GRADUATION MASTERS THESIS MASTER IN FINANCIAL MANAGEMENT

GRADUATION MASTER''''S THESIS MASTER IN FINANCIAL MANAGEMENT GRADUATION MASTER''''S THESIS MASTER IN FINANCIAL MANAGEMENT Studen Name Le Duc Nhat 1 ABSTRACT ACKNOWLEDGEMENT TABLE OF CONTENTS ABSTRACT 2 ACKN[.]

ABSTRACT ACKNOWLEDGEMENT TABLE OF CONTENTS

1.1 Rủi ro tín dụng trong hoạt động của Ngân hàng 10

1.1.5 Một số chỉ tiêu đánh giá rủi ro tín dụng 12

1.2 Quản trị rủi ro tín dụng trong Ngân hàng thương mại 14

1.2.1 Khái niệm quản trị rủi ro tín dụng 14

1.2.2.Yêu cầu trong quản trị rủi ro tín dụng 14

1.2.3 Các nguyên tắc quản trị rủi ro tín dụng 14

1.2.4 Nội dung quản trị rủi ro tín dụng 15

1.3 Các yếu tổ ảnh hưởng đến quản trị rủi ro tín dụng tại Ngân hàng thương mại 21

MASTER IN FINANCIAL MANAGEMENT

Credit risk management at Vietnam Joint Stock Commercial Bank for Industry and Trade,

Thanh Xuan branch

Graduate student: Le Duc Nhat Supervisor: Dr.Tran Tat Thanh

HA NOI, 2020

ABSTRACTThesis Title ： Credit risk management at Vietnam Joint Stock

Commercial Bank for Industry and Trade, Thanh Xuan branch

Pages: 68

University：Vietnam National University

Graduate School：International School

Date：Octorber, 2019 Degree：Master

Graduate Student：Le Duc Nhat Supervisor：Dr.Tran Tat Thanh

I chose this topic for my master's thesis based on the urgency of controlling and limiting risks to ensure the safety and efficiency in credit activities of commercial banks

This thesis systematizes theoretical and practical issues about credit risk management in commercial banks, meanwhile evaluating the credit risk management of Vietnam Joint Stock Commercial Bank for Industry and Trade - Thanh Xuan branch Thereby, solutions will be discussed to enhance credit risk governance in the borrowing activities of banks

Keywords: Risk management, credit risk, commetcial bank, outstanding

debt, bad debt

To complete this thesis, apart from my efforts, I have received the enthusiastic guidance of my lecturers and my supervisor, as well as the unconditional encouragement and support of family and friends throughout the research process

With sincere affection and deep gratitude, I would like to express the most sincere gratitude to those who have cared for and supported me during this pressured time First of all, I would like to express my thanks to the International Faculty / Hanoi National University and all the teachers who have devotedly taught and facilitated me to help me throughout the learning process In particular, I would like to express my deepest thanks to my direct instructor - Dr Tran Tat Thanh, who dedicated, guided, edited and encouraged

me in the process of completing this thesis

Besides, I would like to express my sincere thanks to the Board of Directors and the Finance and Accounting Department of Vietnam Joint Stock Commercial Bank for Industry and Trade - Thanh Xuan Branch for creating favourable conditions and helping me in collecting data, as well as dig deeper into the business situation of the Branch

Lastly, I want to give my greetings to all the teachers, hope they are in good health and achieve more success in their careers

Thank you!

Author

Le Duc Nhat

TABLE OF CONTENTS

ABSTRACT……… 2

ACKNOWLEDGEMENT……… 3

TABLE OF CONTENTS ……… 4

LIST OF TABLES ……… 7

LIST OF FIGURES ……… 8

INTRODUCTION ……… 9

1 Executive summary……… 9

2 Objectives of the study ……… 10

3 Object and scope of the study ……… 10

4 Research methodology ……… 10

5 Structure of the study ……… 11

CHAPTER 1: FUNDAMENTAL THEORY OF CREDIT RISK MANAGEMENT ……… 13

1.1 Credit risk in banking operation……… 13

1.1.1 The concept of credit risk ……… 13

1.1.2 Credit Losses classification ……… 14

1.1.3 Consequences of credit risk ……… 15

1.1.4 Assessing credit risk ……… 17

1.2 Credit risk management in commercial banks ……… 20

1.2.1 Definition of credit risk management ……… 20

1.2.2 Requirements in credit risk management ……… 20

1.2.3 Principles of credit risk management ……… 20

1.2.4 Content of credit risk management ……… 21

1.3 Factors affecting credit risk management at a branch of a commercial banks 26 1.3.1 Subjective factors ……… 26 1.3.2 Objective factors ……… 27 CONCLUSION OF CHAPTER 1 ……… 30

