Credit risk management in the bank for investment and development of vietnam nguyen bich thao 2009 a l0 00064 Credit risk management in the bank for investment and development of vietnam nguyen bich thao 2009 a l0 00064
R esearch O b je c tiv e
This research aims to analyze and assess the current credit risk management practices at BIDV, with the goal of identifying areas for improvement By evaluating BIDV's credit quality and risk management strategies, the study seeks to provide actionable recommendations to enhance the bank's credit performance Ultimately, the research focuses on offering solutions to strengthen BIDV’s risk management framework and improve overall credit risk mitigation.
- S y ste m iz e the fundam ental a rg u m en t ab ou t bank credit, credit risk and credit risk m a n a g e m e n t o f V ietn am ese c o m m ercial b a n k in g system
- Identifying and assess actual situations o f B I D V 's credit activities and its current credit risk m an ag em e n t
- D ev e lo p s o m e suggestions and re c o m m e n d a tio n s to im prove B I D V 's credit quality and its credit risk m a nag em en t.
R esearch S c o p e
D o in g re search risk m an a g em en t in b u sin ess o f c o m m ercial banks in
Vietnam is a broad topic, but this article focuses specifically on credit risk and credit risk management within the Bank for Investment and Development of Vietnam (BIDV) The aim is to provide recommendations to enhance the bank's credit risk system, ensuring effective risk control and management strategies.
Inform ation s o u r c e s
- Statistic d a ta gathered at B ID V (annual reports, financial statem ents, official re le ase s o f BIDV)
- D ata g a th e re d from direct interview s and discu ssio n with officials and m a n a g e rs o f BIDV
- D ata from o th e r sources such as o th er banks, books, Internet, related jo u r n a ls an d periodic, science reviews.
M ethodology’
The main method of this thesis is dialectical materialism, combining logical reasoning with a materialistic view of history to analyze the subject comprehensively It employs various research methods including issue raising, interpretation, as well as quantitative and qualitative analysis Conclusions are drawn based on case studies within BID V, ensuring a thorough and empirical approach to understanding the topic.
L im ita tio n
- T h e a s s e s s m e n t focuses on the credit risk m a n a g e m e n t in BID V D ue to tim e an d ab ility constraints, the research can not c o v e r a large size o f data and info rm atio n.
Economic and financial conditions, particularly credit situations, change rapidly, making timely assessments essential Relying on data from previous years can lead to inaccuracies, as these figures may no longer reflect current realities Therefore, updates are necessary to ensure precise and reliable evaluations in this dynamic environment.
Thesis s tru c tu r e
Bank c re d it
Bank credit represents the borrowing capacity granted to individuals by the banking system through loans or credit facilities The total bank credit an individual receives is the sum of borrowing capacities provided by different lender banks Understanding this helps individuals optimize their borrowing options and manage their finances effectively.
Bank credit refers to the financing provided to borrowers at a specified interest rate, serving as essential funding for various financial needs Each credit transaction involves a debt obligation, meaning borrowers are legally required to repay the borrowed amount Consequently, bank credit creates a financial claim for lenders, establishing a pivotal role in facilitating economic activity Understanding bank credit is crucial for managing financial health and optimizing investment strategies.
Bank credit relations differ from other trade relations because they transfer the right to use the loan's value rather than ownership of the goods itself Unlike purchasing items outright, where the buyer becomes the owner after payment, bank credits simply grant the borrower the right to utilize the funds temporarily The lender provides the borrower with access to the loan's value without transferring property rights, emphasizing the distinction between credit and ownership in financial transactions.
1 Source, http, www investorvvords.com 402/bank credit.html
A loan value refers to the amount of money available to a borrower for a specific period During this timeframe, the borrower utilizes the loan for their intended purpose Upon the completion of this period, the borrower is responsible for repaying the entire loan amount Additionally, they must pay interest to the lender for the use of the funds, which compensates the lender for providing the loan.
Interest, also known as the selling price of money, is often minimal compared to the loan amount, reflecting low compensation for risk Trust plays a crucial role in credit relationships, as lenders rely heavily on confidence rather than high interest rates Due to lack of trust, lenders frequently require collateral or legal guarantees to secure the loan Without trust, establishing effective credit relations is nearly impossible, highlighting its fundamental importance in financial transactions, as emphasized in Article 20.
