PERSONAL CREDIT RISK MANAGEMENT AT TECHCOMBANK

Detail objectiveAnalyzing and assessing the situation of business operations and credit risk management of personal customers at Technological and Commercial Joint Stock Bank during the

NATIONAL ECONOMICS UNIVERSITY SCHOOL OF ADVANCED EDUCATIONAL PROGRAM

***** *****

PERSONAL CREDIT RISK MANAGEMENT AT

TECHCOMBANK

Student : Phan Thanh Dung

Class : Banking EEP 59

Student’s ID : 11171013

Supervisor : Assoc Prof Le Thanh Tam

HANOI – 2021

STATUTORY DECLARATION

During the last internship, I have gotten valuable experiences and practicalresearch on the credit process for personal customers at Vietnam Technological andCommercial Joint Stock Bank called Techcombank that provides information tocomplete my internship report

I pledge this is my research; The Joint Stock Commercial Bank has accuratelyprovided the data and collected results stated in the thesis, which correctly reflectsthe current situation of the bank I am responsible for the data and documents that Ihave stated in this thesis

Due to my limited knowledge and experience in the field of credit, myshortcomings cannot be avoided I look forward to receiving comments fromteachers and the examination committee to improve my future research project.

LIST OF CONTENTS

STATUTORY DECLARATION i

ACKNOWLEDGEMENT ii

LIST OF ABBREVIATIONS vi

LIST OF TABLE vii

LIST OF FIGURE vii

INTRODUCTION 1

CHAPTER 1: THEORETICAL BASIS OF PERSONAL CREDIT RISK MANAGEMENT OF COMMERCIAL BANKS 3

1.1 Credit and credit risk of commercial banks 3

1.1.1 Concepts of commercial bank credit, personal credit 3

1.1.1.1 Concepts of credit 3

1.1.1.2 Commercial bank credit classification 4

1.1.2 Concept of credit risk, personal credit risk 6

1.1.3 Credit risk classification 8

1.1.4 Personal credit risk characteristics at commercial banks 9

1.2 Personal credit risk management of commercial banks 10

1.2.1 Concept of credit risk management 10

1.2.2 Content of personal credit risk management 10

1.2.3 Importance of personal creidt risk management 19

1.3 Factors affect personal credit risk management 20

1.3.1 Internal factors 20

1.3.2 External factors 22

CHAPTER 2: FACT FINDINGS OF PERSONAL CREDIT RISK MANAGEMENT AT TECHCOMBANK 24

2.1 Introduction of the Techcombank 24

2.1.1 History and development of Techcombank 24

2.1.2 Function of Techcombank 26

2.1.3 Managerial apparatus of Techcombank 26

2.1.3.1 Organizational structure diagram 26

2.1.3.2 Functions and Duties of Managerial apparatus at Techcombank

Ba Trieu 28

2.1.4 Analysis Financial Statement of Techcombank from 2017 to 2020 30

2.2 Personal credit risk management at Techcombank 34

2.2.1 Current situation of personal credit risk management 34

2.2.2 Total interest income from personal customer service 35

2.2.3 Rate of non-performing loans ratio from personal customer service 38

2.2.4 Level of provisioning in personal customers 39

2.3 Analyzing personal credit risk management at Techcombank 40

2.3.1 Procedures and policies 40

2.3.1.1 Regulations on lending to personal customers 40

2.3.1.2 Loan process 42

2.3.2 Implementation of personal credit risk management at Techcombank .46 2.4 Evaluating personal credit risk management at Techcombank 48

2.4.1 Achievements 48

2.4.2 Limitations 49

2.4.3 The Reasons 49

CHAPTER 3: IMPROVING PERSONAL RISK MANAGEMENT AT TECHCOMBANK 52

3.1 Personal credit risk management orientation at Techcombank in the next time 52

3.1.1 Development orientation of Techcombank in 2021 52

3.1.2 The target for personal credit risk management at Techcombank up to 2025 53

3.2 Recommendations 53

3.2.1 To Techcombank 53

3.2.1.1 Applying modern credit risk identification methods 53

3.2.1.2 Diversify services and products 54

3.2.1.3 Increasing efficiency of risk financing 55

3.2.1.4 Improving the effectiveness of internal inspection and control of credit activities 55

3.2.2 To the State Bank 56

3.2.3 To the Government 57

CONCLUSION 58

REFERENCES 59

APPENDIXES 62

LIST OF ABBREVIATIONS

LIST OF TABLE

Table 2.1 Income Statement at Techcombank from 2017 to 2020 31

Table 2.2 Balance Sheet at Techcombank from 2017 to 2020 32

Table 2.3 Financial Indicators at Techcombank from 2017 to 2020 33

Table 2.4: Loans to personal customers 35

Table 2.5: Interest rates on loans to personal customers for home loan 36

Table 2.6: Interest rates on loans to personal customers for car loan 37

Table 2.7: Revenue structure from personal service activities 37

Table 2.8: Loan portfolio by quality 40

Table 2.9: Provision for loans to personal customers 46

LIST OF FIGUR Figure 1.1: Types of credit risk 8

Figure 2.1: Organizational structure of Techcombank Vietnam 27

Figure 2.2: Organizational structure at Personal Customer Deparment 28

Figure 2.2: The figure depicts the growth of TCB shares in 2020 34

Figure 2.3: NPLs and loans to personal customers at Techcombank for the period of 2017-2020 38

Figure 2.4: Centralized credit approval process for loan products 43

Banking industry is one of the most integral parts of the national economy.Along with other economic industries, the banking industry is responsible forparticipating in monetary stabilization, controlling, and repelling inflation, creatingjobs for unemployed people to help limit the nation's unemployment rate Beside thisprovides other support activities for businesses and domestic investors as well asforeign investors

One of the most essential activity of the bank is the credit activity whichdetermines all domestic economic activities in general while creating profit as well

as evaluating the development of a bank We must mention the bank's personalcustomer lending activity which the bank focused the most to develop Therefore, italso has potential risks that, when happening, it could directly affect thedevelopment of a bank and bring negative consequences thereafter, the worst effectcould affect a system: the banking system would be collapsed

Along with the innovation of the entire banking system in Vietnam,Techcombank has introduced banking development policies and taken specialattention on the credit risk management process over the years, which has helpedTechcombank become the most profitable joint stock commercial bank of thebanking industry in recent years However, which factors should be to reduce creditrisk for personal customers? What are measures to increase the effectiveness toreduce risks for Techcombank while the economy is being damaged by the Covid-19epidemic?

