Along with the innovation of the entire banking system in Vietnam, Techcombank has introduced banking development policies and taken special attention on the credit risk management proce
Concepts of commercial bank credit, personal credt
The concept of credit, first introduced in Europe after World War II, gained popularity in Africa in the 1950s when banks established credit departments to serve white settlers In the US, credit initially faced resistance due to high interest rates, but it became widespread during the economic boom of 1885 as banks sought to lend excess funds In Kenya, credit was initially restricted to the wealthy and large corporations, limiting its accessibility to the general population.
In the 1990s loans given to customers did not perform which called for an intervention Most suggestions were for the evaluation of the customer’s ability to repay the loan, but this did not work as loan defaults continued (Modurch, 1999), The concept of credit management became widely appreciated by Microfinance Institutions (MFI’s) in the late 90s, but again this did not stop loan defaults to this date (Modurch, 1999)
According to Wikipedia, credit is an objective economic category reflecting the transaction relationship between two entities, in which the subject delivers money of monetary value, assets to the other party to use, and the obligor is obliged to refund an amount larger than the original amount a specified time
A loan agreement establishes a relationship between a lender and a borrower.* The lender grants the borrower the right to use the loan funds or goods for a specific period.* The borrower assumes the obligation to repay the loan amount, including interest (if applicable), when it becomes due.
Banking credit involves a transfer of assets from a bank to a borrower, utilizing them within an agreed period and obligating the borrower to return the principal and interest upon maturity This monetary transaction forms the core of banking operations, with assets primarily being financial However, in certain credit forms like financial leasing, tangible assets may also be transacted.
Based on the purposes of credit, they are classified into 6 main categories:
1 Based on the credit term:
- Short-term credit: a type of credit for short-term loans, the maximum period is 12 months (1 year) This loan is often used for personal consumption purposes
- Medium-term credit: a type of credit that has a term of minimum | year and maximum 5 years for the use of physical procurement, property remodeling or short-term investment
- Long-term credit: a type of credit loan with a term of more than 5 years with long-term purposes such as business investment, infrastructure construction, etc
- Working capital credit: a form of providing working capital for businesses which help businesses expand working capital turnover, increase production, increase revenue and profit, etc
- Fixed capital credit is used for building or buying fixed assets
3 Based on the purpose of the capital use
- Commodity production and circulation credit: a type of credit that provides capital for businesses to invest in merchandises production and circulation
- Consumption credit: a form of credit given to individuals or families for consumption and living purposes
- Study credit: a form of credit for students who must pay school fees including studying abroad
- Commercial credit: A form of capital support for the business between two business subjects, which is solving the problem of lack of capital and backlog of goods
- Banking credit: the bank as a representative for a large subject works with the borrowers as businesses or individuals, which meet the short-term and long-term capital for businesses and individuals and serve for consumption, construction, business, and investment
- State credit: A credit relationship in which the state manifests itself as borrowers, citizens as lenders, economic organizations, banks, and foreign countries The borrowing purpose of the State credit is to offset the budget deficit
5 Based on the subject to pay the loan
- Direct credit: a form of credit in which the borrower is also the person directly paying the loan
- Indirect credit: is a form of credit in which the borrower and the payee are two different subjects
6 Based on the types of collateral
- Secured credit: the credit capital is guaranteed by equivalent goods, materials and assets
- Unsecured credits: credits with non - guarantee goods but only rely on the prestige and credibility of organizations or individuals for the finance credit According to the Circular No 39/2016 / TI-NHNN, December 30, 2016, of the Governor of the State Bank of Vietnam:
- Lending refers to a form of extension of a line of credit under which a credit institution offers or undertakes to offer a customer a sum of money for specific uses within an agreed time provided that that customer adheres to the principle that both principal and interest arising must be repaid
Lending credit institutions, as defined by the Law on Credit Institutions, encompass various financial entities that provide credit services These include commercial banks, which engage in traditional banking activities; cooperative banks, owned and operated by members; non-bank credit institutions, focusing on specific lending markets; microfinance institutions, specializing in providing loans to low-income individuals and small businesses; people's credit funds, primarily serving rural communities; and foreign bank branches, operating as extensions of foreign banks within the domestic market.
- Customer performing a borrowing transaction with a credit institution (hereinafter referred to as borrowing customer) refers to any legal entity or individual, including:
= Legal entities established and operated within the territory of Vietnam and/or those established abroad and legally operated within the territory of Vietnam
= Vietnamese and/or foreign nationals
- Loan for personal or living expenses (consumer loan) refers to a credit institution's granting a loan to a personal customer’s demands for borrowed funds to pay consumption or living expenses for his/her personal or family purposes
- Loan for business or other operating purposes (business loan) refers to a credit institution’s granting a loan to a legal entity or individual to meet the demands for borrowed funds other than those referred to in Clause 4 of this Article, including the demands for borrowed funds by that legal entity or individual, and the demands for borrowed funds by a business household or private company of which that individual is the legal owner
Based on the above concepts, personal customers include individuals and families Personal customer credit is a form of credit in which the bank is in the role of assigning the use of capital to a personal customer or family using capital for a period and must repay principal and interest for the purpose of serving life, utilizing or using in business
Personal customer loan is usually low value, but the number of customers is large and most of them are for additional business or consumer loans (home, car or general consumption) However, the large number of borrowers leads to large loans then the demand for loans is varied by different people's incomes As the socio- economic development is enhanced, the demand for loans from this customer group will increase progressively
1.1.2, Concept of credit risk, personal credit risk
A bank exists not only to accept deposits but also to grant credit facilities, therefore inevitably exposed to credit risk Credit risk is by far the most significant risk faced by banks and the success of their business depends on accurate measurement and efficient management of this risk to a greater extent than any other risks Credit risk is the degree of value fluctuations in debt instruments and derivatives due to changes in the underlying credit quality of borrowers and counterparties (Tilahun Aemiro Tehulu, 2014)
Circular 02 SBV: is a potential loss to a credit institution's debt due to a client's failure to perform or the inability to fulfil part or all their obligations as committed
Basel (2000): Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations by agreed terms
Personal credit risk characteristics at commercial banks
Based on the characteristics of personal and credit customers being applied to this object, the commercial bank divides the following characteristics:
- The diversity of customer objects and use purposes: different personal customers on borrowers such as different ages, industries, qualifications, needs, etc use capital as different as in consumer, production, and business To administrate this customer group, the bank administrators require a reasonable loan policy depending on the industry, qualifications and capabilities of borrowers that decide on the level of credit Besides, the bank must regularly check and monitor customer advice before borrowing in the use of loans effectively
- The value of each credit loan is not large, but the quantity of credits is large Personal credits often serve consumer purposes, production purposes and business purposes, so the loan value is often not large, the value of each loan depends on demands and limits on loan repayment Banking management needs to apply banking technology to be able to manage well with the size and the quantity of customers in monitoring and urging loan recovery due At the same time, there must have policies to adjust each small loan in difficulties on temporary repayment or capital recovery gradually, reducing the pressure to repay loans especially in the field of agricultural production and farming since this field was frequently suffering from natural disasters, epidemics, pricing disadvantageous occurs
- High credit interest rates: Since the size of personal loans are usually small with a large frequency of transactions, risk management risks, large management costs, the credit rates are usually high Administrators need to update information quickly from customers to reduce risks that occur in capital recovery
- Strict requirements on collateral: personal loans are often medium term or long-term loans In the worst case, the banks have strict requirements on collateral to secure the final income Banking manager has loan guarantee policies like the insurance for loans in the agricultural industry.