Vietnam's law for credit organizations, amended in 2004, defines credit activities as those in which credit organizations utilize their own funds to grant loans and provide financial services Granting credit involves allowing customers to access funds with the commitment to repay through various methods such as loans, discounts, financial leasing, and bank guarantees Based on this definition and analysis, bank credit is characterized by three major features: trust, timeliness, and repayment.
1.2.2 Role o f bank credit in the economic development
Bank credit is a financial relationship between banks and enterprises or economic organizations, providing funds in the form of money It plays a crucial role in the economy by supporting economic growth and development As a vital economic tool, bank credit can meet capital demands without restrictions on scale or time, thereby stimulating production, expanding markets, and improving project completion Additionally, bank credit promotes investment in key economic sectors, supports underdeveloped regions, and contributes significantly to overall economic progress.
Providing capital to the economy through commercial banks boosts society’s purchasing power, enhances cash flow, and increases market commodity availability Bank credit plays a vital role in developing the commodity economy by fostering the creation of more products and services Additionally, it facilitates accumulation for extended reproduction, supporting sustained economic growth.
Bank credit is considered one o f the instruments o f the money p olicy issued by the governm ent o f a country
The State Bank implements monetary policy through commercial banks, primarily utilizing credit activities to regulate and stabilize supply and demand, currency circulation, and inflation Key measures include adjusting interest rates, rediscount rates, credit limits, and compulsory reserves to achieve economic stability.
Bank credit plays a crucial role in strengthening and enhancing the accounting systems of enterprises by providing essential capital for business operations Through targeted policies and credit methods, commercial banks offer financial support to manufacturing and service industries, facilitating their growth and development Banks have the flexibility to adjust credit amounts or establish credit relationships with individual enterprises based on specific needs, significantly impacting their operational efficiency and economic contribution.
Bank credit plays a crucial role in fostering stronger relationships between a nation and the global economy It directly contributes to national economic development while simultaneously expanding its influence internationally By enhancing foreign trade, strengthening economic relations, and increasing international competition, bank credit supports the globalization of markets and promotes overall economic growth.
The primary role of credit is to bridge the gap created by balanced budgets, enabling economic agents to meet their financial needs when their expenditures exceed their savings Credit facilitates the transfer of surplus funds from individuals and institutions to borrowers such as traders, companies, and investors who require additional capital for trade and investment activities This function of transferring surplus funds supports the banking and financial sectors in promoting savings and investment, ensuring efficient allocation of financial resources Ultimately, credit fosters economic growth by enabling consumers and businesses to finance expenditures beyond their current resources.
An effective credit system requires efficient management and control to function properly Poor management of credit can lead to inflation or deflation, causing recession and unemployment in the economy Additionally, mismanagement can result in the misallocation of investable resources, hindering economic growth It may also lead to the concentration of economic power among a few, resulting in the exploitation of weaker sections of society.
Practical credit risk management model o f hanking system
There are a number o f d ifferent d e fin itio n s o f com m ercial bank as fo llo w s:
A commercial bank is an institution that accepts deposits, provides business loans, and offers related financial services They offer a variety of deposit accounts including checking, savings, and time deposits While commercial banks serve individual customers, their primary focus is on receiving deposits and lending to businesses, supporting economic growth and financial stability (Source: nun, investoruords.com)
Com m ercial bank: " A bank whose principal functions are to receive demand deposits and to make short-term loans”
(source: http://www ihefreedictionary com/Commercial + banks)
A commercial bank is a privately owned financial institution that accepts demand and time deposits, makes loans to individuals and organizations, and offers services such as documentary collections, international banking, and trading financing Since most deposits are payable on demand, commercial banks primarily focus on providing short-term loans rather than long-term financing, which is typically handled by organizations like development finance companies and home mortgage lenders.
(Source: http: //in n v businessdictionary.com/defmitiori/commercial-bank)
A commercial bank is an organization that actively trades in currency and frequently accepts deposits from customers Its core responsibilities include refunding deposited funds, providing loans, conducting discount operations, and facilitating various payment transactions According to Vietnam's Banking Ordinance dated May 23, 1990, commercial banks play a crucial role in the financial system by managing customer deposits and supporting economic activities through lending and payment services.
Commercial banks primarily function by borrowing funds through deposits and advancing loans, fulfilling their core role of "borrow to lend." Their main activities include accepting deposits and providing various types of loans, which are essential for facilitating economic growth In addition to these core functions, commercial banks also perform miscellaneous roles that have evolved over time to meet the changing needs of society.