That is the reason why I choose the topic: “Personal credit risk management

1.2 Detail objective

Analyzing and assessing the situation of business operations and credit risk

management of personal customers at Technological and Commercial Joint Stock Bank during the period of 2017-2020.

Analyzing and assessing the causes of credit risk in credit risk management

of personal customer at Technological and Commercial Joint Stock

Bank.

Proposing solutions to improve credit risk management for personal

customers at Technological and Commercial Joint Stock Bank.

2 Research Subjects

Research subjects: Personal credit risk management activities at

Technological and Commercial Joint Stock Bank

3 Research Scope

Research scope: This topic focuses on personal credit risk management for

personal customers at Technological Commercial Joint Stock Bank during the

period of 2017-2020

4 Research Methodology

Researching documents of domestic experts through thematic reports onjoint stock commercial banks as well as passages with the same topic on personalcredit risk management

Gathering the experiences from different banking managers at

Techcombank to find out the mechanisms and policies affecting risk management

for personal customers

Using expert methods, statistics, analysis, comparison, comparison,synthesis, etc to assess the current situation and the causes of credit risk in generaland credit management for personal customers on Techcombank for proposingsolutions to improve personal credit risk management of personal customers atTechcombank

5 Structure of Thesis

In addition to the sections such as introduction, conclusion, references,

appendices The thesis is structured into 3 chapters:

Chapter 1: Theoretical basis of risk management personal lending of

commercial banks

Chapter 2: Fact findings of personal risk management at Techcombank

Chapter 3: Improving personal risk management at Techcombank

CHAPTER 1: THEORETICAL BASIS OF PERSONAL

CREDIT RISK MANAGEMENT OF COMMERCIAL

BANKS.

1.1 Credit and credit risk of commercial banks.

1.1.1 Concepts of commercial bank credit, personal credit.

1.1.1.1 Concepts of credit.

The concept of credit can be traced back in history and it was not appreciateduntil and after the Second World War when it was largely appreciated in Europe andlater to Africa (Kiiru, 2004) Banks in the USA gave credit to customers with high-interest rates which sometimes discouraged borrowers hence the concept of creditdid not become popular until the economic boom in the USA in 1885 when thebanks had excess liquidity and wanted to lend the excess cash (Ditcher, 2003) InAfrica, the concept of credit was largely appreciated in the ’50s when most banksstarted opening credit sections and departments to give loans to white settlers InKenya, credit was initially given to the rich people and big companies and was notpopular with the poor

In the 1990s loans given to customers did not perform which called for anintervention Most suggestions were for the evaluation of the customer’s ability torepay the loan, but this did not work as loan defaults continued (Modurch, 1999).The concept of credit management became widely appreciated by MicrofinanceInstitutions (MFI’s) in the late 90s, but again this did not stop loan defaults to thisdate (Modurch, 1999)

According to Wikipedia, credit is an objective economic category reflectingthe transaction relationship between two entities, in which the subject deliversmoney of monetary value, assets to the other party to use, and the obligor is obliged

to refund an amount larger than the original amount a specified time

We can be concluded that, the relationship between the lender and theborrower In this relationship, the lender is obliged to transfer the right to use theloan money or goods to the borrower for a certain period The borrower is obliged topay the amount or value of the borrowed goods when the debt is due with or withoutinterest

1.1.1.2 Commercial bank credit classification

Banking credit is an asset transaction between a Bank (credit institution) and

a Borrower (economic organization / individual) in which the Bank (creditinstitution) transfers the assets to the borrower for the purpose of using in a specifiedperiod according to the agreement The borrower is responsible for unconditionalreturn of both original loan and interest to the Bank (credit institution) when thepayment is due The essence of banking activities is trading in the monetary sector

so the transacted assets in bank credit are mainly in the form of money However, insome forms of credit such as financial leasing, the property in the credit transactioncan also be other assets like fixed assets

Based on the purposes of credit, they are classified into 6 main categories:

1 Based on the credit term:

- Short-term credit: a type of credit for short-term loans, the maximum period is

12 months (1 year) This loan is often used for personal consumption purposes

- Medium-term credit: a type of credit that has a term of minimum 1 year andmaximum 5 years for the use of physical procurement, property remodeling or short-terminvestment

- Long-term credit: a type of credit loan with a term of more than 5 years withlong-term purposes such as business investment, infrastructure construction, etc

2 Based on credit subjects

- Working capital credit: a form of providing working capital for businesseswhich help businesses expand working capital turnover, increase production, increaserevenue and profit, etc

- Fixed capital credit is used for building or buying fixed assets

3 Based on the purpose of the capital use

- Commodity production and circulation credit: a type of credit that providescapital for businesses to invest in merchandises production and circulation

- Consumption credit: a form of credit given to individuals or families for consumption and living purposes

- Study credit: a form of credit for students who must pay school fees including studying abroad

4 Based on credit subjects

- Commercial credit: A form of capital support for the business between twobusiness subjects, which is solving the problem of lack of capital and backlog of goods.

