personal credit risk management at techcombank

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 can be traced back in history and it was not appreciated until and after the Second World War when it was largely appreciated in Europe and later to Africa (Kairu, 2004) Banks in the USA gave credit to customers with high- interest rates which sometimes discouraged borrowers hence the concept of credit did not become popular until the economic boom in the USA in 1885 when the banks had excess liquidity and wanted to lend the excess cash (Ditcher, 2003) In Africa, the concept of credit was largely appreciated in the “50s when most banks started opening credit sections and departments to give loans to white settlers In Kenya, credit was initially given to the rich people and big companies and was not popular with the poor

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

We can be concluded that, the relationship between the lender and the borrower In this relationship, the lender is obliged to transfer the right to use the loan money or goods to the borrower for a certain period The borrower is obliged to pay the amount or value of the borrowed goods when the debt is due with or without interest.

Banking credit is an asset transaction between a Bank (credit institution) and a Borrower (economic organization / individual) in which the Bank (credit institution) transfers the assets to the borrower for the purpose of using in a specified period according to the agreement The borrower is responsible for unconditional return of both original loan and interest to the Bank (credit Institution) when the payment is due The essence of banking activities is trading in the monetary sector so the transacted assets in bank credit are mainly in the form of money However, in some forms of credit such as financial leasing, the property in the credit transaction can also be other assets like fixed assets

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

1 Based on the credit term:

- Short-term credit: a type of credit for short-term loans, the maximum period is 12 months (1 year) This loan is often used for personal consumption purposes

- Medium-term credit: a type of credit that has a term of minimum | 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 institution refers to a credit institution established and operated under the Law on Credit Institutions, including: a) Commercial banks b) Cooperative banks c) Non-bank credit institutions d) Microfinance institutions e) People's credit funds f) Foreign bank branches

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

= Legal entities established and operated within the territory of Vietnam and/or those established abroad and legally operated within the territory of Vietnam

= Vietnamese and/or foreign nationals

- Loan for personal or living expenses (consumer loan) refers to a 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 conclusion, personal credit risk management is a process of the bank starting when the bank meets personal customers, appraisal, and approving lending until the contract settlement to ensure fully principal and interest in accordance with the commitments in the credit contract between personal customers

Based on the above concepts, we can conclude: Personal credit risk management is the process of building and implementing four basic activities:

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 is the construction of an appropriate model to quantify the customer's risk level, thereby determining the risk premium and maximum safe credit limit for customers and setting up risk provisions

Methods: using models to measure risk

In risk management, it is necessary to have a measuring system 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 mterest rate term rate

Buying real estate 7.89% 6 months 300 months 70%

Buyi under | billion _— — 1 estat 9.29% 12 months | 300 months 70%

Buying real estate from ơ 8.29% 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

Along with the Government and the entire banking industry, Techcombank also takes measures to help restore the economy, share difficulties with individual and business customers with a comprehensive support package of up to 41.2 trillion

VND, including restructuring, interest reduction and rescheduling for more than 3,200 customers

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 | 7” Qualified debts 97.75| 17,170 |96.63|8,613.60|96.94 96.91 cual’ 54,349 | 9079 | B70 90 4 I9,742.423| 76)

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: e 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 Techcombank system in general a `

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

- Receive loan requests from customers by the form issued with the instructions of each product and guide customers to provide necessary related documents according to the list of the approved documents ¢ Identify and preliminary assessment of customer information.

- 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 © 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 © Credit approval

- 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)

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