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1.2.1 Concept of credit risk management
Risk acceptance and risk management are fundamental principles in banking business However, the bank should take into accounting risk tolerance in its business strategy and must understand, measure and control risks to the extent of its willingness to respond to possible disadvantages Credit risk management is the process of identifying and analyzing risk factors, measuring the level of risk then choosing preventive measures and managing credit activities to limit and eliminate risks in the credit extension process
Credit risk management is the process of identification, analysis of risk factors and measuring risk levels Based on the process, it can select measures and manage credit activities to limit and exclude risks in the process of credit Effective credit risk management is a fundamental point for a successful risk management method
1.2.2, Content of personal credit risk management
There are many definitions of the concept of credit risk management according to different approaches:
According to Circular 13/2018 / TI-NHNN, risk management is the identification, measurement, monitoring and control of risks in the operations of commercial banks, foreign bank branches (National Economic University, 2019) Commercial bank's risk management is the process of formulating and implementing credit strategies and policies to achieve safety, efficiency, and sustainable development in credit operations
Risk management is a complete system of activities through which a bank identifies, assesses, and controls the risks of granting credit and possible profits, thereby making decisions to maximize good profit for yourself (National Economic University, 2019)
Personal credit risk management is a department of risk management within the framework of general risk management of commercial bank The board of directors is responsible for building the target, strategy, and business tasks for personal customers, which clearly identify the risks and profits of the Bank To establish a personal credit risk control system effectively, the board of directors must organize as well as supervise credit activities in accordance with regulations Moreover, the must assess the risk of credit activities and offer measures to limit risks as well as set limits to control risks
In the realm of personal credit, risk management is a meticulous process undertaken by banks to safeguard their investments This process encompasses the initial encounter with customers, thorough assessments, and the granting of loans It culminates in the settlement of contracts, ensuring the timely repayment of principal and interest as stipulated in the credit agreements By adhering to these measures, banks effectively mitigate potential risks and ensure the stability of their financial operations.
Based on the above concepts, we can conclude: Personal credit risk management is the process of building and implementing four basic activities:
The goals of personal credit risk management:
- Accurately assess the customer's risk of causing loss before lending as a basis for making appropriate decisions
- Early detecting risks from borrowers, quickly handling emerging risks
- Ensuring safety for banking activities
- Contributing to increasing the profit from credit activities of the Bank, minimizing the possibility of capital loss and interest
Personal credit risk management process:
Approaching the contents of risk management theory, the content of credit risk management activities includes identifying, measuring, controlling, and handling risks to achieve the target minimizing credit risk with the bank's business goals in each period ¢ Identifying
Credit risk identification is the process of continuously and systematically determining an organization's risks Identification activities to develop information about the source of risk, the risk factors, hazards, and risks
Risk identification includes the steps: follow-up, review, and research operating environment and lending process to list the types of credit risks, the causes of each period and forecast potential causes that may cause credit risks Signs of credit risk include:
- The identification signs from the bank
- Signs appear in relations with commercial bank
- Identifying signs from the business, financial and management situation of borrowers
= Signs appear in relations with commercial bank
- They are delaying, causing difficulties and obstacles for banks during periodic or irregular inspection of the use of loans, financial situation, production, and business activities of customers without explanation transparent, convincing
- There are signs of failure to fully comply with regulations and discipline violations in the credit relationship process
- Delayed sending or delaying sending financial statements at the request of banks without transparent and convincing explanations
- There are no reports or forecasts about cash flows
- Proposing to reschedule debt payments, adjust debt terms many times for unknown reasons, or lack convincing and objective grounds for extending or changing debt terms
- Unusual decrease in deposit account balances
- Delay in paying interests and fees when due
- Inadequate and punctual payment of principal debts
- Occurrence of overdue debts due to inability or unwillingness of customers to repay
- Product sales and debt recovery were slower than expected
- Loan requirements frequently increased, requiring loans to exceed expected demand
- The collateral 1s not qualified, the value of the collateral decreases compared to the original price There is an indication that the property has been leased, sold, or changed
= Identifying signs from the business, financial and management situation of borrowers
- There are large disparities between an actual revenue or cash flow compared to expected when the customer asks for a loan
- Adverse changes in capital structure, liquidity ratios or client activity levels
- Unreasonable expenses appear more and more
- Regularly change the organization of the executive board
- There are disagreements and conflicts in the management and administration, disputes during the operation and management sewing
- There are signs of finding out that the wrong project appraisal and survey process and quality lead to ineffective investment in the project, difficulties, and risks
- Due to internal pressure leading to the market launch of products and services while the ripe conditions are not met
- Difficulties in developing new products and services
- Changes from State policies affect exchange rates, interest rates, changes in technology, production techniques, consumer tastes, loss of suppliers or large customers, and more competitors have real effects benefits to the KH's the production and business plans and strategies
- Natural disasters, fires, epidemics, etc
- For personal clients, there are signs of a long-term illness or death of the borrower
- Signs in the bank's credit process
- Signs related to the qualifications and qualities of credit officers
= Signs in the bank's credit process
- Credit judgments are based on uncertain commitments and lack of customer guarantees
- Credit growth is too fast, exceeding the bank's ability and ability to control and capital
- Granting credit based on unusual events: mergers, changing legal units from branch to independent company, etc
- Too specific, rigid or loose credit policies create loopholes for customers to take advantage
- Provide bulk credit to customers who do not have optimal market segments
- Tend to over-compete, lower credit interest rates, service fees, or implement a strategy of "retaining" customers by lowering lending standards
- There is a slight change in the credit structure: too focused on a few specific customers or industries
- Measures to conceal the credit quality situation: increase outstanding loans, loan reversal, debt rescheduling, debt write-off
= Signs related to the qualifications and qualities of credit officers
- The credit profile is incomplete, lacks full compliance with current regulations on credit approval
- Drafting unclear, unclear credit contracts, unspecified repayment schedule for each loan, intentionally negotiating credit principles with customers
- Lack of selectively obey the direction and direction of the loan
- There are ‘hands in relationships with customers in the credit appraisal, disbursement and loan use monitoring: Falsifying the indices that reflect customers' financial information and repayment ability ¢ Measuring
Credit risk measurement plays a crucial role in assessing the creditworthiness of customers Through modeling, it quantifies their risk level and determines appropriate risk premiums and maximum safe credit limits Consequently, it enables financial institutions to set up risk provisions and manage their exposure effectively.
