These results have made a significant contribution to improving public confidence in the national financial safety net, accelerating the process of capital mobilization, ensuring monetary and social security and developing the economy. However, over 10 years in operation, the policy on deposit insurance has showed some shortcomings relating to issues such as the coverage, the role of DIV in the financial safety net and handling bank failures. It affects the protection of depositors’ rights. It is urgently needed to adjust the policies on deposit insurance in order to make them consistent with conditions in Vietnam and international practices through the issuance of the Law on Deposit Insurance.
The coverage is too low
Now, DIV reimburses the insured depositors up to the coverage of VND 50 million per insured account at an insured institution. This coverage was stipulated since 2005 based on criteria for protecting the majority of depositors. It was high enough to encourage the depositors but does not cause moral hazard and create belief effect. Now, such reimbursement is too low because the coverage was set up in 2005 based on per capita income of over USD 700 while the current per capita income is about USD 1,200. At the same time, due to the volatile domestic and international financial markets, it is very important to build and enhance confidence of the depositors. Too low coverage will have an adverse impact on public confidence. Mr. Cao Sy Kiem – Former Governor of the State Bank of Vietnam and Chairman of the Association of Small and Medium-Sized Enterprises stated: “The coverage of VND 50 million is too low”.
Economic experts and even depositors in poor rural areas think that the coverage is a matter of concern for policymakers. A depositor named Nguyen Van Phan contacted us at home, saying he felt encouraged because he got money back when Vinh Phong People’s Credit Fund, Dong Phong Commune, Vinh Thuan District, Kien Giang Province went bankrupt. He said: “I’m very happy because I have had my money back. It is the amount of money that my family has saved for years. If there was not DIV , I would lose all of my money”. When asked about the reaction of people to the bankruptcy of Vinh Phong People’s Credit Fund, the Chairman of Vinh Phong Commune said: “People feel secured because they have already been kept fully informed that DIV will ensure to reimburse insured depositors when the Credit Fund goes bankrupt. If there was not DIV, the situation would be much more complicated, even the depositors at other Credit Funds would withdraw money and cause contagions of bank failures. Dong Phong is a poor commune. However, on large scale, the coverage of VND 50 million reimbursed the insured depositors is low. Therefore, the coverage need to be increased in order to enhance public confidence”.
The role of the Deposit Insurance of Vietnam in the financial safety net is still minor
The definition of the financial safety net is widely used in the world consisting of the structure of institutions which supervises the national financial system. According to international practices, the financial safety net includes 4 members such as: The National Financial Supervisory Commission, the State Bank, the Ministry of Finance and the Deposit Insurer. Each country has different regulations but in order to supervise effectively, the law clearly stipulates the area of each institution’s supervisory section to avoid overlapping and gaps among supervisory sections. The national financial safety net has not been clearly defined in legal documents especially regarding the role, responsibilites of institutions in charge of exercising financial supervision. “The role of DIV in the financial supervision has not been clearly defined”, said Dr. Duong Thu Huong – Secretary General of the Vietnam Banks Association. In accordance with the current law in force, DIV supervises, inspects the observance of deposit insurance regulations and safety regulations in the operation of the insured institutions. The insured institutions are required to provide documents, information, reports and statements on business activities regularly or irregularly; implement measures to amend violations of safety regulations on banking activities and the risk of losing affordability. However, the current law does not stipulate penalties for the violations of the insured institutions. Therefore, it will reduce the efficiency and effectiveness of supervision.
Process of handling bank failures is still insufficient
Banking activities have particular characteristics. Different from normal failures of enterprises, failures of credit institutions adversely affect not only the failed credit institutions but also many others, even the whole economy. Therefore, the process of handling bank failures needs to be paid particular attention and carried out by particular measures. According to international practices, when handling cases of bankruptcy, people usually try to reach the goal of economic efficiency and effectiveness with a view to minimizing resolution costs and bringing maximum benefits for depositors. It is widely defined that DIV plays important roles in the process of handling credit institution bankruptcy and achieving goals through professional activities for example bridge banks, financial assistance, reimbursement for depositors... However, in accordance with the current law of Vietnam, the process of handling credit institution failures still reveals shortcomings, especially there has been no rules or regulations on credit institutions’ failures. For instance, it has not clearly defined bank failures and dissolution. The roles performed by DIV in handling bank failures through professional activities such as financial assistance (the process, procedures, initiatives) and asset liquidation (council’s liquidation activities) are still limited. Especially, some professional activities undertaken by DIV to handle failures have not been enshrined in the law, for example regulations on debt purchasing, bridge bank, etc...
It is necessary to promulgate the Law on Deposit Insurance
The above-mentioned shortcomings stem from practical activities and require lawmakers to apply necessary adjustments to policies relating to DIV’s activities to make them more appropriate so that DIV implements its functions to protect the depositors well and contribute to ensuring the safety and soundness of bank system. “It is necessary to increase the coverage reimbursed for the insured depositors to ensure the depositors’ rights”, said Dr. Duong Thu Huong – Secretary General of the Vietnam Banks Association. Meanwhile, roles, functions and duties of supervisory institutions in the national financial safety net need to be clearly stipulated for supervisory section, mechanism of dealing with violations to ensure the efficiency and effectiveness of supervision. It is necessary to amend current laws and regulations on failure resolution including the Law on dissolution, bankruptcy and handling bank failures. Especially, the Laws need to clearly provide the role of DIV in handling credit institution bankruptcy in order to make it easier for DIV to handle credit failures effectively. The issuance of the Law on Deposit Insurance is key to surmount current shortcomings of the Policies on Deposit Insurance in force and it lays an important foundation for DIV to protect depositors, contribute to ensuring the safety and soundness of the banking industry.