CASA: Current Account and Savings Account CCA: Center of Credit Admin CLV: Customer Lifetime Value CSM: Credit Solution Management CPM: Credit portfolio management CRM: Credit risk manag
INTRODUCTION
Commercial banks play a vital role in fostering economic growth by providing loans to creditworthy borrowers, enabling businesses to invest in equipment, expand their workforce, and increase trade Their primary activities—accepting term deposits and offering lending services—support this economic vitality in a competitive market Effective credit risk management remains a crucial component of financial risk management, ensuring the stability and sustainability of banking operations amidst diverse product offerings.
Effective credit risk management is crucial for banks, as it involves accurately distinguishing between good and bad customers to ensure financial stability While banks cannot completely eliminate bad debts, implementing robust evaluation and control systems can significantly reduce their impact For Vietnam Technological and Commercial Joint Stock Bank, analyzing the root causes of credit issues and establishing an efficient risk management system are essential steps By leveraging statistical analysis and data synthesis, the bank can develop practical strategies to maximize credit returns and minimize associated risks.
This research aims to identify the most suitable theoretical framework for credit risk management in the banking sector, analyze the current practices at TCB, and propose actionable recommendations to enhance credit risk management efficiency.
● What are the major contents of Credit risk management in TCB?
● What is the current situation of credit risk management activities in TCB?
● What needs to be done to strengthen the credit risk management in TCB?
The author conducted the data collection from two sources: Primary data and secondary data.
Information was collected from statics data and documents of SBV, TCB internal reports/documents and other scientific magazines, websites, and research on the credit risks in banking sector.
Primary data was collected through in-depth interviews with five managers from both the Head Office and Branches, including the Head of the Corporate Credit Risk Department, Senior Manager of the Legal and Compliance Control Department, Head of Credit Administration, Head of So Giao Dich Branch, and Head of Dong Do Branch These interviews focused on assessing the current state of TCB’s Credit Risk Management (CRM) system and identifying opportunities for improvement The insights gathered from these key personnel provided valuable understanding of existing practices and challenges, forming the basis for proposing targeted initiatives to enhance TCB's credit risk management effectiveness.
The author conducted comprehensive research by gathering secondary data and conducting in-depth interviews with industry experts to develop an effective research model Through synthesis, comparison, and detailed analysis, the study identifies actionable solutions to enhance TCB CRM systems, ensuring improved customer relationship management.
Research Objects: Credit risk management in TCB.
● Timing: Data was collected from 31/12/2019- 30/6/2021.
CHAPTER 1: THEORETICAL BACKGROUND ON CREDIT RISK AND CREDIT RISK MANAGEMENT IN COMMERCIAL BANK
CHAPTER 2: THE SITUATION CREDIT RISK MANAGEMENT IN TCB
CHAPTER 3: RECOMMENDATION TO IMPROVE CREDIT RISKMANAGEMENT IN TCB
THEORETICAL BACKGROUND ON CREDIT RISK AND CREDIT
ON CREDIT RISK AND CREDIT RISK MANAGEMENT IN COMMERCIAL BANK
1 Credit risk in commercial bank
2.1.1 Risk definition and classification in commercial bank
In a market economy, all business activities inherently carry risks, and the banking sector is no exception Financial risk in banking refers to the potential for lower-than-expected profitability due to adverse internal or external shocks While higher risk can lead to greater profits, banks must carefully identify, measure, and manage these risks to prevent unforeseen losses As emphasized by David H Pyle (1999), effective bank risk management is essential for minimizing risks associated with loans, investments, and projects, ensuring the stability and profitability of banking operations.
2.1.1.2 Risk classification in commercial bank
Banks are currently facing emerging risks that can disrupt daily operations and negatively impact financial stability These undesirable events can lead to asset losses and reduce a bank’s net profit below expectations According to Hennie van Greuning and Sonja Brajovic Bratanovic (2020) in *Analyzing Banking Risk*, key risks in banking include credit risk, currency risk, market risk, liquidity risk, and operational risk, highlighting the diverse challenges banks must manage to ensure stability and profitability.