Methods: using models to measure risk
In risk management, it is necessary to have a measuring system measuring credit risks to classify the impact of risks in banking operations, thereby giving specific measures to manage risks at different levels
The focus of this model is to consider whether the borrower has the goodwill and ability to repay loans when they are due Specifically, it includes the following six elements:
- Character: The credit officer must clarify the purpose of the client's loan application, whether the loan purpose is in line with the bank's current credit policy, and at the same time reviewing the history of borrowing and debt repayment with old customers New customers need to collect information from many other sources such as the Risk Prevention Center, other banks, or the mass media
- Capacity: Depending on the law of the country Borrowers must have the civil legal capacity and civil act capacity
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Analysis Financial Statement of Techcombank from 2017 to 2020
Table 2.1 Income Statement at Techcombank from 2017 to 2020
Net Interest Income 8,930,412 11,126,535 14,257,844 | 18,751,209 Net profit/loss from service activities 3,811,902 3,535,984 3,253,353 4,188,778 Net gain/loss from forex and gold trading 278,585 233,751 104,581 745
Net gain/loss from trading securities for 396,730 168,433 397,664 321,397 trading
Net gain/loss from trading investment 855,760 756,585 1,243,759 1,496,997 securities
Net profit/loss from other activities 1,714,891 1,633,777 1,806,728 2,279,168
Net operating profit before the cost of provision for credit 11,645,523 12,507,261 13,755,636 | 18,411,331 losses
Cost of provision for credit risks 3,609,226 1,846,245 917,368 2,611,035
Total profit before tax 8,036,297 10,661,016 12,838,268 | 15,800,296 Profit after tax 6,445,595 8,473,997 10,226,209 | 12,582,467
Source by Techcombank's Financial Report Annual 2020
Based on Techcombank's report on business results for 2017-2020, it found that the growth rate of TCB has steadily increased year by year This is due to the continuous credit growth of 16.7% -18.8% for four consecutive years and guaranteed asset quality, reflected in the 3-5 debt ratio, especially at the end of 2019 when the index stopped at 1.3% This is due to the steadfast pursuit of a low-risk, high-return strategy As a result, the bank has succeeded in balancing revenue structure, reducing dependence on lending activities, and reducing provision costs The most obvious evidence is shown through the cost of provision for credit risks in
2019 when there was only VND 917,368 million, the lowest in 4 years from 2017-
2020 In addition, it can see that Net Interest Income and Profit after tax of the following years increase rapidly, especially in 2019 and 2020 The reason is due to the demand deposit balance and credit growth limit The SBV allowed an expansion to 18.8%, two main factors that helped net interest income achieve the highest growth in 4 years and contributed 68% of Techcombank's total revenue for the period 2019-2020
Table 2.2 Balance Sheet at Techcombank from 2017 to 2020
Loans and leases to customers 158,964,456 | 157,554,103 | 227,885,283 | 275,310,367 Investment securities 51,552,167 86,524,571 66,066,820 | 84,459,047
Other Properties 13,779,993 18,898,129 | 20,494,918 | 23,960,627 Total assets 269,392,380 | 320,988,941 | 383,699,461 | 439,602,933 Liabilities and Equity
Deposits and borrowings from other credit institutions 47,323,825 42,450,587 61,266,635 =|47,484,812
Deposits from customers 170,970,833 201,414,532 231,296,761 |277,458,651 Valuable papers issued 17,639,970 13,177,959 17,460,634 |27,899,640
Capital and reserves 26,930,745 51,782,705 62,072,767 74,614,786 Total liabilities and equity 269,392,380 (320,988,941 (383,699,461 [439,602,933
Source by Techcombank's Financial Report Annual 2020
According to the balance sheet for the period 2017-2020, Techcombank's asset volume increases year by year The amount of cash increased gradually from 2017-2019, but this amount of money by 2020 has decreased by about 24% compared to 2019 Next, it is easy to see that TCB performed better than lending during 2020 vs three years before lending to customers in 2020 is VND 275 trillion
- 20.6% higher than in 2019 The evidence is that Techcombank's credit balance is VND 277,524 billion, equivalent to a credit growth of 19.4% This rate approved by the State Bank when Techcombank approved for early application of Circular 41/2016 / TT-NHNN regulating capital adequacy ratios for banks and branches of the State Bank external (The standard method of Basel H) Focusing on the retail and SME segments continues to be Techcombank's strategic focus segment with growth of 45% and 43% in 2018-2019, respectively, accounting for 46% % and 19% of total outstanding loans of the whole Bank The Bank has maintained a solid shift to collateral in the personal customer segment while maintaining its growth momentum of 60% and 9% in home and car loans The SME segment also recorded a 50% growth in short-term working capital loans in 2019 by the proposed strategic direction Therefore, outstanding loans on the balance sheet of the following years grow more than the previous years In addition, TCB has paid off all debts to the Government and the Central Bank in the last two years in terms of liabilities and equity Customer deposits also increased year by year, proving that TCB is growing strongly In addition, 2020 is also the year TCB promotes equity issue The issuance of valuable papers in 2020 will increase by more than 60% compared to 2019 Table 2.3 Financial Indicators at Techcombank from 2017 to 2020
Source by Techcombank's Financial Report Annual 2020
