Credit risk management in agribank thai nguyen province, vietnam

46 Assessment of the Current Status of Debts of Agribank Thai Nguyen ……… 52 Factors Affecting Credit Risks Management of Agribank Thai Nguyen ……… 62 Significant Difference in the Assessm

in Collaboration with Thai Nguyen University, Socialist Republic of Vietnam

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The Dissertation of

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CERTIFICATE OF ORIGINALITY

iv

The researcher wishes to convey his gratitude to the following persons who wholeheartedly devoted and helped make this piece of work a reality:

DR WALBERTO A MACARAAN, for his invaluable support and supervision

throughout my graduate study program; likewise, for his indefatigable effort in providing daily instructions during the duration of the study, thus, this dissertation is as much his work as mine;

DR CECILIA N GASCON, President of the Southern Luzon State University

in the Republic of the Philippines, for initiating the joint offering of the

Doctor of Business Administration with TNU, through the ITC-TUAF;

DR DANG KIM VUI, President of Thai Nguyen University, for his approval of

the international collaboration with Southern Luzon State University, Republic of the Philippines and for the joint offering of the Doctor of Business Administration, through the ITC-TUAF;

DR TRAN THANH VAN, dean of Graduate School of Thai Nguyen University,

for his assistance and encouragement to pursue this study;

DR DANG XUAN BINH, director of International Training Center, and DR

NGUYEN THANH HAI, vice director of International Training Center,

for their assistance and encouragement to pursue DBA;

DR CONRADO L ABRAHAM, DR JOANNA PAULA A ELLAGA, DR

EDWIN P BERNAL, and DR ALICE T VALERIO, panelists, for their

support and constructive criticisms to improve this dissertation;

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SLSU and TNU Professors, for support and guidance extended throughout

the graduate studies in Thai Nguyen University, Vietnam;

Family and friends, for the love and support in one way or another; and to all

who have contributed to make this study a success

BVK

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This piece of work

is dedicated to

my wife and my boy,

all the staff of the Agribank in Thai Nguyen Province

BVK

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TABLE OF CONTENTS

PAGE

TITLE PAGE ……… i

APPROVAL SHEET ……… ii

CERTIFICATE OF ORIGINALITY ……… iii

ACKNOWLEDGEMENT ……… iv

DEDICATION ……… vi

TABLE OF CONTENTS ……… vii

LIST OF TABLES ……… ix

LIST OF FIGURES ……… xi

LIST OF APPENDICES ……… xii

ABSTRACT ……… xiii

CHAPTER I INTRODUCTION ……… 1

Background of the Study ……… 2

Objectives of the Study ……… 4

Hypothesis of the Study ……… 5

Significance of the Study ……… 5

Scope and Limitations of the Study ……… 6

Definition of Terms ……… 7

II REVIEW OF LITERATURE ……… 11

Conceptual Framework ……….… 37

Research Paradigm ……… 38

III METHODOLOGY ……… 40

Research Design ……… 40

Population and Sampling ……….……… 40

Instrumentation …….……… 42

Data Gathering Procedure ……… 42

Statistical Treatment ……… …….…… 43

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Profile of the Respondents ……… ……… 45

Assessment of Agribank Thai Nguyen Credit Risk …… 46

Assessment of the Current Status of Debts of Agribank Thai Nguyen ……… 52

Factors Affecting Credit Risks Management of Agribank Thai Nguyen ……… 62

Significant Difference in the Assessment of Two Groups of Respondents on Credit Risk Management ………… 65

Recommendations on Credit Risk Management of Agribank Thai Nguyen to Minimize Credit Risk ………… 70

V SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS Summary ……… 72

Findings ……… 73

Conclusions ……… 76

Recommendations ……… 76

REFERENCES ……… ……… 78

APPENDICES ……… 81

CURRICULUM VITAE ……… 89

of Agribank Thai Nguyen in terms of Subjective Criteria … 62

4.2 Assessment of Factors Affecting Credit Risk Management

of Agribank Thai Nguyen in terms of Objective Criteria …… 63

5.1 Significant Differences on Two Groups of Respondents’

Assessment of the Credit Risks in Agribank Thai Nguyen 65

5.2 Significant Differences on Two Groups of Respondents’

Assessment of the Current Status of Debts in Agribank

x

5.3 Significant Differences on Two Groups of the Respondents’

Assessment of Factors Affecting Credit Risk Management

xi

LIST OF FIGURE

1 Input-Process-Output (IPO) Model on Credit Risk

Management in Agribank Thai Nguyen, Vietnam ……… 38

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ABSTRACT

THAI NGUYEN PROVINCE, VIETNAM

Name and Address

of Institution

: Southern Luzon State University Lucban, Quezon, Philippines and Thai Nguyen University, Socialist Republic of Vietnam

of the managers and staff in terms of segment structure, types of customers, types of guarantee, and account outstanding; assess the current status of debts of Agribank Thai Nguyen as perceived by the managers and staff as to overdue, undue, debt requiring attention, under qualified, doubtful, frozen, and bad debts; identifying factors affecting credit risk management of Agribank Thai Nguyen as assessed by the managers and the staff as to subjective and objective criteria; find out the significant difference in the assessment of two groups of respondents on credit risk management and the factors affecting limitations of the credit risks management of the bank With the use of the mixed method of research employing quantitative and qualitative analyses,

