Roles of the Deposit Insurance of Vietnam in restructuring Credit Institutions through purchasing long-term bonds and special lending under the 2024 Law on Credit Institutions

Roles of the DIV stipulated in the 2024 Law on Credit Institutions

Under the 2017 Law on CIs, the DIV participated in restructuring troubled CIs only at the special control and bankruptcy stages. However, according to the 2024 Credit Institutions Law, the role of the DIV has been enhanced, allowing it to engage in the restructuring of problematic CIs at all stages, from the normal stage to the bankruptcy stage, specifically:

Normal and early intervention stages: the DIV provides special loans to commercial banks, the Cooperative bank, People’s Credit Funds (PCFs), and microfinance institutions that suffer bank-runs.

Special control stage: the DIV waives deposit insurance premiums; participating in evaluating the feasibility of recovery plans, plans for merger, consolidation, transfer of 100% of shares of PCFs placed under special control; providing special loans in the following cases: for commercial banks, the cooperative bank, PCFs, microfinance institutions placed under special control that experience bank-runs; for commercial banks, the cooperative bank, microfinance institutions put under special control to implement recovery plans; for compulsorily transferred commercial banks to support the implementation of compulsory transfer plans; purchasing long-term bonds of CIs obligated to take over commercial banks.

Bankruptcy stage: Participating in developing bankruptcy plans for CIs placed under special control; coordinating with the CI in reimbursing depositors under the approved bankruptcy plan.

Regarding financial support, the DIV is now involved in more stages and the beneficiaries of financial support from the DIV have also been adjusted by the 2024 Law on CIs to be more appropriate.

Regarding the purchase of long-term bonds, the 2024 Law on CIs retains the SBV’s authority  to decide on the DIV purchasing long-term bonds, but the entities issuing long-term bonds to the DIV have been adjusted from CIs supporting the implementation of recovery plans to CIs obligated to take over commercial banks placed under special control.

Concerning special lending, although there are no specific provisions on the authority to decide on special lending, under the 2024 Law on CIs, the DIV can proactively make proposals on this issue so that relevant authorities can consider these proposals in amending the Law on Deposit Insurance. Regarding the cases for special lending and entities eligible for special loans, the 2024 Law on CIs removes the provision on lending to support liquidity and lending based on the SBV’s decision, keeps the provision on lending to support recovery plans of the 2017 Law on CIs with some adjustments to the entities eligible for loans. Additionally, it adds cases for lending to commercial banks under compulsory transfers and lending to commercial banks, the Cooperative banks, PCFs, and microfinance institutions experiencing bank-runs.

The amendments to the provisions on entities issuing long-term bonds to the DIV, the entities eligible for loans, and the cases for receiving special loans from the DIV reflect the DIV’s enhanced role and function in the restructuring of CIs towards participating more extensively and deeply in the process, and contributing more financial and human resources to the new tasks. Therefore, the DIV’s management capacity, role, and position in the banking sector are improved to suit the current situation.

Purchasing long-term bonds and special lending – opportunities and challenges to the DIV

The Development Strategy of the Banking sector (approved by the Prime Minister in the Decision No 986/QD-TTg dated 8 August, 2018) sets out 11 tasks, measures. The content related to the DIV mentioned in measure 8c - includes requirements and a roadmap for implementing several law building projects, among which the project of the amended Law on Deposit Insurance is expected to be completed in the 2021-2025 period. The strategy emphasizes: “developing the DIV in the form of a one-member limited liability company...; protecting the legitimate rights and interests of depositors, contributing to maintaining the stability of the CI system...; effectively participating in the restructuring of troubled CIs...; managing investment capital... in line with international practices and Vietnamese legal regulations”.

Additionally, the Deposit Insurance Development Strategy to 2025 with orientations to 2030, approved by the Prime Minister in Decision No. 1660/QĐ-TTg dated December 30, 2022, clearly affirms the viewpoint “enhancing the role of the deposit insurer in the restructuring process... attached with resolving bad debts”.

Therefore, the provision on the participation of the DIV in the restructuring of problematic CIs, previously limited to the special control and bankruptcy stages (according to the 2017 Law on CIs), has been revised to allow for the DIV’s involvement in all stages (according to the 2024 Law on CIs). The role of the DIV has been specified in line with the DIV’s “pay-box plus” operational model : expanding the DIV’s role, forms, and measures of support, as well as the types of CIs being supported.

Opportunities

According to the provisions of the 2024 Law on CIs, the DIV has a role in resolving and restructuring troubled CIs at all stages, including during the normal stage in case of bank-runs. It can be seen that the 2024 Law on CIs allows the DIV to:

- Engage more extensively and deeply in the restructuring of troubled CIs, thus enhancing the role and position of the DIV. Simultaneously, the DIV can improve its management capacity and supplement high-quality human resources for the resolution of troubled CIs, accelerating the resolution process to contribute to ensuring the safety of the CI system – thereby best protecting depositors;

- Diversify the forms of support and the beneficiaries of support in the process of restructuring problematic CIs. The DIV can provide direct financial support through special lending or indirect financial support through purchasing long-term bonds from CIs obligated to take over compulsorily transferred commercial banks. Special lending and long-term bond purchases by the DIV contribute additional financial resources to the process of resolving troubled CIs. CIs have additional resources to make payments to depositors in the event of bank-runs or to implement recovery plans and compulsory transfer plans.

