THE DEPOSIT PRODUCT FOR MEMBERS OF SAVINGS AND CREDIT GROUPS – USEFUL TOOL FOR THE POOR


During the early 2000s, most poor people wished to participate in the formal savings system but found it difficult to make deposit with tiny amounts. At that time, none among formal financial institutions offered a solution to make savings a practical product for poor community. As the bank serving the poor and policy beneficiaries, VBSP conducted pilot studies and deployed the deposit product for members of Savings and credit groups (SCGs). After 9 years of development and continuous renovation, the deposit product for members of SCGs can be considered as the most prominent savings product for the poor community.

The idea  

The poor in Vietnam were getting to be familiar with savings during the 2000s. However, there was hardly any product suitable for them from formal financial institutions or such product from some NGOs could not be accessible nationwide. Lack of services and formal savings products let to informal services rises throughout Vietnam.

 

Group leaders depositing savings of members to VBSP
at a commune transaction point

Studies at the time indicated that most poor people wished to participate in the savings system but could not find any reliable, simple and convenient savings product to deposit their small amount of money (in 2003, the number of small savings deposit amount of less than $ 31.39 only accounted for 2% of total deposits).

At that time no formal institution devised ways to make savings become practical products for poor communities. The formal credit institutions offered “opportunity to access loans” as tools to improve livelihood of poor households without recognition that savings was also an effective way to help the poorest people getting the habit for a financial service to be able to actually have the capacity to effectively use other financial services. Many of the projects of NGOs intended to diversify sources of income among the poor while promoting savings habits and rules. These programs consistently demonstrated that the poor were disciplined savers.

In Vietnam Bank for Social Policies (VBSP), mobilizing savings in the poor community through SCGs had been carried out since the bank was Bank for the Poor. As of 30/6/2007, the balance of savings deposits from poor communities was VND 303,446 million (0.96% of total capital of the VBSP). Many SCGs had done the task of savings mobilization well, thereby helping the poor to raise awareness, habit of savings to have an additional repayment source at debt maturity.

However, savings mobilizations through SCGs revealed a number of shortcomings: not really encourage poor households to practice savings and misappropriation of SGCs leaders did happen. Savings were only implemented in few of SCGs with very small amount, largely compulsory as a condition for joining the group. The proportion of savings mobilization was very small, negligible compared with the total capital of VBSP. To 9/2006, VBSP mobilized only about VND 350 billion savings from the poor while outstanding loans to poor households during the same period reached VND 18,791 billion. Thus, savings from poor households was only 1.86% of total outstanding loans to poor households. VBSP decided to suspend group savings mobilization to consolidate and find a more efficient product which can overcome the shortcomings.

Along with the perception of inefficient savings mobilization in rural financial market, VBSP conducted a study and pilot implementation on new savings product for the poor under sponsorship of the Ford Foundation. The new product was expected to protect millions of poor families from income fluctuations and maintain consumption levels even during the famine. Savings can be used as provision for emergency, business risks, seasonal changes, floods or death which can push the poor households to destitution.

Piloting the deposit product for members of SCGs

In 2007, under sponsorship of Ford Foundation, VBSP launched the pilot deposit product for members of SCGs in 3 symbolic provinces in different regions in Vietnam (Hoa Binh, Hai Phong, Gia Lai) , 4 districts in each province and 3 communes in each district.

Description of the deposit product for members of SCGs

VBSP mobilize savings of the poor who are members of SCGs. Basing on a written agreement among members in the group which defines that they are voluntary to conduct savings activities, leaders of SCGs receives deposits from group members and submit to VBSP monthly or quarterly on commune transaction day. Each SCG has only one savings book to keep track of members’ savings.

Collect savings:  Each member is given a passbook stamped “FORD” by the project.  Each time of depositing, the leader notes incurred and savings balances in the loan book of depositors and the book of the group and sign for certification. Members sign in the payer column. The deposited money is put in a metal box given by the project with witness of the payer.

In case a member cannot make deposit due to objective reasons, the member can make late deposit on the next period; such delayed submission should be no more than 3 times in a row for monthly savings and 2 times in a row for quarterly savings.

On the day VBSP works at the commune transaction point, or in VBSP office, SCG’s leader hands in savings of members to bank staff. Bank accountant fills in Receipt of savings from group members basing on Record on savings collection and payment form. Bank treasurer receives savings from a SCGs’ leader, sign for confirmation and return the Savings book to the leader.

Savings withdrawal

At maturity of debt repayment in a SCG member’s loan book, VBSP automatically transfer his/her saving balance to debt repayment.