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The five (5)-point Likert scale questionnaire was also used for the variables being investigated in this study Thus, it was revealed that majority of the bank customers are women who have marital obligations, are relatively young, have graduated college and work for only few years in their respective jobs The credit risks in Thai Nguyen Agribank are assessed by the managers and

staff as to segment structure with 3.5 or more risky; types of customers with 3.4 (more risky); availability of guarantee which are just risky; and outstanding account which is generally rated as risky with 3.40 The biggest risk for bad

debts is the difficulty to collect both the interest and capital, overdue and undue debts is that both principle and interest is hardly recovered fully, debt requiring attention is the absence of clear mechanism, qualified debt is the interest that is never made free for customers, doubtful credit is less careful appraisal of the borrowers, and frozen debt is that a lot of customers classified

in frozen debt group The risk under subjective criteria is that bad information quality in banking network and outside while for objective criteria is economic environment facilities for both bank and customers It was recommended that the bank may require guarantee properties for credits, carefully manage the segment structure, define exactly targeted customers, pay attention more on long-term and medium credits and review the procedure and conditions to manage, control and minimize risks of credit

Chapter I INTRODUCTION

The banking system as the lifeblood of the country plays a very important role in the economy Vietnam's banking system in recent years has gained encouraging achievements which contribute to stability and control inflation, and for the effective implementation of national monetary policies However, in the market economy, business risk is unavoidable, especially in the field of banking because it has the potential to cause a chain reaction, spreading increasingly into complicated situation

Nowadays, bank becomes the largest payment intermediaries present in most countries Tran Van Viet (2004) observed that with the development of the economy, where banks from supplying deposit has increased, the services on many operating valuated segments such as fund mobilization, credits, payment intermediates and others activates However, the risks always come along with the credit of the banks In its efforts to gain the interest, banks cannot avoid risks but only can find ways to make this activity become safer and to minimize the lost by establishing a suitable strategy

Banks always deal with competition and many different types of risks In Vietnam, the starting point of the banks, which is quite low compared with the average in the region prioritize development of accurate and interest earnings This leads to the risk management of banks which virtually Vietnam is still at the initial stage and the construction has not been considered satisfactory and professional That is why, the ratio of the bad debt problems is rising from loss

of control and is becoming an unsolved problem in most of Vietnam's current

banking particularly in Bank for Agriculture and Rural Development in Vietnam,

a financial institution operating mainly in the agricultural sector and rural areas which reveals that profit is brought mainly from bank credit activity (accounting for 90% of total banking income)

Apparently, credit risk, a possibility that the borrowers or partners cannot carry out their responsibilities as committed, is constantly happening in every banking system Thus, credit risk management is crucial for the survival and the development of the bank relative to agricultural and rural development in Vietnam

Background of the Study

Agribank in Thai Nguyen province was formed in October 1998 on the basis of getting the entire facility and workers from several departments of the provincial state banks and its branches in provinces/ districts of Thai Nguyen These state banks and its branches started with the workforce of 760 people, 2.3 billion funding, and debt balances of 3.5 billion mainly being overdue

Commercial banks are the industry with presently at high risk, especially

in the context of global financial crisis and adversely affect the bank's activities

in general and in particular the credit activities In fact, on the average between

2005 and 2009, the percentage of REO commercial banks in Vietnam steadily increased from 12% to 30% But from early 2010 up to this day, this index has decreased dramatically to 40% compared to that in 2009 Meanwhile in 2011, it decreased to 30% compared to that in 2010 Net interest margins are also in a similar situation Profitability decreased while the CAR is very low, meaning that the commercial banks in the recent years has paid a high price which means that it did not perform well due to the credit risk management which is the most evident ratio of bad debts rise

The Bank of Agriculture and Rural Development of Vietnam (Agribank) is one of the first commercial banks in Vietnam, and is considered prestigious and has affirmed its brand domestically and internationally, not even outside general trend of development of Vietnam's banking system since our country’s transition

to the market economy Agribank continued its expansion of asset size, capital size, in which the credit scale is constantly expanding and this is also the main source of profit for the operation of Agribank

