Deposit insurance policy contributes to economic development in the Northern Midlands and Mountains

14:46-07/04/2022

Protecting depositors, contributing to ensuring the safe and sound development of banking activities is the starting point and the goals of the Deposit Insurance of Vietnam (DIV).

 The DIV was founded in 1999 and officially came into operation on July 7, 2000, in line with other countries’ deposit insurance systems. Depositors’ confidence in the State, the law, as well as credit institutions has been strengthened. In the past, people used to be concerned that if the credit institutions failed, they would lose all of their savings. But now, people have a mechanism to protect them when risk occurs.

Within the legal framework of the DI policy, the DIV participates in the whole existence of a credit institution: from its establishment (issuing a certificate of DI participation), its operation (disseminating DI policy; regularly supervising and examining; participating in the special control process and handling difficulties of credit institution) and its termination (reimbursing insured deposits).

The DI policy in Vietnam is clearly regulated in the Law on DI and other guiding documents issued by the Government, the State Bank of Vietnam and the DIV. Accordingly, the participation in DI mechanism is mandatory; all credit institutions, foreign bank branches that are allowed to mobilize individual deposits in Vietnamese dong (except the Bank for Social Policies) are responsible for paying deposit insurance premium; the depositor is the protected object, who is entitled to the insurance coverage when a statutory event occurs; and the DI coverage limit for each period of time is set by the Prime Minister. Thus, the deposit-taking financial institutions must pay DI premium, while depositors are the ones receiving the protection without paying anything.

Over 20 years of operation and development, the credit mechanism and policies in general and DI policy have been constantly researched, revised and improved. Particularly, the DI policy on DI coverage limit has changed three times, from VND 30 million in 1999 to VND 50 million in 2005, to VND 75 million in 2017 and most recently increased to VND 125 million/depositor/member institution since December 12th, 2021. The adjustment of DI coverage limit shows the State’s concern for the legitimate rights and interests of depositors. With the new DI coverage limit, the DIV could protect the majority of depositors (almost 91%), particularly all retail depositors – who will be hit hardest when bank is insolvent. This proves that the DI policy has closely followed the market, reflecting and ensuring the majority of depositors’ wishes and aspirations, improving people's faith in the credit institutions system, attracting idle cash flow for economic and social development.

The DIV has assigned the Northwestern branch (Branch) to oversee 101 People’s Credit Funds (PCF) in 8 northern provinces of Vietnam, including 7 provinces in the Northern midlands and mountainous areas. This region is known to be inhabited by many ethnic minorities, whose economy is primarily agriculture, forestry, handicrafts, and small businesses; unfavorable natural conditions: rugged terrain, erratic climate changes (rainstorms, severe cold, flash floods, etc.), which directly affect traffic, life and economic development of the area.

In urban areas, the economy is more developed; credit institutions are becoming highly competitive; commercial banks are growing robustly and frequently run promotions to attract customers. Meanwhile, in the Northern Midlands and Mountains, the PCFs are more popular. PCFs are known as a source of funding for those with limited financial capacity (low-income individuals, households, small businesses, etc.) and have trouble accessing capital from commercial banks.

Abundant capital from PCFs has helped millions of households in the Northern midlands and mountains in particular and across the country in general have access to cheap loans, enabling people to overcome difficulties, transform operating model, expand the business scale, improve the production and business efficiency, contribute to economic restructuring, increasing income, sustainably reducing poverty, building new rural areas, and ensuring social welfare. As a result, the illegal credit market of spontaneous individuals and organizations is gradually narrowing, and the State gains advantages in economic management and development. In many areas, deposit mobilization sources have basically met people’s borrowing needs without having to arrange a regulatory capital source from superior commercial banks or capital from other financial institutions.

With the characteristics of the assigned areas, which are mostly midlands and mountains with difficult economic conditions, low level of literacy, and restricted access to the mass media, there is a limited comprehension of the credit system and the DI policy. Therefore, in the coming time, the Branch will further promote the dissemination of DI policy to every citizen (particularly the new DI coverage limit of VND 125 million/person/credit institution, which took effect on December 12th 2021) in order to improve people’s confidence, reduce the risk of bank run, contribute to the safe and stable operation of banking system and economy. At the same time, the Branch will enhance the role of supervision, examination, early detection of violations of DI and banking prudential regulations to report and propose to the SBV for prompt resolution; actively participate in the process of special control, restructure weak credit institutions, minimize the failure of credit institution, comprehensively protect the interests of depositors, attract idle capital from people, contributing to socio-economic development of the region.

Research & International Cooperation Department