Banks primarily rely on deposits as their main source of funding, making deposit collection a vital function These deposits originate from the public and include various types such as demand deposits or current account deposits, fixed deposits or time deposits, and savings bank deposits Understanding these deposit types is essential for grasping how banks finance their operations and support economic activities.
Banks play a crucial role in providing short-term loans to businesses and individuals, ensuring they meet their immediate financial needs They must carefully manage their resources by maintaining sufficient cash reserves to satisfy depositors' demands while also generating profits through lending activities Striking a balance between liquidity and profitability is essential; excessive liquidity can reduce profits, whereas insufficient liquidity can jeopardize depositors' security Banks employ various lending methods including overdrafts, cash credit loans, demand loans, and short-term loans to effectively serve their clients and uphold financial stability.
A key function of modern banks is discounting bills of businessmen, which is a highly suitable short-term investment since bills are guaranteed to be paid at maturity and can be rediscounted with the central bank if needed Bill discounting ensures a steady cash flow for banks, as negotiable instruments like bills pose no payment difficulties and do not involve legal risks This form of short-term investment aligns well with banks' predominantly short-term deposits, making it an ideal financial instrument for banking institutions Consequently, bill discounting is regarded as one of the most appropriate investments for banks, highlighting that a proficient banker understands the distinction between bills and mortgages.
[Banks transfer money from one place to another fo r their customers Banks re m it the funds o f the people by means o f a bank draft o r a cheque
T his is a cheap as w ell as safe method o f transferring money from one place to another.
Modern banks offer a range of services beyond traditional banking They provide safe deposit lockers to securely store valuables Banks also earn interest on behalf of their customers and pay dividends from joint-stock companies Additionally, they facilitate the purchase and sale of stocks and shares for clients, pay insurance premiums on their behalf, and manage the execution of wills and act as trustees for deceased customers.
1.1.3 Role of commercial banks in the economic development
Economic development is fundamentally linked to the rate of capital formation, which relies on savings, investments, and the efficient allocation of funds across sectors The banking system plays a crucial role in fostering economic growth by promoting savings, mobilizing these savings, and ensuring optimal fund allocation Additionally, it supports trade, production, and investment activities, all of which contribute to sustainable economic progress Properly harnessed, the banking sector acts as a vital driver of economic development through these mechanisms.
1.1.4 Main risk in the bank operation
The Basel Committee on Banking Supervision defines credit risk as the potential that a bank borrower or counterparty will fail to meet their obligations according to agreed terms This type of risk is a crucial consideration for financial institutions, as it directly impacts their credit portfolio and overall stability Understanding and managing credit risk helps banks minimize potential losses and maintain sound risk management practices, which are essential for regulatory compliance and long-term profitability.
Joel Bess (2001) defines credit risk in banking as the potential losses a bank may face if a borrower defaults or their credit quality deteriorates This broad definition encompasses various underlying risks, including default risk, exposure risk, and recovery risk, highlighting the complex nature of managing credit risk in financial institutions.
Figure 1.1 Credit risk and its underly
Default risk is the probability o f the event o f default caused by m issing paym ent oblig a tio n , breaking a covenant or entering a legal procedure. ing risk
Exposure risk is generated by the uncertainty p reva ilin g w ith the future amounts o f risks; it is caused by the uncertainty in the scheduling o f repayment.
Recovery' risk happens in the event o f unpredictable default It depends on numerous o f factors such as guarantees received from borrowers, types o f guarantees received and the context at the tim e o f default.
Credit risk refers to the potential decline in portfolio value resulting from counterparties failing to meet their financial obligations or due to shifts in market perception regarding their ability to fulfill these commitments Managing credit risk is essential for safeguarding investment portfolios and maintaining financial stability Understanding the factors that influence credit risk helps investors assess the likelihood of counterparty default and market perception changes Effective credit risk management involves monitoring counterparty creditworthiness and market signals to mitigate potential losses.
While loans are the primary and most apparent source of credit risk for banks, various other activities also expose them to significant credit risk These include banking book and trading book operations, both on and off the balance sheet Increasingly, banks face credit or counterparty risk across a range of financial instruments beyond traditional loans, such as acceptances, inter-bank transactions, trade financing, foreign exchange, financial futures, swaps, bonds, equities, options, and the issuance of commitments and guarantees.