The credit rate on the total assets of Agribank is about 80% while credit risk management is still inadequate, the percentage of total outstanding loan is high from 0.98% in 2005 to 2.24% in 2009, 3.3% in 2010, 6.8% in 2011 and is expected to increase further in 2012 ROE from 2006 has tended to decrease significantly (down to 43%) With Agribank Thai Nguyen, the percentage of total debts balance were as follows: 1.26% (in 2006), 2.58% (2007), 2.34% (2008), 1.42% (2009), 0.98% (2010), and 0.58% (2011) Despite the bad debt ratio of Agribank Thai Nguyen, it is also lower than that of Agribank Vietnam’s average bad debt ratio but also the amount of bad debt increases in current economic conditions If the bank does not implement well in controlling risk, the efficiency

of credit activity will decrease, hence, the growth of bank becomes slow

In this situation, while credit remains the main activities of commercial banks, the activities of credit risk management is vital to the commercial banks

as well as Agribank Vietnam and Thai Nguyen Agribank in particular and also the means that the stability of the economy is affected

Cognizant that the credit risk management in the commercial banks has been given more attention, but generally are not effective in carrying out the implementation and based from the foresaid scenarios, the researcher opted to conduct the study on credit risk management in Agribank Thai Nguyen Province

Objectives of Study

The study aimed to determine the credit risk management in the Agribank Thai Nguyen Province for the year 2014-2015

Specifically, it sought to answer the following questions:

1 To describe profile of the respondents in terms of:

1.1 Age,

1.2 Gender,

1.3 Civil status,

1.4 Education, and

1.5 Number of Years in service

2 To determine the credit risk in the Thai Nguyen Agribank as assessed by the managers and staff in terms of:

2.1 Segment structure,

2.2 Types of customers,

2.3 Types of guarantee, and

2.4 Outstanding account

3 To assess the current status of debts of Agribank Thai Nguyen as perceived

by the managers and staff in terms of:

3.1 Overdue Debt,

3.2 Undue Debt,

3.3 Debt requiring attention,

3.4 Under qualified Debt,

3.5 Doubtful Debt,

3.6 Frozen Debt, and

3.7 Bad Debt

of credit risks management of the bank

6 Propose recommendations on the credit risk management of Agribank Thai Nguyen to minimize credit risk

Hypotheses of the Study

1 There is no significant difference between the assessments of two groups of respondents on credit risk in the bank

2 There is no significant difference between the assessments of two groups of respondents on factors affecting limitations of bank credit risks management

Significance of the Study

This study was carried out to find out and eventually improve Agribank

Thai Nguyen credit risk management, and contribute to economic restructuring

of agriculture and rural towards industrialization and modernization Further, this study is significant to bank manager, researcher himself, and future researchers

on the following respects:

Bank Managers This study would provide them with valued information

concerning the credit risk management of the branch In this regard they will be able to adapt their development programs to help the bank reduce credit risks

They may also provide contingency in their management in order to sustain the operation of the bank despite the bad debts

Bank Employees The result of this research may influence the bank

employees in their functions on financial field as they may assonate investment, loaning, and borrowing They likewise perform better services in consultancy, financial management, buying and merging for the customers as allied of bank managers

Researcher This investigation may be beneficial to the researcher as an

employee of the bank and as a candidate for Doctor of Business Administration Degree Through the study, the researcher may strengthen his knowledge that

he could use and apply to the bank in the future

Future Researchers This could serve as reference materials for future

researches similar to this The study might also offer new insights for the future researchers who would like to venture on a probe and follow up studies similar

to or parallel to the current research endeavor

Scope and Limitations

This study dealt with credit risk management in banks for Agriculture and Rural Development in the Thai Nguyen province with an endview of proposing recommendations to improve Agribank Thai Nguyen’s credit risk management Moreover, the bounds of study extended from describing profile of respondents

in terms of age, gender, civil status, education, and number of years in service; determining risk of credit in Thai Nguyen Agribank, considering the assessment

of the managers and staff in terms of segment structure, types of customers, types of guarantee, and account outstanding; assessing the current status of

debts of Agribank Thai Nguyen as perceived by the managers and staff as to overdue, undue, debt requiring attention, under qualified, doubtful, frozen, and bad debts; identifying factors affecting credit risk management of Agribank Thai Nguyen as assessed by the managers and the staff as to subjective and objective criteria; finding out significant difference in the assessment of the two groups of respondents on credit risk management and the factors affecting limitations of the credit risks management of the bank

It made use of the mixed method of research employing quantitative and qualitative analyses The respondents subjected in this research were limited to

a total of 203 comprising of 40 managers and 163 staff Further, the present research was limited to the use of a questionnaire particularly of a five (5)-point Likert scale of the variables under study

The study was conducted from the year June 2014 to May 2015

Definition of Terms

To clearly understand the different terms used in this study, the following were technically and operationally defined:

Availability of guarantee refers to a guarantee given by the lending institution

ensuring that the liabilities of a debtor will be met In other words, if the debtor fails to settle a debt, the bank will cover it (Njanike, 2009) In this

study, it is categorized as to with or without property as guarantee

Bad Debt is the amount owed to a business or individual, for which there is

zero probability of collection (Young, 2010)

Credit risk is the risk of loss due to a debtor's non-payment of a loan or other

line of credit (either the principal or interest (coupon) or both) The default

events include delay in repayments, restructuring borrower repayments, and bankruptcy