When the member complete debt repayment (interest and principal) to VBSP, if he/she wants to withdraw savings, he/she can directly withdraw the money at VBSP after VBSP and the SCG compare the balance and certify in Savings book of such member.

Savings product: term deposit, the amount depends on economic capabilities of each member, maximum amount is not controlled. Minimum amount for each deposit is VND 20,000/member.

Interest rate: As applicable to 3 months term deposit of VBSP at the time of interest payment.

Results

At the end of 2009, the project mobilized roughly VND 1.5 billion with savings balance of VND 1.3 billion. Customers and local authorities were agreed that the deposit product was prospective, accessible and effective.

The project provided the poor with awareness and saving habits as provision for illness and as accumulate assets for greater spending or emergency, contributes reduce usury or unsafe ROSCA.

The bank could also raise the population’s idle funds and reinvest to lend to poor households participating in the project.

The product is simple, easy to implement, easy to reach and be accepted by the people, however, the pilot project still showed limitation: (i) minimum deposit amount of VND 20,000 was still high for some low capacity poor households in Hoa Binh; (ii) interest rate applicable was the rate at withdrawal date which make it difficult for depositors to know in advance how much they would get and for the bank to estimate interest payment; (iii) certification of group leader to depositors as receiving savings was not ensured legally; (iv) VBSP automatically transfer savings balance to debt repayment make savings become compulsory rather than voluntarily; (v) SCGs’ leaders receive commission from interest collection only, not from deposits of members, thus, they had less motivation to promote depositing from the group.

Launching the product nationwide

From monitoring the pilot product, VBSP completed and launched the deposit product for members of SCGs nationwide with remarkably improvements, including: (i) members of SCGs can make deposit with very small amount (from VND 1.000) instead of VND 20,000; (ii) members of SCGs make deposit under the Group savings book kept by the group leader, however, the members can withdraw their savings directly at VBSP transaction points or offices; (iii) VBSP offers demand deposit including initial deposit (the first depositing amount when a member joins a SCG) and monthly deposit. Interest was as applicable to normal demand deposit; (iv) depositors can make deposit and withdraw on demand from VBSP or from the group leader. VBSP shall not automatically transfer customers’ savings to debt repayment unless they voluntarily require; and (v) SCGs’ leaders receive a commission of 0.1% of the group’s average monthly savings balance. Commission is paid right after the leader deposit money to VBSP. If a member of a SCG goes directly to the bank for depositing, the deposit is still count for calculating commission of such member’s SCG leader.

Advantages of the deposit product for members of SCGs

Low transaction costs

VBSP does not charge any service fee or require any minimum balance so the transaction costs for savers are minimal, especially compared with major commercial institutions, who often require a minimum initial deposit of 50,000 VND and/or a transaction fee (like in VBARD). Furthermore, services (deposit and withdrawal) are within close distance of the clients so there is virtually no traveling cost. The guidelines are talked to be easy to understand and the services provided by the staff (group leaders) have been friendly. This means that, the costs of transaction with VBSP have been relatively low.

Furthermore, by delegating the deposit collection, and potentially the withdrawal function, to the group leaders, VBSP did not need many staff and facilities at the local level. In fact, VBSP has one of the lowest staff-to-clients ratios among microfinance institutions – VBSP has only 9000 staff covering the entire country, serving roughly 7 million customers.

It could offer access residence of poor households often living in rural and remote areas. In combining the credit and deposit functions, VBSP saved on the transaction costs, the group leaders saved another trip to the members’ houses and the savers had their deposits collected at their door step, which saved them time and money in traveling.

Broad network

Among banks in Vietnam, it can be said that VBSP has broadest network and highest accessibility to target customers. Throughout the country, VBSP has 63 provincial branches, 629 district transaction offices 10,917 commune transaction points throughout the country. This means that the bank has its hands to every commune- the smallest geographical administration unit in Vietnam. Furthermore, VBSP even can reach its customer door to door with the mechanism of collecting savings though SCGs’ leaders. Target customers only have to take few steps from their home to access to the bank’s services by meeting with their group leaders living in the same village, who are entrusted by the bank. By this way, VBSP is close to any people who want to use its savings services.

Time flexibility

Depositors of VBSP do not have to go to VBSP branch for depositing during working hours as in other commercial banks; they can access to their group leaders at any convenient time for them, may be during evening or lunch time. In addition, it does not take much time of them since their group leader is in the same village which they can walk to his/her house.

