Objectives of the Topic - I 2 Scope of the Topic
Research Method
Analytical and synthetic methods based on books, Internet, secondary data, etc.
Contents
Theopaper consists of three major chapters that are listed below
Chapter 1: Credits and Classifications of Credits
Chapter 2: Credit-Risk Management at the Branch of China Bank in Hochiminh
Chapter 3: Some Recommendations for Controlling Credit Risks at the Branch of China Bank in Hochiminh City
What is Credit?
Credit is a financial agreement where a Lender, such as banks or financial institutions, provides an asset—either money or goods—to a Borrower, which can be an individual, business, or organization This arrangement allows the Borrower to utilize the asset for a specified period, with the obligation to repay the principal amount along with interest to the Lender when the loan matures.
Classification of Credit
In today's modern world, living standards are rising alongside increasing consumer demands As individuals seek greater financial resources, businesses must also secure more capital to enhance and innovate their products for sustained growth and competitiveness.
I TS.Ho Dieu, Tin Dung Ngan Hang (NXB Thong Ke: nom 2001), page 19.
With limited capital and income sources, individuals often seek ways to achieve their financial goals To address this need and stimulate economic growth, banks provide a range of credit loans Here are some of the primary types of loans available to help meet these financial demands.
/ Real Estate Loan is the type of loan relating to purchasing and building real estate, such as houses, lands, real estates in industry, trade and service areas.
Customers seeking to buy real estate or construct homes but lacking sufficient funds can apply for specialized credit loans These loans typically involve significant costs and require extended repayment periods, making them suitable for mid-term or long-term financing options.
/ Industry and Trade Loan is a short-term loan for supplementing working capital for businesses in industrial, commercial and service areas
/ Agriculture Loan is the loan to payoff production costs in agriculture, such as fertilizer, pesticide, cattle-feed, labor, fuel, etc.
/ Financial Institution Loan includes granting credits for banks, financial companies, financial leasing companies, insurance companies, credit fund and other financial institutions.2
2 T5 Ho Dieu Tin Dung Ngan Hang (NXB Thong Ke: nom 2001), page 20.
/ Personal Loan is the loan to meet needs of consumption, such as purchasing expensive goods, and the loans which cover daily expenditures by issuing credit cards
/ Leasing includes two types They are operation leasing and financial leasing The assets for leasing includ~ real-estate and personal property that are mainly machines and equipment.
A short-term loan is designed for quick financial relief, typically maturing within one year It serves to address working capital shortages for businesses and meets the immediate financial needs of individuals.
Short-term loans allow banks to swiftly recover both the principal and interest, resulting in lower interest rates compared to mid and long-term loans due to the reduced risk associated with the shorter repayment period.
Opening Lie accounts for already transacted companies is also one type of short-term loan.
• Mid-term Loan: This type of loan has the maturity from 12 months to 5 years 3
3 T5 Ho Dieu, Tin Dung Ngan Hang (NXB Thong Ke: nam 2001), page 21.
It is mainly used to invest in purchasing fixed assets, improving or innovating equipments, technology, extending business activities, building new projects with small scale and quick equity recovery.
Besides investing for fixed assets, mid-term loan is also a source of working capital for businesses, especially the newly-established ones.
A long-term loan is characterized by a maturity period exceeding five years, with terms that can extend up to 20 to 30 years, and in certain instances, even reach 40 years.
It is used to meet long-term need~, such as building houses, equipment, transportation means with large scale, building new factories.
This type of loan typically has a lengthy repayment period, which increases the risks for the bank compared to other loan types As the duration extends, the bank is more susceptible to market fluctuations impacting interest rates based on benchmarks like LIBOR, SIBOR, or VNIBOR Additionally, external factors such as inflation and currency depreciation can further influence the value of money over time, exacerbating the risks associated with long-term loans.
