principals, interests of outstanding investments and annual premiums collection; and (ii) based on the Investment Plan that have been previously approved by SBV. Accordingly:

- The premiums collection records high values in the first months of every quarters (January, April, July and October) as insured institutions pay their premiums, and on the annual basis, the first 6 months recognize the majority of amount collected (over 60%) with a downward trend from the 3rd quarter.      

- While DIV enjoyed a rather stable and constantly growing idle capital for the period 2015-2020, that might go down for the coming time (with annual unstable growth or even downturn). The reason is that the revenue of principal and interest at maturity depends on the investment interest rates of the preceding years (recorded with lower figures from 8.27 of the year 2013 to 2.99% of 2020) and this may affect the dividends for the following years. This is not to mention the fact that the interest rate may decrease or go up and down unstably while the expectation of hitting the previous year’s target may put more pressure on the next years. Besides, the premiums collection value might also be affected by the regulation of the Article 146đ of the Law No.17 which provides that “credit institutions put under special control shall be exempted from the deposit insurance premiums”. Those are the factors that directly affect the growth of DIV’s capital, and they should be thoroughly considered in a technical view. 

In order to harmonize the benefits of “purchasing long-term bonds for participation in restructuring of CIs” and “investing in Government’s bonds” as well as to ensure the revenue for stable growth and development of the total capital, DIV needs a proper allocation of its existing idle capital. This is not an easy job for many difficulties arise from the beginning with information gathering and building plans. The purchase of long-term bonds depends on the SBV’s decision in one hand , and the outstanding capital amount by the time of the purchase in the other hand which may be far different from the planned allocation ratios of capital for long-term bonds purchase and investment in government’s bonds. For effective allocation of capital to investment and participation in restructuring, we need a solution that meets basic requirements in short term and ensures stable and sustainable development in long term.

Legal framework and practice of investment

In terms of investment, the Law on Deposit Insurance narrows the scope of investment by DIV as compared to that of the time prior to 2013 (from 06 groups of instruments for the period 2000-2004 and 07 groups for 2005-2012 down to just 03 instruments – of which only the Government’s bonds make rather good returns. The DIV’s purchase of long-term bonds is aimed to join the weak CIs restructuring, but in fact DIV’s funds management and usage has not been accordingly broadened both in legal documents and practice. In the meanwhile, the inconsistencies between the Law on Deposit Insurance and the Law No.17 and the Circular No. 20 hinder DIV’s active role in allocating its capital that may lead to the dilemma of “must purchase bonds to avoid capital stagnation despite low interest rates, and not allowed to sell bonds even at high rates”. Also, the principle that DIV could only “buy and hold to full maturity” government’s bonds and long-term bonds in future may increase risks relating to changing rates and value of assets due to not having rights and plans to sell at high rates and in need for the purpose of prompt insurance payout duties. If allowed to sell bonds at its discretion, DIV would build plans for holding its assets and define limits for maturities, then harmonize the ratios of capital for buying long-term bonds, avoiding to focus on sensitive and dependent assets, relieving pressure on extending maturity just for fulfilling planned targets.  

“Buying and holding bonds to the maturity”

Almost DIV’s total idle capital (approximately 95% of its total capital) is now for investment, while the reserve fund for payout of 190 billion dongs at present is just enough for DIV to realize its legal duty in small failures of People’s Credit Funds. In case of dealing with failures of commercial banks, DIV would not be able to promptly access its huge capital invested in bonds which are in middle or long terms and must be hold until the maturity. Therefore, the rule of “buying and holding bonds to the maturity” makes it difficult for DIV to sell its invested bonds in order to balance its portfolio of long-term bonds. As this rule has not been modified yet, the sale of long-term bonds would create more pressure on DIV in future.   