Credit risk management is the flow of credit in global financial markets slowed

from a glacial pace to the virtual standstill and the credit markets have threatened to stay that way (Rose, 2004) It is the main variable, referring

to the immense amounts of cash being pumped in by governments and central banks, being investigated in the study

Debts requiring attention refer to the debts have been rescheduled maturity

for the first time (Casner, 2010) In this research, these are the credit in banks that include those which are overdue from 10 to 90 days

Doubtful debt are those debts which a business or individual is unlikely to be

able to collect (Toumo, 2010) In this study, doubtful debts include those

which are overdue from 181 to 360 days, have been restructured based

on maturity for the first time of overdue less than 90 days according to rescheduled maturity or on maturity for the second time

Frozen debt is an uncollectible debt, credit institution will not restructure the

payment maturity, not move the overdue debt, not calculate the interest from the moment of deciding to freeze the debt (Asner Group, 2010) In this study, it includes loans under the state policy, under government’s assignment and being allowed by the state for temporarily “freeze” for later settlement

Objective criteria refer to external factors that effect to credit risk management

of bank (Powel, 2005) In this research, it refers to the factors that affect bank’s credit risk management such as financial capability of customers, effective operation of business customer, and stable of politics

Overdue debt refers to the nature of the credit activity where borrowers could

not carry out their paying responsibility to the loaner at payment time In

other words, it is the debt that is being unpaid when due (Casner, 2010)

Outstanding account refers to the credit dues unpaid in relation to time such

as short, medium and long term debts (Nguyen Thi Phuong Lan, 2005)

Segment structure is a banking segment structure enables the banks to target

different categories of consumers who perceive the full value of certain products and services differently from one another (Tran Van Viet, 2004)

In the context of the study, segment structure can be apportioned to the credits for industries, trade and commerce, service sector, constructing infrastructures, and personal expenditure

Subjective criteria refer to internal factors that affect credit risk management of

bank (Powel, 2005) In this research, it refers to the factors like policies, regulations of bank or quality of human recourse management that affect the credit risk management of the bank

Types of customers refer to the psychological type of customer, also known as

the personality type a tremendous personal benefit to knowing your type (Zikmund, 2003) In this research, it is classified according to individuals, small and/or big companies/ organizations

Underqualified debts are assessed by credit institution to be unable to pay the

principal and interest at maturity and are assessed by credit institution to have potential for partial loss of the principal and interest (Coleen, 2010)

In the context of this study, it includes debts which are over due from 90

to 180 days, restructured based on the maturity for the first time, and is made free or decreased as the customers are unable to pay interest in full according to credit contract

Undue debt is not due that are assessed by credit institution to be able to pay

the principal and interest of debts in full and in a timely manner (Young, 2010) In this research, it refers to an overdue debt for less than 10 days

and assessed by the credit institution to be able to pay in full overdue

Chapter II REVIEW OF LITERATURE

This chapter presents the concepts and theories from related literature and studies that are associated in the study

Credit Risks Management of Banks

A bank is a financial organization supplying a diversified financial service especially the credits, saving, payment services and other financial functions compare to any organization within the economy According to Tran Van Viet (2004) the main activities of the bank is to transform the money from saving to investment: The individuals and organizations who are temporarily spending deficit, which means the spending for consumption and investment go beyond income and that's why they need to add more fund On the contrary, individuals and organizations who are spending the surplus, which means their income is higher than the spending they spend on goods and services and they have money to be saved (Tran Van Viet, 2004)

The bank becomes the largest payment intermediaries present in most countries nowadays With the development of the economy, where banks from supplying the deposit, has increased the services on many operating valuated segments such as fund mobilization, credits, payment intermediates and others

activates The details as follow:

Fund Mobilization contains mobilizing funds: deposit payments, term and

demand deposits, issuance of bonds and notes, loans of credit institutions,

capital funds, investment funds, etc

Loaning which includes loaning for consumption for the individuals and

households and loaning for business which is a short-term loan, medium and

long-term loan for customers to buy material, equipments, build manufactures

Payment on behalf of the customers, banks perform payments for buying

goods and services All of the services of the midterm payments include check, payment orders, recovering money, etc Previously, banks performed internally

in the narrow range, within the districts, but now they have performed interbank

payment and on the global

Other transactions include a) guarantee when banks commit to perform

financial obligations for their customers when the customers do not perform the obligations as committed Banks often guarantee the customers to buy goods,

equipment, bidding, and implementation of contracts; b) assignation, consultant

or working in financial field, banks might be assonated as investing assignation, loaning assignation Banks can receive assignation such as assignation for investing, borrowing, etc., and can perform services as investment consultancy,

financial management, buying and merging for the customers, etc.; c) treasury management when the banks open accounts and keep moneys from most of

customers and individuals Therefore banks always have close relationship with

their customers; d) property protection when the banks store the gold, valuable documents and other properties for customers in safe; e) leasing and buying

when the customers have demand to borrow capital to buy unaffordable assets, the Bank can buy the asset and lease them to the customers The two main

forms of leasing are operation leasing and financial leasing; f) stock investment brokers is a best service that the banks can meet customers' demands At the

moment this service are set up to be security company to improve professional

activities of stock investment brokers; g) insurance service when bank is

joint-venture with the insurance corporations or insurance institutes, banks provide saving service stick with insurance such as welfare, saving, and pension saving;

h) providing service agents when a bank can provide service agents to other banks

as payment, issue certificates of deposit, as representative in supplying, etc

In general, every basic activity of Commercial Banks, the credit operation

is the most important activity, because this activity accounts for 60-70% of portfolio assets and bring primary income for commercial Banks