- Banking credit: the bank as a representative for a large subject works with theborrowers as businesses or individuals, which meet the short-term and long-term capital forbusinesses and individuals and serve for consumption, construction, business, andinvestment

- State credit: A credit relationship in which the state manifests itself asborrowers, citizens as lenders, economic organizations, banks, and foreign countries Theborrowing purpose of the State credit is to offset the budget deficit

5 Based on the subject to pay the loan

- Direct credit: a form of credit in which the borrower is also the person directlypaying the loan

- Indirect credit: is a form of credit in which the borrower and the payee are twodifferent subjects

6 Based on the types of collateral

- Secured credit: the credit capital is guaranteed by equivalent goods, materials and assets

- Unsecured credits: credits with non - guarantee goods but only rely on the prestige and credibility of organizations or individuals for the finance credit

According to the Circular No 39/2016 / TT-NHNN, December 30, 2016, of the Governor of the State Bank of Vietnam:

- Lending refers to a form of extension of a line of credit under which a creditinstitution offers or undertakes to offer a customer a sum of money for specific uses within anagreed time provided that that customer adheres to the principle that both principal andinterest arising must be repaid

- Lending credit institution refers to a credit institution established and operatedunder the Law on Credit Institutions, including:

a) Commercial banks

b) Cooperative banks

c) Non-bank credit institutions

d) Microfinance institutions e)

People's credit funds

f) Foreign bank branches

- Customer performing a borrowing transaction with a credit institution(hereinafter referred to as borrowing customer) refers to any legal entity or individual,including:

Legal entities established and operated within the territory of Vietnam and/

or those established abroad and legally operated within the territory of Vietnam

Vietnamese and/or foreign nationals

- Loan for personal or living expenses (consumer loan) refers to a creditinstitution's granting a loan to a personal customer’s demands for borrowed funds to payconsumption or living expenses for his/her personal or family purposes

- Loan for business or other operating purposes (business loan) refers to a creditinstitution’s granting a loan to a legal entity or individual to meet the demands for borrowedfunds other than those referred to in Clause 4 of this Article, including the demands forborrowed funds by that legal entity or individual, and the demands for borrowed funds by abusiness household or private company of which that individual is the legal owner

Based on the above concepts, personal customers include individuals andfamilies Personal customer credit is a form of credit in which the bank is in the role

of assigning the use of capital to a personal customer or family using capital for aperiod and must repay principal and interest for the purpose of serving life, utilizing

or using in business

Personal customer loan is usually low value, but the number of customers islarge and most of them are for additional business or consumer loans (home, car orgeneral consumption) However, the large number of borrowers leads to large loansthen the demand for loans is varied by different people's incomes As the socio-economic development is enhanced, the demand for loans from this customer groupwill increase progressively

1.1.2 Concept of credit risk, personal credit risk.

A bank exists not only to accept deposits but also to grant credit facilities,therefore inevitably exposed to credit risk Credit risk is by far the most significantrisk faced by banks and the success of their business depends on accuratemeasurement and efficient management of this risk to a greater extent than any otherrisks Credit risk is the degree of value fluctuations in debt instruments andderivatives due to changes in the underlying credit quality of borrowers andcounterparties (Tilahun Aemiro Tehulu, 2014)

Circular 02 SBV: is a potential loss to a credit institution's debt due to aclient's failure to perform or the inability to fulfil part or all their obligations ascommitted.

Basel (2000): Credit risk is most simply defined as the potential that a bankborrower or counterparty will fail to meet its obligations by agreed terms

According to Bank Management and Financial Services Book (Peter S.Roseand Sylvia C.Hudgins, 2015), the probability that some of a financial institution’sassets, especially its loans, will decline in value and perhaps become worthless isknown as credit risk The following are four of the most widely used indicators ofcredit risk:

- The ratio of nonperforming assets to total loans and leases

- The ratio of net charge-offs of loans to total loans and leases

- The ratio of the annual provision for loan losses to total loans and leases or to equity capital

- The ratio of allowance for loan losses to total loans and leases or to equitycapital

- The ratio of nonperforming assets to equity capital

Thus, it can be concluded that credit risk is the default risk on a debt thatarises from a borrower who fails to make the required payments The borrower can

be a person or business By assessing credit risk, banks can maximize their profits byextending credit to only those borrowers most likely to pay them back and reducetheir losses by not extending credit to those who may default on their loans

From the above credit risk concepts, we can define the concept of personalcredit risk as to the inherent potential loss in the provision of credit to the personalcustomer when the borrower fails to repay the contract attached to each credit thebank gives them That means the projected flow of income from a bank's profitableaccounts may not be fully refunded in quantity Banks are not threatened by creditrisk if they always receive both the principal and interest of the loans on time,otherwise, if the borrower is in financial trouble, both the principal and interest ofthe loan will be placed at irrecoverable risk

The assessment of relatives, sources of loan repayment and the purpose ofusing loans of personal customers is often difficult to complete and clear that leads

to risks due to asymmetric information or in accurate information by mainlyconsidering the current source of repayment of the customer In addition, if theborrower has health problems, unemployed, family problems or attempting to

deceive such as not repaying loan, noncooperation etc., then the bad loans and credit

risks will happen immediately

Lending to personal customers in Vietnam is mainly in rural areas in theactivities of serving agricultural production, aquaculture that are allowed unsecured

loans based on customers' prestige This is paid special attention by the Government

The State Bank and the industry Besides, the area of operation is wide then the

customer appraisal and the cost is large At the same time, risks of bad weather,

prices, epidemics usually occur This is also a detrimental factor for the current

credit activities for rural, aquaculture

1.1.3 Credit risk classification

To classify credit risks, we can base on two factors: the cause of the risk andthe ability to repay the debt of the customer (Ha Chi, 2017) Based on that we have

the following table:

Credit Risk

Figure 1.1: Types of credit risk

Source by Author

Based on the cause of the risk:

Transaction risk: This is a form of credit risk that arises due to limitations

in the transaction process, loan approval, customer evaluation Trading risk has three

types:

- Selection risk: is the risk related to the credit analysis and evaluation

process when the bank chooses an effective loan plan to make lending decisions

- Security risk arises from the security standards such as terms in the loan

agreement, types of real estate, the guarantor method and, the loan amount on the value of theinsured

- Business risk is the risk associated with loan management and lending

activities, including using a risk rating system and problematic loan handling techniques

Portfolio risk: This is the risk that arises due to limitations in managing a

bank's loan portfolio, including internal risk and concentration risk

- Internal risks: Derived from the unique internal factors and characteristics

of each borrower or economic sector or sector It stems from the aspects ofoperations or parts of the borrower's capital use

- Concentration Risk: When banks focus on lending too much for some

customers, lending too many businesses operating in the same industry, economicsector, or within a specific geographic area, the same type of loan with high risks

