Approval of the Project on restructuring the credit institution system in association with bad debt settlement in the 2021-2025 period: Studying, reviewing, amending and supplementing the Law on Deposit Insurance


One of the solutions for a comprehensive legal framework stated in Decision 689/QD-TTg dated June 8, 2022 approving the Project “Restructuring the system of credit institutions (CIs) in association with bad debts settlement in the period of 2021 - 2025” (Decision 689) is researching, reviewing, amending and supplementing the Law on Deposit Insurance (Law on DI) and relevant legal documents. In particular, functions and tasks of the Deposit Insurance of Vietnam (DIV) participating in restructuring weak CIs need to be reviewed and completed.

Ensure the legitimate interests of depositors

One of the viewpoints stated in Decision 689 is that “restructuring the system of CIs associated with bad debt settlement is an objective requirement, inheriting the results of the previous period, overcoming shortcomings and limitations, and proactively responding to challenges in the new period. It has to be implemented comprehensively, prudently, and step-by-step, ensuring compliance with the socialist-oriented market principles, openness and transparency; making maximum use of CIs' available resources to self-handle; maintaining stability and safety in order to prevent crisis conditions or failures of CIs; ensuring the legitimate interests of depositors.”

Therefore, ensuring the legitimate interests of depositors is one of the Government's key directions when formulating and promulgating Decision 689.

Among the grouping of general solutions of Decision 689, there is a solution, that is, “improving the legal framework on currency, banking activities, restructuring and resolving bad debts in compliance with principles of the market economy properly, targeting towards international practices and matching with Vietnam's conditions.”

Accordingly, as regards the legal framework for restructuring and handling bad debts of CIs, the research, review, amendment and supplementation of the Law on State Bank of Vietnam (SBV), Law on CIs, Law on DI and relevant legal documents is implemented in the following directions: (i) Study, develop and complete support mechanisms for CIs participating in restructuring weak CIs to minimize negative impacts on their operations and financial conditions; (ii) Do research and supplement functions and tasks of the DIV to participate in restructuring weak CIs; (iii) Do research and develop loan valuation standards (including bad debts) in order to create a legal basis for loan valuation process, ensuring objectivity in the loan valuation (including bad debt).

The Law on DI amended to further enhance DIV’s roles in restructuring CIs

It is said that the Law on DI No. 06/2012/QH13 approved by the 13th National Assembly on June 18, 2012, effective from January 1, 2013, marked a significant milestone in its development as well as affirmed the important role of the DI policy in Vietnam. According to the Law, social relations arising in the field of DI are governed independently by a separate law. In the past, these relationships were regulated in many different sub-law documents of the competent authorities.

The Law on DI has regulated a full range of DI activities such as: goals, principles, state management agencies in DI, insured persons, rights and obligations of the deposit insurer, organizations participating in DI, DI participation certificates, DI premium, the time triggering DI reimbursement, DI coverage and so on.

Implementing the provisions of the Law on DI, legal documents related to DI activities, especially the SBV’s governing documents on DI, the DIV has gradually innovated itself, improved its operational performance, actively participated in handling weak people's credit funds (PCFs), safely managed its capital resources, and improved its financial capacity. In particular, the DIV has attached great importance to the supervision and examination of PCFs.

Through supervision and examination of insured institutions, the DIV has actively requested the SBV to consider and handle violations of regulations on deposit insurance or violations of regulations on operational safety, threatening the stability of the banking system. Besides, the DIV has also actively promoted and diversified channels for disseminating DI policies, including the Law on DI, in order to maintain depositors’ confidence in insured institutions, prevent bank runs when spreading rumors detrimental to the safety of the banking system. When an insured institution becomes illiquid, the DIV also reimburses depositors properly and timely so that the depositors’ trust is always firmly maintained.

It can be certain that, for the past years, thanks to the effective implementation of the Law on DI - the highest legal framework for DI activities in Vietnam, the legitimate rights and interests of depositors have been guaranteed, and the stability of the CI system has been  continuously maintained.

The introduction of the Law on DI has shown the positive development of the DI policy in Vietnam, overcoming the shortcomings and limitations of the previous mechanism on DI by supplementing the provisions which have higher regulatory enforcement and incorporating advanced international practices on DI. However, after ten years of implementation, the Law on DI has also exposed a number of shortcomings and limitations as some certain regulations have not been specified in the Law on DI yet, or they are unclear or not consistent with other laws.

In particular, a number of provisions in the Law on DI need to be amended and supplemented to ensure consistency with the Law amending and supplementing a number of articles of the Law on CIs, and  at the same time, creating a basis for the DIV to implement newly-assigned tasks. More specifically, on November 20, 2017, the National Assembly passed the Law amending and supplementing the Law on CIs (the Law on CIs Amended 2017), in which the DIV was assigned a number of new tasks such as: coordinating with the Special Supervisory Board in assessing feasibility of recovery plans towards financial companies, PCFs and especially microfinance institutions placed under special control; coordinating with the Special Supervisory Board to develop bankruptcy plans towards CIs placed under special control, providing special loans to CIs placed under special control and purchasing long-term bonds of assisting CIs.

Although the legal regulations on participating in the restructuring of CIs initially created conditions for the DIV to promote its role in restructuring the system of CIs, the regulations on the powers of the deposit insurer in the Law on DI have not been harmonized with current legal documents on restructuring, hindering the DIV’s active participation in this process.