Receiving funds from the DIV through long-term bond issuance will help CIs obligated to take over compulsorily transferred commercial banks to supplement resources to fulfil their mandated tasks. For compulsorily transferred commercial banks, receiving funds from healthy CIs, which are derived from bond issuance to the DIV, will provide them with additional capital to support their business operations, organizational restructuring, management, and governance to address financial problems and bad debts.

The amendments to the entities issuing long-term bonds, as well as the entities and cases eligible for loans from the DIV, are suitable for the current situation,  where there have been cases of CIs experiencing bank-runs and urgently needing financial support to overcome difficulties. Additionally, providing special loans to commercial banks under compulsory transfer and purchasing long-term bonds of CIs obligated to take over helps accelerate the transfer process, given the current slow progress in the compulsory transfer of commercial banks. While long-term bond purchases may not be an investment tool, they lay the groundwork for the DIV to propose purchasing these assets as investment tools in the medium term, based on market supply-demand relationships and agreements between the DIV and CIs etc.,

The DIV’s special loans and long-term bond purchases help:

1. The DIV gain practical experience in resolving and supporting the restructuring of the CI system; (ii) Diversify the forms and use of operational capital in general, and temporary idle capital (TIC) in particular. This improves financial management capacity; analytical, forecasting, and evaluation capabilities; and the ability to allocate resources efficiently (in a balanced and flexible manner to achieve restructuring objectives, complete political tasks, and investment goals to ensure revenue and safe capital growth). Forecasting and planning capital use for various priority goals support the ability to respond to and manage risks of capital loss, and declines in the Operational Provision Fund – contributing to fulfilling public policy objectives on deposit insurance.

Participating in the restructuring of CIs through activities such as purchasing long-term bonds and providing special loans is not only a new political task for the DIV but also helps the DIV diversify the use of capital for various purposes, contributing to enhancing the DIV’s financial capacity and position. This aligns with the “pay-box plus” model and moves towards the “risk minimizer” model, common among advanced deposit insurers worldwide.

Challenges

Alongside the opportunities, the DIV also faces several challenges when implementing tasks according to the provisions of the 2024 Law on CIs. Specifically:

As the DIV's financial resources are limited and not yet substantial sufficient, providing special loans and purchasing long-term bonds will impact the DIV’s ability to fulfill its primary task of making payouts. Notably, given that commercial banks are among the entities eligible for special loans from the DIV, and very large-sized, the DIV's financial resources may not be sufficient. In cases where all three tasks—providing special loans, purchasing long-term bonds, and making payouts—occur simultaneously, the DIV needs to allocate resources appropriately and prioritize the tasks accordingly.

Allocating TIC to participate in the restructuring process will probably reduce capital of the DIV, affecting its income, revenues, thereby affecting its payroll plan.

Purchasing long-term bonds and providing special loans pose various risk management requirements for the DIV. In particular, special lending involve lending troubled CIs placed under special control or those experiencing liquidity/payment issues due to bank runs. Therefore, special lending carry significant risks of unrecoverable losses and do not always ensure the principles of safe capital development.

The mechanism for handling losses/risks related to the DIV’s special lending is specified in Circular 20: “The DIV is allowed to use the balance of income derived from special lending to CIs placed under special control, which is separately monitored in the Operational Provision Fund, to cover irrecoverable losses from special loans. If this income balance is insufficient to cover the losses, the DIV must report to the SBV for consideration and decision on using the Operational Provision Fund to cover the losses according to legal regulations”. However, there are currently no additional legal regulations or guidance on this matter. The SBV and the Ministry of Finance have not yet issued any guidance for the DIV to implement this task.

Additionally, the activity of providing special loans presents several other issues, such as: (i) The DIV does not engage in assessing the feasibility of compulsory transfer plans for commercial banks, nor in assessing the feasibility of recovery plans for commercial banks, the cooperative banks, and microfinance institutions. Therefore, when providing loans in these cases, the DIV may be passive as it lacks active involvement in the assessment process ; (ii) Whether a compulsorily transferred commercial bank retains its legal status after the transfer and how loans to such banks are handled are practical issues the DIV may face.

Regarding the purchase of long-term bonds, the DIV has only revised and developed regulations and guidelines and organized basic and specialized training courses. The DIV has yet to purchase long-term bonds due to the lack of a comprehensive legal framework as well as numerous obstacles and shortcomings stemming from current investment activities. Challenges include difficulties in reasonably allocating capital for investment purposes and long-term bond purchases, as well as difficulties in developing plans for buying and selling bonds in particular, and overall financial and payroll plans in general.

Concerning special lending, no special loans have been made according to the SBV’s decision as some CIs have requested loans but not met the lending conditions.