Operational risk: the risk of direct or indirect loss caused by bank

officials, incomplete or inactive internal processing and system, or external eventsaffecting the banking operations

Based on the customer's ability to repay debts:

Liquidity Risk: When establishing credit relationships, the bank and the

customer must prescribe the loan repayment period However, up to the conventionaldeadline, the bank has yet to recover the loan

Repayment risk: The risk that occurs if a borrower is insolvent, the bank

must liquidate the enterprise's property assets to collect debts

1.1.4 Personal credit risk characteristics at commercial banks

Based on the characteristics of personal and credit customers being applied tothis object, the commercial bank divides the following characteristics:

- The diversity of customer objects and use purposes: different personal

customers on borrowers such as different ages, industries, qualifications, needs, etc usecapital as different as in consumer, production, and business To administrate this customergroup, the bank administrators require a reasonable loan policy depending on the industry,qualifications and capabilities of borrowers that decide on the level of credit Besides, thebank must regularly check and monitor customer advice before borrowing in the use of loanseffectively

- The value of each credit loan is not large, but the quantity of credits is large.

Personal credits often serve consumer purposes, production purposes and

business purposes, so the loan value is often not large, the value of each loandepends on demands and limits on loan repayment Banking management needs toapply banking technology to be able to manage well with the size and the quantity ofcustomers in monitoring and urging loan recovery due At the same time, there musthave policies to adjust each small loan in difficulties on temporary repayment orcapital recovery gradually, reducing the pressure to repay loans especially in thefield of agricultural production and farming since this field was frequently sufferingfrom natural disasters, epidemics, pricing disadvantageous occurs.

- High credit interest rates: Since the size of personal loans are usually small

with a large frequency of transactions, risk management risks, large management costs, thecredit rates are usually high Administrators need to update information quickly fromcustomers to reduce risks that occur in capital recovery

- Strict requirements on collateral: personal loans are often medium term or

long-term loans In the worst case, the banks have strict requirements on collateral to securethe final income Banking manager has loan guarantee policies like the insurance for loans inthe agricultural industry

1.2 Personal credit risk management of commercial banks

1.2.1 Concept of credit risk management

Risk acceptance and risk management are fundamental principles in

banking business However, the bank should take into accounting risk tolerance in itsbusiness strategy and must understand, measure and control risks to the extent of itswillingness to respond to possible disadvantages Credit risk management is theprocess of identifying and analyzing risk factors, measuring the level of risk thenchoosing preventive measures and managing credit activities to limit and eliminaterisks in the credit extension process

Credit risk management is the process of identification, analysis of risk

factors and measuring risk levels Based on the process, it can select measures andmanage credit activities to limit and exclude risks in the process of credit Effectivecredit risk management is a fundamental point for a successful risk managementmethod

1.2.2 Content of personal credit risk management

Definition of risk management

There are many definitions of the concept of credit risk managementaccording to different approaches:

According to Circular 13/2018 / TT-NHNN, risk management is the

identification, measurement, monitoring and control of risks in the operations ofcommercial banks, foreign bank branches (National Economic University, 2019)

Commercial bank's risk management is the process of formulating and

implementing credit strategies and policies to achieve safety, efficiency, andsustainable development in credit operations

Risk management is a complete system of activities through which a bank

identifies, assesses, and controls the risks of granting credit and possible profits,thereby making decisions to maximize good profit for yourself (National EconomicUniversity, 2019)

Personal credit risk management is a department of risk management

within the framework of general risk management of commercial bank The board ofdirectors is responsible for building the target, strategy, and business tasks forpersonal customers, which clearly identify the risks and profits of the Bank Toestablish a personal credit risk control system effectively, the board of directors mustorganize as well as supervise credit activities in accordance with regulations.Moreover, the must assess the risk of credit activities and offer measures to limitrisks as well as set limits to control risks

In conclusion, personal credit risk management is a process of the bankstarting when the bank meets personal customers, appraisal, and approving lendinguntil the contract settlement to ensure fully principal and interest in accordance withthe commitments in the credit contract between personal customers

Based on the above concepts, we can conclude: Personal credit risk

management is the process of building and implementing four basic activities:

- Credit risk identification

- Measuring credit risk

- Limit (monitor) the risk

- Non-performing loan handling

The goals of personal credit risk management:

- Accurately assess the customer's risk of causing loss before lending as a basis for making appropriate decisions

- Early detecting risks from borrowers, quickly handling emerging risks

- Ensuring safety for banking activities

- Contributing to increasing the profit from credit activities of the Bank,

minimizing the possibility of capital loss and interest

Personal credit risk management process:

Approaching the contents of risk management theory, the content of creditrisk management activities includes identifying, measuring, controlling, andhandling risks to achieve the target minimizing credit risk with the bank's businessgoals in each period.

Identifying

Credit risk identification is the process of continuously and systematically

determining an organization's risks Identification activities to develop informationabout the source of risk, the risk factors, hazards, and risks

Risk identification includes the steps: follow-up, review, and research

operating environment and lending process to list the types of credit risks, the causes

of each period and forecast potential causes that may cause credit risks

Signs of credit risk include:

- Identifying signs from customers

- The identification signs from the bank

Signs from customers:

- Signs appear in relations with commercial bank

- Identifying signs from the business, financial and management situation of borrowers

Signs appear in relations with commercial bank.

- They are delaying, causing difficulties and obstacles for banks during periodic

or irregular inspection of the use of loans, financial situation, production, and businessactivities of customers without explanation transparent, convincing

- There are signs of failure to fully comply with regulations and discipline violations in the credit relationship process

- Delayed sending or delaying sending financial statements at the request of banks without transparent and convincing explanations

- There are no reports or forecasts about cash flows

- Proposing to reschedule debt payments, adjust debt terms many times forunknown reasons, or lack convincing and objective grounds for extending or changing debtterms

- Unusual decrease in deposit account balances

- Delay in paying interests and fees when due

- Inadequate and punctual payment of principal debts

- Occurrence of overdue debts due to inability or unwillingness of customers to repay

- Product sales and debt recovery were slower than expected

- Loan requirements frequently increased, requiring loans to exceed expected demand.