Credit Payment of Commercial Bank

Credit derives from Latin means "trust", or in other way it means using the trust to make the loan relationships amount of value material or money in the period of time Credit relationship was understood by temporary transmitting relationship of the amount of value material (formed by money or commodity) from the owners to users after a period of time and recovers a higher value of material than the initial one Credit manifests externally as unilateral movement

of the two values together in the opposite direction a particular time

In summary, credit is considered as relationships among entities within the economy, in which an entity transfers the rights to use an amount of value (in form of goods or money) to another entity under particular conditions and time that were agreed by them based on the regulation of return

When the banks act as the credit intermediate, they are understood as:

a) Banks play as a capital mobilization where commercial banks can attract

temporary spare capitals such as deposit, and payments, etc., from economic organizations and individuals of the economy at the different interest rates; b)

Banks play as a loaner: From the mobilized capitals, the banks shall provide

loans to the economic organizations and individuals that need capital to recover

their business and for domestic uses in the economy Therefore, bank credit is considered as the debt-credit relationship between the customer-bank, especially

in the field of money, in which one party is the economic organizations, individuals and citizens of the economy for a particular time, based on the rule of returning both the principal and interest timely

Basically, there are some credit activities of Commercial Banks for the

customers as follow: a) To borrow capital, customers have to ensure principles

as follows: Using loan capital for right purposes as agreed in the credit contract;

and repaying principal and loan capital as timely as agreed in the credit contract;

b) Credit shall be considered and lent by the bank only when customers meet the following conditions: 1) Having civil legal capability, legal acting competence

and bearing responsibilities as regulated by the Law, having legal purpose of using loan capital; 2) Having enough financial resource for repaying debt within the time as committed; and 3) Having feasible and efficient project or business Following regulations on loan security as regulated by the law In general, to minimize credit risks, Banks must never stop diversifying forms of credit and make them suitable to customer’s demands

Based on different criteria, bank credit may be divided as follows: 1) On

time, banking credit is divided into three (3) types: a) Short-term credit means

credit having up to 12-month lending time This kind of credit is regularly applied for different forms of customer under the form of limited loan or due loan The customer will have one part of property as guarantee for the entire loan (Kim Thi

Ngoc Diep, 2008); b) Medium-term credit has lending time in the range of 12

months to 60 months This is often the form that a bank gives credit to project of purchasing the equipment and devices, project of the constructing workshop, warehouse, etc., regularly, the asset formed by loan capital shall be used as the

mortgage for bank (Kim Thi Ngoc Diep, 2008); c) Long-term credit has lending

time up to 60 months or more This credit form is often given by the Bank to project

of the purchasing synchronous devices equipment line, project of infrastructure construction, etc Mortgage for this kind of credit is mainly formed from loan

Based on guaranteeing method, bank credit is subdivided into two types:

a) Secured credit is credit in which the debt service obligations of customer are

ensured with pledge, mortgage, and asset formed from loan of customer or secured by asset of a third party This form of credit ensures the bank to be safer, the low risk of losing capital as the bank can selling the mortgage to withdraw capital in force majeure that customer is unable to repay the loan at maturity; and

b) Unsecured credit is credit in which debt service obligations of customer is not

ensured by mortgage, asset formed from loan of customer or secured by asset

of the third party This form of credit is risky to the bank and is applied for the prestigious customers who are trusted by bank and are traditional or strategic customers of the bank According Kim Thi Ngoc Diep (2008), asset ensuring for credit enables the bank to have the second earning source by selling such asset when withdrawing debt from business is nothing or not enough

Based on risk level, bank credit is divided into group of debts: Qualified debt group (group 1) includes: Undue debt which are considered able to be withdrawn both the principal and interest timely Debt requiring attention group (group 2) includes: debts which are able to be withdrawn both principal and

interest but appearing signals of declining capacity of repaying by the customer

Substandard debt group (group 3) include: debts which are considered by credit organizations as able to lose principal and interest partly Doubtful debt (group) include: debts which are in the high risk of lost Highly losing capable debt (group 5) include: debts which are unable to be withdrawn and capital is lost