Figure 2 The major types of bank risks
Source: Hennie van Greuning and Sonja Brajovic Bratanovic (2020), Analyzing
2.1.2 Credit risk in commercial bank
Credit risk is defined as the possibility that a debtor, which can be an individual, company, or country, will be unable to repay the principal, interest, or other investment cash flows as outlined in the credit agreement This risk can lead to cash flow issues and impact a bank’s liquidity, emphasizing the importance of effective credit risk management in banking (Hennie van Greuning and Sonja Brajovic Bratanovic, 2020; Basel Committee on Banking Supervision)
(1999), Principles for the Management of Credit Risk, credit risk is defined as the possibility that a borrower can not meet its obligations under agreed terms Saunder
According to H Lange (1996), credit risk represents the potential for loss faced by financial institutions when a bank extends credit to a customer, but the borrower’s income fails to cover the repayment amount or cash flows are delayed beyond the anticipated schedule Managing credit risk is essential for maintaining the financial stability and profitability of banking institutions Proper assessment and mitigation of credit risk help prevent potential financial losses and ensure sustainable banking operations.
Credit risk Currency risk Market risk Liquidity risk Operational risk
Andrew Kimber (2003), Credit Risk: From Transaction to Portfolio
Management, credit risk can be divided into 2 types: Transaction risk or default risk and Portfolio risk.
Source: Andrew Kimber (2003), Credit Risk: From
2.1.3.1 Transaction risk or credit default risk
Default risk refers to the likelihood that a borrower will fail to make full and timely payments of principal and interest according to agreed terms This credit default risk arises from various banking transactions, including loans, bonds, securities, and derivatives, impacting the overall financial stability and investment return Managing default risk is essential for banks to minimize potential losses and ensure sound credit practices.
Downgrade risk: Risk ratings of issuers can be downgraded, thus resulting in downgrade risk
Portfolio risk encompasses two primary types: intrinsic risk and concentration (industry) risk Intrinsic risk stems from the unique internal factors and characteristics of individual borrowers or specific economic sectors, influencing their creditworthiness Conversely, concentration risk arises when a portfolio is overly exposed to the same borrowers or counterparties, increasing vulnerability to sector-specific downturns According to the Basel Committee on Banking Supervision (1999), effective credit risk management involves addressing both these risk types to ensure financial stability and reduce potential losses.
Comprises intrinsic Concentrati on risk Concentrati on risk or industry that causes large potential losses, threatens the bank's creditworthiness and core operations or impacts bank’s risk portfolio.
In a credit relationship, there are two key parties: the lender and the borrower Credit risk stemming from the business environment is referred to as objective risk, which can impact the stability of the lending process According to Allen N Berger & Robert DeYoung (1997), understanding problem loans and their relation to cost efficiency is crucial for managing credit risks effectively in financial institutions.
Commercial banks may face loan quality issues due to external events like regional economic downturns, which increase expenses for managing nonperforming loans and reduce operational efficiency Credit risk stems from factors such as natural disasters, epidemics, storms, and floods, as well as intensified competition among financial institutions leading to lax lending standards Additionally, inadequate support from credit management systems and fluctuations in interest rates, exchange rates, inflation, and input costs can impair customers' financial health, resulting in defaults and increased credit risk.
Risks arising from borrowers and lenders are called subjective risks Allen N. Berger & Robert DeYoung (1997) Problem Loans and Cost Efficiency in
Commercial banks often struggle with effective credit scoring, leading to the selection of unsuitable loans or projects A lack of expertise in collateral appraisal and insufficient monitoring of borrowers post-lending increase the likelihood of credit risk Incomplete credit assessments and missing crucial information can result in subjective decision-making and inadequate oversight, worsening operational risks Additionally, weak early warning systems hinder timely intervention, while staff with poor ethics and professional qualifications further elevate the risk of credit losses.
Borrowers may misuse capital by deviating from their original business plan or lack the necessary management expertise, leading to potential business failure when goods and services cannot be sold, resulting in cash flow issues and inability to repay loans Weaknesses and immoral behavior among borrowers can also increase the risk of losses for the bank Early detection by the bank is crucial to prevent such risks and mitigate potential financial losses.
Christopher L Culp (2001), The Risk Management Process: Business
Credit risk management (CRM) is a strategic process that involves identifying, measuring, and monitoring risks to ensure they are fully understood and maintained within accepted limits Effective CRM helps organizations mitigate potential losses by implementing robust strategies and tactics, aligning risk appetite with business objectives, and adhering to approved frameworks As highlighted by David, a comprehensive CRM approach is essential for managing credit risks responsibly and enhancing overall financial stability.
H Pyle (1999), Bank Risk Management, CRM is the practice of understanding and mitigating losses in banks.