CHAPTER 2: CURRENT CIRCUMSTANCE OF RISK MANAGEMENT IN VIETNAM JOINT STOCK COMMERCIAL BANK FOR INDUSTRY AND TRADE - THANH XUAN BRANCH ……… 31

2.1 General introduction about Vietnam Joint Stock Commercial Bank for Industry and Trade - Thanh Xuan branch ……… 31

2.1.1 Historical establishment and development of the branch ……… 31 2.1.2 Organizational structure ……… 32

2.1.3 Business performances and earning results of Vietnam Joint Stock Commercial Bank for Industry and Trade - Thanh Xuan branch in recent years 33

2.2 Actual situation of credit risk management at Vietnam Joint Stock Commercial Bank for Industry and Trade - Thanh Xuan Branch ……… 38

2.2.1 Circumstance of credit risk at Vietnam Joint Stock Commercial Bank for Industry and Trade Thanh Xuan branch ……… 38

2.2.2 Actual situation of risk management of Vietnam Joint Stock Commercial Bank for Industry and Trade - Thanh Xuan Branch ……… 40

2.3 Some limitations in risk management activities of the Vietnam Joint Stock Commercial Bank for Industry and Trade Thanh Xuan branch ……… 43

2.3.1 Restrictions on credit file evaluation and credit rating performance ……… 43

2.3.2 Limitations in inspection, control and supervision Monitoring after disbursement has not been effective ……… 44

2.3.3 Restrictions on the handling of bad debts ……… 44

2.3.4 Business restrictions on credit officers ……… 44

2.4 Reasons for the limitations in risk management activities of The Vietnam Joint Stock Commercial Bank for Industry and Trade, Thanh Xuan branch…… 45

2.4.1 Subjective causes ……… 45 2.4.2 Objective reasons ……… 47 CONCLUSION OF CHAPTER 2 ……… 51

CHAPTER 3: SOLUTIONS TO STRENGTHENING CREDIT RISK MANAGEMENT OF COMMERCIAL BANK OF INDUSTRIAL AND COMMERCIAL JOINT STOCK COMPANY OF THANH XUAN BRANCH … 52

3.1 Orientation to strengthen credit risk governance at Vietnam Joint Stock

Commercial Bank for Industry and Trade Thanh Xuan branch until 2021 …… 52

3.1.1 Business development orientation ……… 52

3.1.2 Orientations for strengthening credit risk governance ……… 53

3.2 Solutions to enhance credit risk governance at Vietnam Joint Stock Commercial Bank for Industry and Trade, Thanh Xuan branch ……… 54

3.3 Some recommendations ……… 58

3.3.1 Propose to the State ……… 58

3.3.2 For the State Bank ……… 59

3.3.3 Propose to Vietnam Joint Stock Commercial Bank for Industry and Trade 61 CONCLUSION OF CHAPTER 3 ……… 63

CONCLUSION ……… 64

REFERENCES ……… 66

LIST OF TABLES

Table 2.4 Proportion of provision to total outstanding loans 38

LIST OF FIGURES

Figure 2.1 Vietnam Joint Stock Commercial Bank for Industry and

INTRODUCTION

1 Executive summary

Vietnam’s economy in general and banking system, in particular, are in the integration process into the world, which asks the authority to affirm and develop themselves In recent years, due to the macro and microeconomic policies, the Government and the State Bank of Vietnam have directed the direction in development for the banking system Promoting FDI (Foreign Direct Investment) into the banking industry is one of Vietnam's commitments as joining WTO (World Trade Organization) Vietnamese enterprises and financial institutions have various opportunities to expand their business activities, which also leads to fierce competition among foreign and domestic companies This phenomenon brings millions of possibility of uncertainty for operating businesses into the segment

As credit activities still play a major part in the business structure of Vietnamese commercial banks, credit risk is accounted for the largest proportion and has the most serious consequences When credit risk occurs, banks are likely to face overdue, bad debts, which leads to a shortage of capital allocation, low liquidity, reduced profits, and bankruptcy as well

Practically, the requirement for the Board of Directors is to control credit growth along with improving credit quality and ensuring credit safety

in the upcoming period In order to achieve the required return, Vietnam Joint Stock Commercial Bank for Industry and Trade needs to analyze, identify and measure the causes of credit risk, thereby proposing solutions to prevent

them That is why I chose the research topic "Credit risk management at

Joint Stock Commercial Bank for Industry and Trade of Vietnam - Thanh Xuan branch" to contribute a practical value in daily credit activities for the

overall development of banks

2 Review of related studies

Currently, in Vietnam and around the world, there are many researches, theories and experimental models related to the prevention and limitation of credit risks In it, there are some outstanding studies as follows:

- In the world:

+ Risk Management in Banking, Joel Bessis (1998), Dictionary of

Banking, Christian Frey (1998) The document summarizes and clarifies the

basic theoretical issues about credit risk management from the basic concepts

of credit risk and credit risk management

+ Credit risk measurement models, Joke Basis (1998), Chrinko (2000),

Crolina (2001) The document clarifies the credit risk measurement models of

commercial banks

- In Vietnam:

+ Testing the credit risk tolerance of Vietnamese commercial banks - A case study of Vietnam Joint Stock Commercial Bank for Industry and Trade,

Vu Trung Thanh (2017) Documentation dealing with the concept of credit

risk tolerance After systematizing the theoretical basis of micro-stamina test, the thesis has proposed a three-step model of Vietinbank's capital adequacy test in three economic scenarios

+ Credit risk management at Vietnam Joint Stock Commercial Bank for Industry and Trade, Nguyen Duc Tu (2012) Documents that clarify the

rationale for credit risks of commercial banks, the need to manage credit risks, and credit risk management contents include: identification, measurement, response and control credit risk

+ Some credit risk restrictions at Vietnam Joint Stock Commercial Bank

for Industry and Trade Hai Phong Branch, Pham Trung (2017) The

document proposes solutions and recommendations to enhance credit risk

management at Vietnam Joint Stock Commercial Bank for Industry and Trade

3 Objectives of the study

The objective of the project is to achieve the following:

- Improving and raising awareness of theoretical issues about credit risk management at a joint-stock commercial bank

- Fully and comprehensively assess the situation to indicate the shortcomings in credit risk management of Vietnam Joint Stock Commercial Bank for Industry and Trade - Thanh Xuan branch

- Proposing solutions and recommendations to improve and accomplish the credit risk management at Vietnam Joint Stock Commercial Bank for Industry and Trade - Thanh Xuan branch

4 Object and scope of the study

+ Research subjects: credit risk management in Vietnam Joint Stock Commercial Bank for Industry and Trade - Thanh Xuan branch

+ Scope of the research: basic research on credit risks and the actual causes of credit risks at Vietnam Joint Stock Commercial Bank for Industry and Trade - Thanh Xuan branch in the period of 2017 to 2019 Hence, proposing solutions to strengthen credit risk management from 2020 through

Accordingly, using a combination of the main research methods such

as statistical methods, analysis and comparison, etc to appraise the basic indicators of banking - Finance sector and credit risk rates at the reference

bank

6 Structure of the study

In addition to the introduction, table of contents, list of tables, figures, abbreviations, references and other appendices, the content of the thesis is divided into three main parts as follows:

Chapter 1: Fundamental theory of credit risk management

Chapter 2: Current circumstance of risk management in Vietnam Joint Stock Commercial Bank for Industry and Trade Thanh Xuan branch

Chapter 3: Solutions to strengthening credit risk management of Vietnam Joint Stock Commercial Bank for Industry and Trade, Thanh Xuan branch

CHAPTER 1: FUNDAMENTAL THEORY OF CREDIT RISK MANAGEMENT

1.1 Credit risk in banking operation

1.1.1 The concept of credit risk

Among the activities of commercial banks, credit business generates the highest benefits However, accompanied by strong profits, credit risks as well cause considerable damage, which could lead to bankrupting There are many different concepts about credit risk, namely:

According to Anthony Sauders (2007): “Credit risk is a potential loss when a bank sponsors resources to a customer, meaning that the expected income from a bank loan cannot be realized in terms of both payment quantity and duration.”

According to Timothy W Koch (2006): "Credit risk is a variation in net income and market value of equity resulting from customer’s nonpayment

or delayed payment."

According to the Basel Committee's definition of international affairs (2000): "Credit risk is the ability of a borrower or a partner of banks to fail to fulfil its agreed commitments"

In Vietnam, according to Clause 1, Article 3 of Circular No 02/2013/TT-NHNN: “Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations following agreed terms.”

