Luận văn some issues of credit risk management in vietnam commercial banks

Credit risk activities always have potential risks, thas enhancing the credit management quality in order to reduce credit risk have decisive meaning to the business activities of a ban

Some issues of credit risk management in Vietnam commercial banks

STUDENT: Phan Thi Quy

COHORT: IB2012A MAJOR: International Business

Hanoi - Year .2016

Thank youl

To complete this thesis, I sincerely thank teaches, who have taught and guided me throughout study period at International schoal- VNU

Many thanks to Ma Chu Von Hung for whole- hearted, thoughtful guidance and

useful knowledge in my whole research process

Livied my best ta carry out this thesis However, because I start to be familiar with science analysis, access ta reality af economy and due to my limitations in

understanding asx well as experience, [ may not avaid making some mistakes in this

study wish ta receive feedbacks and comments of teachers to improve quality of

thesis

Sincerely thank,

Leiter of Declaration

T hereby declare that the Graduation Project ° Some issues af credit risk

management in commercial bank is the results of my own research and has never

been published in any work of others During the implementation process of this

project, I have seriously taken research ethics; all findings of this project are

results of my own research and surveys; all references in this project are clearly

according to regulations

T hear full responsibility for the fidelity of the manber and data and other

contents of my graduation praject

Hanoi,.31/1/2016

Phan Thi Quy

Tables, charts

i "Loan classification

31 Organizational structure of Techeornbank

1, Overview about credit

1.1, Definition of bank credit

2 Credit risk of commercial banks

2.4 Definition of credit risk

Classification of credit risk

2.3 Causes of credit risk

2.3.1 Causes from banks

23.2

3

Causes from borrowers

3.1 Definition of credit risk nanageHIettl « es~eeo

3.2 Organizational structure and managerial mechanism of credit risk

343 Credit risk management policies

343.1 Limiting credit risk

34 Credit rish management procedures

3-41, Credit risk identification

34.2 Credit risk measurement

3.4.3, Credit risk observation and cowl

3.8 Internal credit ratÌngs systefo

3.6 Managementinfarmatio systent

3.7 Internal audit system

Chapter 2: Methodology- analyzing case study

1 Theory of analyzing case study

1.4 What isa case study

1⁄3 Analyze the results

2 Analyzing case study in this thesis

2.4, Reasons for choosing case af Techcombank and BIDV to analyz:

22 Sources af information for analysis

2.4 Problems of banks need tn he analyzed

Chapter 3; Reality of credit risk management system at some Vietnam

commercial banks

1 Credit risk management system at Vietnam Technological and Commercial

Joint stock Bank

4.1 Credit information at Techcombank in 2013-2014

4.2 Organizational structure and managerial mechanism of credit risk

1.3 Internal credit risk cating system of Techcombak

1⁄4 Credit risk management provedures of Techcombank

1.4.1 Credit risk identification

14.2 Credit risk measurement

2 Credit risk management system at Joint'stock Commercial Bank for

Investment and Development of Vietnam

2.4, Credit information at BIDV in 2013-2014

2.2 Organizational structure and managerial mechanism of credit risk

24 Credit risk management procedures of BIDV

24.1 Credit risk identification _

Chapter 4: Discussion and analysis

1 Assessment for credit risk management system at Techcombank

4, Proposing some solutions ta improve credit risk management system in

41, Complete organizational structure of credit risk management system

4.2, Building effective credit policies

introduction

{ The imperiousness af topic

Credit is the most cotuplex activity in comparison with other business activities of commercial banks, in spite of being profitable, it faces a great deal of difficulties

Therefore, if credit risk occurs, then it will have a huge impact and direct influence

on the survival and development of each credit institution; especially affects whole

banking system and entire econumy Credil risk snanagement is a difficult problem,

but very urgent in the current conditions, especially for commercial banks in

Vietnam, because the credit income is essential, accounting for between 60-80% income of bank

