The amendment of Circular No. 44/2011/TT-NHNN, dated December 29th, 2011 on the internal control and audit of credit institutions, foreign bank branches and relevant regulations are an urgent requirement for PCFs to operate safely, effectively under new circumstances.
Mr. Dao Minh Tu – Standing Deputy Governor of SBV speaks at the workshop
Circular No. 44/2011/TT-NHNN, dated December 29, 2011 providing for the internal control and audit system of credit institutions, foreign bank branches basically created a legal corridor for PCFs to operate safely and effectively.
However, in the operation, the regulations on internal control and audit in Circular No. 44 still contain some contents that are still inconsistent with the actual operation of the PCFs system.
According to Mr. Tran Dang Phi – Deputy Chief Inspector of Banking Supervision and Inspection Agency (BSA), SBV considers that the amendment of Circular No. 44 and related regulations are an urgent requirement for PCFs to operate safely and effectively under new circumstances. The SBV representative emphasized that during a seminar on “The improvement of the legal framework for internal control and audit to ensure PCFs’’ safety” organized by the BSA, Banking Academy, Co-opBank and VAPCF on the morning of November 4, 2022.
Many enforcement challenges
Co-opBank’s Chairman Nguyen Quoc Cuong emphasized that the three pillars for a sustainable development organization are sound financial resources, high-quality human resources and an executive management system including internal control and audit. Internal control and audit are an important part of governance, determining the success of the organization.
With PCFs system, internal control and audit have been developed and implemented by PCFs under the instructions of SBV on the basis of Circular 44. PCFs have focused on human resources in internal control and audit, and selected officers of training in recent times. However, there are some PCFs that have not followed their operational goals, putting more focus on profits and not respecting the standards on internal control and audit. There are differences on how to operate and direct the leadership honesty, ethical values, organizational structure, regulations, processes and procedures, and the importance of internal control and audit. Many PCFs have not been able to separate these business functions as many PCFs staff who specialize in internal control and audit concurrently hold other positions.
Mr. Nguyen Quoc Cuong highlighted that, it is necessary to establish an effective internal control and audit system for the PCFs system to manage risks, improve professional ethics, operate safely and develop stably. This is also a very important task in the restructuring process of the PCFs system.
The requirement to have a system an internal control and audit for the PCFs system becomes increasingly necessary when experts, researchers as well as PCFs themselves, from their actual operational experience, indicate that there is no process for PCFs system only. Therefore, it is the one of the causes leading to the risks of the PCF system in recent years.
Mr. Nguyen Quoc Cuong – Chairman of Co-opBank speak at the conference
Dr. Nguyen Thi Kim Thanh – Deputy Secretary General of VAPCF said that through the cases of PCFs that have been published in the mass media since their establishment, the violations lead to the asset loss mainly due to a lack of self supervision at some PCFs. Managers do not control the activities of employees and vice versa which consequently has led to violations of the SBV management regulations.
However, Mr. Trinh Cong Van – Director of SBV’s branch in Son La province pointed out 5 common challenges when implementing regulations on internal control and audit. In particular, the biggest challenge is allocating resources to organize the implementation. Due to the limited scale in the operation and financial capacity compared to commercial banks, the quality of human resources is rather limited. For example, a member of the Supervisory Board must be a capable person to be able to issue risk warnings. However, many PCFs’ staff do not fully understand the operation, how can they warn the risk management. Besides that, PCFs are not financially sufficient to hire experts.
According to Mr. Trinh Cong Van, limited financial capacity also leads PCFs to not allocate financial priorities for creating a legal framework, regulations on internal control and audit. VAPCF and Co-opBank’s budget are also limited and insufficient, leading to a lack of training resources for the internal control and audit staff. Besides that, a lack of financial resource has also led to the PCF’s prioritizing investments on IT facilities for monitoring loans, deposits, and members without a software exclusively for internal control and audit.
Secondly, the development of policies, regulations and internal processes at PCFs has not been fully ensured and follow with the provisions of the law. Currently, the lending process for individual customers and the process of document rotation in the transaction has not been specified. Meanwhile, these are tools for the internal control and audit staff to review and evaluate the performance, detect violations, responsible people, the risks and inadequacies in the PCFs’ operation….
Thirdly, PCFs do not have a 5 – 10 years’ operating strategy, so the internal control and audit team have no basis to determine whether PCFs is on the right or wrong direction to issue warnings.