Thus, it can be understood that credit risk is the potential loss that can

occur in the process of credit provision of banks because the borrower fails to perform repayment obligations (including interest and principal) or repay the debt at maturity to the bank as committed in the contract The arising risk is associated with credit operations, leading to financial losses such as a

decrease in net income and a decrease in the market value of banks capital

1.1.2 Credit risk classification

Figures 1.1: Credit Risk Classification

(Source: Nguyen Van Tien (2013), "Curriculum on business risk management

of Banking", Statistical Publishing House)

1.1.2.1 Based on the causes of risks

Transaction risk: It is a form of credit risk which is caused by limitations

in the process of loan processing, loan approval and customer evaluation

There are three parts to trading risk:

● Selective risk is related to the credit analysis and evaluation process

when banks select an effective loan plan to make a loan decision

● Security risk arises from security standards such as terms in a loan

contract, types of collateral, collateral, method of guarantee and level of loan

on the value of the collateral Bao

● Technical risk is in relation to loan management and lending activities,

including the use of a risk rating system and problem-solving technique

Portfolio risk: A risk arising from restrictions on banks' loan portfolio

CREDIT RISK Cause of Issues

Transaction risk Risk

● Selective

Selective Risk

Security Risk

ảo đảm

Technical Risk hiệp vụ

Operational Risk

Portfolio Risk hiệp vụ c

Intrinsic Risk Risk i

Centralized Risk Risk g

Solvency

non-payment or

or delayed payment

delayed payment

insolvency

Unlimited

in lending activities

credit risk in lending activities activities

management, including intrinsic and centralized

- Intrinsic risk: Starting from factors, own characteristics, internal

characteristics of each borrower or economic sector It comes from the operating characteristics or capital use characteristics of the borrower

- Centralized risk: When banks focus too much on loans to some

customers; loans to too many businesses operating in the same industry, economic sector, or in a certain geographical region, the same type of high-risk lending

- Operational risk: is the possibility of direct or indirect losses happened

because of banks officers due to incomplete or inactive internal processing system or external events affecting banking operations

1.1.2.2 Based on the repayment capacity of customers

Risk of non-payment or delayed payment: When the two parties

establish a credit agreement, banks and borrowers must stipulate the repayment period However, banks have not received debt obligation from the borrowers at maturity

Risk of insolvency: A risk occurring in case the borrower loses its

ability to pay debts, banks must liquidate its security assets to collect debts

Unlimited credit risk in lending activities: including other activities

of banks' credit nature such as guarantees, commitments, trade finance approvals, interbank market loans, and lease purchase credit , co-sponsor, etc

1.1.3 Consequences of credit risk

Credit risk is systematic, therefore when credit risk occurs, it will cause damage not only to banks itself in terms of profits, assets and reputation, but also affects the entire banking system and the economy

For lending banks: Credit risk is one of the basic risks associated with

business activities causing damage to banks, specifically:

First, reduce profits: When credit risk occurs, banks may not be able to recover their capital and interest, which reduces banks' income Moreover, whether the loan and interest are recovered, banks still have to spend additional expenses to manage the loan during the lending period or the expenses for managing bad debts and overdue debts

Secondly, the inability to take initiative in capital sources: Credit risk happens, which causes banks itself to be clustered They are forced to narrow the business scale, lower financial capacity and competitiveness due to non-repayment or delayed receivables Therefore, this situation causes imbalances

in revenue and expenditure of banks, or make them fall into insolvency, affecting their reputation

Thirdly, losing the opportunity to sign new contracts: When bank capital

is stagnant and is not freed as expected, banks will ignore opportunities to sign new credit contracts or new investment opportunities Besides, credit risk also reduces the reputation of banks not only within the country but also internationally, making adversity for international business activities including international payment and foreign currency trading

For the economy: Banks attract idle capital among people as well as pump

money into circulation, stabilize the economy So when credit risks occur, it affects not only banks itself but also the entire banking system, disturbing the entire economy and society, reducing public confidence and soundness and health in banking and financial system The incident that happened in the past year with a series of equitized commercial banks such as Asia Commercial Joint Stock Bank, Ocean Bank, Maritime bank is effective examples Without the support of the State Bank, commercial banks system may collapse, affecting other economic sectors, causing economic turmoil, and more The

damage is therefore extremely large

1.1.4 Assessing credit risk

1.1.4.1 Indicators reflect overdue debts

➢ Outstanding debt ratio

According to Circular 39/2016/TT-NHNN: “Outstanding debt is a loan which partially or wholly principal and/or interest is overdue” Outstanding debt is a basic indicator reflecting credit risk; it is also the result of an imperfect credit relationship, demonstrating the financial weakness of customers, causing a disruption of the creditor's credit to the recipient Outstanding debt has many different levels:

Formulas:

Outstanding debt ratio (%) =𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑑𝑒𝑏𝑡 𝑏𝑎𝑙𝑎𝑛𝑐𝑒

𝑇𝑜𝑡𝑎𝑙 𝑙𝑜𝑎𝑛𝑠 𝑥 100%

High overdue debt ratio indicates a low credit quality and vice versa

➢ Total outstanding outstanding loans ratio

This entry includes all outstanding loans of a customer (including due and is not due) since the first appearance of the overdue debt therefore, it reflect more accurately the bank's exposure to credit risk