Credit risk activities always have potential risks, thas enhancing the credit

management quality in order to reduce credit risk have decisive meaning to the

business activities of a bank, a commercial banking system and even for the whole

economy

With the favor in banking sector, especially credit risk management, I do a study about credit risk and credii risk management syslem al some Vietnam commercial

banks, Graduation thesis with the topic: “ Some issues of credit risk management in

Vietnam commercial banks” will provide an insight view into the reality of credit

risk management system as well as propose solutions to improve credit risk

management quality at two Vietnam commercial banks including Techeombank and

BIDV

2 Purposes of study

Thesis resolves four following primary issues:

* Clarifviag some issues in theoretical basis of credit risk management at

commercial banks

* Identifying credit risk management system at Techcombank and BIDV

* Assessments for credit management system of Techcombank and BTDV

* Proposing some measures lo enhance quality of credit risk management ai

Techeornbunk and BIDV, which can be applied in realily

3 Study subject and sphere

(Techcombank} and Joint stock and Coumnercial Bank for Investment and

Development of Vietnam (BIDV)

¢ Stady sphere: credit risk management system of Victnam Technological and

Commercial Joint- stock Bank (Techcombank) and Joint stock Commercial Bank

for Investment and Development of Vietnam (BH2V)

© Period of time: 2013- 2014

4, Study method

Using the dialectical materialism method combined with statistical research,

comparison, analysis, go from theory Lo practice to address and clarify the purposes

set out in writing

“Chapter 2: Methadology- analyzing case study

Chapter 3: Reality of credit risk management system at some Vietmam

commercial banks

#* Chapter 4:THseussion & analysis

% Conclusion

Chapter 1: Overview about credit risk management in

operation of commercial banks

4 Overview abuut credil

1.1 Definition of bank credit

Rank credit is “The amount of credit available to a company or individual trom the banking system It is the aggregate of the amount of funds financial institutions are willing to provide to an individual or organization” (Investopedia, 2008),

According to Ho (2001), bank credit is a transaction involving the assets (money or

goods) between the lender (bank) and borrowers (individuals, businesses and other entities) based on the principle of repayment, in that lenders transfer the property to

the borrower used in a certain period under the agreement, the borrower has the

responsibility to repay principal and interest unconditionally tothe lender upon

tnaturity

1.2 Characteristics of bank credit

Credit founds on faith The word “credit” itself comes from the Latin "credimm”

means “entrustment” or "credibility" Research ahout credit concept also shows that

credit is the loan having promised repayment period Trust is indispensable in credit

relationships and is a dorainant element in the credit activity In credit relations

“trust" is expressed from many sides, not only with confidence from one side of the

lender to the borrower If lenders do not trust the repayment capacity of the

borrowers, the credit relationship cannot arise, and vice versa, if the borrowers feel

lenders cannot meet the requircments in terms of volume credit, the loan period,

then two parties cannot come to an agreement, However, in the credit relationship lender's confidence against the borrower is much more important because lenders entrust their money or assets to others to use

Credit is the transfer of an amount of assets (money or goods) from one party to

others, but do not alter the ownership of them Credit granted to customers is fram

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‘bank deposits, mainly deposits of domestic and abroad individuals and

organizations ‘herefore, customers hold loan temporarily and only use for the

purposes already commilted with bank

Credit takes repayment ‘(/his is nature characteristic of the credit movement, which

distinguishes the categary of credit with cther economic categories Aller the end of

accredit cycle, completing a production period reverting to monetary condition,

credit borrowers must repay to the lender principal and interest as agreed

Credit bas limit term Lenders assigned value of loan under formn of goods or

currency for borrowers to use within a certain period Atter exploring the loan for a period of commitment, the borrower must repay the full value of the loan plus

reasonable profits as commitment with lenders before All loans in kind or cash are

also goods and hence they have value and use value In the credit business lender

sells only “using value (right) of loans" not selling "the value of the loan," so after

time as commitments, the loan is completed returns and retains ils value, Lhe income under the agreement is "price” of the right to use the loan in the gives time Thus,

the voluine of goods or currencies (the principal} loan was initially only specialized

materials or their using value, it is emitted through a ceriain Gmc and thew be

collected, not sold off

2 Credit risk of commercial banks

2.1 Definition of credit risk

Credit risk usually refers to the abilicy to repay a loan and the magnilude of the

potential loss Sathye et al (2003) stated, “ Credit risk is the potential for the

financial obligations of a contract not to be fulfilled” From another perspective,

credit risk is “the risk that the promised cash flows from luans and scouritics held

by financial intermediaries may not be paid in full” (Saunders and Comett 2008)

