Trouble with loss resolution in special lending by deposit insurance

Legal basis of special lending and loss resolution upon granting special loans

The Law amending and supplementing a number of articles of the 2017 Law on Credit Institution stipulates that the DIV is authorized to provide special lending to support liquidity when CIs are at risk of default or fall into insolvency, threatening the stability of the system during the time CIs are placed under special control, including the case where CIs are implementing the approved restructuring plan and to support the recovery under recovery plan, and the approved mandatory transfer plan.

Based on the 2017 Law on Credit Institutions, the State Bank of Vietnam (SBV) promulgated Circular No. 08/2021/TT-NHNN stipulating special lending to CIs placed under special control. Accordingly, the DIV can provide special lending to CIs placed under special control in the following cases:

(i) Providing special lending to support liquidity when CIs are at risk of default or fall into insolvency, threatening the stability of the system during the time CIs are placed under special control, including the case where CIs are implementing approved restructuring plan, approved transfer plan; (ii) providing special lending under the decision of the SBV at the preferred interest rate of up to 0% to support liquidity to financial companies, People’s Credit Fund (PCFs), microfinance institutions with the fund taken from the Operational Provision Fund when financial companies, PCFs, microfinance institutions are at risk of default or fall into insolvency, threatening stability of the system before the restructuring plan is approved; (iii) providing special lending at the preferred rate of up to 0% to support recovery for financial companies, PCFs, microfinance institutions with the fund taken from the Operational Provision Fund under the approved recovery plan.

According to the above regulations, the lending targets of the DIV are CIs placed under special control. These are weak CIs, at high risk of failure, with low recoverability. Thus, special lending activities of the DIV are always implicitly highly risky, with the threat of inability to recover loans, leading to capital loss. Some regulations are already in place for the DIV to deal with loss upon providing special loans like: the 2017 Law on Credit Institution promulgated that “The DIV is enabled to write down the Operational Provision Fund to deal with unrecoverable special loans” in case the DIV provides special loans under the approved restructuring plan; The Circular No. 20/2020/TT-BTC by the Ministry of Finance stipulates that the DIV can use its operational provision fund to compensate for unrecoverable losses of special loans provided to CIs placed under special control;  use balances of earnings from special loans provided to CIs placed under special control which are particularly separately monitored in the operational provision fund to compensate for the unrecoverable losses of special loans. In case balances of earnings from special loans cannot cover losses, the DIV will report to the SBV for reviewing and making the decision to use operational provision funds to compensate as legally regulated, not implement the provision for hard-to-collect debts of special loans.

Regulation on special lending and loss dealing of the DIV upon special lending

Source: Summarized by the DIV

Some difficulties in dealing with losses in special lending

Although there are some regulations on loss dealing upon special lending, there are still some difficulties and obstacles in implementation:

Firstly, as for determining the amount of losses upon special lending, according to the regulation in Circular No. 08/2021/TT-NHNN and regulation on special lending by the DIV, depending on each case of lending, CIs placed under special control must have suitable collaterals according to the regulation of the SBV and the DIV. When special loans are due, CIs are unable to pay debts and special loans are not extended, the DIV will transfer them to the classification of overdue loans to be monitored and take measures to deal with collaterals to recover debts.

In case, after dealing with collaterals, the DIV still fails to recover outstanding debts from special loans, it will monitor and urge CIs to collect debts. This means that even when CIs placed under special control cease their operation and fail to pay debts to the DIV, the DIV will continue monitoring loans with the inability to determine the amount of loss. The amount of loss is only determined to be the remaining amount of special loans after deducting the amount of money that the DIV collected during the process of asset liquidation of bankrupt CIs placed under special control. The DIV cannot determine the amount of loss upon provision of special loans because the amount of loss depends on the time of implementation of the bankruptcy plan and the remaining amount of money after the DIV’s collections during the process of asset liquidation.  

Secondly, as for the point of time of recording the amount of loss, Circular No. 20/2020/TT-BTC stipulated that “The DIV is entitled to use balances of earnings from providing special loans to CIs placed under special control to compensate for the unrecoverable losses of special loans, in case of not enough to compensate for losses, the DIV will report to the SBV for reviewing and making the decision on using its operational provision fund to compensate according to legal regulations.”