In general, bank credit plays very important role in economy It enhances accumulation, concentration of the capital and reallocates the social investment effectively to different area of economy Credit of one healthy banking system reflects capacity of absorbing the capital of national economy; low risk rate of economy is the condition that calls for foreign capital for development of the country However, as the bank lend customers in different aspect of business such as construction, industrial production, commerce, consumption, tourism services, etc, capital ownership is temporarily separated from the right of using capital after lending, activeness of the bank, thus, is lowered down and easy become passive against borrower and in the risk of losing partly or entire capita

There are many studies on credit risk management, which is the subject

of scientific researches, dissertations and master's theses These include some typical projects which are directly related to the subject as follows:

The doctoral dissertation on the main solution is to limit the credit risk of

commercial banks in the current period by Nguyen Huu Thuy (2006), Industrial

and Commercial Bank of Vietnam defense at the Council evaluated state-level dissertation in University of National Economy The study focused on analysis, assessment of the constrained credit risk on commercial banks at early stage to the innovation performance of banking activities, and expanding lending non-state economy like the Ordinance Bank This time the commercial banks were accounted to 70% market share in credit activities of banking industry, solution and should mention mainly the state-owned commercial banks The solution mentioned in the thesis is no longer suitable for the operation phase of current credit (Nguyen Huu Thuy, 2006)

A Number of Bank Risk in terms of the Market Economy by Nguyen Thi

Phuong Lan (2005) quantified the banks’ credit risks as the economy moved to

the new market mechanism, environment, legal environment, and the operating environment such as credit risk and credit risk management of the commercial banks which as specified in second content Banking Ordinance and the State Bank has issued specific regulations on credit: short-term credit, medium-term credit due to the commercial banks that are applying some of the content is no longer consistent with current situation (Nguyen Thi Phương Lan, 1995)

The thesis Credit Risk Management at Bank of North Asia Commercial Joint Stock by Chu Van Son (2008) focused on credit risk management of North

Asia Commercial Joint Stock Bank, a joint-stock commercial bank with a small, head quarter in Vinh City, Nghe An province The credit activities of commercial bank of North Asian serves mostly urban for credit, non-state customers, should the situation and risk management solutions author refers primarily to customer groups lies in a narrow range

Credit Risk Management at Bank of Agriculture and Rural Development

in Vietnam in Hanoi was conducted by Nguyen Van Chinh (2009) This research

discussed the credit risk management of the Bank of Agriculture and Rural Development in Hanoi, wherein the local branch lends credit to urban areas, because the study involved only the old branch in Hanoi, Ha Tay province, not including pending merger, which do not cover more loans to households who produce export to the credit risk of the rural agriculture The scope of credit risk research thesis is only in terms of management of each branch in the province

On the operation of the Bank for Agriculture and Rural Development,

Vietnam, the dissertation on Solutions to Completed Operations of the Bank for Agriculture and Rural Development of Vietnam for Industrialization, Agricultural Modernization in Rural Areas by Doan Van Thang (2003) The study focused on

wide business operations of the Bank for Agriculture and Rural Development in

Vietnam during the period of restructuring the Government's proposals after the financial crisis affecting the region It refers briefly on credit risk management, not going to specialize in his area and no update in the period of international economic integration present authors favor of their solution proposal effective measures to raise the capital mobilization, lending efficiency and diversify non-credit services to the Bank for Agriculture and Rural Development, Vietnam

The dissertation Solutions to develop and improve leasing operations at the Bank for Agriculture and Rural Development in Vietnam by Nguyen Quoc

Trung (2004) dealt with developing and improving the leasing activity, which is concentrated in two leasing companies of the Bank for Agriculture and Rural Development of Vietnam is a Leasing company I (ALC1) and Co leasing 2 (ALC2) The scope of the study in the early stages of restructuring two banks in the system of government schemes, but in open conditions of financial markets, international economic integration which is now a reality that has changed the size both in terms of overall risk management and risk management in leasing activity in particular

Credit Risks of Commercial Banks

Bank’s credit has the following characteristics: a) Credit banking is the loan relationship based on the rule of returning both seed money and interest between the entity of the Commercial Bank (credit issuer) and individuals and organizations (borrower) of the economy (Rose, 2004); b) There should have a basis to belief that the borrower shall return the asset in time when the Loaner transfers it to the borrower; and c) The returned value should be higher than the lending value, it means the interest should also be paid apart from the principal

The rules of bank’s credit are: Firstly, loan for the particular purpose The

purpose for loan should always be stated clearly in Credit contracts between the

Bank and the borrowers to ensure that a bank shall not support illegal activities

and that the borrowers use the loan for the right purposes Secondly, loan with guarantee This rule is a guarantee for the loaner, to minimize the capital lost when there is problem with the loan Thirdly, principal and interest should be returned in time Bank’s credits originate mostly from the deposits of customers

and from loans of the Bank; therefore, the Bank is also responsible for returning both principal and the interest as committed Hence, when bank issues credits,

it always asks receivers to follow commitments as stated in the Credit Contract

As the Bank’s credit is based on the trust in each other in lending and borrowing between the Bank and economic organizations, there are many potential risks in this activity The risk is the possibility of unexpected events

that may happen to cause lost and damage to the assets The risks always

come along with the credit of the Banks In its efforts to gain the interest, Banks cannot avoid risks but only can find ways to make this activity become safer and

to minimize the lost by establishing a suitable strategy According to the opinion

of Basel committee of Bank for International Settlement: “credit risk is possibility that the borrowers or partners cannot carry out responsibilities as committed”