Liquidity risk is a major concern for investors, as it can be defined in various ways It refers to the potential for extreme illiquidity, the safety cushion offered by holding a portfolio of liquid assets, and the ability of a firm or individual to raise funds at a normal cost Managing liquidity risk is essential to ensure financial stability and flexibility in meeting obligations.
Extreme liquidity issues can lead to bankruptcy, making liquidity risk a critical concern for organizations Such severe conditions often stem from other risks, like significant losses resulting from a major customer's default These losses can undermine confidence in the organization's stability, prompting large-scale fund withdrawals and the termination of credit lines by other institutions to mitigate their own risk Consequently, these actions can trigger a severe liquidity crisis, potentially culminating in the company's insolvency.
Current practices o f credit risk management in Vietnamese banking system 27
Vietnamese commercial banks, particularly state-owned banks, are still in the process of mastering sound lending policies amidst ongoing financial reforms, restructuring, and recapitalization While risk management practices are improving, most domestic banks have yet to develop formal credit risk measurement systems with suitable tools or techniques, relying instead on strict, standardized credit procedures supported by financial analysis, enterprise credit ratings, and the Credit Information Center (CIC).
27 department is h ig h ly responsible fo r both lending and credit risk management
In South Outer Commercial Banks (SOCBs) and some large joint-stock commercial banks, the Asset and Liability Management Committee plays a crucial role by regularly reviewing interest rate exposures and approving management strategies This committee supports the credit department by overseeing investment, market, deposit, and lending activities to ensure sound financial management and risk mitigation.
Currently, in the Vietnamese commercial banking system, only major State-Owned Commercial Banks (SOCBs) and a few leading Joint Stock Commercial Banks (JSCBs), such as ACB, Sacombank, and Habanbank, have established their own credit procedures These tailored credit processes are not present in most other commercial banks in Vietnam, highlighting a significant difference in credit management practices within the banking sector.
Credit activities and credit risk management in financial institutions are often impulsive and lack systematic measurement and techniques Different financial intermediaries follow varying credit procedures aligned with their specific credit policies Key distinctions include task assignments and decision-making limits among credit officers, management, headquarters, branches, and departments Additionally, differences exist in credit line allocation, credit guarantee regulations, and customer assessment criteria and techniques.
In general, credit procedures in vo lve 6 steps from receiving loan application form from customers to term inating the credit contract.
Figure 1.4 Summary o f credit procedures in Vietnamese commercial banks
(Source: ( 'omhined by authors fro m credit m aterials o f some o f
I ’ietnamese commercial hanks) 1.5.2 Financial analysis
Banks typically analyze the three primary financial statements—balance sheet, income statement, and cash flow statement—when making credit decisions The balance sheet offers a snapshot of a company's assets, liabilities, and equity at a specific point in time, such as the end of the year The income statement reflects the company's profit or loss over the period, while the cash flow statement details the sources and uses of cash during that time Although cash flow analysis provides valuable insights, it is rarely used in Vietnamese banks' credit assessments due to its non-mandatory nature and lack of widespread expertise Instead, banks mainly focus on evaluating return, financial stability, and repayment capacity based on these financial statements.
Ensuring the accuracy and genuineness of financial statements is essential, involving reliable data sources, whether the data has been audited, and adherence to appropriate accounting systems and recording principles The approval process by the responsible organization is crucial for maintaining credibility, while precise calculations and meticulous record-keeping ensure the integrity and transparency of financial reporting.
Credit officers analyze financial ratios to assess a company's financial and operational health by comparing absolute and relative indicator changes over different years Ratio analysis helps determine whether a business is improving compared to previous periods and how it performs relative to competitors in the same industry Banks typically categorize financial ratios into four groups, emphasizing their importance in evaluating overall business performance.
Figure 1.5 The four financial ratio categories in financial analysis
( Source com bined b y authors from credit materials o f some o f I 'ietnamese commercial banks)
A comprehensive business project appraisal evaluates the project's feasibility, efficiency, and repayment capacity Feasibility assessment considers input-output analysis and the firm’s ability to implement the business plan, alongside factors influencing project success Efficiency metrics include quantified market size, key market drivers, distribution channels, cost-effectiveness, and the logical progression of plan phases These evaluations identify income sources and help determine the project's viability Additionally, the capacity to repay the loan depends on capital turnover and cash flow analysis, ensuring a sustainable financial outlook.