2.2.2 The objectives of credit risk management
Effective credit risk management is essential for safeguarding a company's investments and optimizing cash flows According to Brian Coyle (2000), the primary objectives of credit management include protecting the company's investments in debtors and enhancing operational cash flow Implementing clear policies and procedures for granting credit, collecting payments, and mitigating the risks of non-payment is crucial As highlighted by Paul Hopkin (2018), a structured risk management framework helps in identifying, assessing, and controlling credit-related risks to ensure financial stability and sustainable growth.
Effective risk management is essential for ensuring the stability of profitability, maintaining consistent growth, and maximizing bank value In today's volatile market conditions, commercial banks face increasing risks, making robust credit risk management crucial The primary goal of credit risk management is to enhance the efficiency of credit activities while continuously improving their quality, thereby supporting the bank's overall stability and long-term success.
Specifically, good credit risk management supports commercial banks to lower credit risks and improve business safety
2.2.3 Roles of credit risk management in commercial bank
Credit risk poses significant threats to banks, borrowers, and the broader economy When credit risk materializes, commercial banks experience an increase in bad debts, higher provisioning requirements, and a reduction in lending activity, which weakens their financial stability Elevated bad debts hinder borrowers from obtaining future loans, lead to potential business failures, and heighten the risk of bankruptcy For the social economy, credit risk causes a slowdown in production and circulation of goods, undermining the economy's regulatory functions Additionally, depositors’ interests become vulnerable, compromising confidence in the banking system Effective management of credit risk is crucial to safeguarding financial stability and supporting sustainable economic growth.
2.3 Credit risk management contents in commercial banks
Christopher L Culp (2001), The Risk Management Process: Business
Strategy and Tactics, Credit risk management process can be presented by 1 circle with these 3 following steps:
Figure 4 Credit risk management process
Source: Christopher L Culp (2001), The Risk Management Process:
Christopher L Culp (2001), The Risk Management Process: Business
When developing CRM strategies and tactics, it is essential to consider two key dimensions: the portfolio level, which categorizes obligors, and the customer level, focusing on individual obligors An effective analysis involves identifying all potential risks by examining risk sources from both perspectives, enabling commercial banks to make informed decisions and proactively manage credit risks This dual approach ensures comprehensive risk assessment and enhances overall risk management effectiveness.
THE SITUATION OF CREDIT RISK MANAGEMENT IN TECHCOMBANK
Established in 1993, TCB emerged during Vietnam’s transition from a centrally planned economy to a market-oriented system This period marked significant economic reforms that fueled rapid growth, doubling GDP compared to the previous decade The macroeconomic expansion spurred increased demand for capital domestically and attracted global investment interest in Vietnam Consequently, the country experienced a surge in foreign direct investment and the liberalization of its private sector, laying the foundation for sustained economic development.
Founded in 1993 with a modest charter capital of 20 billion VND, TCB has grown to become Vietnam's second-largest joint-stock bank by chartered capital Its success is driven by a customer-centric strategy focused on meeting evolving needs Today, TCB serves over 6 million retail and corporate clients nationwide through an extensive network comprising 1 head office, 2 representative offices, and 314 transaction offices across 45 cities and provinces The bank offers a comprehensive range of financial products and services, including traditional banking, security, and wealth management solutions.
In 2018, Techcombank (TCB) distinguished itself among Vietnam’s nine largest joint-stock banks by leading in key performance indicators, including non-interest income ratio, cost-to-income ratio, return on assets, and total operating income per employee.
1994-1995- Ho Chi Minh City branch was established, starting the process of fast expansion of TCB in the main urban areas.
The 1998-Head office was moved to TCB Building, 15 Dao Duy Tu, Hanoi
2004-Launched the new brand identity of the Bank
2005-Raised registered capital to VND 555 billion / USD 35.7 million
2011- Vietnam’s second-largest Vietnamese JSC bank
2018-Listed on Ho Chi Minh City Stock Exchange
TCB's core activities encompass collecting short, medium, and long-term deposits from both organizations and individuals, and providing a range of lending services across various terms The bank also offers SBV-approved settlement, cash management, and other essential banking services to meet customer needs Additionally, TCB invests in associates, joint ventures, companies, bonds, and engages in foreign exchange trading Leveraging advanced technology, TCB focuses on delivering customer-centered banking solutions that enhance efficiency and satisfaction.
In 2001, TCB became the first private bank to make a significant investment in its core banking system, allocating 20% of its charter capital, demonstrating its commitment to technological advancement This bold investment enabled TCB to develop a customer-centric, supply-driven banking platform that offers a comprehensive view of transactions and advanced analytical tools to better understand customer needs Leveraging customer-centric strategies and ecosystem modeling, TCB has effectively expanded its customer base and diversified its product offerings, strengthening its position in the banking industry.