4 TS Ho Dieu, Tin Dung Ngan Hang (NXB Thong Ke: nom 2001), page 22.
• Loan witltout Guarantee is the type of loan which has no collateral, no mortgage or the third party's guarantee It just relies on the borrower's creditworthiness itself.
Loans without physical guarantees are seldom utilized by public business sectors due to the inherent risks they pose to banks Creditworthiness alone does not provide sufficient security for lenders, as it lacks tangible proof Consequently, banks prefer loans backed by guarantees, making unsecured loans an unfavorable option for business credit.
A loan with a guarantee is a type of financing secured by collateral, a mortgage, or a third-party guarantee This form of guarantee serves as a legal foundation for banks, providing them with an additional means of debt recovery, supplementing the primary, often uncertain, source of repayment.
Third-party entities in this context may include government organizations like the Ministry of Finance and the Ministry of Planning and Investment (MPI), as well as reputable companies This type of loan involves collaboration with these third-party institutions.
Government-backed guarantees are primarily utilized by state-owned companies or government-affiliated entities when they lack sufficient asset-backed collateral for their projects In such cases, these companies can seek assistance from the government, prompting banks to request essential legal documentation before approving loans without requiring collateral However, banks must be cautious of sovereign risk, which arises from lending to government or government-backed bodies, as it may be challenging to pursue legal recourse if the borrower claims immunity or fails to comply with a judgment.
• Loan with one period time-limit of repayment
This is the type of loan which the counterparty has to make the repayment just one time as agreed 6
• Loan with installments with periods time-limit of repayment
This is the type of loan that the counterparty has to pay for parts of the principal and interest by installments at a particular period of time until
The loan repayment structure allows borrowers to pay interest and principal installments separately, ensuring that these payments do not coincide This type of loan is commonly utilized for real estate, industrial, trade, and personal loans, making it a standard practice among banks when issuing credit loans It provides convenience for borrowers, as they are only required to repay a portion of the loan within a specified timeframe.
• Loan with installments without specific time-limit
The repayment of this loan is contingent on the borrower's financial capacity, allowing them to repay when funds are available This loan utilizes the overdraft technique, enabling the borrower to withdraw beyond their account balance up to a specified limit However, prolonged repayment results in increased interest payments.
7 TS Ho Dieu Tin Dung Ngan Hang (NXB Thong Ke: nam 2001), page 24.
B/ Credit Risks Management and Major Types of Risks in Banking:
Risk for bankers refers to the uncertainty surrounding various events, such as the likelihood of a customer renewing a loan, potential growth in deposits, fluctuations in the bank's stock price and earnings, and changes in interest rates that could impact income or asset value.
Bankers prioritize high stock values and profitability, yet they must also consider the associated risks Recent economic volatility and issues in sectors like energy, real estate, and foreign loans have prompted a heightened focus on measuring and managing banking risks effectively.
Establishment
Founded in 1912 under a license from Dr Sun Yat-sen, this bank is the oldest in China and has been recognized as "The Best Bank of China" by Euromoney nine times in the past 15 years It has also been included in the Fortune Global 500 for 15 consecutive years As the official banking partner of the Beijing 2008 Olympic Games, the bank showcases its robust capabilities and high-quality service With branches and sub-branches worldwide, it offers a comprehensive range of financial services, including traditional banking, investment banking, and insurance.
Established in 1995, this China Bank branch at Hochiminh City IS the only mainland China's banking organization operating in Vietnam.
Its mampurpose is to provide full banking serVIces for economic as well as commercial activities among all the countries of the world, especially between Vietnam and China.
• Receiving demand and term deposits.
• Extension of credit in VND, USD
• Conducting payment services and encashing international credit cards.
• Buying and selling foreign currency.
• Issuing bank guarantees and providing investment consultancy.
• And other banking business approved by the State Bank of Vietnam
3- Products and Services v" CREDIT ACTIVITIESThe bank provides diversified credit facilities including working capital loan,fixed assets loan, project financing, syndicated loan, trade finance, as well as issuing guarantees without or with a small amount of deposit.