Financial ratio analysis enables banks to assess enterprise creditworthiness effectively This method, currently utilized by some commercial banks and under trial by others, is based on classification and comparison techniques Banks collect financial and non-financial data, then categorize companies by industry and asset size, calculating four key financial ratios These ratios are compared against official standards provided by SBV, which describe typical enterprises in each sector and assign points and weights to various business performances Based on these assessments, banks assign credit classes—AA, A, BB, B, CC, C—where AA indicates the highest credit quality and C the lowest Monitoring annual changes in a company's credit class provides insights into their credit risk; for example, a downgrade from B to CC signals increased risk, prompting banks to monitor the client closely to prevent potential business failure.
Vietnam established the Credit Ratings Vietnam Net Centre in June 2005 to promote the capital market and enhance credit risk management in commercial banks The agency focuses on collecting and analyzing information, building enterprise data systems to evaluate financial health, solvency, and credit ratings for Vietnamese companies Additionally, it offers financial consultancy, management, and public relations services to help enterprises build their brand, improve their image, and strengthen competitiveness in the context of Vietnam’s international integration The Mol is also exploring mechanisms to establish a legal framework for the first credit rating company and to attract both domestic and foreign investors to participate in this sector, supporting the development of a robust credit risk management system.
The Vietnamese banking industry faces significant challenges due to an underdeveloped legal framework, which hampers its growth and stability The lack of a comprehensive legal, accounting, and regulatory system prevents banks from effectively implementing market-oriented practices and transitioning to risk-based assessments For instance, current loan classification methods rely on overdue periods rather than assessing the actual credit risk, and issues related to collateral valuation remain undefined and unresolved Additionally, there is no overarching law addressing corporate insolvency, further complicating efforts to strengthen financial stability.
V ietnam Insolvency and creditor rights are regulated in many regulations in c lu d in g Law on Bankruptcy, C iv il Law , and O rdinance on Econom ic
Existing regulations related to contracts are often unclear, inconsistent, and open to varied interpretation, which can hinder effective application This lack of enforceability has historically resulted in the violation of creditor rights and prolonged delays in debt resolution To address these issues, the National Assembly enacted the new Law on Bankruptcy on June 15, 2004, which became effective on October 15, 2004, establishing a more robust legal framework Additionally, numerous regulations have been introduced to enhance insolvency risk management, including NPLS resolutions for commercial banks and SOHs, recapitalizations of SOCBs, and the equitization of SOEs In the banking sector, reforms have focused on separating policy and directed lending from commercial lending, alongside regulations governing the establishment and operation of Asset Management Companies (AMCs) to strengthen financial stability.
Several commercial banks have established Asset Management Companies (AMCs) to manage and recover long-standing non-performing loans (NPLs) by dealing with transferred mortgaged assets In addition, the Vietnamese government launched the Debt and Asset Trading Company (DATC) under the Ministry of Finance in June 2003 to assist enterprises in resolving distressed assets and improving financial stability However, the current legal framework lacks clear regulations on debt and asset valuation, as the State determines the price while independent appraisal institutions set it, leading to uncertainty over whether DATC can refuse to purchase debts or assets if pricing disagreements arise.
A credit policy is the framework that guides credit activities for commercial banks, ensuring their lending practices align with regulatory standards and strategic objectives Typically, each bank's credit policy is based on the Credit Ordinance, government-issued credit guarantee regulations, and the bank’s own credit strategy It encompasses regulations on credit customer eligibility, lending principles, credit limits, loan terms, interest rates, credit guarantees, and credit risk management, providing a comprehensive structure for responsible lending In some Vietnamese banks, especially State-Owned Commercial Banks (SOCBs), credit policies tend to be flexible and lack standardization, leading to inconsistent criteria for loan approval and insufficient credit appraisal processes for new borrowers.
34 com plex credit products, lacking professional requirem ents for credit officers in each department, decentralization
Traditional credit risk management techniques are primitive and incompatible with international standards, relying heavily on subjective assessments and lacking comprehensive financial information of customers These methods depend on indirect, report-based evaluations through policy reappraisals, resulting in inconsistent risk decision-making processes Additionally, there are no models to accurately estimate insolvency probabilities or adjust profitability and capital ratios for risk, making it difficult to determine appropriate credit lines based on risk exposure When appraising loans, banks primarily focus on the purpose of the loan without strictly monitoring the borrower’s ability to repay the principal and interest.