In the context of a solid global outbreak of COVID-19, which led to instability that negatively affected the economy, governments responded differently However, Vietnam's success in preventing COVID-19 showed the world its governance capabilities and boosted its economy to help it become one of the few countries to achieve growth in 2020 At Techcombank, this is reflected in the financial indicators in the table above In 2020, Techcombank's CASA had ranked number | in the Vietnamese banking market and reached a record level when it reached 46.1% It can seem that in the last four years, Techcombank has a strategy to focus on attracting demand deposits to reduce capital costs and focus on promoting digital solutions to benefit both customers and banks In addition, the capital adequacy ratio under Basel II reached 16.1%, helping Techcombank to have a solid capital source to support customers and create favorable conditions for growth as the economy recovers from COVID-19 Thanks to the above two factors, the market leader returns on average total assets (ROA) by 3.1% and increase in Techcombank's share price (Symbol: TCB on HOSE) up to nearly 100% in the fourth quarter of 2020
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Figure 2.2: The figure depicts the growth of TCB shares in 2020
Source by Data in Cophieu68 2.2, Personal credit risk management at Techcombank
2.2.1, Current situation of personal credit risk management
With the primary goal of developing safe and sustainable credit, Techcombank always focuses on prioritizing short-term credit with fast capital turnover Short-term credits occupy a high and continuous proportion in 03 the most recent year (over 60%) The financing for the medium and long term is only based on balancing capital sources and limiting the ratio of medium-term, and long-term debt / total debt according to the State Bank's regulations.
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Total Interest Income from personal customer serviee
Techcombank is currently implementing many loan packages for personal customers However, the most attractive package is a home loan, car purchase These service packages now have interest rates, loan terms and a quick disbursement process so that customers can satisfy their own shopping needs ® Home loan
For home loan purposes, customers can choose from two loan packages with different preferential interest rates Customers should note that after the end of a promotional period, the interest rate will be floating within a certain margin Therefore, customers need to consider and compare the same period deposit interest rate to make a suitable decision Typically, home loan and purchase programs will have fixed interest rate incentives for a particular time After the preferential period, the customer's loan interest rate will be the base interest rate plus amplitude (Usually, the base rate will have periodic changes)
Table 2.5: Interest rates on loans to personal customers for home loan
Preferential Maximum loan | Maximum loan
Home loan Offer time interest rate term rate
Buying real estate 7.89% 6 months 300 months 70%
Buyi tiymig neat estar’ 1 estat 9.29% 12 months | 300 months 70% under | billion
Buying real estate from ơ 8.29% 12 months 300 months 70%
Buyi YING BEAT SANE ONT T 8 090% 5 billion 1 estat 12 months | 300 months 70%
Source by Author ® Car loan
Techcombank supports both loan needs for both new and used cars Customers can buy a car to travel or buy a car for business with maximum support from the bank
Besides, for unique customers, Techcombank will send invitations to customers to use the loan package "Meet | time, get a car now" with many privileges:
- While the customer reviews the car, the bank staff will actively calculate the maximum loan limit and notify the customer
- If the customer agrees, the bank will tmmediately process the loan application so that the customer can get the right car
Table 2.6: Interest rates on loans to personal customers for car loan
Preferential Offer Maximum loan | Maximum loan
Car loan mterest rate time term rate
New car package | 8.29% 6 months 84 months 80%
New car package 2 8.79% 12 months 84 months 80%
Old car package 1 8.29% 6 months 72 months 75%
Old car package 2 9.29% 12 months 72 months 75%
Source by Author Although Techcombank's car and home loan interest rates are very favorable (According to Table 2.5, and Table 2.6), Techcombank earns in 2020 only accounts for 35% of the profit of the entire branch; the rest are mainly SMEs and large corporations The cause of this problem is that Techcombank only focuses on disbursing for home and car loans For consumer loans or unsecured loans, Techcombank will regularly refuse to lend In addition, many personal borrowers at Techcombank are usually employees and VIP guests already available For that reason, profits from lending services do not take a high proportion, but instead are services related to credit cards, VISA, insurance, and other services
Table 2.7: Revenue structure from personal service activities
Total income from service 100% 100% activities
Rate of non-performing loans ratio from personal customer service
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Figure 2.3: NPLs and loans to personal customers at Techcombank for from
In 2020, Techcombank proactively resolved some non-performing loans Provision expenses for 2020 will increase to VND 2.6 trillion compared to VND
917 billion in 2019 Credit costs are maintained at 1.1% for the whole of 2020, compared to 0.5 % of 2019
As of December 31, 2020, the NPL ratio was kept at 0.5%, lower than 0.6% on September 30, 2020, and 1.3% on December 31, 2019 NPLs decreased because the Bank proactively dealt with non-performing loans to consolidate the balance sheet strength against the effects of the COVID-19 pandemic on the economy NPL coverage as of 31/12/2020 1s 171.0% compared to 148.0% on September 30, 2020, and 94.8% as of December 31, 2019
Techcombank's solid capital position is reflected in the CAR of Basel II, reaching 16.1% by the end of 2020 It can say that Techcombank has concluded the process of implementing the 2016-2020 strategy very successfully and successfully Good results in challenging economic conditions in Vietnam due to the COVID-19 pandemic
To aid in economic recovery, Techcombank has introduced a comprehensive support package worth up to 41.2 trillion VND, in collaboration with the Government and banking industry This package includes measures such as debt restructuring, interest rate reductions, and payment rescheduling, benefiting over 3,200 individual and business customers These efforts demonstrate Techcombank's commitment to supporting customers who are facing financial difficulties, thus contributing to the overall economic restoration efforts.