- The collateral is not qualified, the value of the collateral decreases compared

to the original price There is an indication that the property has been leased, sold, orchanged

Identifying signs from the business, financial and management situation of borrowers.

- There are large disparities between an actual revenue or cash flow compared

to expected when the customer asks for a loan

- Adverse changes in capital structure, liquidity ratios or client activity

levels

- Unreasonable expenses appear more and more

- Regularly change the organization of the executive board

- There are disagreements and conflicts in the management and administration, disputes during the operation and management sewing

- There are signs of finding out that the wrong project appraisal and surveyprocess and quality lead to ineffective investment in the project, difficulties, and risks

- Due to internal pressure leading to the market launch of products and services while the ripe conditions are not met

- Difficulties in developing new products and services

- Changes from State policies affect exchange rates, interest rates, changes intechnology, production techniques, consumer tastes, loss of suppliers or large customers, andmore competitors have real effects benefits to the KH's the production and business plans andstrategies

- Natural disasters, fires, epidemics, etc

- For personal clients, there are signs of a long-term illness or death of the borrower

Signs from the bank.

- Signs in the bank's credit process

- Signs related to the qualifications and qualities of credit officers

Signs in the bank's credit process.

- Credit judgments are based on uncertain commitments and lack of customer guarantees

- Credit growth is too fast, exceeding the bank's ability and ability to control and capital

- Granting credit based on unusual events: mergers, changing legal units from branch to independent company, etc.

- Too specific, rigid or loose credit policies create loopholes for customers to take advantage

- Provide bulk credit to customers who do not have optimal market segments

- Tend to over-compete, lower credit interest rates, service fees, or implement a strategy of "retaining" customers by lowering lending standards

- There is a slight change in the credit structure: too focused on a few specific customers or industries

- Measures to conceal the credit quality situation: increase outstanding loans, loan reversal, debt rescheduling, debt write-off

Signs related to the qualifications and qualities of credit officers.

- The credit profile is incomplete, lacks full compliance with current regulations

on credit approval

- Drafting unclear, unclear credit contracts, unspecified repayment schedule for each loan, intentionally negotiating credit principles with customers

- Lack of selectively obey the direction and direction of the loan

- There are 'hands in relationships with customers in the credit appraisal,disbursement and loan use monitoring: Falsifying the indices that reflect customers' financialinformation and repayment ability

Measuring

Credit risk measurement is the construction of an appropriate model to

quantify the customer's risk level, thereby determining the risk premium andmaximum safe credit limit for customers and setting up risk provisions

Methods: using models to measure risk.

In risk management, it is necessary to have a measuring system measuringcredit risks to classify the impact of risks in banking operations, thereby givingspecific measures to manage risks at different levels

Qualitative models - 6C model

The focus of this model is to consider whether the borrower has the goodwilland ability to repay loans when they are due Specifically, it includes the followingsix elements:

- Character: The credit officer must clarify the purpose of the client's loan

application, whether the loan purpose is in line with the bank's current credit policy, and atthe same time reviewing the history of borrowing and debt repayment with

old customers New customers need to collect information from many other sources such as the Risk Prevention Center, other banks, or the mass media.

- Capacity: Depending on the law of the country Borrowers must have the civil

legal capacity and civil act capacity

- Cash: It is necessary to identify the source of the borrower's debt repayment,

such as cash flow from sales or income, money from asset liquidation, or money fromsecurities issuance Then it is necessary to analyze the financial situation of the borrowerthrough the financial ratios

- Collateral: This is a condition for the bank to grant credit and is the second

source of assets to repay loans to banks

- Conditions: Bank specifies the conditions depending on credit policy in each

period

- Control: Evaluate the effects due to changes in laws, operating regulations on

customers' ability to meet the bank's standards

The 6C model is relatively simple but depends too much on the accuracy ofthe collected information sources, the ability to predict, and the level of analysis andsubjective assessment of the credit officers

Credit risk quantification models

The purposes of these models are to:

- Establish terms of the number of factors that are important for explaining default risk

- Evaluate the level of the relative importance of these factors

- Completing the valuation of default risk

- The basis for screening the borrowers

- Calculate the need for reserves required for future credit losses

There are two popular models:

Linear Probability Model (Linear Probability Model)

This model, based on historical data, calculates the correlation coefficient (βj)j)between the cause variables j and the risk of default on loan i (Xij) Let Zi be thedefault probability of the borrower i is:

Zi = Σ (βj × Xij) + errorj × Xij) + error

financial factors (Xj) From this model, the borrower's default probability iscalculated based on historical data Altman built the scoring model as follows (PhD.Nguyen Quoc Toan, 2015):

Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5

Inside:

X1 = "Net working capital / Total assets" ratio

X2 = "Retained Earnings / Total Assets" Ratio

X3 = "Profit before tax and interest / Total assets" ratio

X4 = “Market share price / carrying value of long-term debt” ratio

X5 = “Revenue / total assets” ratio

Thus, the higher the Z number, the lower the borrower's default and viceversa This is an objective basis by which to rank customers according to their risk ofdefault The Z-score is an aggregate measure of customer default probability.According to calculations and practice shows:

- If Z> 3: The business is in a safe area, not in danger of bankruptcy

- If 1.81 <Z <3: The company is in a warning area, it may be in danger of bankruptcy

- If Z <1.81: The business was in a dangerous area, high risk of bankruptcy Withthis model, banks and customers can measure and compare specific Z-

scores for each loan Besides, the volatility of Z-scores predicts a customer's ability

to convert credit ratings

In addition, some more modern models that use more financial market data such as:

Mortality rate derivation of credit risk Risk-adjusted return on capital (RROC) Option Model of default risk

Controlling

Credit risk control: techniques, tools, strategies, and processes that aim totransform an organization's risk through avoidance, prevention, and minimization bycontrolling frequency and degree of risk and loss

To limit the risk firstly must be taken precautions Preventive measures arebuilt based on the causes of risks:

- Force majeure objective causes: prediction, forecasting and provisioning

(e.g., credit risk dispersion, loan insurance, use of derivative instruments, )

- Causes from customers: appraisal to sort, screen and select customers;

supporting customers to use the capital for the proper purpose

- Causes from the bank:

Improving banking technology

Reasonable credit policy and maintaining reserves to deal with risks, well complying with provisions to deal with risks

Improve the qualifications and quality of bank staff,

When risks happened: take measures to minimize and overcome

consequences

Credit risk control methods:

Controlled by conducting internal inspections and control.