Besides, there are cases that the assisting CIs appointed by SBV to join the restructuring might not do their jobs well, and DIV is not allowed to choose the best assisting CIs at its discretion for working together based on contracts, or the CIs under special control cannot be viable even after taking the recovery methods as approved. In those cases, the high risk is that the principals and the interests of the long-term bonds that have been purchased by DIV at maturity would not be recovered in all or in parts. So the rule of “buying and holding bonds to the maturity” challenges the recovery of capital before the maturity for other purposes for some following reasons:

- The participation in the CIs restructuring through the long-term bonds purchase is the commitment and financial assurance for DIV’s role and prestige;

- The long-term bonds issued by assisting CIs to DIV are of a special type not only in term (“long-term” means a period of time equivalent to a recovery cycle of the CI put under special control) but also in criteria, conditions and requirements for the assisting CI – a special type of CI.  

- The definition of “term” of long-term bonds is still unclear for the design of term should be based on the expected time for implementing a recovery plan – than means the time might be decided by SBV or contracted between DIV and the assisting CI. The term has not been clearly defined but it should facilitate the duties performance of relevant parties in a recovery plan.  

- The long-term bonds issued by the assisting CIs are not featured with high interest rates as usual because the long-term bonds purchase is not an investment but a duty of DIV to join the restructuring.

Risk of capital loss and reduction

In theory, all debt instruments (including government’s bonds) have risks at every period of time, and a great example is the sovereign debts crisis in Europe in the past. The issuance of long-term bonds for the sake of weak CIs restructuring should obey the Ministry of Finance’s regulation on risk provision and in fact bears not high risks as DIV shall purchase the bonds upon SBV’s decision and the assisting CIs approved by SBV must have good ratings. Therefore, in case the purchase of long-term bonds issued by assisting CIs would be implemented with an interest rate support or with a lower rate than that of tools invested by DIV, then the purchase would make a capital cut down which affects the final revenue of DIV. This may be the worst risk of the purchase for DIV.  

The purchase of long-term bonds would be carried out with a volume, term and interest rate as defined in the recovery plan and as decided by SBV. This makes DIV difficult to be active in allocating and taking full advantages of its resources. Specifically, DIV would be unable to buy bonds when it has idle capital leading to a failure to fulfill its business plan and ineffective funds management with temporary capital stagnation and/or capital shortage. Moreover, the development of recovery plans usually takes long time and DIV should await SBV’s approval for every step resulting in retarding the bonds purchase. There should be a detailed plan of actual revenue and expenditure, for effective monitoring of costs and savings for building the best reserve funds which may accrete a pool of idle capital available in time and improve DIV’s funds management efficiency.   

Below is a detailed proposal for DIV to purchase long-term bonds issued by assisting CIs.

A practical plan for DIV to buy long-term bonds issued by assisting CIs

As analyzed above, with the existing financial resource and challenges, DIV would use arising idle capital for both investment and purchase of long-term bonds for participation in restructuring while ensuring to realize its public policy objective of a deposit insurer in case of payouts. For the period 2022-2025, the annual arising idle capital is expected to be 16 trillion dongs on an average for both the 02 tasks.

Expected arising idle capital of DIV for the period 2022-2025

Unit: billion dongs

- In short term, in the first year of purchasing long-term bonds, DIV should take a humble ratio of annual arising idle capital at around 10% for maximum (equivalent to 1.6 trillion dongs) and in the next years gradually increase this ratio but not over 30% (around 5 trillion dongs).

- In middle term, it is advisable to establish a spare fund for buying long-term bonds for the sake of participation in restructuring (may be called “Restructuring Fund) - separate from the Professional Reserve Fund used for paying out insurance to depositors. Based on reviewing practices in some countries like South Korea (with 40% of capital for resolution and restructuring and 60% for priority purposes), Indonesia (80% of capital for payout, liquidation and restructuring, and 20% for a Reserve Fund), DIV could set up a proper ratio to allocate its capital to a Restructuring Fund in consideration of Vietnam’s condition and DIV’s capacity.