Formulas:

Total outstanding outstanding loans ratio (%) =𝑇𝑜𝑡𝑎𝑙 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑙𝑜𝑎𝑛𝑠

𝑇𝑜𝑡𝑎𝑙 𝑙𝑜𝑎𝑛𝑠 𝑥 100%

➢ Customers with overdue debts ratio

This target shows how many customers for every 100 borrowers expired If this rate is high, it reflects the bank's credit policy inefficient In addition, if this indicator is lower than the “overdue debt” target, said

Overdue debt focuses on large customers On the contrary, if this indicator is high than the “overdue debt” target indicates that overdue debt focuses on small customers

1.1.4.2 Indicators reflect Bad debts

According to Circular 02/2013/TT-NHNN, debt is divided into 5 groups: Group 1 (Standard debt): Current debts, overdue debts are less than 10 days Group 2 (Special mention): Debts are overdue for a period of 10 days to 90 days and debts are restructured for the first time

Group 3 (Substandard debt): Debts are overdue for a period of 91 days to 180 days and debts are extended for the first time

Group 4 (Doubtful debts): Debts which are overdue for a period of 181 days

to 360 days, debts that are restructured for the first time and are overdue for less than 90 days under the first restructured repayment term

Group 5 (Potentially irrecoverable debt) Debts are overdue for more than 360 days

➢ Bad debt ratio

Represents banks's loans that are considered to suffer a partial or total loss of principal and interest

1.1.4.3 Appropriation of credit risk provisions

Allowances for credit losses indicate bank's ability to pay when risks occur Indicators representing credit risk:

1.1.4.4 Reserve to Total loans

Formulas:

Reserve to Total loans ratio (%) =𝐶𝑟𝑒𝑑𝑖𝑡 𝑟𝑖𝑠𝑘 𝑝𝑟𝑜𝑣𝑖𝑠𝑖𝑜𝑛

𝑇𝑜𝑡𝑎𝑙 𝑙𝑜𝑎𝑛𝑠 𝑥 100%

1.1.4.5 Debt write-off rate

Bad debts will be written off according to current regulations (off-balance

sheet accounting) and covered by the credit risk reserve fund

Formulas:

Debt write − off ratio (%) = Average use of provision

If this ratio (usually 2% or more), then the credit quality bank's alarm problem (According to Pham Trung, 2017)

1.2 Credit risk management in commercial banks

1.2.1 Definition of credit risk management

Credit risk management is the process of identifying, analyzing risk factors and measuring the level of risk hence select several preventive measures and suitable managing methods for credit activities to minor and eliminate possible risks in credit sponsoring process

1.2.2 Requirements in credit risk management

The requirement in credit risk management is that banks must assess the importance of credit risk management, which is determining the existence, prosperity or not of an entire banking system Credit officers must be serious and must cultivate a great deal of knowledge in order to identify credit risks from there, along with advanced technology tools to assess and measure credit risk They also need to propose measures to cope with credit risk when

it occurs or devise strategies to prevent, avoid, and provide an acceptable level of credit risk

1.2.3 Principles of credit risk management

Risk management is based on a series of principles, which include some of the following basic rules:

- Principle of accepting risks: Banking administrators must accept risks

at an allowable level if they wish to obtain appropriate income from each of their professional operations Accepting which level and type of risk are significant are the prioritize condition to regulate their negative impacts in the

risk management process

- Permissible risk management principle: this principle requires that most of the risks allow being regulated in the management process, regardless

of their objective and subjective circumstances

- Principle of independent management of separate risks: one of the basic principles of risk management theory is that the risks are quite independent of each other and the damage caused by a certain type of risk will increase the probability with other types of risks In other words, the damage to banks caused by different types of risks is quite independent and their management process needs to be regulated separately

- Appropriate principle between the allowed level of risk and the level

of income: Banks in the course of their operations are only allowed to accept the appropriate types and levels of risks that are lower than the predicted amount of income

- Principles of economic efficiency: The basic purpose of bank risk management is to regulate the negative effects of risks Therefore, the cost that banks spend regulating must be lower than the value of damage to the possible risks

1.2.4 Content of credit risk management

1.2.4.1 Identify risks

Concept: Risk identification is a systematic and continuous

determination process to monitor and review the operating environment and loan process to make statistics of credit risks and identify the causes of risks from each period and forecasting potential causes that may give an increase in credit risk