Low minimum requirements for savings

VBSP regulates that customers can save even from 1,000 VND which is a very minimum amount of money. Everybody even the poorest can make savings with VBSP.

High institutional creditability

Being the only policy bank delivering loan programs for the poor and the disadvantaged in rural and remote areas for more than 10 years, VBSP has gained strong reputation and creditability among the poor community. It is not only famous for its devotion to the society but also for the big network and good relationship with local authorities. VBSP’s Board of directors is from local authorities, which is usually led by a vice chairman of local people’s committee. This strong coordination brings to VBSP great support from local government, in human resources and infrastructure (giving VBSP a room in local government’s office on its monthly transaction day at commune level) and more importantly makes VBSP well-known among the local community.

Besides, contractual agreement of VBSP with mass organizations also makes it become closer to the community. Most of people in rural areas are member of one among four mass organizations, Youth Union, Women’s Union, Farmer’s Association and War Veteran Association. VBSP has these organizations form and manage its SCGs making its name quickly spread among local people.

In general, VBSP has been successfully in building its image as a government’s bank delivering preferential financial services to the poor and not making profit from their customers, a bank existed for the benefits of the disadvantaged community not of itself. This is a very strong advantage of VBSP in deploying any of its service in the community not only the deposit product for members of SCGs.  

Transparency

VBSP mobilizes savings through SCGs’ leaders, the process as described in the above section is rather proper. A group leader receives deposit from their members, records it in his/her books and in the member’s book. The bank, after receiving deposits from the group leader, confirm the information again by announcing the each group member savings balance on the board at the transaction points. Also on this board, VBSP informs its current interest rates, changes in regulations, the local deposit balance of the village this month and how it is being used (liquidity, lending, reserve, etc). Depositors can come and check if their information is recorded properly. This is to avoid fraud of group leaders if any, and again ensure the high creditability of the bank’s service.

Limitations

However, the deposit product for members of SCGs still has shortcomings to be under research and development by VBSP.

Lack of product variety

At present, VBSP has only one the deposit product for members of SCGs, i.e. demand deposit with scheduled deposits (determined by the groups based on the group’s economic ability and the region’s economic conditions) and unlimited withdrawals. This type of product only meets demand of customer who wants highly liquid account. In fact, according to Rutherford, Stuart in “Money Talks: Conversations with Poor People in Bangladesh about Managing Money.”,  most of poor savers like a savings account which allows them to (1) deposit small, variable amounts frequently and (2) access larger sums in the short, medium, or long ter. Each saver will have different demand for their savings, for example, long term savings for their investment, medium savings for crops etc,. They expect savings product to give them higher benefit with longer term.

Ultimate purpose of VBSP in doing savings program is to help the poor getting used to savings and having money to pay principal of loans, but with unlimited withdrawals, the poor may not wait until they have a pretty good sum of money to withdraw.

Tri-parties withdrawals leading to lower liquidity

The deposit product for members of SCGs allows for unlimited withdrawals of savers but the process must go through the group leader. Deposit should be handed to group leader and so is withdrawal. The savers can withdraw money from the group leader if the group leader has enough savings outstanding on hand or, they have to wait until the transaction day of VBSP for the leader to get cash from the district office. Therefore, there’s nothing to be ensure that customer can withdraw money anytime they want or once a month on transaction day of the bank. The presence of group leaders in savings withdrawal may be a constraint to discourage customers from making savings in VBSP.

Low interest rate

The program interest rate is average demand deposit interest of commercial bank in the same areas, currently, it is around 3%/year. It is not low as compare to other commercial banks; however, if VBSP can provide more medium and long term savings products, the customers can have more benefit from savings. Interest rate does influence the decision of the savers. The low interest rate makes people think that bank deposit is not an effective investment and they may get attracted to other kind of informal savings which often offer higher return or coming back to traditional savings method like buying gold.

Withdrawal through group leader can cause appropriation

The group leader is responsible for the consistency of records between their books and the members’. However, district VBSP can hardly monitor a huge numbers of all SCGs depositors and compare with records of the group leaders during every transaction day at commune. VBSP can only check randomly a number of SCGs. Thus, irregularities are unavoidable and can easily lead to appropriation group leaders.

Limited among members of SCGs

The deposit product is for members of SCGs only, other local poor people who do not get loan from VBSP and join SCGs cannot make deposit and Commune transaction point of VBSP.