Some measures and proposals

To realize the role of the DIV in the restructuring of troubled CIs through purchasing long-term bonds from CIs obligated to take over commercial banks placed under special control according to the SBV’s decision, and providing special loans according to the 2024 Law on CIs, the following measures are proposed:

Firstly, improving the legal framework and developing an administrative and governance system in line with the 2024 Law on CIs:

The Law on Deposit Insurance is the highest legal basis regulating the activities of the DIV. Therefore, it is necessary to promptly amend the Law on Deposit Insurance to include the roles and tasks related to restructuring troubled CIs in general, and providing special loans, purchasing long-term bonds in particular, in alignment with the 2024 Law on CIs.

The DIV needs to recommend the Government and the SBV to issue a decree and circulars providing guidelines for the DIV's purchase of long-term bonds. Additionally, the Ministry of Finance should amend or issue a new circular regarding financial regulations related to the DIV’s financial regime (such as the source of funds for purchasing long-term bonds, risk management mechanisms, loss provision, capital preservation  during the purchase of long-term bonds, special lending, interest/loss accounting, etc.) in accordance with the provisions of the 2024 Law on CIs.

The DIV should review, amend, supplement, or replace the administrative and governance documents related to long-term bond purchases and special lending. Furthermore, it should issue guiding documents to effectively implement these activities.

Secondly, enhancing the financial capacity of the DIV and allocating financial resources reasonably when participating in the restructuring process:

To effectively take part in restructuring troubled CIs through the purchase of long-term bonds and special loans, the DIV needs to have substantial financial resources. Currently, the DIV's financial resources are not sufficient, so the following measures should be taken to strengthen the DIV's financial capacity:

Expanding the investment portfolio to include purchasing local government bonds; depositing funds at commercial banks; and buying bonds, promissory notes, treasury bills, and deposit certificates issued by commercial banks. This is fully in line with the Deposit Insurance Development Strategy to 2025, with orientations to 2030.

Fulfilling premium collection plans and ensuring growth of collected premiums: The DIV’s TIC is mainly derived from annual premium income. Therefore, it is essential to fulfill premium collection plans, while improving the deposit insurance premium collection process to increase TIC and enhance the DIV’s financial capacity.

The DIV can receive funding to supplement its financial resources through mechanisms such as receiving special loans from the SBV; receiving financial support with repayment from the state budget as decided by the Prime Minister; or borrowing from CIs or other organizations with government guarantees if the DIV’s funds are temporarily insufficient to make payouts.

To effectively participate in the restructuring of troubled CIs while ensuring payout capability and fulfilling business and payroll plans, the DIV needs to balance and allocate financial resources reasonably to meet various tasks. This includes calculating the allocation of idle capital in business and financial planning, ensuring proactivity and flexibility in allocating idle funds based on specific investment and restructuring needs. Additionally, it is important to prioritize the use of financial resources when multiple tasks need to be executed simultaneously.

Thirdly, improving the quality of human resources:

The quality of human resources is a crucial factor in effectively participating in the restructuring of troubled CIs. Therefore, measures should be taken to enhance both the quality and quantity of personnel involved in the restructuring, especially those handling special loans and long-term bond purchases, which are complex tasks and where the DIV lacks practical experience. Some proposed measures to improve the quality and development of the DIV's human resources include:

In term of quality, enhancing specialized training on special lending, asset valuation, resolution, and recovery, long-term bond purchases, and other new tasks that may be assigned in the future by: organizing advanced training courses, inviting experts from CIs, the SBV, and Special Control Boards to be lecturers; holding experience-sharing seminars; sending staff abroad for training; and hiring high-quality external experts to support the DIV during the restructuring of troubled CIs; Implementing policies to encourage staff to contribute innovative ideas and actively participate in operational activities.

In term of human resource development, recruiting new, experienced personnel and implement policies to attract talent to work at the DIV. To ensure the sustainability of the DIV’s solutions for purchasing long-term bonds and providing special loans, the Government and the SBV should promptly issue decrees and circulars guiding the implementation of the 2024 Law on CIs, which include specific provisions on purchasing long-term bonds. The Ministry of Finance should amend or issue a new circular regulating the financial regime for the DIV (regarding the source of funds for purchasing long-term bonds, risk management mechanisms, loss provision, capital preservation during long-term bond purchases, special lending, and profit/loss accounting) in line with the provisions of the 2024 Law on CIs.

On the DIV’s side, it is necessary to recommend the SBV to propose that the Government should include the plan for amending and supplementing the Law on Deposit Insurance in accordance with the 2024 Law on CIs into the law and ordinance building program. This will serve as the basis for the National Assembly to amend and supplement the Law on Deposit Insurance according to the planned schedule. In addition, the DIV should proactively review and develop its governance documents regarding long-term bond purchases and special lending in accordance with legal regulations. The DIV should also draw up practical training plans and programs related to taking part in special control, purchasing long-term bond, and providing special loans, and conduct public awareness programs as to the DIV's new role in restructuring according to the 2024 Law on CIs.

Research and International Cooperation Department (translation)