2.2.4, Level of provisioning in personal customers
According to the regulations of the State Bank, the debt is classified as follows: ¢ Group 1 (qualified debts) includes:
- Short-term debts that the credit institution assesses as capable of fully recovering both principal and interest on time
- Debts of which the customer fully pays principal and interest by rescheduled terms within one (01) year for medium and long-term debts, three (03) months for short-term debts and assessed by the credit institution to be capable of paying the principal and interest in full on time according to the rescheduled time limit, the credit institution ¢ Group 2 (Debts requiring attention) includes:
- Debts which are overdue for less than 90 days
- Restructured debts within the same term
- Other debts that are classified into group 2 in accordance with Clause 3 and Clause 4 Article 6 of Decision No 493/2005 / QD-NHNN ® Group 3 (Sub-standard debts) includes: ¢ Debts which are overdue for a period of between 90 and 180 days
- Restructured debts which are overdue for less than 90 days within the rescheduled term
- Other debts that are classified into group 3 in accordance with Clause 3 and Clause 4 Article 6 of Decision No 493/2005 / QD-NHNN
- Debts which are overdue from 181 days to 360 days
- Restructured debts which are overdue from 90 days to 180 days within the rescheduled term
- Other debts that are classified into group 4 according to the provisions of Clauses 3 and 4, Article 6 of Decision No 493/2005 / QD-NHNN ® Group 5 (Potentially irrecoverable debts) includes:
- Debts which are overdue for more than 360 days
- Frozen debts waiting for the Government to handle
- Restructured debts which are overdue for more than 180 days within the rescheduled term
- Other debts that are classified into group 5 according to the provisions of Clauses 3 and 4, Article 6 of Decision No 493/2005 / QD-NHNN
Loan portfolio by quality can be presented as follows:
Table 2.8: Loan portfolio by quality
VND | VND | VND | VND |, billion| ” |billion | ” | billion | ” | billion | ”
Debts requiring 572.68| 1.03 1.380 0.62 0.88 attention (Group 2) 0 % 245.215 % 55.090 % 88.467 % Substandard debts 0.09 0.15 0.36 0.28 (Group 3) 50.040 % 26.654 % 31.988 % 34.644 % Doubtful debts 0.63 0.54 0.28 0.33 (Group 4) 50.280 % 95.954 % 24.879 % 33.1751 % Potentially irrecoverable debts | 278 | 929} 231 | 1:39 159.939 | 1:89 | 160.849 | 16° % % 1% 1%
It can see that provision expenses during the period of Techcombank in the past year increased sharply The bank's credit risk provision expense in the first 3.5 times higher than the same period last year Techcombank accelerated the provisioning while the loan size and NPL ratio did not increase The non- performing loan ratio only accounts for about 0.5% of the total outstanding loans This shows that Techcombank is very cautious about the Covid19 epidemic, raising the CAR rate in 2020 One of the other reasons why Techcombankincreased CAR with personal customers is that most customers at Techcombankoften borrowed money to buy real estate or run hotels and tourism The Covid epidemic affecting the tourism sector will put Techcombank's customers under considerable pressure That is the main reason why TCB increased risk provision in 2020 higher than in other years
2.3 Analyzing personal credit risk management at Techcombank
2.3.1.1, Regulations on lending to personal customers
Having the civil legal capacity, civil act capacity and civil liability by the law
For customers who borrow Vietnamese individuals include: ¢ The organization must have the civil legal ability
- Representatives of households/business households
- General partners of partnerships must have the civil legal capacity and criminal capacity
For customers who borrow foreign individuals ¢ Foreign organizations must satisfy the following conditions:
- Lawfully operating abroad by the laws of the State in which the organization is headquartered
- Having a license to use in Vietnam issued by a competent Vietnamese state agency
- The loan term must not exceed the period permitted to operate in Vietnam Foreign individuals must meet the following conditions: ¢ Have a valid passport
Being permitted to enter or reside in Vietnam by Vietnamese immigration authorities to work, study, travel or treat medical treatment by one of the following documents:
- Permanent residence card (reissued once every 3 years)
- Temporary residence card (granted for a period of | to 3 years)
- Passport (valid for no more than 6 months) © Other papers if required by law
Loan details include the following: loan term, which must not exceed the visa or residency period; loan amount, calculated based on project value, borrowing needs, equity, collateral, and repayment capacity; loan tenor, short-term or medium-long-term, based on loan purpose and repayment ability; loan type, including installment, credit line, project-based, syndicated, reserve-based, credit card executive, overdraft limit, and other lawful methods; and loan security, with options such as deposit, mortgage, pledge, and guarantee.
- Legal documents of the borrower, guarantor (if any) (ID card, household registration book or KT3) Records related to security measures
- Loan-related documents (application form, plan, proof of income, repair, construction, internal documents etc.)
The process of lending credit to personal customers is applied to the entire
Figure 2.4: CENTRALIZED CREDIT APPROVAL PROCESS FOR LOAN
Source by Authors ¢ Receiving and collecting records
- Search and directly contact, work with customers; research customers’ needs and advise customers to use suitable products and services
By receiving loan requests from customers via specified forms, we provide guidance on submitting required documentation based on the approved documents list This entails identifying and conducting a preliminary evaluation of customer information, ensuring that all necessary details are provided.