However, the point of time for determining the amount of unrecoverable loss of special loans for which the DIV can use its balances of earnings from providing special loans to CIs placed under special control or report to the SBV for reviewing and making decisions to use operational provision fund to compensate according to the legal regulations is difficult to recognize. It is due to the fact that the amount of loss is only determined to be the remaining amount of the special loans after deducting the amount of money that the DIV can collect during the process of liquidating assets of bankrupt CIs placed under special control. Meanwhile, the debt recovery process of CIs placed under special control faces a lot of difficulties because loans provided by PCFs are mainly unsecured, or if possible, most collateral files lack the legal factors required for asset liquidation, which often lengthen the period of liquidation, although the Circular No. 24/2017/TT-NHNN dated 29/12/2017 by the Governor of the SBV stipulated the period of liquidation to be 12 months and can be extended with each time not exceeding 12 months.

Thirdly, regarding the time of implementation of the restructuring plan for CIs placed under special control, according to the 2017 Law on Credit Institutions, there are five plans for restructuring CIs placed under special control, including: Recovery plan; plan of merger, consolidation, transfer of all shares, capital contribution of CIs placed under special control; mandatory transfer plan; dissolution plan; and bankruptcy plan. Depending on each specific situation and proposal of the Special Control Board, the competent authorities will decide which restructuring plan will be applied to CIs.

In case the restructuring plan of CIs placed under special control is not approved or during the implementation process of the approved restructuring plan, the competent authorities recognize the objectives of this plan will not be achieved, Cis placed under special control will implement another plan. At present, due to no regulation on the maximum time of implementing the restructuring plan, the implementation time of the restructuring plan will be lengthened rather than changed to another plan like dissolution or bankruptcy, affecting the recovery of special loans, determination of the amount of loss as well as recording the amount of loss upon special loans provided by the DIV.

Fourthly, regarding the loss resolution process, there is no specific guidance on procedures for loss resolution upon the provision of special loans as of now.

Finally, the Law on Deposit Insurance is the highest legal regulation governing deposit insurance activities. However, there are no regulations on loss resolution of the DIV upon their provision of special loans under the Law on Deposit Insurance, although this issue was regulated under the Law on Credit Institutions.

Some proposals and recommendations

The Scheme on strengthening and developing the system of people's credit funds until 2020 and orientations to 2030; Directive No. 06/CT-TTg dated 12/3/2019 on enhancing solutions to ensure operational safety and strengthening the PCF system and the Strategy on Deposit Insurance Development by 2025 and orientations to 2030 have shown that the DIV has played an increasingly significant role in participating in restructuring weak CIs.

With the role of protecting the legitimate rights and interests of depositors, contributing to protecting safe and sound operation of banks, the use of capital of the DIV to serve operations as legally regulated must ensure the principle of capital preservation and development. To reach these goals, it is necessary to study the following solutions.”

Firstly, to supplement the regulation on the maximum time for implementing restructuring plans to deal with weak CIs completely;

Secondly, to add the regulation on the maximum time for liquidation of assets of CIs, avoiding multiple extensions of the liquidation, leading to prolonged liquidation time causing asset losses and depletion.

Thirdly, to complete and create a synchronous and favorable legal environment for deposit insurance activities, namely: Research, propose amendments and supplements the Law on Deposit Insurance in a direction compatible with laws governing other sectors in banking and financial activities, especially the Law on Credit Institution. Accordingly, it is required to clearly stipulate items related to loss dealing of the DIV upon providing special loans to CIs placed under special control, like items related to the implementation process; time for determining losses; time for the DIV to use its earnings from special loans, operational provision fund to deal with losses due to no recovery from special loans. At the same time, researching and developing administrative regulations on this item after the Law on Deposit Insurance and the Law on Credit Institutions are amended and supplemented to provide guidance and ensure uniform implementation throughout the entire DIV system.

Department of Research and International Cooperation (translation)