Overview on BIDV and its credit s y ste m
The Bank for Investment and Development of Vietnam (BIDV) was established under Decision No 177/TTg on April 26, 1957, by the Prime Minister Over its 48 years of development, BIDV has undergone significant transformation, including several name changes, reflecting its growth and evolution within Vietnam's banking sector.
• Bank fo r Investment and C onstruction o f Vietnam (06/1981-11/1990)
• Bank for Investment and Development o f Vietnam (from 11/1990 till now)
B ID V is the first to be established among four largest State-owned
Commercial banks in Vietnam, including BIDV, are state-owned enterprises organized as State General Corporations Their organizational structure has evolved into a modern, international financial group model Currently, BIDV consists of five main units: the State-owned Commercial Bank division, which includes three transaction centers and nationwide branches; subsidiaries; administrative offices; joint-venture partnerships; and investment units.
BIDV functions as a comprehensive commercial bank offering a full range of currency, credit, banking, and non-banking services It serves as an authorized agency for funding projects through sources from both domestic and international financial institutions With extensive experience in investing in key projects, BIDV plays a leading role in development investment and project financing in Vietnam.
B ID V has always accom plished its tasks as assigned by the
G overnm ent since its establishment In parallel w ith other state-owned
BIDV, one of the leading 37 commercial banks, has consistently served as a primary agent in executing national monetary policy The bank ensures full compliance with relevant laws and regulations, demonstrating its commitment to maintaining financial discipline Additionally, BIDV fulfills its obligations to the national budget, playing a vital role in supporting the country's economic stability and development.
B ID V, a prominent player in the credit and currency industry, actively shares expertise and collaborates with both domestic and international banks and financial institutions These strategic partnerships foster mutual growth and development, positioning B ID V as a trusted leader in the financial sector.
2.1.2 B ID V 's action plan under B asel I!
Currently, the State Bank has not established specific regulations or an action plan for commercial banks to implement Basel III standards As a result, Vietnamese commercial banks, including BIDV, lack a detailed strategy for transitioning to Basel II regulations This gap highlights the need for regulatory clarity to ensure banks can adequately prepare for Basel II compliance and strengthen their financial stability.
Based on the three p illars o f Basel II m entioned in Chapter I, at present,
B ID V has completed the fo llo w in g s:
BIDV calculates its Common Equity Tier 1 (CET1) capital ratio in accordance with Decision 457/QD-NHN issued by the State Bank of Vietnam Since the second half of 2006, BIDV has implemented an internal credit rating system to improve the quality of its risk assets and enhance its capital adequacy ratio In the long term, BIDV aims to consistently meet minimum capital requirements in line with Basel II standards.
BIDV prioritizes enhancing its supervisory review process and risk management capabilities to ensure robust oversight The bank also conducts comprehensive assessments of capital allocation across various business sectors to maintain minimum capital adequacy standards, thereby safeguarding financial stability and regulatory compliance.
BIDV has continuously improved its organizational structure in line with international best practices, successfully completing its transition project from 2007 to 2010 to clearly separate its core functions The bank is actively managing market risk by implementing foreign exchange risk management tools, establishing and monitoring limits for partners Additionally, BIDV focuses on operational risk management by researching and applying assessment tools such as matrix models, maintaining a library of operational risk signals, and developing comprehensive frameworks for operational risk management.
Under the third pillar, "Market Discipline," BIDV is demonstrating strong performance, with its annual financial reports being audited by reputable international auditing firms in accordance with two recognized accounting standards This adherence to rigorous auditing practices enhances transparency and accountability, reinforcing investor confidence and supporting sustainable growth.
B ID V usually discloses inform ation about its operation, its financial situation through p ublic media and annual reports uploaded on its website.
2 1.3 B I D V 's credit system a n d the status quo o f non-perform ing loans
2.1.3.1 O verview on achievements o f credit system
Table 2 1 Scale, growth rate an d efficiency o f credit activities
4 M idterm and long term loan/Total outs.loan
(Source: BIDV's annual reports in 2004 -2008)
Between 2004 and 2008, BIDV experienced an impressive average credit growth rate of 20.5%, reflecting robust expansion during this period By December 31, 2008, the bank's outstanding loans had reached 151,972 billion dong, more than doubling the amount in 2004 and increasing by 1.29 times compared to 2007 This significant growth highlights BIDV's strong financial performance and growing market presence during those years.