- Identify and preliminarily evaluate customers' customer information and loan profiles by "Guidance on centralized credit extension with products”
- Check and consider loan conditions for a loan according to current regulations
Techcombank's regulations consider rejecting not eligible cases and violating rules on loan restrictions, ineligibility by current rules of Techcombank and the law Identify risks and record them in the credit proposal ¢ Processing records
- With the application file is ineligible for credit extension, the limit of advance to the personal account issued with the credit card is following the current regulations of Techcombank o Request customers to declare and provide additional documents with complete information (if any) to prove information o If the customer is not eligible for a loan, notify the customer about refusing the loan or guiding customers to complete the application
- With documents eligible to be considered for credit extension, personal account advance limit, credit card issuance in accordance with current regulations of Techcombank © Sign the proposal on the loan proposal o Authorized submission o Leaders of Branches / Transaction Offices / examine, control and sign and approve loan applications from customers
- Control, sign and approve the proposal and submit the dossier to the Personal Credit Appraisal and Approval Center o Receiving records o Decision to receive or refuse loan request Sign the proposal of loan limit, account advance limit, credit card issuance limit for eligible customers o Control the content of loan application and sign for certification o Send a scanned copy of the loan application to the contact point of the Center for Personal Credit Appraisal and Approval via the Email address at Email Out ook system, ECM e-document management system Techcombank o Save the original loan application of customers ¢ Examining, verifying, and classifying records
- Receive documents from Transaction Office
- Re-check the completeness and reasonableness of the profile
- Ifthe application is incomplete: notify and return the application
- Ifthe profile is complete: notify and continue with the following steps
- Verify the authenticity and ensure that the contents of the loan application do not have any conflict between the above information and are in line with the reality as specified in Techcombank's product instructions
- Check customers! loans at Techcombank
- Check loan history of customers at other credit institutions
- Contact customers by phone to determine the accuracy and truthfulness of information provided by customers in loan documents If detecting signs of tampering with suspicions, dossier-processing specialists consult with leaders and agree with leaders of the branch / transaction office on how to coordinate the physical inspection of customers
- Input profile status and perform customer credit scoring Print credit scorecard with the customer profile
- Based on the loan limit and credit card issuance limit of each application, approve the loan according to the approval competence
- Ifthe loan is in the judgment level: approve the loan
- For loans with different conditions (exception documents): give you agree or disagree (must specify the reason) on the proposal of the branch/transaction office: o If you agree with the proposal: transfer the case back to a case handler who applies to a place with authority to approve exception records After obtaining loan approval results, send credit notices to branches to send to customers o If you disagree with the proposal: give your disagreement, state the reason, and transfer the application back to the branch o Ifthe branch leader agrees to refuse the loan according to his opinion, the branch shall send a credit notice of rejection to the customer o If branch leaders evaluate customers’ satisfaction, good debt repayment ability, risk assessment, safe ability to lend to customers, leaders proactively submit to the competent authority to approve exception documents
- The Personal Credit Appraisal and Approval Center is responsible for keeping the following documents: o Credit approval / denial notice o Customer credit score sheet with approval results ¢ Credit notification
Send scanned documents for approval via Email Outlook system, ECM electronic document management system of Techcombank
- Save original approval results (customer credit score sheet)
Procedures and polIc1es . - + c1 22 1122112121111 1111111115111 11221112 40 1, Regulations on lending to personal CUSTOMETS ccccccicecicee 40 2 LOGH PVOCOSS ccccccccccceccctcee tet c te ceee eects eeteeeeeeteeeeecieeeteneeeeeeeeeennnnas 42 2.3.2 Implementation of personal credit risk management at Techcombank .46 2.4, Evaluating personal credit risk management at Techcombank
2.3.1.1, Regulations on lending to personal customers
Having the civil legal capacity, civil act capacity and civil liability by the law
For customers who borrow Vietnamese individuals include: ¢ The organization must have the civil legal ability
- Representatives of households/business households
- General partners of partnerships must have the civil legal capacity and criminal capacity
For customers who borrow foreign individuals ¢ Foreign organizations must satisfy the following conditions:
- Lawfully operating abroad by the laws of the State in which the organization is headquartered
- Having a license to use in Vietnam issued by a competent Vietnamese state agency
- The loan term must not exceed the period permitted to operate in Vietnam Foreign individuals must meet the following conditions: ¢ Have a valid passport
Being permitted to enter or reside in Vietnam by Vietnamese immigration authorities to work, study, travel or treat medical treatment by one of the following documents:
- Permanent residence card (reissued once every 3 years)
- Temporary residence card (granted for a period of | to 3 years)
- Passport (valid for no more than 6 months) © Other papers if required by law
The loan term is not over the period permitted to reside in Vietnam according to the above documents and by the visa term ¢ Loan level: Determined based on the estimated value of the project, the customer's borrowing needs, the equity capital of the customer participating in the project/plan, the value of the loan collateral and the loan collateral repayment ability of customers ¢ Loan term: short-term or medium-long-term in line with the loan plan, the ability to repay the customer's debt ¢ Loan method: Loan instalment, credit line loan, loan according to the investment project, loan syndication, instalment loan, loan according to the reserve credit line, loan via credit card executive operations, overdraft limit lending and other lending methods not prohibited by law ¢ Loan Security: Applying forms of security: deposit, mortgage, pledge, guarantee and other security measures as prescribed by law ¢ Loan profile:
- Legal documents of the borrower, guarantor (if any) (ID card, household registration book or KT3) Records related to security measures
- Loan-related documents (application form, plan, proof of income, repair, construction, internal documents etc.)
The process of lending credit to personal customers is applied to the entire
Figure 2.4: CENTRALIZED CREDIT APPROVAL PROCESS FOR LOAN
Source by Authors ¢ Receiving and collecting records
- Search and directly contact, work with customers; research customers’ needs and advise customers to use suitable products and services
As a financial expert, you are responsible for evaluating loan applications and providing guidance to customers Upon receiving a loan request form, you diligently review it for completeness and accuracy, ensuring that all required documents are provided Through careful examination of the applicant's information, you make an initial assessment of their financial standing and suitability for the loan product, providing valuable insights for loan approval decisions.