According to first article, third clause of circular regulating about classifying assets, level and methods of risk provisioning, using provision against risk in the operation

of credit institutions of state bank governor: Credit risk in banking operations

"HH

thereinafter referred to as the risks) is potential lass happened to loan of credit

institutions and branches of forcign banks because castomers do nat perform or

have no ability to carry out part or all of their obligations under commitment

(Moj.gov.vn, 2016)

It is understandable credit risk is the potential loss that may occur in the process of

granting credit of banks,.as borrawers do not fulfill the repayment obligation

{inclading interest and principal) or not timely repay to the bank as promised in the

contract This is the risk associated with credit operations, leading to financial

losses such as net income decrease and capital market value reduction

2.2 Classification of credit risk

2.2.1 Based on canses of credit risk

Transaction risk: ag a form of credit risk caused by limitations in lending

* Assurance tisk arising ftom guarantee standards such as the forms of the loan

agreement, the type of collateral, ruarantces subject, manner and the loa guarantee

on the value of callateral

« Professional risk is related to the management of loans and lending operations, including the use of risk rating systems and technical handling problem loans

Portfolio risk arises due to the limitations of managing the loan portfolio of the

banks, including the inherent risks and concentration risk

«Inherent risks: derived from the specific elements and charactetistics that are

distinct nature af cach borrower or economic sector It comes from the operating characteristics or using capital loan of borrowers

+ Concentrate risk: when banks loan focus foo múch an same enstomers; lend foo

many companies operating in the same industry, economic sector, ot in the same

specific geographical areas, the same types of loan that are high- risk

Operational Risk means the risk of direct or indirect losses because bank staffs,

procesyes und internal systems are incomplete or do not work or external events

impact on banking operation

2.2.2 Based an customer’s repayment ability

Risks of not being timely repayment: when establishing credit relationships, banks and customers roust establish conventions abcut loan repayment period However,

‘bank cannot recover loans on time

Risk of inability for repayment: the risk occurs in the case of borrowers are unable

to repay, thus, banks have to liquidate assets of the business to ensure debt

collection

Credit risk is unlimited in lending activities: It includes other credit activities as

guarantee, commitment, commercial finance, lending in interbank market, credit

leasing, co-sponsored

2.3 Causes of credif risk

Roth individual credit risk and portfolio credit risk are impacted by systematic and

unsystematic risk External forces that affect all businesses and households in a

country of economic system are called sysiematic risk, and are considered as

uncontrollable risk (Ioseph 2006) The uncertainty of the economic environment in

general as economy crisis, GDP declines, interest rate fluctuations, inflation rate

changes are examples of systemic risk In addition, political risk such as

alteration of goverment; changes in laws and policies of state; the convertibility of

the local currency; war, terrorism are considered as systematic risk The second type

of credit tisk, unsystematic risk/controllable risk does not affect entire cconomy or

all businesses, Such risks arc largely industry- specific or firm- specific A creditor can diversify these risks by extending credit to a range of customers (Joseph, 2006),

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'To analyze reasons leadiag to credit risks i1 Vietara comnercial bank, we splft

into three groups of causes: Causes from banks, causes from borrowers and other

causes,

2.3.1 Canses from banks

Staffs are unqualified The weaknesses here include both the ability and morality If

a loan officer lacks of qualifications, lacks of knowledge and experience, he/she

