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Financial capacity and depositor protection mechanism
According to the Law on Deposit Insurance, the aim of the deposit insurance mechanism are: Protecting the legitimate rights and interests of depositors, contributing to maintaining the stability of the system of credit institutions, ensure safe development and healthy banking operations.
After more than 23 years of operation, DIV has reimbursed 26.78 billion VND to 1,793 depositors at PCFs, fully fulfilled legal obligations in protecting the legitimate rights and interests of depositors. DIV has not yet had to reimburse depositors at commercial banks for any additional reimbursement obligations since 2014. The amount paid so far is not large but has helped prevent breakdowns and complaints. In particular, DIV has not needed support from the State budget yet.
Since the Law on Deposit Insurance took effect in 2013 until now, DIV has tried to make use of idle capital for investment (the ratio of investment amount/total capital from 2013 to present has always been at 95- 96%) in order to develop capital sources in the context that the Law has narrowed the investment portfolio from 6-7 tools to 3 tools, of which Government bonds make the main and major contribution to revenue (more than 99.9 %). From VND 1,000 billion in State budget capital, by December 31, 2023, the total capital of DIV is more than VND 110 billion. Along with deposit insurance premium collection, investment profit has contributed to the growth and accumulation of the professional reserve fund which helped to prepare well for reimbursement scenarios.
With the deposit insurance coverage limit according to current regulations at 125 million VND per individual at an insured institutions, DIV calculates that it can fully insure 91% of depositors, in accordance with international practices . This coverage limit is consistent with the current financial capacity of DIV to respond to risks in the following directions: Professional reserve fund ensures immediate reimbursement to 100% of PCFs (97% of public institutions); and meet the reimbursement requirements for depositors at commercial banks depending on the banking group according to capital size and rank.
However, the obligation to protect depositors should be understood more broadly than the role of pay-box, specifically, the deposit insurance mechanism must help prevent failures through examination, supervision, special control and participate in restructuring weak credit institutions, contributing to strengthening public trust. According to the provisions of the Law on Credit institutions recently passed by the 15th National Assembly at the 5th extraordinary session on January 18, 2024, DIV is given a number of additional powers and functions.
Accordingly, DIV has a role in participating in restructuring weak credit institutions right from the early intervention stage (supporting reimbursement in case of mass withdrawals) to the special control stage (coordinating to evaluate the considerations of a specially controlled PCFs recovery plan; providing special loans for commercial banks, cooperative banks and microfinance institutions); compulsory transfer stage (Credit institutions receive compulsory transfers from specially controlled commercial banks for special loans and long-term bond purchases according to the SBV's decision) and bankruptcy stage (DIV can participate in developing plans and propose limits for PCFs; participate in developing plans for other credit institutions). In particular, after the bankruptcy plan is approved, DIV "is responsible for coordinating with specially controlled credit institutions to reimburse deposit insurance to depositors" (Clause 1, Article 190); “The maximum deposit insurance coverage limit for depositors is equal to the insured individual's deposit amount at the People's Credit Fund and/or credit institution” (Clauses 2 and 3, Article 188).
This is consistent with the nature of the organization operating under the pay-box plus model that DIV is undertaking, but it also poses a problem for DIV to strengthen its financial capacity sufficiently to be ready with reimbursement plan and participation in resolution; reasonably calculate resources to protect depositors at PCFs in particular and credit institutions in general; contributing to maintaining the stability of the system of credit institutions, ensuring the safe development of banking activities such as objectives stated under the Law on Deposit insurance.
Identifying challenges in capital growth until 2025, with orientation to 2030
The "Deposit insurance development strategy to 2025, with orientation to 2030" approved by the Prime Minister under Decision No.1660/QD-TTg dated December 30, 2022 sets the general goal of improving financial capacity based on 04 specific goals: (i) increase charter capital from self-accumulated sources; (ii) diversify investment portfolio; (iii) ensure revenue from deposit insurance premium; and (iv) develop a mechanism to access support capital when there is temporary insufficiency for reimbursement.
Looking at self-reliance, the first three goals aim to ensure capital development, increase revenue through accumulation and investment, of which: basic input premium sources supplement for the professional reserve fund to reimburse and revenues from idle capital to grow capital - thus ensuring resources to reinvest and implement public policy goals on deposit insurance. However, DIV is facing some of the following difficulties:
First, the capital source and investment amount recorded next year are higher than the previous year, but the growth rate is uneven and profitability is gradually decreasing (from 9.41% in 2013 to 3.82% in 2023). The basic reason is that the Law on Deposit insurance has narrowed the investment portfolio.
Second, the investment portfolio was narrowed down, only government bonds with the ability to generate decent revenue and buy and hold until maturity, which does not create the advantage of being able to flexibly choose the term, increasing the risk of fluctuating interest rates and liquidity - affecting investment efficiency facing high interest rates the bonds cannot be sold, low interest rates the bonds must be bought. Investment interest rates dropped sharply, forcing DIV to increase the investment term to complete the plan.
Third, in case the 2015-2020 period sees growth next year that exceeds the previous year's temporarily idle capital (formed from collecting principal, interest on investments and premium), capital in the 2021 -2030 period is expected to increase: i) gradually decrease due to principal and interest income depending on investment interest rates of previous years, interest rate increase/uneven decrease, expectations of completing previous years' plans create pressure for next year; and ii) the exemption of weak credit institutions from paying deposit insurance premiums may lead to a decline in premium collection.
Solutions for sustainable capital growth to ensure financial capacity
Firstly, increasing charter capital as required by the Strategy helps maintain the proportion of charter capital on announced deposit balance in 2025 and 2030 (calculated by DIV at 0.15% - quite close to 0.17% in 2015 when the charter capital increased from 1,000 billion VND to 5,000 billion VND). Before 2013, 100% of investment revenue was accounted for as income to determine the difference reserve in revenue and compared to the current rate of about 20% (80% is accounted for in the professional fund: minus expenses, the difference will be set aside for the further develop investment fund and supplement for the fund). If it continues to be deducted at a rate of 100% (allocated to both funds), it is expected that by 2025 and 2030, the cumulative investment and development fund will be more than 11 and 20 trillion VND, meeting the target of increasing charter capital to 10 and 15 trillion VND as required.
Second, diversify investment portfolio: When the investment portfolio has a variety of tools, flexible channels and forms, assets held with diverse terms and interest rate support, principal and interest income will grow steadily .This is the basis for ensuring input resources to develop optimal plans and solutions against fluctuations, improving investment efficiency – contributing to stable capital growth. This also helps to properly balance idle capital to perform tasks according to priority level.
Third, ensure revenue from deposit insurance premium to ensure correct, adequate and timely collection to optimize input sources for investment and capital turnover. Expected time and revenue that differ from reality will affect the opportunity to use capital, so the more accurate the plan, the more effective it will be.
Protecting depositors is a guarantee of trust to enhance the position of the deposit insurance for the development of system safety and social security. Compared to the optional deposit insurance mechanism, DIV operates more closely with the task of protecting the legitimate rights and interests of depositors. To maintain and strengthen trust, the financial potential of DIV must be strong enough to support the best implementation of its tasks. DIV needs to calculate long-term plans for capital growth, ensure revenue sources to strengthen financial capacity, maintain immediate reimbursement to 100% of depositors in the PCFs system; while having a plan to respond to reimburse when banks fail and proactively participate in the process of restructuring weak credit institutions.
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