- Identify and preliminarily evaluate customers' customer information and loan profiles by "Guidance on centralized credit extension with products”
- Check and consider loan conditions for a loan according to current regulations
Techcombank's regulations consider rejecting not eligible cases and violating rules on loan restrictions, ineligibility by current rules of Techcombank and the law Identify risks and record them in the credit proposal ¢ Processing records
- With the application file is ineligible for credit extension, the limit of advance to the personal account issued with the credit card is following the current regulations of Techcombank o Request customers to declare and provide additional documents with complete information (if any) to prove information o If the customer is not eligible for a loan, notify the customer about refusing the loan or guiding customers to complete the application
- With documents eligible to be considered for credit extension, personal account advance limit, credit card issuance in accordance with current regulations of Techcombank © Sign the proposal on the loan proposal o Authorized submission o Leaders of Branches / Transaction Offices / examine, control and sign and approve loan applications from customers
- Control, sign and approve the proposal and submit the dossier to the Personal Credit Appraisal and Approval Center o Receiving records o Decision to receive or refuse loan request Sign the proposal of loan limit, account advance limit, credit card issuance limit for eligible customers o Control the content of loan application and sign for certification o Send a scanned copy of the loan application to the contact point of the Center for Personal Credit Appraisal and Approval via the Email address at Email Out ook system, ECM e-document management system Techcombank o Save the original loan application of customers ¢ Examining, verifying, and classifying records
- Receive documents from Transaction Office
- Re-check the completeness and reasonableness of the profile
- Ifthe application is incomplete: notify and return the application
- Ifthe profile is complete: notify and continue with the following steps
- Verify the authenticity and ensure that the contents of the loan application do not have any conflict between the above information and are in line with the reality as specified in Techcombank's product instructions
- Check customers! loans at Techcombank
- Check loan history of customers at other credit institutions
- Contact customers by phone to determine the accuracy and truthfulness of information provided by customers in loan documents If detecting signs of tampering with suspicions, dossier-processing specialists consult with leaders and agree with leaders of the branch / transaction office on how to coordinate the physical inspection of customers
- Input profile status and perform customer credit scoring Print credit scorecard with the customer profile
- Based on the loan limit and credit card issuance limit of each application, approve the loan according to the approval competence
- Ifthe loan is in the judgment level: approve the loan
Exception document approvals vary based on loan conditions If the branch agrees with the proposal, it is returned to a case handler with approval authority Upon approval, credit notices are sent to the branch for customer distribution In cases of disagreement, the branch states its reasons and returns the application Branch leaders may also proactively submit proposals to the competent authority for exception document approval based on customer satisfaction, repayment ability, and risk assessment If the branch leader declines the loan, a credit notice of rejection is sent to the customer.
- The Personal Credit Appraisal and Approval Center is responsible for keeping the following documents: o Credit approval / denial notice o Customer credit score sheet with approval results ¢ Credit notification
Send scanned documents for approval via Email Outlook system, ECM electronic document management system of Techcombank
- Save original approval results (customer credit score sheet)
- After receiving approval results, within a maximum of 01 working days, send credit notices to customers and give feedback by Outlook system about customers agreeing or rejecting approval results o If the customer disagrees with the review result: notify the customer's reply o If the customer agrees with the approval result: Send the scanned loan application and approval results (Customer credit score sheet), the application control rotation slip to CCA via Outlook Email system ECM system of electronic documents of Techcombank
2.3.2, Implementation of personal credit risk management at Techcombank Provision for loans to personal customers are as follows:
Table 2.9: Provision for loans to personal customers
Source by Author e Management capacity to manage personal credit risk
It is the capacity to develop strategies, perfect credit processes, and policies Here, with the well awareness of the essential role of personal credit risk management, Techcombank has built a personal credit risk management strategy for the whole system based on principles:
- Simple and convenient in the process
- Commitment to invest in human and system development
- Prudent policies with a long-term vision
Besides, in demonstrating the capacity to build an organizational model of personal credit risk management apparatus, Techcombank Head Office applies a centralized risk management model with independent separation between three functions: business, risk management, operations ¢ Capability to develop and operate personal credit risk measurement tools
Currently, Techcombank's internal credit rating system has been supported by software for centralized credit approval at main es, centralized credit rating In Techcombank's internal credit rating system, in addition to personal customers, there are also corporate customers
To comply with Basel I standards, Techcombank has implemented a credit risk measurement model In 2012, anticipating the adoption of Basel II in Vietnam, they formed a Basel II project group led by experts experienced in Asian Basel II implementations Techcombank has since implemented various projects, including the Internal assessment process for capital adequacy (ICAAP), Endurance test, and Capital planning, to enhance their risk management practices and align with Basel II standards.
The bank has invested in Switzerland's T24 core banking system since 2000 and has continued to upgrade it up to now The bank's customer data system, as well as its accounting and database system, are confirmed to meet international standards Since 2009, the bank has hired the world's leading consultant, McKinsey, to restructure the system, and the strategic partner of the bank has actively supported the upgrading of the risk management system With that support, Techcombank has put the risk management framework under the model of "3 lines of defense" and "risk management of the whole enterprise" into the application After strictly complying with the 3-layer defensive management model at Techcombank, safety standards have been followed and gradually approached with the world's advanced governance standards creating a culture of risk awareness and control in every employee of the bank Everyone from the customer specialist to the support team staff must comply with the regulations, process and be aware of the responsibility to assess, detect risks early and find ways to prevent arising risks This means ensuring the risk management is done by the whole system, not Just the responsibility of the Risk Management Division ¢ Personal credit risk handling capacity
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- Due to the influence of Covid, customers pay their debts slowly
Due to the complicated development of the Covid19 epidemic in 2020, many sectors have difficulty, which significantly affects the ability of customers to repay debts The rapid exponential spread of the epidemic affected the operational activities and the operational structure of all customers, businesses, and banks Just one member infected with Covid-19 (F0) can act the company either on purpose or spontaneously with someone in group FO At that time, individuals’ work and professional activities immediately stalled, thereby affecting the series of other jobs, affecting the psychology and performance of other employees and the system On the other hand, when corporate information with employees infected with Covid-19 or quarantined is spread to the outside, this will undoubtedly affect enterprises’ psychology and business activities Since then, business activities were stalled, making the financial situation of businesses and individuals difficult Many business establishments must close, affecting the personal customers of the bank directly, making them difficult in the problem of capital rotation to repay bank loans
- The tourism, hospitality and service industries have been affected by the Covid19 epidemic
In 2020, industries related to tourism, entertainment services and airlines will be significantly affected by the Covid19 epidemic It has caused many hotels and business cafes to close during the process of social isolation This has a significant impact on the restaurant's revenue, hotel owners, etc., making it difficult for customers in the process of repaying loans to the bank ¢ Internal reasons
- Techcombank's customers are mostly coffee and hotel business
Trading in cafes and hotels are two popular forms of Techeombank's customers However, these forms still have certain limitations, bringing risks to debt repayment Today, the unpredictable market situation makes many coffee shops or hotel owners find it difficult Besides, there are many new trends in business, and the high competition in these industries has made this group of customers face more and more difficulties These factors directly affect the ability of customers to repay debts If the customer has financial problems, they will delay the repayment to the bank
- Techcombank only focuses on VIP customers and home and car buying packages In addition, small loan packages under 500 million are usually less disbursed
This group of the customer only accounts for a small percentage of the overall demand in the market Borrowing demand from other groups of customers is also very high However, due to its focus on VIP customers, Techcombank's loan packages are not suitable for most customer groups The customer groups ideal for the home loan or car loan packages of Techcombank are all high-income people, but these people do not account for most of the market's needs today Due to customer restrictions, these bank loan packages depend on home buying or car purchases from other parties such as the Vinhome home purchase program.