‘will not have the ability to evaluate and process information, assess clients

inaccurately, interest Taie and malurity are inappropriate; leading to lower credit

quality, high risk Besides, if the loan officer does not comply with the credit

procedures such as disbursement before completing vouchers or monitoring the usc

of fands of borrowers, the capital loss can casily occur Moreover, if credit officers

are immoral and irresponsible then it would cause huge losses for banks by lending

based on relationships with customers, based on personal interests and ignoring

necessary conditions and procedures

‘The supervision of the management of the bank is not close Credit officers need to have the approval of the leadership before disbursement So if the authorities da not check, assess whether the decision of the staffs are really correct or not, the credit

risk will be very high Moreover, after disbursement, ioan officers must continue to

track customer to detect eatly signal of problematic debts, However, this process is

just tokenistic with many workers Therefore, if managers do not have the

supervision to credit officers, their operation will not work, even lead to ethical

irregularities in lending and debt collection In addition, authorities who are nol

interested in ihe rel situation of bank credit will not have timely guidance to

prevent and handle risks

Credit policies do not work effectively Hanks do not diversify portfolio A tool that

always mentioned in credit management in all banks in the world is purtfolic

management, It balances and contro!s risk by identifying, forecasting and control tisk levels for each market, customer, type of credit products and various operating

conditions Many banking experts believe that diversification is 4 most effective to

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prevent credit risk While understanding the importance of diversifying portfolio, a lot of banks lend onty one or two branches or lend only a few large eaterprises,

single business groups A portfolio, which depends primarily on one sector or one type of itetn is very dangerous because the public sector is not without risk,

Valuation of loans does not follow to the risk level of customers Regarding the

structure, the interest rate for a loan must be specified in the warrant to offset input

cost of capital, management cost, expectation profit and risk offset part of the loan Customers are assessed as higher- risk level, the greater the risk premium However because of competition, sore banks may accept lower loan rates, even just enough input, capital cost and management cost, regardless of the risk premium Doing that

in the long tezm not only reduces profits, but also increases the risk in credit

activities of banks

2.3.2 Causes from borrowers

Dive to suffering losses, clicnts lose ability to repay This case is very popular

because customers are weak in predicting economic problems, management

capacity, improper use of fund, low-quality products not sold Moreover there are

many people willing to engage in tending venture business with high expected

profits without calculation the uncertainties which may occur so that possibility of

losses are extremely great

Borrowers appropriate loan from banks intentionally To gain profit, many

customers are willing to seek every trick to deal with banks such as bribery or

providing misleading financial statements, In this case, if not found, banks will

misjudge the financial capacity of clienis and lend unreasonable loan volume and

Joan period, leading to bigh potential risks In addition, there are alsu cases where

business have profit but do not repay bank on Gime and deliberately prolong with no,

intention to pay or continue to use Lhe loan as long as possible.

2.3.3, Other causes

The causes are largely emerged fiom the external environment as the quality of

information, economic fluctuatians and legal policies

Quality of information is low Information that banks collect usually relales to

production and business activities, financial capacity of the client, the socio-

economic situation and’competition in the market; then based on this information lo

make loan decisions However, in the teality, collected data is nol ulways accurate,

complered aad timely Therefore, if credit information system of the bank does not operate efficiently, update credible information, inevitably leading to losses in

lending activities

Changes of economy are not predictable When economy is stable and grows

healthily, demand for investment in society tends to rise, creating favorable

conditions for the credit activities However, the emergence of econamic

fluctuations such as inflation, price increases in some items (hat affect an industry group, credit risk of banks is very large Many borrowers can adapt and overcome

difficulties, but others stagnate production activities, suffer losses so that their

ability to repay bank loans may not be guaranteed

‘The inconsistency in economic policies and lcgistation affects greatly not only

banks bul also companics using bank loans Business activities of enterpriscs will

be unstable when there are changes in tax rules, capital; credit operations of banks are also affected more by laws on callateral reserves, provisioning Thus,

incomplete cconomic policies, legislation create a great deal of obstacles for

enterprises to repay loan as well as threats to the safety of banks in Jending (Dan Kinh Te, 2014),