- Establish policies and processes for control objectives to ensure compliancewith legal regulations, meet management requirements to reduce risks, prevent fraud, bringsafety and effectiveness for credit operations Control policies and procedures must be linked

to daily credit activities In that process, control points have been installed to minimize risks:from compliance with legal documents attributable to the issuance of appropriate internalpolicies, regulations, and procedures

- Carrying out control procedures corresponding to the set policies Inparticular, the essential issue is that all bank members need to be appropriately aware of theimportance of internal control and be mindful of their responsibilities as a controller forabsolute compliance the provisions of the law, the internal policy has set out

- Verify and evaluate the implementation of these policies is complied with ornot At the same time, it is necessary to assess the suitability and effectiveness of thosepolicies that need to be amended or not

Provisioning for risks

- Derived from the nature of giving activities borrowing is when the loancontains risks However, this is a speculative risk, so the bank must weigh the opportunity tocreate a profit and the risk of loss to accept a reasonable level of trouble with the desire toachieve the desired profit Once a risk is received, it is necessary to make a financial estimate

so that when the risk occurs, it will be promptly overcome to compensate for the loss This isthe method through loss keeping The retention is done in a proactive and planned mannerthrough periodic debt classification and provisioning for risks This action will give the bank

a sense of strict risk control because when risks occur, the bank will suffer losses The riskprovision is the accrual expense, thus increasing costs and affecting the bank's

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profitability The risk provisioning at banks has the exact nature of the form of

hedging (MBA Nguyen Quoc Toan, 2015)

Derivative tools for controlling risk:

- Credit Default Swap (CDS)

- Credit option contract (Credit Default Option)

- Total Return Swap Contract

- Credit Linked Note (RR)

Credit-linked notes

- A combination of conventional debit and credit franchise agreements

- Help banks are more flexible in the payment process and the right to reduce the payment rate if there are significant changes in some factors

- Example about Credit-linked notes: Banks issue bonds to mobilize capital toreserve for a group of loans with a coupon rate of 10% / year This bound bond stipulates that

if the credit loss rate is too large (for example, 7% of total outstanding loan), the bank willonly have to pay the investors the 7% coupon rate

Bank guarantees from the investor for the credit both in terms of cost and supervision (PhD Phung Thanh Quang, 2019)

Handling

It means that banks use measures to recover non-performing loans fromcustomers In the event of failure to recover debts, the bank will use internal andexternal financial sources to offset the loss of loans when risks occur After beingtreated, risk debts will be recovered or transferred to off-balance sheet monitoring

Views on handling non-performing loans:

- Limit direct administrative measures, increase indirect handling and

settlement through the market

- Minimize losses for both customers and banks

Methods of handling non-performing loans: Directly handling and

handling through the market (PhD Phung Thanh Quang, 2019).

o Debt freezing, interest reduction.

o Liquidation of property assets

o Convert debt into equity

o Use DPRR, transfer the debt to off-balance sheet monitoring

o Debt sale to Vietnam Asset Management Company (VAMC)

For Activities of Banking:

Personal credit risk reduces the bank's prestige: A bank with a great personalcredit risk is a bad performing bank which makes people less trustworthy fromwhich, it finds difficult to mobilize abundant capital Foreign banks also shunned,did not grant credit lines, did not open agency relationships As a result, foreignbanks do not grant credit lines and expand agency relationships

Personal credit risk makes the solvency of banks decline: Personal credit risksmake repayment difficult while deposits and savings of residents still must pay ontime While the bank could not mobilize an abundant source of capital due to the loss

of credibility, the quantity of people withdrew increasing that makes the bankdifficult in the payment process

Personal credit risk makes profits decline: Personal credit activities createover 20% of the assets of a commercial bank, which is one of the main profit-making activities for commercial banks Therefore, if there is a risk, the bank'sassets will decrease and the bank's profit will decrease, affecting the interests of theshareholders.

The risk of personal credit makes the psychology of bankers lose confidence

in their ability to control their loans, the boredom of working ineffectively results tothe bank's operations decline

Personal credit risk leads to bankruptcy: If the effects of personal credit risk

in the abovementioned aspects are not overcome and continue to develop to a certainextent, the bank will go bankrupt

We can see that the importance of personal credit risk management for banksand the economy is not minor Personal credit risk management will help the bankminimize business risks and ensure profitability From there, the country's financialsystem will avoid risks and limit problems related to the financial crisis

1.3 Factors affect personal credit risk management.

1.3.1 Internal factors.

Internal factors of commercial banks that have essential effects on thepersonal credit risk management of commercial banks include:

Bank credit policy: Credit policy is only effective when built based on

objectivity and the seriousness of promulgation and application The development ofunreasonable credit policies: such as the lack of a scientific credit policy, thegovernance of the loan portfolio by field forte, the appropriate model for quantifyingthe risk level of Since then, to determine the maximum risk premium and maximumsafe credit limit for a customer as well as to make a risk provision, it has not beenbuilt by commercial banks This will make it difficult for credit officers andregulators to make safe and effective credit decisions

Internal credit process:

- Credit information is only practical when built based on collectinginformation of each bank about customers, industries, the economic environment in whichcustomers are operating, about new documents that have been issued, about domestic andforeign market price movements Especially warnings about the banking sectors that banksare and will invest in have not been regularly and systematically implemented Sometimes, italso depends on quite a lot on the data provided by customers but has not actively searchedfor information or other words

exists extreme information situation between commercial banks and borrowers Thisleads to the opposite choice of commercial banks Therefore, inadequate, inaccurate,and timely credit information will increase credit risks in commercial banks.