Diversified trade finance includes issuing LlC without or with a small amount of deposit, import bill advance, export bill purchase, packing loan, export discounting, factoring and forfeiting; etc. v' DEPOSIT
Individuals and organizations satisfying the conditions stipulated by the State
Bank of Vietnam are entitled to open current account or deposit account in
.VND or other foreign exchange. v' PAYMENT SERVICES
International and domestic settlement is the daily service supplied to all kinds of customers.
The bank can precisely and quickly provide money transfered nationwide no matter where you are.
The bank's international settlement products also include outward/inward
.remittance, export collection and letters of credit, etc. v' GUARANTEES
The bank's strong reputation ensures that all guarantees and counter-guarantees issued by its branch, including bid bonds, performance bonds, advance payment guarantees, and retention money guarantees, are recognized and accepted globally.
With over a decade of experience operating in Vietnam and a deep understanding of the commercial laws and regulations in both China and Vietnam, the bank offers expert consultancy services on policies, legal matters, geography, and cultural insights of both countries.
4- Organizational Chart of the Branch of China Bank at HCMC
Banking Corpo[\Jte Accounting IT
Figurel- The Organizational Chart of the Branch of China Bank in HCMC a/ Board of Management
The Board consists of a General Director and a Deputy Director, both hailing from China Most experts in the team relocate to Vietnam for a three-year tenure before returning to mainland China.
The Board of Management takes responsibilities of leading, managing, and running all the activities at the bank in generaL
The General Director is responsible for formulating strategies and establishing objectives for the bank, making critical decisions such as approving credit facilities for customers Additionally, the General Director fosters relationships with high-ranking government officials to enhance the bank's influence and operations.
The Deputy Director also manages the activities at the bank She takes part in granting credit facility decision, too. hiBanking Department
Head of each department is one expert coming from China They come here for a three year time working period.
The Corporate Banking Department is the hub for essential banking services, where customers frequently conduct transactions This department handles daily banking activities, including opening LLCs, accepting deposits, issuing funds, and notifying clients about the arrival of documents via telephone.
The primary function of this department is to manage credit activities, serving as the point of contact for borrowers seeking to establish a credit relationship with the bank It conducts a thorough analysis of the borrower's business performance using provided financial statements and relevant information to determine the viability of granting a loan Additionally, the department engages in negotiations with borrowers regarding loan terms, including the duration, interest rates, security, and repayment methods, while also monitoring the repayment process to ensure compliance.
situation of the borrower, and write reports Of their customers periodically, etc. This department will keep records of all relevant information about the business situation of their customers.
Risk management officers play a crucial role in analyzing and assessing potential risks associated with credit loan contracts They assist the credit department in examining and verifying counterparties' securitization, including mortgages and collateral.
The primary responsibilities of the personnel department include maintaining daily transaction records and preparing financial statements at the end of each reporting period They must adhere to the accounting and financial regulations set forth by the State Bank of Vietnam, the Ministry of Finance, and the bank's internal policies Additionally, they work closely with the Banking Department to ensure the security and accuracy of electronic money transfers and inter-bank payment activities.
The department is responsible for implementing the bank's personnel policy, addressing salary matters, onboarding new employees with essential regulations, and managing office supplies Additionally, they collaborate with headhunting agencies to recruit talent and facilitate employee training and development initiatives.
Head of this department is also a Chinese expert He takes responsibilities of the updated informatics programs to modernize banking activities in accordance with the international standards.
B/ An Overview of Credit Activities at the Branch of China Bank in HCMC
The bank primarily targets Chinese and Taiwanese companies that have invested and conducted business in Vietnam Since Vietnam's open-door policy was implemented in 1986, a significant number of foreign companies have entered the market, contributing to the country's economic growth.
business in Vietnam, both directly and indirectly Until 1990s, the number of
Chinese and Taiwanese companies increased faster and faster And this is also the period of time the bank's target customers came to Vietnam.