Methods: To identify risks, Board of Directors must lists all risk

categories that have been, will be, and likely to occur by using: research

questionnaires, conducting surveys and analyzing credit profile, especially paying attention in investigating problematic records

1.2.4.2 Credit risk measurement

• Z-score model: This is a model developed by E.I.Altman used to give

credit scores to US businesses The quantity Z is used as a general measure to classify credit risks for the borrower and depends on: (i) the value of the borrower's financial indicators (Xj); (ii) the importance of these indicators in determining the probability of past borrowers' default As a result, Altman

built the scoring model:

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

While:

X1 = Ratio of Net working capital / Total assets

X2 = Retained Profit / Total Ratio

X3 = Ratio of Profit before tax and interest / Total assets

X4 = Share Market Price Ratio / Book value of long-term debt

X5 = Revenue / Total assets ratio

After alternating X values into the model, we compute Z If:

Z <1.81: Enterprise has a high risk of default

1.81 <Z <2.99: Businesses can be considered to be at medium risk of default

Z> 2.99: Enterprises have low risk of default

● Qualitative model (Quality model 6C):

- Character (customer status): The customer must have a clear borrowing purpose and have goodwill repay the debt when it comes to

• Credit risk quantification model:

- Measuring the risk of lending

● EL = PD × LGD × EAD

● While:

● EL: Expected losses

● PD: Probability of Default

● LGD: Loss Given Default

● EAD: Exposure at Default

- Consumer’s credit rating model

- Corporate credit rating model

- Z score model

1.2.4.3 Measures to handle risks

- Double-checking risk policies at each period

The policy of credit risk management is aimed at limiting risks such as collateral policies, guarantee policies, co-financing policies, etc From this policy, the credit process with professional guidance details, specific steps in

the credit extension process is formed

● Credit checking and supervision:

Following the loan closes, performing credit risk checking and

handling is considered a credit monitoring mechanism, to limit customers' moral risks The basic contents of the inspection of all types of credit include: + Conduct periodic checks on all types of credit

+ Develop program plans and contents of the inspection process carefully and in detail such as repayment planning for customers, ensuring that customers are not slow in paying debts according to plans and inspections quality of collaterals, checking the adequacy and validity of credit contracts, assessing financial conditions and forecasts of unusual changes in all aspects

of the borrower, assessing whether the loan is granted using banks' loan policy and the standards set by the regulatory agency

+ Check regularly for large loans, because when credit risk happens to this loan will adversely affect the financial situation of banks

+ Strengthening credit checks when the economy shows signs of decline or industries that are granted lots of credit by banks are having problems that may cause risks to banks

+ Building a credit check process is one of the important tasks of credit risk management The process must be tight but not too cumbersome and must ensure efficiency and performance

- Diverse credit products

The diversification of credit products in addition to the purpose of meeting new and advanced needs of customers, enriching types of credit to increase competitiveness with other banks, but also has the effect of diversifying spread risk by asset portfolio, contribute to reducing the damage that occurs when there are risks with certain types of assets

- Scattering risks

Scattering risks in credit activities is the provision of credit for many industries, sectors, areas of production and business to avoid major losses to commercial banks Scattering risk is one of the main solutions that banks often use The main forms of risk dispersion include:

+ Do not give credit to only one industry, a field or a region When banks focus on providing credit in the economic sector, it will be like "putting all eggs in only one basket" which can lead to huge losses for banks when this sector faces disadvantages Thus, dispersing risks or dividing investment areas and investment areas is a measure to prevent risks

+ Do not give credit to one or several customers Whether you are an effective business customer or have a long-standing relationship with banks, the above requirements still need to be complied with, because if the customer encounters difficult risks, unexpected risks occur, customers also suffer great losses, moreover, changes in business cycles of customers are unavoidable + Diversification of credit products: the effect of diversification of credit products is to spread the risk in the portfolio, reduce the damage that occurs when there are risks to certain types of assets

+ Co-financing lending: is a form of lending by credit institutions for a few projects and a credit institution stands as a focal point between the parties

to implement financing To disperse risks in credit activities, co-financing also helps banks improve business efficiency, gain more revenue from a feasible business plan

Banks should not focus on providing credit to an industry, a field or a region because if the area where banks focus on adverse changes, the damage

of banks is extremely large

Similarly, the capital should not be invested in one or several customers,

because if unfortunately, the customer is at risk, banks must bear the loss

- Transfer of risks using derivatives

+ The use of Credit Default Swap contracts: One of the most typical forms of derivative credit instruments is a credit exchange contract, whereby two lending credit institutions agree to exchange one another portion of the payments under each party's Credit Default Swap Contract This is usually done through an intermediary, which can assure the parties that the contract will be completed to receive additional fees Credit exchange contracts help banks improve the diversity of their loan portfolios, reduce their reliance on the traditional market and access to a broader market