Between 2004 and 2006, BIDV learned valuable lessons about credit risk potential from the rapid growth experienced earlier, which exceeded its control capacity amidst market fluctuations In response, BIDV adjusted its strategies and took proactive steps to strengthen credit control Compared to the average credit growth rate of 24.26% during 1999-2003, BIDV's credit activities during this period demonstrated more cautious and regulated growth, reflecting its improved risk management approach.
2004-2006 showed B ID V ’ s opinion on constraining grow th to control the safety.
- From 2004 to 2008, B ID V 's average credit grow th rate (20.5% ) was rather lo w as compared to that o f the w hole hanking system (31,3% ) because
BID V aimed to control and enhance credit quality during this period by restructuring its customer base and credit activities The bank focused on effectively managing bad debts incurred in the previous period to reinforce financial stability and ensure sustainable growth.
Table 2.2 BIDV's outstanding loan com pared to the whole banking system
(Source: BIDV's credit reports in 2004 -2008)
Av erage grow th rate o f income from credit a ctivitie s was 45% , tw ice as much as credit grow th rate B ID V ’ s rate o f income from credit activities
BIDV’s credit activities have become more efficient, as evidenced by the increasing proportion of income from credit operations relative to total outstanding loans This improvement reflects a higher effectiveness in their lending processes compared to the overall banking system, which maintained an 80% efficiency rate, while BIDV’s rate was notably lower at 69%.
In detail, B ID V ’ s credit activities achieved the targets and developed sharply, m aking the significant contribution to the accom plishm ent o f the w hole system’ s business plan.
Figure 2 / Credit growth through years (2004 2008) (billion VND)
(Sou rce: B ID V 's A n n u a l rep o rt 2004 2005 2006 2007)
BiDV has taken the initiative to diversify its credit products by differentiating its lending principles to effectively disperse risk In addition to providing loans aligned with State plans and instructions, the company's lending portfolio is categorized into five main types, ensuring comprehensive risk management and meeting diverse customer needs.
Status quo o f credit risk management in B ID V
2.2.1 O rganizational structure o f credit activities in BID V
Table 2 7 Organizational structure o f credit activities in BIDV
2.2.2 S trategy a n d orientation f o r credit activities in B ID V
Credit activities are essential to BIDV's development, providing significant benefits such as revenue generation and financial growth However, they also involve various risks that must be effectively managed to ensure stability and sustainability To achieve optimal efficiency, risk control, and consistent growth, it is crucial to develop a well-defined and coherent credit strategy aligned with the bank's long-term objectives.
General target fo r credit development:
- Enhance the com petitiveness and e ffic ie n c y o f credit activities; create its own position, image and brand;
To support our restructuring goals, it is essential to develop credit strategies aligned with the target, enhancing the development and quality of BIDV's products and services This approach will not only foster growth but also enable effective risk control in the coming years.
2.2.3 BID V's credit and credit risk m anagem ent p o licy
B ID V 's credit p o licy is issued to ensure that the credit granting at Head O ffic e and Branches o f B ID V is s tric tly in accordance w ith the fo llo w in g principles:
All credit officers working at BID V must strictly adhere to relevant legislation and regulations governing credit activities Credit approval for customers must be based on BID V's legitimate and proper interests, ensuring compliance with legal standards Under no circumstances are credit officers permitted to exploit BID V’s assets or reputation for personal gain in their credit activities.
IDV's credit activities are a crucial component of its overall business strategy, and their development must align with the company's strategic goals for each period To ensure effectiveness, credit operations should be closely integrated with other departments such as treasury, customer relations, and payments, fostering strong interdepartmental collaboration This strategic approach enhances IDV’s ability to adapt to market changes and achieve sustainable growth.
BIDV’s credit policy prioritizes credit safety and flexibility, demonstrating respect for the determination of each branch director The bank aims to create optimal conditions for branches to effectively develop their credit activities in line with BIDV’s overall business orientation and periodic targets, ensuring balanced growth and risk management.
- O p in io n on equality and towards customers: In credit granting,
B ID V unifies its customer p o lic y , makes no difference in all economic
51 sectors, proprietary forms (except for granting credit in accordance w ith the
G overnm ent’ s and State B ank’ s appointm ents) w hich are suitable to business a ctivitie s in market mechanism.