3 Credit risk managentent system at commercial banks

3.1 Definition of credit risk management

Risk management is the process of comprehensive and systematic approaching risk

in order to identify, control, prevent and mitigate the damage, loss and adverse

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effects of risks Therefore, credit risk management in banking system can be

understandable that “Credit risk management is the lending institution's primary

line of defense to protect itself against customers who fail to meet the terms of the

loans or other credit that was extended to them Credil risk manayemem is an

important aspect of a bank's success aud ensures @ lending institution will not take

on mote risk than it can handle” (Geeksonfinance.com, 2016) In other words, credit

tisk management is the process of developing and implementing oredit strategies,

policies and business governance of to maximize profits within the acceptable risk level Commercial banks manage risk at acceptable rate through strengthening

ineasures to prevent, Limit and lower overdue debts, bad debts in the credit business,

to inerease credit sales, lower cast of risk coverage, in order to achieve efficiency in

the credit business in the short term and long term as well

3.2 Organizational structure and managerial mechanism of credit risk

ủaHagemient

The organizational structure of credit management at commercial hanks is generally

classified into 3 levels: Head office, branch level | and branch level I1 In each level,

there are four groups often engage in credit processes namely credit committee,

executive committee (general manager, branch manager) professional departments

Credit administration, whichis decentralized,

and credit monitoring departmen

wilt promote specific role and responsibilities of each level, ensure independent

cleavage between appraisal process and lhe granting credit devision Credit

planagement system well organized, will meet mest requirements of credit risk

management

Regulation about credit council is issued only to support and agsist authority to

make crodit decisions In fact, members of credit council are not really experts in

the field, they mainly read and study document provided by credit officers

Therefore, in branches, primarily based on the evaluation of business managers so

that lead to agreement between the parties ta get a joan, thus, there will be risk,

which has not been shown, even concealed within the appraisal

1

3.2.1, Organizational structure

Organizational structure for credit risk management in commercial banks regularly

includes three main groups:

+ Executive board

* Credit operation departments

+ Independent credit monitoring department

‘These three groups are responsible for formulation and implementation of policies,

procedures and regulations on the credit management in commercial banks

3.2.2, Management mechanism

Executive board:

* Coordinating with credit department to determine credit strategy and credit risk

management strategy They are final deciders in issuing policies, credit procedures,

tisk appetite and implementation guidance

* Who has the highest authority in the whole system of bank in approval the

granting of credit terms and credit limits (including credit limits for customers,

credit limits according to the credit portfolio structure and the judgment), loans,

guarantees and commercial sponsorship

* Deciding key positions in the organizational structure of credit management of

bank

Credit department:

* Controlling credit activities of the entire bank

* Drafl regulations, procedures and puidelines in credit operation

* Supervising and analyzing credit activities, classifying loan, analyzing overdue

debt to find out causes and solutions

* Evaluation lending projects, guaranice projects exceeding jurisdiction of branch

managers

Independent credit monitoring department

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* Itassesses the level of risk and credit portfolio risk management process from the perspective of each debt trading business department at the Center for Urology

+ Control credit in entire banking system; periodivally conduct audits of the

credit operations of branches

* Dotcrmining preventive measures to avoid new violations arising

* Make recommendations to improve policies, regulations and security

procedures and to the professional department and the research and implementation

4.3 Credit risk management policies

Policies and risk management processes must meet the following requirements:

Being, suitable and sufficient to identity measure, monitor and control material

risks in all business activities;

Applying uniformly across bank branches; updating regularly and popularizing to

the relevant officers of bank

‘The key risks are identified early, completely control and reported to the Board, the

Board members and executive board of bank

Iniernal audit be revaiued independently,

Ensuring adequate human resources to operate risk management system

3.3.1 Limiting credit risk

Lean limit with large customers (large exposure) is total maximum risk accepted by commercial banks Laws of every country propose (his limit io prevent banks from cuncentraied leuding some customers of groups of customer It is established base

on capital of bank (often from 10% to 25%) When setting up limits, banks have to

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count on all types of credit risk and determine definition of customers and related

groups of customer

T.oan limit with related group of customer is highest risk ancepted by bank with this group Policies about maximum limit for related groups of customer have special

meaning because lending this kind of customer are becoming popular at some

banks, which tend to prevail lending method basing on prestige rather than

traditional and commercial lending procedures and conditions International

practice shows thal maximum limit of credit institutions with lending activities of

related groups of customer should not exceed 50% equity of bank and 60%

including underwriting activities

Limit by industry / sector is the highest total risk that banks can accept for this

industry / economic sector ‘his policy aims to prevent banks trom Joss due to a

series of customers in trouble with the same reason These limits are sel by industry, sector or even by geographic region