● WB customers: Enterprises with the most recent year's revenue of more than
● SME customers in TCB are divided into 4 groups based on revenue size:
+MM: Enterprises with the most recent year revenue of 600-800 billion VND
+Upper SME (USME): Enterprises with the most recent year's revenue of 200-600 billion VND
+SME: Enterprises with the most recent year revenue is 20-200 billionVND
+Micro SME (MSME): Enterprises with the most recent year's revenue is less than 20 billion VND.
● Individual customers: focus on the middle class and higher
In TCB, the organizational structure is described in the following diagram:
The Board of Directors is responsible for establishing and overseeing TCB’s financial risk management framework to ensure the bank’s safe and sustainable growth They develop risk management policies and strategies, set business limits, and approve high-value transactions in accordance with legal and internal standards Additionally, the Board makes key decisions regarding organizational structure and appoints top executives, ensuring all risk management practices align with the Bank's Charter and shareholder resolutions.
The Audit and Risk Committee (ARCO), established by TCB's Board of Directors, oversees auditing, risk management, and monitoring functions within the organization ARCO is tasked with developing and supervising the risk management framework, establishing the company's risk appetite, and approving risk management policies Additionally, it approves market risk and credit risk limits for various industries, business lines, and overall risk exposure to ensure effective governance and risk control in TCB’s operations.
The Risk Management Division (RMD) is responsible for developing comprehensive credit risk management strategies and processes, as well as identifying and measuring credit risks It oversees and controls the credit activities within the business sector to ensure compliance and risk mitigation Additionally, the RMD holds the authority to approve loans, ensuring that credit offerings align with the institution’s risk appetite and regulatory standards.
Business divisions such as Wholesale Banking (WB), Business Banking (BB), Personal Finance Services (PFS), and Markets must strictly adhere to credit risk policies These divisions are responsible for driving business development, identifying potential credit risks, and proposing effective solutions to mitigate and prevent credit-related issues, ensuring the bank's risk management and growth objectives are met.
● All staff in the remaining divisions: required to proactively identify and report on risk inside and outside of the bank and directly report to the Head of appropriate divisions.
Table 3.1 – The asset growth rate
Source: TCB 2019-2020 annual reports and 2021 semi-annual report
Total assets and shareholders' equity increased steadily over the years, in three consecutive years from 2018 to 2021, although this is a difficult economic period, in
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The lending has grown steadily over the years, increasing by 10% in Jun
2021 when compared to 2020; 2020 increased by 20% compared to 2020 with an absolute amount of more than 27,000 billion VND and 46,000 billion VND
Table 3.2 - Lending growth rate in recent 3 years
Total lending outstanding (VND million) 305,144,355 277,524,615 230,802,027
Source: TCB 2019-2020 annual reports and 2021 semi-annual report
Net fee and ‣ Net interest income commission income 2,782,154 4,188,778 3,253,353 3,272,580
Provision expenses for credit loss -1,448,488 -2,611,035 -917,368 -1,846,245
Source: TCB 2019-2020 annual reports and 2021 semi-annual report
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The ratio of return on assets (ROA) has grown steadily over the years The ratio of return on equity (ROE) in 2020 decreased slightly by 0.2% compared to
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Profit before tax increased VND 2,177 billion and VND 2,692 billion in
In 2020, TCB experienced a 20% increase in profits compared to 2018, and a 23% rise compared to 2019, demonstrating consistent growth despite challenging economic conditions Profits steadily grew by over 20% from 2018 to 2021, highlighting the bank’s resilience and effective business strategy The return on equity remained stable and high throughout this period, establishing TCB as one of the leading joint-stock commercial banks in profitability These results reflect TCB's rapid and balanced growth in both scale and profits, showcasing its sustainable development even in a difficult and competitive business environment.
3.2 Credit Risk Management in Techcombank
3.2.1 Credit risk management process in Techcombank
The CRM process at TCB is structured into three key steps, as explained by the Senior Manager of the Legal and Compliance Control Department Risk identification involves two levels: the portfolio level and the customer level Risk measurement focuses on two main aspects: the 5C assessment and internal credit scoring Since risks are inherently linked to banking activities, risk treatment emphasizes avoiding critical risks, accepting medium and low risks, and transferring risks when necessary During the implementation phase, continuous evaluation ensures effective management of identified risks.
3 factors (i) the human resources, (ii) the statistical model, and (iii) the technology.”