+ Credit option contract: Credit option contract is a suitable tool to hedging banks against losses in the value of credit assets, helping to offset higher loan costs when the credit quality of bank decline This contract guarantees a full payment if the loan is significantly reduced or cannot be repaid If the customer pays the debt as planned, banks will receive the payments as expected and the option contract will not be used

1.3 Factors affecting credit risk management at a branch of a commercial banks

1.3.1 Subjective factors

- Internal management, and controlling activities in the organization

Internal management is a systematic measure to achieve the objectives

of the bank's credit operations, and at the same time ensuring the credit risk limit at the permitted level It is a mandatory and consistent guideline of banks on the following issues: Maximum credit extension scale, credit limits; types that banks may choose to provide credit; sectors that can grant credit; term of credit extension; credit guarantee policy; ways of determining credit pricing It can have a boosting, supporting or restrictive effect, hindering your

ability to proactively prevent and handle credit risk In other words, management and organization have a great influence on the capacity of credit risk management If management and organization work is carried out closely and scientifically; functional departments have a close relationship to support each other in all activities, credit activities will take place healthily and effectively At the same time, it also facilitates the checking, controlling, detecting and handling credits showing signs of risk In addition, the internal control also guides officials in managing the work in accordance with the mechanism, regulations and law, being well informed about the loans, avoiding the situation of customers using capital wrong goal If internal controlling is obtained properly and regularly, it will help customers to promptly detect and supervise at the right time to overcome problematic credits

- Human resources for credit operations

Credit policies and processes are implemented through the work of credit officers Therefore, the number and quality of credit staff are very important factors affecting banks' credit risk The number of credit officers must meet the credit scale in each period The quality of credit officers must

be ensured in terms of capacity and ethics It can be seen from the practical credit of banks, the number and quality of the credit officers decide a very large part to the problem of credit risk in general lending and corporate lending private If managers, credit officers are incompetent and unethical, risks can still occur depending on human subjectivity Therefore, the human factor is an important factor that requires attention and facilitates to encourage its contribution to risk management of commercial banks

1.3.2 Objective factors

- From the customers

Some businesses deliberately cheat banks or have no real financial strength but always advertise, show off their identities, build tight relationships, and create credibility with banks For the credit relationship with banks, the business provides documents, false information, or fraudulent declaration of collateral, falsified financial statements, etc to borrow large sums of money

On the other hand, some businesses have poor business capacity They invest in many areas beyond the management capacity, leading to prolonged losses but businesses have no solution and are trying to conceal and deceive banks

- From the Head office of the commercial bank

+ Interest rate policy from the bank's head office is not flexible, competitive and inconsistent with market developments and customer needs

non-+ Loan products are not diversified, failing to meet the specific capital mobilization for each industry and each field

+ Process, procedures, and transaction documents have not been completed, are still rigid and have many holes

- From economic environment

+ According to Pham Thai Ha (2017), In the economy, the macro and micro policies of the Government play a decisive role in the activities of the national economy in general and the monetary and credit business activities of banks in particular If the Government's policy is right and in line with the reality, the economy will be stable, inflation is low, there is no crisis, production and business activities of the enterprise are effective, bring high profits Since then, lending activities of banks have grown and loan quality has been improved However, if the policy is not appropriate, it will hinder the development of production and business, making businesses difficult at

that time, it will also significantly affect the operations of banks, including credit risks of banks, which are also very significant

+ In business activities, the legal factor is the leading guarantee condition, especially for the complexity and diversity in business lending activities of banks If the legal environment is good, complete and uniform, it will create a fair competitive environment for entities in the economy On the contrary, if the legal environment is incomplete, inconsistent and inconsistent with the current economic development trend, it will create an unhealthy business environment, many loopholes for businesses to do illicit business, fraud and fraud by banks itself thereby increasing credit risk at banks

+ Natural disasters and epidemics unexpectedly cause difficulties in the production, as well as the business process, the consuming merchandises procedure and the recovering debts circle of enterprises who are borrowing capital from banks

+ Another objective factor is the customer database (CIC) This is the main situation which leads to bank's credit risk because customer information

is the basis for banks to evaluate and make credit decisions If the information resource is good and accurate, the decisions will be made without mistakes, the credit quality will be improved, and the risk management efficiency will

be improved to help banks avoid the opposite choice Bank's credit activity is information production so that the outputs are right loan decisions To have a database for verification, ranking requires information to be collected, processed and stored for a long time scientifically and logically in order to facilitate the researching and using