Restructuring loans: this policy refers to priaciples, which assign application of debt settlement solutions such as exemptions interest rate, cunversion of debt inte shares

As usual, these methods should be approved by Board of director

3.3.2 Loan classification

Itis considered as key tool in credit risk management In principle, classification is

carried out at the time of granting credit and reviewed sometimes in one year There are five types including: standard debt, special- mentioned debi, sub- standard debt,

doubtful debt and losable debt,

No | Types of debt | Overdue ‘Characteristics — TT]

1 | Standard debt | <10 days No doubt about copayment ability

2 |Special ” [10-90 đays l May moct difficultics in repayment if

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Sub- standard [91-180 days | Having disadvantages that negatively

4 | Doubtful debt, 181-363 days | Similar to Sub- standard debt, plus

difficulties of debt according to current

Purposes of tisk provisioning are confronting expected loss Loan classification is

foundation for this policy, other factors such as debt collecting experience, credit

growth rate, change in economic conditions are also mentioned when building

credit risk provision policy The following table suggests risk provision level for

Figure 1.2 Risk provision level for developing economy

(Source: Greuning and Brajovic Bratanovic, 2000)

3.4, Credit risk management procedures

3.4.1 Credit risk identification

Risk identification is a continuous and systematic process of determining to

monilor, review and research environment and lending procedures to camry vul

statistics forms of credit risk, determine causes of risks in each period and forecast potential causes resulting in credit risk

Methods: To identify risk, the administrator must make a list of all types of risk,

which was/ have been and will be able to appear by methods such as setting up

research questionnaires, conducting investigations, analysis of the credit profile,

particnlarly focusing on investigating records, which had problems and identifying

warning signs of problematic granling credit

3.4.2, Credit risk measurement

Measurement of credit risk refers to the quantificaiion of credit tisk exposure of a

bank through suiluble madels to determine the risk premium and maximum credit

safety limit for customers as well as a provision for risks It has a number of uscful benefits, such as:

* Removing the subjectivity fm credit assessment

* Adding a scientific basis to the credit assessment process

* Rating loan that have ne credit catings or providing a system of grading

* Proving a mechanism for monitoring loans to ensure they are not potential

problem loans (Sathye et al., 2003)

‘To assess the credit risk exposure, banks need to measure the probahility of

berrower default, which depends significantly on the amount of information banks

have about borrowers At che retail level, much of the information needs to be

collected internally or purchased trom external credit agencies At the wholesale Jevel, these information sources ere bolstered by publicly available information,

such as certified accounting statements, stocks and prices, and analysl's reports

(Saunders and Cornett, 2008)

Nowadays, many financial institutions make usc of internal models, which

internally developed by themselves to assess credit risk Besides, they also depend

on “off: the- shelf” methods as a check against interna! solutions, Talk about

measurement of credit risk, we could not help mentioning qualitative model: “6C”

and quantitative models; Aluman Z score as one of the earliest model used by bank

and another recent approach popularized by KMV corporation

With each loan, the first question of bank arising is repayment ability of customers’

at maturity, It relates to studying six angles of borrowers incJuding character,

capacity, cash flow, collateral, conditian and controls

Altman’s Z score, which can remove subjectivity in assessing credit risk ba

3.4.3 Credit isk observation and control

Banks tiust moniter and control credit risk for cach granted credit and entire

portfolio of granted credit Each bank has observation and management system for credit portfolios and carries ant appropriate solutions when credit quality declines:

= Keep track on debt classification results of granting credit terms

* Evaluate the adequacy of the risk provisions as stipulated by the State Bank

* Comparison of actual credit risk with limits for granted credit following law and limit granted credit by the Board of Directors, Board members

‘The process of monitoring and controlling credit risk written need to approved by

authorities of banks, at least include the following details:

* The role and respousibility of individual, departments who are responsible for

monitoring and controlling credit risk

* The process of implementing loan classification for granting credit terms

stipulated by the State Bank

© The evaluation process and analysis ucthods for cach granted credit term and entire portfolio of ranted credit

+ The process of determining the deterioration of credit quality of cach granted

oredit term and granted granted ercdit portfolia

+ The frequency of monitoring credit risk

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+ The frequency of direct contact with customers to collect information for

controlling of credit risk

«The value of the scourity property: Periodic inspection value of guaranteed

asscts and immediate reassessment the value of collateral when there are signals of decline in the value of such collateral;

« Early warning procedure when there are signals of decrease credit quality or

increase level of risk Cases of early warning must be notified immediately to all

relevant parts of bank and reviewed and evaluated credit quality and levet credit

tiak

Problematic grantcd- credit has special management process including following

steps:

= The principle of agreement and customer tracking, Proactively dealing with

clicnts about aclutions of problematic granted credit and assessing feasibility of

these methods

© OGUUUL UULLLL of building and implementation solutions: Improving

repayment ability of clients (hy restructuring granted credit, interest rate reduction}

and guaranteeing bank’s maximum profit bases on business condition as well as

repayment commitment of customers

© Reviewing and reassessing the guaranieed property according to the valuation principles of recovered amount of granted credit on the basis of latest value of

guaranteed assets Profile of guaranteed assels raust be reviewed to ensure

effectiveness when handling of security assets

* Reports about reality of problematic granted credit are checked more regularly than other granted credit Repayment status of problematic granted credits is

updated and reported to cxccutive board of bank

Furthermore, in risk management process we can mention mote about sharing the

risk, a form of diversification and hedging Because, these steps concerns as

solutions for credit risk in some specific conditions while I do not have enough time

sc E only focus on general procedures

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3.5, Internal crediE ratings systera

Basically, the credit rating is understood as assessment about credit risk and credit quality through the rating system in order to demonstrate the ability to repay of

objects granted credit to meet financial obligations fully and on time Currently,

there are two common methods of credit rating methodology is mathematical

madeling and expert methods:

* Mathematical modeling methods: method primarily focuses on quantitative data

and incorporates with the mathematical model Through mathematical modeling,

the ralings agencies can assess asset quality, profitability, and ability to repay

* Expert method: ta assess the solvency of the object need to be rated, the

analysts (based on the combination of a group of experts) will bases on the

information from the reports of the borrowers, market information, information

trom interviews of business leaders to evaluate the financial condition, corporate

governance, strategy and risk management policies of the enterprise thereby making the ratings

It was found that, basically, the ranking would be based on financial indicators

(based on the financial statements of the enterprises} and non-financial indicators

(organizational structure, management operating values} to provide a rating basis

These indicators will be enalyzed and standardized to a scale to measure, compare

The ranking these clients requires a large volume of comprehensive information,

therefore, developing completed information systems, will help cornmercial baoks accumulate and gradually standardized data warehouse about customers from time

to time, helping credit risk management more efficient,

Tn 2008, State bank issued Decision No 493/2005 / QD-NHNN on "Classification

of debt, appropriation and usc of risk provisions for handling credit risk in banking

activities." With the provisions of article 7, Decision 493, state bank has encouraged banks research and develop credit ratings, as a basis for loan classification and

provisianing according to qualitative methods ‘This is the basis for the commercial

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banks to develop and deploy credit ratings, serve the credit risk management and implement customer policies After a period of implementation eredit ratings,

Vietnam commercial banks have achieved some results Almast large commercial

banks in Vietnam have been aware of the importance of credit ratings, proactively

researched and developed credit operations Results of credit ratings at some hanks

have heen used for credit granting proposes and interest rate policy (on the basis of

credit scoring of collateral, credit risk ievel of customers, risk level of sector}