Credit preferential treatment is awarded based on a customer's financial capacity, prestige, risk level, and ability to repay the debt A dedicated credit division manages all credit transactions for each customer, ensuring tailored financial services This approach helps optimize risk management and enhances customer relationships by providing personalized credit solutions.
High individual responsibility is essential for enhancing transparency and the quality of credit activities Each credit officer should be empowered to make independent decisions and be accountable for their choices, ensuring a more reliable and responsible credit process.
Between 2004 and 2007, BIDV made significant advancements in improving and developing its policy framework and regulations governing credit activities During this period, the bank established strict credit control and management systems through comprehensive regulations and processes, including loan regulations, credit procedures, credit risk management policies, internal credit rating systems, loan classification policies, customer policies, and regulations on guaranteed assets and debt restructuring Additionally, BIDV introduced a credit notebook that details organizational structure, credit policies, credit processes, customer policies, loan pricing, guarantees, and credit risk management, reinforcing its commitment to robust credit oversight and risk mitigation.
The im provem ent o f credit p o licy has made great contribution to c o n tro llin g and enhancement o f credit q u a lity, establishing suitable credit structure in the past period.
To align with international standards, BID V is restructuring its operational model; however, it must alsoEnhance its credit policy and processes, along with updating regulatory documents, to effectively support the upcoming updates in its credit activities.
2.2.3.2 Customer p o lic y in credit activities
The bank is actively shifting its customer portfolio to reduce the proportion of loans extended to state-owned enterprises while increasing lending to non-state customers This strategic move aligns with changes in the sector structure, reflecting a focused effort to diversify the customer base and optimize risk management Prioritizing non-state clients helps enhance financial stability and supports the bank’s growth objectives in line with evolving market dynamics.
When selecting customers, prioritize those with legal status and a robust financial position to ensure reliable repayment Ensure the customer's business activities are profitable, or if there are losses, they remain within acceptable limits Additionally, confirm that the customer's available time aligns with the loan repayment schedule to facilitate smooth business operations and successful loan repayment.
- A lw a y s keep track on, manage and evaluate customers in all aspects: organization, management, and m anufacturing, business, finance and business prospect in future
- C urrent situation on finance, debt, m anufacturing, business, o rg a n iz a tio n , orientation and e fficie n cy o f custom er’ s business perforniance are the prerequisite fo r loan granting.
- For customers who are large econom ic organization, B ID V should establish long-term and stable relations
- For in d ivid u a l customers: broaden credit services to meet customers’ demand fo r various kinds o f products and services
- C lassify customers to build suitable p o licy
- Focus on p roviding package financial - banking service fo r customers Some main criteria fo r customer classification
Loan classification is carried out based on some fo llo w in g criteria
- Financial criteria: payment capacity, perform ance index, self-financing capacity, profitable capacity
C reditw orthiness in lending - b o rro w in g relation
Customers are classified in related groups to avoid risk as w ell as better evaluate and manage customers.
Credit officers periodically perform credit scoring to classify customers, which forms the foundation for determining loan pricing and impairment loss provisions Customer classification is essential for assessing individual loan risks and managing credit portfolios effectively This process helps recognize the implicit risk associated with each loan, ensuring accurate risk management and financial planning.
The credit scoring, evaluation, classification, and customer rating are integrated into a unified system regulated by the General Director This system is regularly adjusted based on BIDV's current credit portfolio and economic conditions, ensuring accurate and up-to-date assessments.
Between 2004 and 2008, BIDV implemented comprehensive credit risk management across its credit mechanism, policies, and processes In 2006, the bank successfully developed an internal credit rating system to evaluate customer creditworthiness, ensuring proper loan classification in compliance with Article No 7, Decision 493, and aligning with its customer policy However, BIDV’s credit risk management policy has certain shortcomings that need to be addressed to enhance its effectiveness.
- It has not specified B ID V 's level o f risk acceptance to lay the foundation to establish customer p o licy as w e ll as credit handling methods in
Many banks adopt prudent risk management policies, such as not granting credit to newly established enterprises or customers with less than two years of operation Additionally, they typically limit the maximum credit exposure to no more than five times the owner’s equity, ensuring financial stability and minimizing risk.
- B ID V has not established the m axim um lim it, advance ratio and guarantee in the total outstanding loan for each sector or each economic field