The bank has established credit relationships with over 10 major customers, many of whom have been with the bank since its inception These key clients primarily operate in various industries.
Table 1- The Major Industries of the Bank's Customers
Housing Electricity Steel Cement Coal Textile Seafood
(Source: Internal document of the China Bank branch-HCMC)
Figure 2- Percentage of the Borrowers'
(Source: Report from China Bank Branch at HCMC)
In the banking sector, maintaining confidentiality is paramount, which is why I cannot disclose the names of our clients Instead, I can highlight the major industries they represent, ensuring their sensitive information remains protected while still providing insight into the diverse sectors we serve.
The interconnection between industries such as cement, steel, and electricity plays a crucial role in the housing sector, where fluctuations in one can trigger a domino effect on others This interconnectedness can adversely impact loan repayments, posing risks for banks While banks hold securities as collateral, they cannot solely depend on them, as the primary goal of lending is to support borrowers in growing their businesses and ensuring timely repayment of principal and interest Furthermore, not all securities are easily sellable to recover debts, and the costs associated with reselling can be significant, creating an additional burden for banks.
Assessment of Credit Risk
Assessing credit risks plays an important role in credit granting activities: Banks
should assess risks before accepting to provide credit loan facility Different banks
Different banks implement specific credit risk management practices tailored to the nature and complexity of their credit activities Guided by the bank's credit policies, officers are equipped to effectively assess customer profiles These credit policies serve as essential tools for identifying, monitoring, and controlling credit risks.
The credit policy includes the following:
• Terms and conditions of the bank's credit portfolio, such as types of credit, loan tenor, credit quality, currency, interest rate, purpose, etc.
• Classifying lending competence of each credit officer (stipulating the maximum credit line, permitted types of credit, and signatures of responsible people, etc.)
• Devolving responsibilities and reporting information within the credit department.
• Accepting, controlling, evaluating and making decisions process towards borrower's credit granting application
• Compulsory documents of each application and other documents kept in the bank, such as, financial statement, etc.
• Devolving responsibilities in the bank, such as who will be responsible for maintaining and controlling the credit documents.
• Stipulating policy about interest rate,_fee rate, and conditions for repaying the loan.
• Determining the maximum credit limits, this means determining the maximum Debt to total asset ratio of counterparty,
• Determiningthe major industries of the bank.
• Priority projects for investigating, analyzing, and handling bad quality credit loans.
To ensure safe and sound credit approval, it is crucial to adhere to well-defined credit granting criteria These criteria specify eligibility for credit, the amount accessible, the types of credit offered, and the terms and conditions under which credit is granted, ultimately targeting the right customers.
• Does the borrower belong to the group of target customers of the bank? Does their chartered capital fit the credit-granting standards of the bank?
When establishing a credit relationship with a bank, it is essential to determine whether the borrower is a first-time applicant or has a longstanding history with the institution First-time borrowers must be prepared to provide extensive information to the bank to facilitate the assessment of their creditworthiness Understanding the borrower's background is crucial for the bank in making informed lending decisions.
• What is the scope of business or the major industry that the borrower is now involving?
• The organizational chart, the board of management, the business situation, etc.
• The borrower's business background, creditworthiness as well as whether there is the third party guarantee.
• The borrower's past credit history, monthly income, references and banks used.
• Audited financial statements, such as, balance sheet, income statement, cash flow, etc.
• If the borrower has never done business before, he has no financial statements, so he can provide his overall business plan. c/Purpose of the Credit
When borrowers seek a credit loan, their primary intentions may include supplementing working capital, purchasing fixed assets, or financing factory construction However, it is crucial for lenders to understand the specific reasons behind the loan request to ensure that the funds are allocated for legitimate purposes This understanding not only helps in issuing the loan appropriately but also plays a significant role in mitigating potential credit risks Additionally, assessing the source of repayment is essential for evaluating the borrower's ability to repay the loan.