At present, the Law on Deposit Insurance is in the process of amendment and supplementation to be consistent with the Law No 17 and the Circular 20. If this process has not been finished when SBV decides a purchase of long-term bonds issued by the assisting CI(s) namely A and/or B,...DIV would consider the ratio of capital allocation in the annual plan that has been approved by SBV and the idle capital available at the time of purchase. In case the practical conditions do not meet the requirements for the purchase, DIV should make a report on that situation to SBV. DIV’s usage of its capital to buy long-term bonds issued by assisting CIs at SBV’s discretion and on meeting all practical requirements may be realized with the following suggestions:

1. DIV would temporarily purchase long-term bonds issued by assisting CIs for the purpose of assisting the restructuring weak CIs (the leading priority);

2. In the phase of building a recovery plan for a CI under special control, DIV proposes to have a financial support – in accordance with the SBV’s guidance in the Document No. 2166 that DIV should have detailed proposals on the purchase of long-term bonds. The fact is that beside the task of participation in restructuring weak CIs through buying long-term bonds issued by assisting CIs, DIV has to maintain its activities to realize its task as assigned in the Law on Deposit Insurance through hitting at the same time all targets (of performance, labor – wage, finance) as stipulated by laws, contributing to improve its financial capacity for further taking new assignments in the future when the amended Law on Deposit Insurance comes into effect.

3. For the interest rate of long-term bonds for purchase, DIV would consider and compare with the market’s reference rates of the Government’s bonds with the same term at the time of purchase so that the purchase could be made at the rate not lower to that of the government’s bonds. Besides, DIV would also take a look into the performance of the issuing CIs, consider SBV’s request and the approved recovery plan for the weak CI.

4. For the term of the bonds to be purchased, DIV would take the term equivalent to the time for the implementation of the recovery plan and the term of conventional bonds for raising capital issued by commercial banks as assisting CIs; in other cases, DIV would report to SBV for decisions.

5. For the volume of bonds to be purchased, with the above-mentioned financial capacity, DIV could promptly meet a requirement to assist People’s Credit Funds under special control. However, for commercial banks under special control, DIV would make a line for allocation of its resources to support an assisting CI to take part in the restructuring on the basis of the available idle capital amount. Other cases would be reported to SBV.

Some recommendations

For a sustainable solution for the DIV to purchase long-term bonds issued by assisting CIs so that DIV would take its part in the restructuring as stipulated by existing laws, the following recommendations should be considered by relevant parties:

- The National Assembly should promptly take the amendment of the Law on Deposit Insurance into its agenda of laws and ordinances construction.

- The Prime Minister should approve the Development Strategy of Deposit Insurance so that the roadmap proposed in the Strategy would not be outdated; guide the review of the Law on Deposit Insurance implementation so that the results would be incorporated in the amendment of the Law on Deposit Insurance and relevant laws; direct relevant ministries and agencies to submit drafts of relevant by-laws in accordance with the amended Law on Deposit Insurance.   

- The Ministry of Finance should have a plan soon to amend or change the Circular 20 to be consistent with the amended Law on Deposit Insurance; and to ensure a financial regime for DIV in accordance with the Development Strategy of Deposit Insurance and the amended Law on Deposit Insurance.

- SBV should soon promulgate guiding documents for the implementation of the Law No 17 and/or for the DIV’s purchase of long-term bonds issued by assisting CIs, make report to the Government for a submission of the draft amended Law on Deposit Insurance and relevant laws to the National Assembly; lead the construction of and report to the Government guiding documents for implementing the amended Law on Deposit Insurance as required; continue the review of the Law No 17 as recommended by DIV.

- DIV should consult relevant agencies to promptly accomplish the draft of the amended Law on Deposit Insurance for SBV’s submission to the Government and the National Assembly; update the approval of the Development Strategy of Deposit Insurance. While awaiting the SBV’s promulgation of guiding documents for purchasing long-term bonds, DIV should build its internal regulations on the sale of long-term bonds as planned, disseminate the regulations and make report to SBV. Especially, DIV should build a plan and design highly practical training programs on the participation in special control of CIs, purchase of long-term bonds issued by assisting CIs as well as launch communication campaigns on the DIV’s new task of participation in the restructuring of CIs under special control.