CONCLUSION OF CHAPTER 1

Credit risk and other types of risks are the objective existence which inherent in banking operations The development of risk prevention tactics after assessing the risk level of each specific operation is indispensable, but completely eliminating risks in banking operations is not possible The cause

of credit risk is subjective factors from banks, and also objective factors from the business environment Each bank should develop its separate risk management policy These policies are based on several basic principles The purpose of this provision building a remote prevention system, providing solutions to regulate the negative impacts on the bank’s financing

From the theoretical basis and experience in credit risk management which mentioned above, Chapter II will focus on analyzing the situation of banking credit risk management, thereby assessing the performance in risk management at Vietnam Joint Stock Commercial Bank for Industry and Trade

- Thanh Xuan branch

CHAPTER 2: CURRENT CIRCUMSTANCE OF RISK

MANAGEMENT IN VIETNAM JOINT STOCK COMMERCIAL BANK FOR INDUSTRY AND TRADE - THANH XUAN BRANCH

2.1 General introduction about Vietnam Joint Stock Commercial Bank for Industry and Trade - Thanh Xuan branch

2.1.1 Historical establishment and development of the branch

On April 22, 1997, Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) announced decision No 17 / HĐQT-QD of the Chairman by the Board of Directors regarding the establishment of Thanh Xuan Branch The branch is directly under Vietinbank - Dong Da Branch on

to and upgrade from Thuong Dinh transaction office to meet the requirements

of socio-economic development of Hanoi capital in general and Thanh Xuan district, in particular, to integrate with the industrialization and modernization

of Vietnam After two years of operation, in March 1999, the branch was separated under Industrial and Commercial Bank, which is now Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) After more than

20 years of construction and development with undying efforts, striving tirelessly, overcoming difficulties by numerous generations of employees, the business operation of Thanh Xuan Branch has increased They remain in the top position as an institution that directly under the head office

Joint Stock Commercial Bank for Industry and Trade of Vietnam - Thanh Xuan Branch is located in Noi Chinh area, Nhan Chinh ward, Thanh Xuan district Optimal customers of the Branch are small and medium enterprises, production and business organizations, limited liability companies, factories and individuals The bank has attracted and created a good, long-term relationship with a large number of potential customers both

in deposits and loans

Vietnam Joint Stock Commercial Bank for Industry and Trade - Thanh Xuan branch operates with a vision: helping the whole commercial bank become the leading, modern and multi-functional retail bank in Vietnam with up-to-date technology and specialized personnel The network of businesses and networks are nationwide, providing partners and customers with comprehensive and convenient banking products and services, with reasonable costs and high quality of services By 2020, the branch will strive

to become a strong financial group according to international standards

2.1.2 Organizational structure

Figure 2.1: Vietnam Joint Stock Commercial Bank for Industry and

Trade - Thanh Xuan branch

Board of

Directors

Vice Directors Vice Directors Vice Directors

Vice Directors

Individual relationship department

Small and Medium enterprises relationship department International paymentdepartment

Customer services

Credit appraisal department

Accounting and finance office

Credit supporting office

Technological department

Administrative Department

2.1.3 Business performances and earning results of Vietnam Joint Stock Commercial Bank for Industry and Trade - Thanh Xuan branch in recent years

2.1.3.1 Capital mobilization

Capital takes a significant role in the production and business activities of any business or company For banks, capital also plays an important role when banks need to finance their daily trading activities For that reason, capital mobilization has a great impact on other banking activities Thanh Xuan Branch has been paying attention to capital mobilization and has concretized by professional measures to attract idle money for the bank

Table 2.1: Capital raising situation of Thanh Xuan Branch

capital

4.563.92

8 100 6.154.679 100 34,85 6.559.196 100 6,57 1.Accordi

currency

convertibl

e

181.255 3,97 169.508 2,75 - 6,48 161.975 2,47 - 4,44

Targets

Amount

Prop ortio n(%)

The mobilized capital of the branch has increased in recent years In

2018, the total mobilized capital was VND 6,154,679 million, which witnessed an increase of VND 1,590,751 million compared to this category

2017 By 2019, the mobilized capital VND 6,559,196 million, increased VND 404,517 million compared to 2018 amount Deposits from residents in 2018 were VND 5,102,807 million, which is an increase of VND 1,540,654 million compared to 2017 In 2019, VND 5,723,771 million were mobilized that equivalent to VND 620,964 million compared to 2018 From the table of data,

it can be seen that the mobilized capital from the residents a major proportion

in the mobilized capital of the bank Therefore, the branch is not a prioritize investment channel of economic organizations Meantime, we can see that the majority of mobilized capital from Vietnam Dong is medium-term loans