• The borrower has to show the bank some sources of repayment How can the borrower have money to pay for the credit facility when it comes due?
• What types of pledge of the borrower does the bank need? r
• The borrower's repayment history and current capacity to repay, based on historical financial trends and future cash flow projections e/ Different Types of Credit Exposures
When issuing a loan, banks must identify and assess potential risks associated with the borrower to ensure they can implement timely solutions if needed If the risks are manageable and not significant, the bank may approve the credit loan However, if the risks are deemed dangerous and uncertain, the bank has the right to deny the loan application, as it poses too much risk to their financial stability.
1.3- Credit Administration and Monitoring Process
The bank has developed and utilized an internal risk rating system in managing credit risk Follow is the bank's Five-Tier classification of credit risks.
After evaluating the borrower and associated risks, the Board of Directors makes the final decision on granting credit facilities, relying on credit risk classification Overall, the bank thoroughly assesses key factors to identify and manage the inherent credit risks in all lending activities.
Measurement refers to the process of determining the size or magnitude of various entities It encompasses not only physical quantities but also extends to abstract concepts like uncertainty and consumer confidence Different types of quantities are assessed using varying levels of measurement, highlighting the diverse applications of measurement in various fields.
To effectively measure and manage risks in credit granting, banks must establish a clear credit granting process that outlines essential criteria for credit officers to follow This structured approach ensures that credit officers are aware of the specific criteria to consider when evaluating loan applications, as well as their responsibilities in the process Understanding the bank's general credit process is crucial for maintaining effective risk control in lending practices.
24 www.bambooweb.com/articies/r /i/Risk_ma nagement /html
When approving a credit line, it is crucial for a bank's credit manager to have a comprehensive understanding of the borrower An experienced credit analyst should gather pertinent information from diverse sources, including annual reports and market briefings, to assess the borrower's intentions This thorough analysis aims to identify any potential risks and prevent financial losses.
Every bank must implement a strict credit granting process to evaluate potential borrowers While the specific forms and procedures may vary between institutions, the credit granting process generally consists of four essential steps.
To initiate the borrowing process, a credit-granting proposal letter must be submitted by the Borrower seeking funds for various business needs, such as increasing working capital, acquiring new technology, or constructing a new factory This proposal serves two primary purposes: economically, it lays the groundwork for establishing a sound credit relationship, and legally, it facilitates the collection of necessary documents that verify the Borrower's genuine need for the loan and the legality of their financial history.
The Borrower 25 acknowledges their request for the loan and accepts full responsibility for repaying it upon its due date.
A credit loan is granted when a bank has full confidence in the borrower's future capacity and commitment to repay the loan To secure this loan, the borrower must submit various financial statements, which are thoroughly documented and audited Key financial statements include the Balance Sheet, Income Statement, Statement of Owner's Equity, and Statement of Cash Flow.
After submitting a credit-granting proposal, the bank conducts a thorough credit analysis to evaluate the borrower's current and potential ability to use and repay the credit This analysis serves three primary purposes: identifying potential risks to the bank, assessing the bank's capabilities to manage those risks, and forecasting effective risk management strategies to minimize potential losses Additionally, credit analysis enables the bank to verify the accuracy of the information provided by the borrower, ensuring informed decision-making regarding credit approval.
25TS Ho Dieu, Tin Dung Ngan Hang (NXB Thong Ke:2001), page 46.
261S Ho Dieu, Tin Dung Ngan Hang (NXB Thong Ke: 2001), page 49.
To effectively assess a borrower's creditworthiness, banks must thoroughly understand the business operations of the borrower's company, including key details about the stockholder situation, management board, and overall business background Visiting the borrower's premises can provide valuable insights into the company's operations Additionally, it is crucial for the bank to confirm that the borrower possesses both civil and legal capacity to enter into a credit contract Furthermore, the bank should ensure that the borrower has a clear purpose for the loan and a commitment to repay it upon maturity.