Pursuant to the Decision No 493/QD- NHNN dated 22 nd April, 2005of the

Governor of the State Bank of Vietnam on classifying debts and establishing risk contingency fund, “Credit risk of credit agencies in Banking is the possibility

of lost happening in banking as the customers do not or cannot carry out their responsibility as committed” In general, there are different ways to define the credit risk and, in the author’s opinion, credit risk is simply understood as the risk of unrecoverable due debts Credit risk is reflected in both the aspects of: a)

Quantitative where credit risk is reflected by the number and rate of overdue debt, bad debt, etc, of the commercial banks; and b) Qualitative which has a

contrary relationship with the credit quality It means that the higher the credit quality is, the lower the credit risk is, and vice versa

Credit risk is associated with credit activity: credit which is an important activity of the Commercial Banks as the value of productive assets allocated to the loans is highest Therefore, on issuing credit, Commercial Banks should analyze the factors of the borrowers to have the safest level including the introduction of methods to minimize credit risk Credit risk affects the activities

of the Banks a lot, it can lower the prestige of the Bank, decrease the paying capacity of the Banks, reduce the interest, or even cause looses or bankruptcy Hence, the realization of credit risk manifestation, prevention, limitation, and

control of the risk are the priority of the managers in Baking (Pursuant to the

There are some studies in both doctoral and master theses on the other business activities of Bank for Agriculture and Rural Development of Vietnam as well as referring to a number of different aspects of business, including matters related to credit risk of some branches of Agricultural Bank System and Rural Development of Vietnam (Nguyen QuocTrung, 2004)

The study of Peter Miu (2002) on Risk Management of a Credit Portfolio:

An Alternative to Structural Approach showed that unlike the structural model,

little has yet been done in the literature to empirically study the performance of reduced form a model as the portfolio risk management tool In this study, he developed the practical way to implement the model in a portfolio setting He calibrated and back-test the model using a portfolio of corporate bonds over the period from 1993 to 2001

The results suggest that implied hazard rate from reduced form model can be a leading indicator of credit worthiness In some instances, it can foretell

the deterioration of the firm's financial health much earlier than another indicator that is mainly driven by equity prices It therefore suggested that there can be significant value-added if both debt and equity market information are utilized in the modeling of a firm’s credit risk We have yet to see such a risk management model in practice Further, credit risk is highly systematic For example, about 30% of the shocks in the hazard rate of the Baa-rated firms can be explained by

a single market-wide factor Moreover, firms of high credit ratings are found to

be more governed by firm-specific… factors than firms of the low credit ratings Back-testing results indicate the importance of incorporating discontinuity in the stochastic process for the model to successfully capture the occurrence of rare but extreme loss events It would be interesting to compare the results when different approaches (e.g Markov switch etc.) are used to model discontinuity

Finally, he tested the robustness of the results obtained by using a richer data set For example, it would be interesting to document the performance of the model on a much larger bond portfolio It would be even better if it can test the model on other default-contingent claims (e.g credit default swaps etc.)

The study of Njanike (2009) about The Impact of Effective Credit Risk Management on Bank Survival showed the results obtained from the research that

clearly support the assertion that poor credit risk management contributed to a greater extent to the bank failures in Zimbabwe Therefore, effective credit risk management is important in banks and allows them to improve their performance and prevent bank distress The success of the systems depends critically upon a positive risk culture Banks should have in place a comprehensive credit risk management process to identify, measure, monitor and control credit risk and all material risks and where appropriate, hold the capital against these risks The establishment of a comprehensive credit risk management system in banks should

be a prerequisite as it contributes to the overall risk management system of the bank There is also a need for the banks to adopt sound corporate governance practices, manage their risks in an integrated approach, focus on core banking activities, and adhere to prudential banking practices

The study of Nisso Bucay and Dan Rosen (2000) about the Credit Risk

of an International Bond Portfolio: A Case Study demonstrated the application

of the credit metrics to measure portfolio credit losses for a portfolio of bonds in emerging markets The study shows the sensitivity of the loss distribution to the various factors and finds that the model used to estimate migration correlation

of counter parties has large effect on portfolio losses Concentration risk has a substantial contribution to portfolio credit risk The loss estimates obtained using historical transition matrices from different rating agencies are similar, whether

we are investigating the possibility of migration or default or the possibility of default only The difference between estimates obtained using the rating agency matrices and the KMV matrix, particularly for estimating the credit reserves, is substantial Changes in the risk-free rate result in small changes to the mark-to-market value of this bond portfolio and thus to losses Risk reduction realized by diversification within countries is much smaller than risk diversification realized among sovereigns