To be more specific, regarding the rights and obligations of the deposit insurer, in Clause 2, Article 148 and Clause 1, Article 152a of the Law on CIs amended 2017, the deposit insurer participates in the process of formulating restructuring plans. QTDND. However, the provisions on the rights and obligations of deposit insurer in the Law on DI are not sufficient enough for the DIV to participate more deeply in the restructuring process of CIs (for example, participating in supporting supervision and examination of PCFs, participating in developing restructuring plans for PCFs, providing special loans for PCFs placed under special control, and so on).

Regarding providing special loans to CIs placed under special control, the Law on CIs amended 2017 stipulates that the DIV gives special loans to financial companies, PCFs, and microfinance institutions; the DIV buys long-term bonds to assist CIs under the decision of the SBV, but these regulations have not been included in the Law on DI.

Towards the year 2025 to reduce the number of CIs, basically handle problem banks

Also in Decision 689, a viewpoint of restructuring the system of CIs is “considering a comprehensive legal and institutional framework the key solution to create a solid legal foundation and remove difficulties and obstacles arising in reality to perform the restructuring of the system of CIs, handle weak CIs in a safe, effective and transparent manner.”

Regarding the overall objectives in Decision 689, (i) Create a clear and substantial change in the restructuring of the system of CIs associated with bad debt settlement; strive to reduce the number of CIs by 2025, basically dealing with weak banks, preventing the occurrence of potential weak banks, the system of CIs develops soundly and sustainably; (ii) Develop a CI system in the direction that domestic CIs play a key role, operating in a safe and sound, qualified, efficient, open and transparent manner, meeting the standards of safety in banking operations in accordance with the Law and close to international practices, aiming to reach the developmental level of the grouping of 4 leading countries in the ASEAN region; (iii) Promote bad debt settlement, improve credit quality, prevent and minimize emerging bad debts; improve the financial capacity of CIs; prevent cross-investment, cross-ownership and manipulative and dominant ownership of CIs.

Specific objectives are as follows:

(i) Pilot implementation of Basel II using the advanced method at state-owned commercial banks holding dominant shares and joint stock commercial banks with good governance quality that have completed the application of Basel II using the standard method by the end of 2025; striving by 2023, the capital adequacy ratio (CAR) of commercial banks will reach at least 10 - 11%; by 2025, reaching at least 11 - 12%; (ii) CIs have to take measures to ensure the amount of charter capital by 2025 as follows:

- For existing CIs (excluding commercial banks, financial companies, financial leasing companies being weak, placed under special control, being restructured by competent authorities):

+ For commercial banks: (i) The group of domestic commercial banks with financial capacity, competitiveness, and large scale: minimum charter capital of VND 15,000 billion; (ii) The group of domestic commercial banks with financial capacity, competitiveness, small and medium scale and commercial banks with foreign capital: the minimum charter capital is 5,000 billion VND;

+ For financial companies: the minimum charter capital of VND 750 billion;

+ For financial leasing companies: the minimum charter capital of VND 450 billion;

+ For commercial banks, financial companies, financial leasing companies being weak, placed under special control, being restructured by competent authorities: capital raising plan shall comply with the approval of the competent authority.

(iii) Strive to have at least 2-3 commercial banks in the top 100 largest banks (by strength criterion) in Asia; complete the listing of shares of joint-stock commercial banks on the Vietnamese stock market and strive to have 1-2 banks listing their shares on the international stock market.

(iv) Develop digital banking models, promote utilities and customer experience, and realize the goal of financial inclusion and sustainable development on the basis of promoting the application of new and advanced technology in the management and supply of products and services in the direction of process automation and optimization of business operations.

(v) Utilize the achievements of the 4.0 Industrial Revolution to upgrade and develop the payment infrastructure and non-cash payment services, to meet the payment needs of organizations and individuals in a convenient and efficient way; ensure security, safety and confidentiality in the non-cash payment operation and protect the legitimate rights and interests of payment service users.

(vi) Strive to increase the proportion of income from non-credit service activities in the total income of commercial banks to about 16 - 17% by the end of 2025. Increase bank credit capital invested in low-carbon manufacturing and domestic consumption industries.

(vii) Develop the PCF system in accordance with the objectives and principles of the type of cooperative credit institution, relevant to the Law and international practices; operate in a safe, efficient, stable and sustainable manner, meeting the capital needs, improving the financial access of PCF members, aiming at the main goal of mutual aid among PCF members to serve production, business, and improve living standards, especially in rural and remote areas.

(viii) Develop a system of microfinance institutions to operate safely, effectively and sustainably, aiming to serve the poor, low-income people, women, and microbusinesses with a variety of financial products and services that are flexible and suitable, contributing to the implementation of the Party and State's policy on ensuring social security and sustainable poverty reduction.

(ix) Complete the model, functions and operating mechanism of the Cooperative Bank with sufficient financial capacity, enhancing the governance capacity, administration, control, operational safety, effectiveness, and sustainability to perform well its role as the bank of all PCFs (implementing systemic connectivity, providing financial support, regulating capital, ensuring the safety of the PCF system), promoting the development of other types of the collective economy as cooperatives nationwide.

(x) Strive to the end of 2025, the ratio of bad debt on the balance sheet of the system of CIs, bad debt sold to the Vietnam Asset Management Company (VAMC) but unresolved and recovered and potential bad debt is at less than 3% (excluding weak commercial banks).

Department of Research and International Cooperation