After identifying the purpose, the bank also finds out whether the borrower shows the responsibility for the loan and whether he is honest in answering questions
The responsible attitude, honesty, clear purpose and the willingness to pay for the
Diversification
Diversification of risk is essential in banking, rooted in the investment principle of "never putting all your eggs in one basket." With a limited customer base often concentrated in similar industries, banks face heightened risks during economic fluctuations, which can significantly impact revenue from loans Since over 70% of a bank's total revenue typically comes from credit grants, effective risk management in this area is crucial To mitigate risks, banks should diversify their counterparties across various industries, preventing a "domino effect" in their customer portfolio during economic downturns This approach not only safeguards against repayment issues but also expands the bank's options for attracting new clients Ultimately, diversifying the bank's portfolio is a vital strategy for risk prevention.
2/ Have a Clear "Definition" of Target Customers
The bank primarily serves Chinese and Taiwanese companies, which presents challenges due to the high volume of these firms operating in Vietnam The credit application process requires thorough analysis and short-listing, often leading to rejections for those that do not meet qualifications This can negatively impact relationships with counterparties To mitigate this, it is essential to establish clear requirements for credit applicants, enabling the bank to effectively compare conditions and determine which firms warrant further analysis.
Effective market segmentation of target customers is crucial for success By identifying specific customer segments, we can expedite the process of attracting individuals seeking credit loans from banks Additionally, this segmentation provides insights into the market landscape, allowing us to understand whether we are engaging with middle-market lending or more developed markets, as well as the scale of operations involved.
3/Set Provision Fund/or Loan Losses
To effectively manage credit risk, banks must establish loan-loss reserves, also known as the allowance for loan losses, by allocating annual charges from current income, referred to as the provision for loan losses This proactive approach serves as a financial buffer to mitigate potential losses from substandard credit contracts.
When determining the appropriate percentage for the provision fund, banks must strike a balance; setting it too high can deplete capital that could otherwise be invested in more profitable ventures Instead of allowing resources to remain idle in the bank's reserves, they should be allocated to projects that yield higher returns The challenge lies in minimizing resource expenditure on risk management while effectively mitigating risks Ultimately, the bank's policy will dictate the optimal percentage for the provision fund, ensuring both risk management and profitability are addressed.
4/ set a Sensible and Structured Credit Policy
Establishing a well-defined and sensible credit policy is essential for banks to retain loyal customers and attract new ones A clear credit policy empowers credit officers to operate with flexibility, ensuring effective customer relationships and satisfaction.
Credit officers should regularly update their information to make informed decisions regarding credit conditions, such as offering preferential interest rates or extended repayment periods for both loyal and new customers Implementing an effective credit policy not only attracts new clients but also helps retain existing ones, ultimately contributing to the bank's revenue growth.
5/ Establish a Group of Legal Officers.
To support the credit department effectively, banks should establish a team of legal officers well-versed in banking, credit, contract, and corporate laws These officers play a crucial role in reviewing credit contracts, assessing asset securities, and fostering relationships with government and local authorities By enhancing business and governmental connections, the bank can better navigate credit risks and access confidential information, ultimately mitigating potential credit risks.
Self-insurance is a risk management strategy where an organization retains certain risks while allocating a specific amount of money to cover potential losses This approach is akin to establishing a provision fund for loan losses Credit officers must analyze all relevant information to accurately estimate the necessary funds to mitigate future risks If the potential loss exceeds what can be feasibly covered, the risk becomes uninsurable, prompting banks to deny credit loans to such counterparties to avoid financial strain.
Credit insurance is a financial protection that ensures the insurer compensates the lender for any loan damages when payments are missed or delayed.