- The appraisal depends quite a lot on the data provided by customers Theappraisal is one of the essential stages in making loan decisions to help banks prevent creditrisks However, the assessment of the prestige, governance capacity, and financial capacity ofthe customers of commercial banks have many limitations When assessing human resources,especially the leadership of customers, there is absolutely no basis, mainly listingqualifications and working years Vietnam has no regulations on information transparency.Therefore, it can be said that the reliability of the financial statements is not high, especiallyfor private enterprises, so the analysis of the financial statements will not reflect the truenature of the financial capacity of the customer In addition, there are many subjective andobjective factors affecting the results of the loan plan/project, leading to the quality ofevaluation of the loan plan/project is not practical Therefore, the non-feasible projectevaluation has the most significant impact on the ability of commercial banks to recovercapital The above reasons limit the quality of appraisal and limit corporate credit risks ofcommercial banks

- There are many subjective and objective factors affecting the loan plan/projectresults, so the loan plan/project assessment quality is not regular, not systematic Just stop atthe level of checking on legal documents, periodically reassessing the value to adjust the loanbalance or request additional customers In addition, the subjective and objective factorsaffect the determination of the absolute value of the collateral between customers andcommercial banks, which significantly affects the purchase and sale of the assets Therefore,when there are risks, the disposition of assets to recover debt meets many difficulties Inaddition, the legal mechanism for loan security is not precise, subject to the adjustment anddomination of many overlapping legal documents, especially for real estate

- The monitoring of the borrower's activities to comply with the terms set out inthe credit contract between customers and banks reduces corporate credit risk at commercialbanks

The quality of human resources in credit activities: From credit

approval level to credit proposing officer in case of limited capacity and expertise inthe appraisal and control of decision-making or sensitive reasons leading to lack ofethics in the grant process credit This is a group of factors that cause severe risks inpersonal credit risk management

The quality of the banking information system: Limited information,

lack of information, and imbalanced information make it difficult for banks toexpand and control credit, leading to contrary choices and ethical risks, increasingbanks' risk of non-performing loans The risk prevention information system has notpromptly met the needs of banks when facing risks

Internal control: The internal control is faster than the state bank

inspection It will help the bank to execute quickly and promptly when there are anyproblems After all, checking that is done regularly with an enterprise will helpreduce its risk However, the internal inspection of banks is almost only to deal with,making the test results ineffective

1.3.2 External factors.

Economic environment

- In the market economy, the Government's macroeconomic policy plays adecisive role in the operation of the national economy in general and commercial banks'monetary and credit business

- Macro-economic policies of the Government include policies on the economy,finance, and monetary, and external economy If the Government changes one of the abovepolicies, it will immediately affect enterprises' production and business activities The peopledirectly affected are commercial banks and their business operations Different products arealways closely linked with business activities Therefore, if the Government'smacroeconomic policy is appropriately consistent with the reality, it will contribute topromoting production and business development, creating conditions for businesses to dobusiness effectively However, vice versa will also inhibit the production and businessdevelopment, making businesses difficult, even losing money or bankruptcy

- The economic and legal environment creates the business environment ofbusinesses, and at the same time, creates a lending environment for commercial banks Thelending environment has a positive or negative impact on credit activities It will contribute tolimit or increase risks in the lending activities of commercial banks.

Social environment

- Significant fluctuations in the political economy in the world always affect thebusiness of enterprises and banks Today, along with the expansion of economic, cultural,and political exchanges between countries, world economic life has also changed To developthe economy fully, it is necessary to open the economy to absorb modern technical andscientific achievements of developed countries, exchange, import and export goods, servicesand investment or borrow money from abroad All these activities create the externaleconomic relations of the national relationship All these activities create the externaleconomic relations of the countries together Political changes can most likely lead tofluctuations in the international trade balance, currency exchange rates In addition, it alsoaffects the domestic market, such as the prices of raw materials, goods, services, marketinterest rates, and currency demand This directly affects the production and businessoperations of enterprises, and the target is commercial banks

CHAPTER 2: FACT FINDINGS OF PERSONAL

CREDIT RISK MANAGEMENT AT TECHCOMBANK

2.1 Introduction of the Techcombank

2.1.1 History and development of Techcombank

Techcombank was established in 1993, in the context of Vietnam's economyshifting to a market economy Back then, Vietnam undertook and witnessedcomprehensive changes in economic development, unleashing an explosive level ofgrowth that doubled the GDP expansion of the previous decade

This macro-economic expansion was the first step towards a more significantshift in the local need for capital as well as the global appetite for investmentopportunities in Vietnam, and the nation saw a fresh influx of foreign directinvestment as well as the liberalization of the private sector

From modest beginnings in 1993 with charter capital of a mere VND20billion, we have grown to become the third-largest bank in terms of chartered capital

in Vietnam Our success is rooted in the strategy of focusing on the customers andmeeting their evolving needs Today, we provide a broad range of products andservices to more than 6 million retail and corporate customers in Vietnam throughour extensive network of 1 head office, 2 representative offices, and 314 transactionoffices across 45 cities and provinces nationwide, satisfying not only traditionalbanking needs but also security and wealth management needs In 2018, among thenine largest joint-stock banks in Vietnam, Techcombank led in terms of non-interestincome ratio, cost-to-income ratio, return on assets, and total operating income peremployee

In 2018, the company listed its shares on the Ho Chi Minh City StockExchange The company raised more than $900 million through the IPO, making itVietnam’s largest IPO to date Most of the IPO shares were reserved for so-calledcornerstone investors, i.e., institutional investors which included GIC, Fidelity, andDragon Capital

Today, Techcombank is one of the largest joint-stock banks in Vietnam As

of 2019, it has more than 300 es and serves more than 5 million customers

- Full Name: Vietnam Technological and Commercial Joint Stock Bank

- Head office: 191 Ba Trieu Head Office, Hai Ba Trung district, Hanoi,

- To provide our employees with a great working environment where they have multiple opportunities to develop, contribute, and build a successful career

- To offer our shareholders superior long term returns by executing a growth strategy while enforcing rigorous corporate governance and risk management bestpractices

fast-CORE VALUES: Techcombank’s “corporate culture” is based on 5 core

values that create strength for Techcombank and is the foundation for theorganization’s sustainable development, as well as bring greater success forcustomers

- Customer centricity: "Because we only succeed when customers succeed."