3.6, Management information system

Management information of bank through observation, analysis and forecast

macroeconomics as well as supervision and analysis emerged risks in ficids related

to business activitics of banks can guarantee:

* Providing information to the management levels to supervise, assess

immediately and accurately level of credit risks and determine implementation of

the credit risk management strategies of banks

© ‘Timely warning to the Executive Board when the level of credit risk rises nearly

to credit risk limits to ensure solutions, which do not execed credit risk limits

* Supplying adequate and timely information on the extent of the credit risk of

customers and relevant exceptions of credit risks limits

3.7, Internal audit system

Tniernal audit regularly reviews and independently assess appropriateness and

effectiveness of credit risk management system Principles of internal andit system:

* Implementation based on the most updated information about financial

situation and business environment of customers, transactions on customer’s

accounts

* Review the impact of exceptions in credit management with the ability to carry

oul repayment obligation of customers

= Assessment on the principle of consolidated company and principle of related people of customers

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The review of internal audit system with granted credit terms is done at least once a

year and more frequently with problematic granted credit It includes:

= Credit management procedure

* Internal credit rating accuracy

» Adequacy of risk provision

© Credit quality of granted credit portfolio

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Chapier 2; Methodolegy- Analyzing case study

1 Theory of analyzing case study

The case study research design has evolved over the past few years as a useful tool for investigating trends and specific sitnations in many scientific disciplines

The case study has heen especially used in social science, psychology, anthropology

and ecology

‘Lhis method of study is especially uscful for trying to test theoretical models by

using them in real world situations

1.1 What is a case study

Bi

ally, a case study is an in depth study of a particular situation rather than a

sweeping statistical survey ft is a method used to narrow down a very broad field of research into one easily rescarchabic topic

Whilst it will not answer a question completely, it will give some indications and allow further elaboration and hypothesis creation on a subject

‘The case study research design is also useful for testing whether scientific theories

and models actually work in the real world You may come out with a great

computer model for describing how the ecosystem of a rock pool works but it is

only by trying it out on a real life pool that you can see if it is a realistic simulation

For psychologists, anthropologists and social scientists they have been regarded as

avalid method of research for many years Scientists are sometimes guilty of

becoming bogged down in the general picture and it is sometimes important to

understand specific cases und ensure a mote holistic approach to research

1.2 How to design and conduct a case study

‘The advantage of the case study research design is that you can focus on specific and interesting cases This may be an attempt to test a theory wilh a typical case or

it can be a specific topic that is of intcresi Research should be thorough and note

taking should be meticulous aud systematic

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‘The first foundation of the case study is the subject and relevance, In a case study, you are deliberately trying to isolate a small stndy graup, one individual case or one particular population

In the design of'a case study, it is important to plan and design how you are going to

address the study and make sure that all collected data is relevant Unlike a

scientific report, there is no strict set of rales so the most important pact is making sure that the study is focused and concise; otherwise you will end up having to

wade through a lot of irrelevant information

tis best if you make yourself'a short list of 4 or 5 bullet points that you are going to try and address during the study Lf you make sure that ail research refers back ta

these then you will not be far wrong

‘With a case study, even more than a questionnaire or survey, it is important to be

passive in your research You are much mote of an observer than an experimenter

and you must remember that, even in a ruulti-subjeet case, each case inust be treated individually and then cross case conclusions caa be drawn,

13 Analyze the results

Analyzing results for a case study tends tn be more opinion based than statistical

methods The usual idea is to try and collate your data into a manageable form and

construct a narrative around it,

Use examples in narrative whilst keeping (hings concise and interesting It is useful

to shuw some numerical data bat remember that you are only irying to judge trends and not analyze every last piece of data Constantly refer back to your bullet points

so that you do nol luse focus,

It is always a good idea to assume that a person reading your research may not

possess @ lot of knowledge of the subject so try to write accordingly

In addition, unlike a scientific study which deals with facts, a case study is based on opinion and is very much designed to provoke reasoned debate There really is no

right or wrong answer in a case study

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