Fourthly, awareness of the role, effects, and necessity of internal control and internal audit activities for PCF managers and staff is limited (BoD, Board of Managers) and have not appreciated and found it difficult to understand the important role of internal control and audit activities (as tools to serve management and administration). The establishment and operation of this department is only to deal with the management agency, leading to the unreasonable allocation of resources.
The last difficulty was that there was no guideline and instruction so PCFs did not understand and see any effect of control and internal audit, but only saw the burden. Therefore, they just deal with it without any effort. They found it complicated and wanted to change to easier and shorter process.
These problems have been solved by SBV Son La Branch by helping PCFs understanding the role and effects of control and internal audit activities; Training and guiding the PCFs on this issue with the help of SBV Managers, BSA, Co-opBank and VAPCF; Set up an internal control and audit system, partly meeting the requirements of management.
Delegates commented on the development of regulations on internal control and audit with PCF activities
From his implementation experience, Mr. Van proposed the BSA to advise the Governor to issue a Circular to replace Circular 44 with separate regulations on control and internal audit system for PCFs to ensure compliance with the PCF model. Before issuing, it is necessary to survey the actual operations of PCFs and consult experts, and SBV branches.
He also suggested that VAPCF and Co-opBank annually organize a training course on internal control and audit, developing regulations and sample documents related to internal control and audit activities to guide trainings for PCFs.
Based on a thorough analysis of the differences between commercial banks and PCFs with problems of the PCFs system in Circular 44, Dr. Nguyen Thi Kim Thanh proposed a direction to amend the regulations on the internal control and audit system of the PCFs with the components of the internal control system including 5 groups of regulations.
In particular, the regulations related to the establishment of the control environment of PCFs should clearly define the responsibilities of the BoD, especially the Chairman, the Director and the Supervisory Board and must assign clear division of responsibilities in each level of management and employees suitable with the provisions of law.
Meanwhile, PCFs managers must always consider the importance of internal control, must demonstrate a scientific management style, have professional ethics, demonstrate honesty and responsibility at the workplace. They should be role models for their subordinates; Communicate orders and directions clearly to employees.
Ms. Thanh also analyzed the regulations on risk management in the operation of PCFs, which should not prescribe 3 lines of defense as in Circular 13 for commercial banks because PCFs are small in scale and simple in operations than commercial banks. In which, there should be open regulations on the organizational structure of risk management: Depending on the size, conditions of resources and complexity of business activities, PCFs shall decide on their own the organizational structure of the risk management.
Personally, she suggested that PCFs with large operations, with a staff of more than 15 people, it is necessary to set up a risk management department to help the management board fully identify and measure accurately, according to the report to take timely preventive measures, minimize material risks and control the risk position, ensure compliance of PCFs; For small and medium sized funds , having a staff of 15 or less may not set up a risk management department, but monthly, the Board of Management, including the Director, Deputy Director and Head of business divisions should meet to discuss risks. material, identify risks, assess risk levels, and take action to reduce risks to the lowest possible level.
For regulations on internal control activities, it is necessary to specify control activities for each segment of activities, such as credit activities; capital raising activities; capital and asset management controls; vault; financial accounting management; control the implementation of regulations to ensure the safety of operation; Control the classification of debts, setting up risk provisions; accounting control.
The above areas of business activities should be clearly defined as to the purpose of the control and what the specific content needs to be controlled. In addition, it is necessary to have regulations on information and communication mechanisms and on supervision and appraisal
It is necessary to issue a separate circular
Agreeing with the experts’ opinions, Ms. Vu Ngoc Lan – Deputy Director of the Legal Department of SBV said that setting up a separate model and process for internal control and audit for PCFs still needs time because this regulation is currently being adjusted in the Law on Credit Institutions in Articles 40 and 93. However, Ms. Lan also emphasized that the errors of the past PCFs are due to the lack of good internal control and audit, so to correct these errors in advance, develop manuals guideline to promptly guide PCFs in developing internal control and audit procedures to overcome the past weaknesses.
Delegates attending the conference
Proposing that the amendment of Circular No. 44 is necessary not only for PCFs activities but also for Co-opBank when its operation is different from commercial banks, Mr. Vu Ngoc Khuynh – Head of Supervisory Board pointed out Circular No. 44 is issued for credit institutions in general, not for the PCFs system and Co-opBank with the specific characteristics of cooperative organization model.