This insurance safeguards banks against various financial risks, particularly credit risks, by covering instances such as a creditor's failure to repay owed amounts to the insured.
Credit insurance pays some or all of a loan back when certain things happen to the borrower like unemployment, disability, or death.
B- Recommendations for Developing the Bank
The reputation and brand name of a prominent bank significantly influence its operations, impacting both service delivery and credit activities.
A highly appreciated bank can get much more attention from lots of customers.
A reputable bank instills confidence in customers, encouraging them to deposit savings and establish credit relationships without fear of losing their money High-profile banks attract creditworthy clients, as businesses prefer partnering with reliable institutions As a result, a strong brand name enhances customer acquisition, allowing banks to curate a diverse portfolio and select the most qualified borrowers Building a solid reputation is crucial for banks, especially with Vietnam's impending entry into the WTO, making it essential for future growth and stability.
playing field for every business, including banking business There will be more and more foreign companies, foreign banks -investing in Vietnam This will create
As the business environment in Vietnam becomes increasingly competitive and challenging for both domestic and foreign companies, it is essential for businesses to be prepared to navigate these market dynamics effectively.
'. choice to follow With the above reasons, I would like to recommend some suggestions to develop the image of the bank
1/ Build Website/or the Bank
As Vietnam prepares for integration into global markets and membership in the WTO, accelerating technological innovation is crucial for enhancing competition within the banking sector Establishing a website for the bank is an urgent necessity, especially since the main bank in China already has an online presence while its local branch does not A website would enable customers to easily access vital information about their accounts, exchange rates, and banking services The Internet serves as a powerful advertising tool and a vast source of information; thus, leveraging this resource to create a customer-focused information system is essential for maintaining communication and engagement with clients.
Here are some advantages of establishing a website
• It is a tool for Advertising.
• People can access this website to know more about the bank, as well as the services, the activities, etc.
• Existing customers can check the outstanding balance through the website, or transfer their account to the other party or to pay for their bills, etc.
• They can also keep up-to-date information about the bank's activities.
Establish a Group of Professional Internal Auditors
This team is tasked with reviewing all bank documents related to credit activities, banking services, and accounting to identify any discrepancies or errors made by bank officers By detecting these issues early, the bank can take swift action to rectify them, ultimately preventing substantial financial losses.
Training and Developing Employees
Developing and continuously updating the knowledge and skills of employees, particularly credit officers, is crucial for the growth of a bank Human resources are vital across all sectors, as employees drive daily operations Enhanced knowledge and experience enable employees to perform their tasks more effectively and minimize mistakes In credit granting, it is essential to have experts who are well-versed in various laws, such as credit, investment, corporate, and bankruptcy laws, as well as skills to stay informed about relevant credit customers' businesses This expertise is necessary for analyzing and identifying potential risks associated with credit facilities.
The apparent financial stability of a counterparty can be misleading, as their internal business conditions may be deteriorating Without the necessary skills, knowledge, and experience, credit officers may fail to identify potential risks when approving credit facilities, leading to significant losses for the bank Regular training for bank employees is crucial for their development and the bank's survival, as it equips them with the essential information to adapt to the changing economic landscape, ultimately enhancing business productivity.
Training enables management to communicate updated credit risk strategies, policies, and procedures for identifying, measuring, monitoring, and controlling credit risks to bank employees.
Effectively managing credit risks is essential for the overall development of a bank Therefore, my seven recommendations for credit risk management should be aligned with seven strategies aimed at enhancing the bank's growth and performance.
Lending activities carry significant risks, with many banks failing due to poor credit management Despite these risks, credit activities are the primary source of revenue for banks, accounting for over 70% of their income To mitigate these risks, banks must implement robust credit risk management policies that include thorough assessment, measurement, and control of credit risks Adhering to procedures approved by the board of directors is essential in creating an effective risk management system Each component involves specific criteria aimed at minimizing risks and reducing potential losses.