Personal credit risk management orientation at Techcombank in the
3.1.1 Development orientation of Techcombank in 2021
* Compliance with the law: all officers and employees are responsible for complying with the provisions of the law in credit activities and related regulations ¢ By TCB's business strategy in each period: credit expansion and development must be based on method, business orientation and the association with other departments in the system ¢ Equal and customer-oriented perspective: in credit extension, TCB practices unified customer policy, irrespective of economic sector, a form of ownership (except for the case of credit extension as designated by Government, State Bank) following the market mechanism Incentives in credit are based only on the customer's financial capacity, reputation, level of risk and goodwill to repay debts ¢ Personal responsibility enhancement: TCB emphasizes personal responsibility to improve transparency and quality in credit operations Individuals who are empowered to make decisions must be responsible first and foremost for their own choices ¢ TCB's general view of credit risk:
- When deciding to grant credit for a large project, it must be done according to the collective regime, ensuring objectivity
- Personal credit risk management policy is the highest document in the field of personal credit risk management of TCB In the personal credit risk management policy, TCB clearly defines the organizational structure of personal credit risk management; authority to issue personal credit risk management documents; credit management policy for customers; credit allocation policy; policies on debt classification, setting up and use of credit risk provisions; jurisdiction; regulations on risk monitoring and reporting ¢ Form of personal credit risk management:
- The Board of Directors promulgates documents to create a standard personal credit risk management environment, sets acceptable levels of risks and approves risk strategies for each period The Board of Directors also issued the Loan Regulations / Regulations, Guarantee Rules / Regulations, Loan Guarantee Regulations / Regulations, Interest Exemption Regulations / Regulations for customers etc
- The General Director promulgates documents to guide and implement the Board of Directors' regulations related to personal credit risk management such as credit process, credit manual, credit allocation policy In each period, relevant rules on risk measurement and identification, authority to review etc
3.1.2 The target for personal credit risk management that Techcombank up to
2025 ® Mimimmize credit risks based on Improving credit quality but ensuring growth by credit policies and orientations ® In 2020, Techcombank's NPL ratio was only 0.5% in the whole system The goal for 2021-2025 is to maintain the NPL ratio below 0.5% for personal borrowers © Distributing risks in the credit portfolio according to the orientation of selected industries, fields, and groups of customers with the ability to develop and achieve efficiency © Increasing the ability to prevent credit risks in TCB operations by improving the quality of appraisal and strengthening control, continuous, comprehensive, and timely supervision in the credit granting process ¢ Develop a flexible and effective non-performing loan handling mechanism, ensuring the cooperation of customers in handling non-performing loans, reducing losses caused by credit risks ® Improve business performance and work towards standards international level in personal credit risk management
3.2.1.1, Applying modern credit risk identification methods e Set up a division of risk research, analysis, and forecasting
- Building an early warning system related to customer and market signals, forecasting economic developments in each sector affecting banks and borrowers in the area From there, giving directions and policies for each industry, field and granting specific limits to prevent risks proactively, avoid too slow reactions that confuse the bank's risk management
Establishing an Economic Research, Analysis, and Forecasting division becomes imperative to navigate the highly volatile economic climate This strategic move not only alleviates the burden on credit officers, enabling them to specialize in their field, but also provides TCB with a comprehensive view of its loan portfolio This enhanced oversight allows for proactive personal credit risk management in response to macroeconomic shifts, ensuring responsible, effective, and sustainable credit expansion for TCB while fostering collaboration with industry professionals.
- Using reports of professional credit assessment and credit risk organizations (corporate credit rating agencies)
- The advantage of using corporate credit organizations report that these companies will use information sources to compare and use analytical methods to identify good or good companies The problem, thereby giving specific recommendations on credit limits, helps banks make more accurate credit-granting decisions
They are distributing risks through diversification of the lending industry, diversification of customers, diversification of types of collateral, and diversification of regions and regions
- Diversify industries, lending sectors: Diversify to limit credit risk, avoid over-concentration of capital for many industries, sectors, regions, territories, customers, etc as at present Real estate and tourism are areas where TCB lends a large proportion, so when Covid19 takes place, Techcombank has many credit risks
- Diversification of customers: Do not focus on lending to a customer with a large debt balance because risks will lead to unpredictable consequences when the customer occurs TCB needs to focus on diversifying customers, including those who borrow small capital for business or consumption with a limit of less than 500 million
- Diversify regions and regions: TCB expands its lending areas to suburbs to attract borrowers, should not focus too much on the Hoan Kiem district because this area is very concentrated many competitors such as VCB, ACB, Vietinbank
3.2.1.3 Increasing efficiency of risk financing ¢ Credit risk reserve fund
When other debt collection measures are ineffective, a bank can use funds from the standard non-performing loan risk reserve fund to offset the loss of bad debts
TCB aims to minimize branch NPLs below 0.5% in the coming years To mitigate risks associated with debt collection, particularly during the ongoing pandemic, TCB requires a comprehensive risk provisioning policy This policy will ensure adequate coverage in case of loan defaults, safeguarding the bank's financial stability Additionally, TCB emphasizes the utilization of loan security instruments to further minimize risk exposure and improve loan recovery rates.
Credit risks arise from a variety of reasons that banks cannot sometimes foresee Therefore, it is essential to use insurance tools and apply loan guarantees to limit losses when risks occur Some solutions to implement:
- The Bank needs to develop a clear collateral policy, collateral standards, pricing method, and collateral requirements based on credit rating and calendar customer transaction history
To mitigate risk, consider pledging highly liquid assets that can be easily managed in times of financial uncertainty For property purchases, ensure that customers complete legal ownership registration procedures before accepting their mortgages In cases where loan capital serves as collateral, mandate property ownership registration upon project completion Regularly monitor the legal status and condition of all collateral to maintain compliance and protect the lender's interests.
- The collateral is not a basis for deciding to grant credit, which is just the basis for determining the loan limit Proving the new source of repayment is the deciding factor for customers to be given credit or not
3.2.1.4 Improving the effectiveness of internal inspection and control of credit activities