Mr. Khuynh said that the principle of the cooperative that the administrator and executive has been ignored a lot in PCFs activities is the membership issue. This is also the preeminence of PCFs. From the opposite perspective, inspection and control from members is the key issue with PCF activities. When we institutionalize the role of inspection and supervision and let members understand and know their role, they will participate in monitoring of the PCF effectively
Chairing and concluding the conference, Deputy Governor Dao Minh Tu said that the amendment of Circular No. 44 is necessary and urgent because one of the main causes of risks and breakdowns of the PCF system in the past time and the inefficient activities is due to the weak control and internal audit activities of PCFs. Therefore, it is necessary to correct and improve the role of control and internal audit of PCFs. If we do it well from the inside of PCFs, it will limit, prevent risks and negatives, ensure compliance with legal regulations.
Pointing out a number of causes affecting to the limited system of internal control, of the PCFs, the reality is that every PCF has a control department, but the operation is not effective nor not many staff areaware of the importance of internal control and audit, also their capacity is still weak and limited without much training opportunities. Mr. Dao Minh Tu said that the important thing now is how to promote the role of members in supervising the activities of PCFs. We must build a legal corridor for PCFs operation to meet the current model needs.
In details, according to Mr. Dao Minh Tu, in order to improve capacity and the effective role of control and internal audit and amend Circular No. 44, for PCFs system in line with the views and policies of the Party and State that they still follow the cooperative model. Therefore, it is necessary to continue to ensure the stability, safety and health of the PCFs and continue to develop. On the contrary, if the development of the model is not suitable, the appropriate model must be researched. At the same time, step-by-step consolidating so that PCFs can develop locally on the basis of ensuring stability and safety.
Mr. Dao Minh Tu emphasized that the state management agencies, policy-issuing agencies, experts, banks, etc. need to agree, be well aware of the roles, functions and necessity of the control and internal audit departments, from which to design, build and complete the legal framework for internal control and audit to ensure the safety of the PCFs. This awareness must be spread to each and every PCF. when implementing, PCFs still have to comply to ensure operational safety even with higher costs than the current one.
Mr. Dao Minh Tu directed the management agencies, promulgating policies to quickly establish, strengthen, and reorganize the internal control and l audit system to ensure the safety requirements of each PCF; decentralization of control requirements, internal audit according to each scale level. Require management units to study an organizational and operational mechanism, functions and duties of the control and internal audit departments with clear functions and authority so that the BoD cannot undermine the functions of the control and internal audit departments. At the same time, when inspecting, it is necessary to inspect both internal control and internal audit activities.
The Deputy Governor requested to soon amend Circular 44 with the general regulations of all credit institutions, including the PCF. He suggested that if necessary, it is possible to develop a separate circular for the PCFs system to make the system work better, transparently and safely
In addition, Mr. Tu suggested that strengthening coordination between branches of SBV and Co-opBank; VAPCF and Banking Academy in enhancing the training background on control and internal audit for PCFs. The director of the SBV branch is responsible for tightening this operation and requesting PCFs to follow.
With the BSA, SBV provincial branch, Co-opBank, Deposit Insurance, Mr. Dao Minh Tu also asked to strengthen the responsibility and role to improve the effectiveness of the control and internal audit of PCFs in the coming time, and fully evaluate and recognize the roles and responsibilities of these parts in PCFs. BSA needs to exploit the internal audit and control department to capture information and strengthen the supervision of PCFs. At the same time, it needs to show them that their job is not just a task paid by the PCFs but also subject to other supervision from the SBV so that they can strengthen their operations and avoid being disabled.
At the proposal of PCFs that independent audits are time consuming and expensive, but the results are sometimes not close to reality, Mr. Tu proposed to study and build an independent internal audit department to support PCFs instead of hiring an independent auditor every year.
He said that if there is an independent internal audit department and located in the Co-opBank, it will equip an additional tool for Co-opBank to strengthen its role as a focal point to support the system. The inspectors will also have an additional channel to capture information, increase intense supervision.
Finally, Mr. Dao Minh Tu also ordered all stakeholders to study and develop more scientific conferences, to solve the remaining problems of the PCF system, to ensure the the final goal of developing a healthy safety system that not only meets the current requirements but also prepares the foundations for the future development of PCFs model, contributing to the development of the country’s economy.