Product improvement in 2014

As reviewing pros and cons of the deposit product for members of SCGs, on December 2014, VBSP has launched a document to overcome some of the disadvantages of the product, according to which (i ) instead of a joint account, each member of SCGs has his/her own demand deposit account, withdrawal from the account can be done directly at VBSP instead of through SCG leaders; (ii) To avoid unlimited withdrawal of depositors while their savings are still small and they in fact are not in emergency for using savings, VBSP decides that savings of SCGs’ members must be for interest and principal payment first. The SCG members can only withdraw savings after completion of repayment obligations to VBSP.

Results as of 30/9/2016

After the improvements, deposit activity has many positive changes. VBSP staffs, mass organizations, management board of SCGs and the borrower are fully aware of the meaning and effect of the practice of saving everyday, creating a regular habit to make deposit monthly, to accumulate, create resources for the repayment to VBSP and gradually establish their own capital for improving livelihood. The deposit product for members of SCGs has been appreciate and supported by local government, mass organizations, management board of SCGs and the borrowers, thus, brought about significant results.(Unit: million dong, SCGs, households)

Se.

Year

Total number of SCGs

Number of SCGs having savings balance

Number of households having savings balance

Savings balance

Note

1

2011

204,514

163,604

3,552,717

1,318,729

 

2

2012

204,505

182,656

1,719,689

 2,049,593

 

3

2013

199,603

189,741

4,813,512

2,714,380

The number of SCGs decreases as VBSP consolidates SCGs to improve operation efficiency

4

2014

196,606

192,881

5,490,054

3,399,987

5

2015

192,936

191,478

6,016,399

4,258,512

6

30/9/2016

191,736

190,058

6,344,898

4,976,360

Savings deposit of members of SCGs in VBSP as of 30/9/2016

The deposit product for members of SCGs has a trend of gradual increase since being launched, especially since improvement in 2014, savings balance and number of depositors increase remarkably. However, if taking a comparison to total capital or total loan outstanding of VBSP (as of 31/08/2016, the total capital and total loan outstanding of VBSP are roughly VND 158 trillion and 151 trillion respectively), savings mobilized from members of SCGs counts for a very small percentage, not reflecting the real capacity of such a large bank in microfinance as VBSP.

The reason is due to limitation in policy communication and dissemination leading to improper understanding of the poor and policy beneficiaries on purposes and meanings of the deposit product of VBSP. Besides, some limitations on the deposit product have not yet been fully resolved.

Perspective

In the development strategy for the next ten years, VBSP set a target to become a financial self-sustainability with emphasis in self-sufficient in funding. VBSP defines 3 actions to get more funding self-sufficient, which are (i) gradually increase lending interest rate, (ii) strengthen fund raising including micro-savings mobilization and (iii) develop services like money transfer, collecting bills etc,. The deposit product for members of SCGs is still expected to be one among key product of VBSP and still in continuous research and development.

Applying mobile banking technology for more flexible depositing and withdrawal

Besides using SCGs as the linkage between VBSP and customers, VBSP is considering mobile banking for better services.

The deposit product for members of SCGs has helped customers to make deposit and withdrawal at commune transaction points conveniently, however, the product is still simple with mostly fixed monthly small depositing, not yet meeting demand for making savings and withdrawal on demand of customers.

Mobile banking service under research for implementation of VBSP is expected to help customers to make deposit, withdrawal and money transfer for bill payment or debt repayment through agencies or through SMS on their phone. The service can mitigate risks of mistakes in savings books and can promote direct interaction between VBSP and customers. Besides, the service can facilitate development of variety savings products basing on demand and capacity of customers.

Expanding opportunities for non-member of SCG

Many poor people do not have demand for loans, thus, they are not member of SCGs, and however, they have demand for savings for their risk or emergency provision or building their own capital. The deposit product for members of SCGs did not allow non-member to make deposit at commune transaction points. Other poor people, if having demand for savings must go to transaction office of VBSP, which are often relatively far from their houses, to be served by the bank.

To overcome this limitation, besides the deposit product for members of SCGs, VBSP has just launched new regulation allowing mobilization of savings in commune transaction points. Accordingly, every Vietnamese with full legal capacity can make deposit in VND at any transaction point of VBSP. Interest rate is as applicable for same term-deposit of local VBSP office. Minimum deposit amount is VND 500,000 and customers can make withdrawal before maturity as prescribed by regulations.

After 9 years since piloting, the deposit product for members of SCGs has become familiar and been appreciated by the poor and policy beneficiaries taking loans from VBSP. The product has helped the poor and policy beneficiaries to get saving habit for their future, including for repayment obligations to VBSP. Despite existing constraints after several improvements, to present, the product is still the most prominent savings product, suitable for the poor and policy beneficiaries in Vietnam.