Techcombank always put us in customers’ position in every thought andaction to bring the best benefits and experience for customers We protect ourcustomers' interests by always complying with the laws and the Bank’s regulations

- Innovation & Creativeness: "To always lead."

All Techcomers are always ready to lead the change to create new results

with new working ways, and great results with breakthrough ways

- Collaboration for common objectives: "To form a collective strength for a

sustainable development and greater success with the Bank."

Techcombank's strength is created from a collection with the foundation of unity in thinking, in action

- Self-development: "To be able to grasp the opportunity of development with

the bank."

Techcomers always actively learn to improve their capabilities and tocontinually set higher goals for themselves along with the development and success

of the Bank Techcombank also creates conditions and opportunities for the staff todevelop and to succeed

- Work efficiently: "To bring about greater success with suitable resources."

With the goal of "All actions are directed towards specific and clear results",

we always work with a plan and discipline in implementation, as well as ensureresources are allocated optimally

Guarantee, consultancy, investment trust for customers according to current regulations

Domestic payment with electronic money transfer methods, collectionrequest, payment order, and international payment with electronic money transfermethods, collection request, and letter of credit

Organize operations, make business plans, and report, inspect, and control according to the Bank’s regulations

Develop new services, find new customers, and produce products: cards, foreign trade finance, factoring etc

2.1.3 Managerial apparatus of Techcombank

2.1.3.1 Organizational structure diagram

Organizational structure diagram of Techcombank Vietnam

Figure 2.1: Organizational structure of Techcombank Vietnam

Source by Techcombank's Financial Report Annual 2020

Organizational structure diagram at Techcombank Ba Trieu

Board of Manager

usiness customer Psersonalvicedepfinartmentncebanking serviceCustomerdepartmeServiceIndternapartionalment Payment depaPrioritytmentcustomer service tea

Figure 2.2: Organizational structure at Personal Customer Deparment

of customers

Accounting and transaction department

- The accounting department has the tasks: accounting according to arising transactionsand financial statements according to the Vietnamese accounting standards issued by the Ministry of Finance andAccounting In addition, the accounting department also post-checks the payment vouchers of the department in thebranch; Provides information on the financial position and liquidity of the branch At the same time, deducting andpaying corporate income tax and other taxes, building comments on the implementation of the financial andaccounting regime

- Transaction department is responsible for: directly contacting customers and processingarising transactions; open accounts for customers; Make domestic payments with methods of electronic moneytransfer, payment orders, checks, etc Conducting spot trading, foreign currency exchange; Advise customers with

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necessary information about using the banking services and receive feedback

information from customers

- The treasury division has the tasks of importing and exporting money,preserving, and transporting money, ensuring the balance of funds in VND, foreigncurrencies, checks and checks Manage the vault of professional funds, collateral withvaluable vouchers

Business customer service department

- Provide long-term, medium-term, and short-term loans in VND and foreigncurrencies to corporate customers Directly approach customers to collect necessaryinformation, consult, analyze corporate loan documents, manage collateral, disburse loans ifthe branch director approves the application Then monitor and supervise the use of capital,corporate finance, recovery of principal and interest, transfer of overdue debts

- Analyze, evaluate, score points for each customer to decide the type of loan for every kind of customer: loan each time, credit line, overdraft loan, etc

- Business Service Department is also responsible for guaranteeing the businessafter the appraisal and approval of the leader with reasonable fees according to the level ofrisk with the following forms: loan guarantee, payment guarantee, guarantee bidding,guaranteeing the quality of products and services, etc

Personal customer service department.

- The Personal Customer Service Department is responsible for being the focalpoint for implementing banking services to personal customers The employees of thisdepartment are charged with establishing, maintaining, and expanding relationships withpersonal customers, keeping old customers, and looking for new ones In addition, thedepartment must meet the everyday needs and develop new retail banking services atTechcombank

Appraisal Committee

- Collaborate with customer experts to evaluate customers' business plans and conduct re-evaluation (re-evaluation)

- Performs checks and re-evaluations of customer collateral valuations

- Under the authorization of the General Director and the Branch Director to coordinate with the business departments to evaluate collateral

Control team

- Responsible for inspecting and supervising the compliance of the processes inthe process of professional performance and business activities in the bank In addition, thecontrol team must also check customer information during the

credit disbursement procedures Simultaneously act as the focal point to coordinatewith inspection teams, law agencies, auditing agencies in inspecting, examining, andauditing the branch's operations.

Control Board and customer support.

Includes two primary missions:

- Control: the controller receives and checks the records from the customerspecialist after they are approved and requested to be corrected Then, they will supplementthe documents that have never been assessed before transferring to the head of thesupervisory board for the last time

- Business support: is responsible for assisting customer specialists in analyzingand evaluating projects, collecting information from different sources related to theproduction and business activities of customers In addition, they must calculate financialratios based on the financial statements and investment projects of their clients

General Office

- Carry out the administrative and human resources work of the branch

Priority customer service team

- They are responsible for taking care of Techcombank VIP customers Thisdepartment will handle personal customers' issues with a deposit limit of over VND 5 billion

at Techcombank

2.1.4 Analysis Financial Statement of Techcombank from 2017 to 2020

Table 2.1 Income Statement at Techcombank from 2017 to 2020

Net Interest Income 8,930,412 11,126,535 14,257,844 18,751,209Net profit/loss from

3,811,902 3,535,984 3,253,353 4,188,778service activities

Net gain/loss from forex

and gold trading

Net gain/loss from

trading securities for

Net operating profit

before the cost of

11,645,523 12,507,261 13,755,636 18,411,331provision for credit

Source by Techcombank's Financial Report Annual 2020 Based on Techcombank's

report on business results for 2017-2020, it found that the growth rate of TCB has

steadily increased year by year This is due to thecontinuous credit growth of 16.7% -18.8% for four consecutive years and guaranteedasset quality, reflected in the 3-5 debt ratio, especially at the end of 2019 when theindex stopped at 1.3% This is due to the steadfast pursuit of a low-risk, high-returnstrategy As a result, the bank has succeeded in balancing revenue structure, reducingdependence on lending activities, and reducing provision costs The most obvious