Analysis of credit losses for a bond portfolio requires a complete set of risk-free and spread curves for each rating class in all currencies, transition matrices, reliable correlation model and consistent estimates of recovery rates Gaps in the data are inevitable, particularly in emerging markets, but need not curtail credit risk management activities Assumptions and estimates can be made to complete the dataset; these should be made explicit and the sensitivity

Limitation of Credit Risks

A bad debt is the amount owed to a business or individual, for which there

is zero probability of collection This is not to be confused with doubtful debt which is and amount for which payment is unlikely (Tim Hornal, 2001) A bad debt when it occurs is not a surprising event when is occurs as the debt will have become doubtful almost instant that payment was refused by the customer and remedial action required to attempt recovery (Court proceedings, binding arbitration, dispute resolution) take considerable amount of time to complete

According to Zikmund (2003), in commercial banking system, banks and creditors can forecast the credit risk based on: The Customers request the Bank

to extend their payment terms; Late in paying salary for workers; Annuity inside the organization, there is contradiction and fight for power; Reduction in output and income from customers; Commercial debts increase extraordinarily; Late or delaying in submitting financial statement; data in the financial statement are not reasonable and accurate; Increase in the selling but decrease in interest or even having loss; Customers change the business lines into other lines that are not its sociality or into high risk business lines The unfavorable factor input:

increase in input materials’ price, could not import specialized materials, etc Use short term loan to support fixed assets, etc

The nature of overdue debt in the credit activity is that borrowers could

not carry out their paying responsibility to the loaner at payment time Overdue debt is the most specific manifestation of credit risk Overdue debt is inevitable, but if the overdue debt is higher than the permitted rate, the Commercial Banks shall lose their paying capacity (Casner, 2010) Based on the nature and other

criteria, overdue debts can be classified as: a) Recovering capacity refers to the

a) overdue debt whose both principal and interest can be recovered; b) overdue debt whose a part of principal or interest can be recovered; and c) irrecoverable overdue debt

Based on the terms of the loans, it consists of the overdue debt of short, medium, and long term loans Based on the overdue time, it comprises 10 days overdue debts, 10 to 90 days overdue debts, 91 to 180 days overdue debts,

181 to 360 days overdue debts, and more than 360 days overdue debts

Based on the reason of the debts, limitations could be overdue debts due

to the borrowers’ fault and overdue debts due to the loaner’s fault Based on the guarantee of the loan, it consists of secured overdue debts, partial guarantee overdue debts, and unsecured debts

Classifying and evaluating the overdue debts play an important part in establishing methods to recover principal and interest as well as to minimize to the lowest level of the risk in credit activity of Commercial Banks (Casner, 2010) Credit risks of the commercial banks can be affected by both the subjective and objective factors In order to get good credit quality, the activity to minimize the risks should be effective and the credit relationship between the bank and the

customers should be established basing on the trust and respect for each other The action of understanding the nature of credit risks, analyzing, evaluating and identifying correctly limitations leading to low credit quality for having methods

to overcome it shall help banks find out suitable mode of operation to survive and develop in the current potential and challenging market economy

Overdue debt is a debt of which partial or full principal and/or interest has been overdue Overdue debts may escalate due to such subjective reasons: Weak management ability of the customer, the outdated production technology, customers can not adapt to the market and also because of objective reasons such as: the changing of state policy, business risks like disasters, and war The ability to recover overdue debts is also different: debts due to the delayed goods payment, temporary difficulties and some customers are in state of production stagnation, heavy losses resulting in the inability to pay debt (Casner, 2010)

Based on the criteria of delinquency rate, it may assess the restriction ability

in credit risks of any Bank High rate of overdue debt presents that the policies, tools being applied by the Bank to prevent risks are not effective The Bank needs

to review the qualities of loans, introduce necessary solutions to quickly recover the overdue debts If this rate is low proving that the Bank’s measures to limit credit risks are effective, however has to tighten the regulations, criteria on the loaning accordingly to enterprise type and business industry

Commercial banks transfer the overdue debts, classify the debts, and the loss provisioning to deal with risks under Decision 493/2005/QD-NHNN dated

April 22/2005 and Decision 18/2007/QD-NHNN dated April 25/2007 (amending

Decision 493) of the state bank However, to assess accurately the credit risks

of credit institutions in general and Banks in particular, it should be based on the

ratio of bad debt Bad debt is identified on the basis of assessing the ability to pay debts, including undue debts

As bad debt impacts mainly on profit of the bank, it should be based on the bank bad debt criteria to assess whether the credit risk restriction level being applied by the Bank can provide the security of credit operation or not The higher ratio of bad debt shows that the methods to limit risks of the Bank are inefficient; the management board of the bank needs an urgent guidance to lower bad debt ratio (Young, 2010)

Under Decision 493/2005/QD-NHNN dated April 22/2005 and Decision 18/2007/QD-NHNN dated April 25/2007 (amending Decision 493) of the State

Bank on debts classification, loss provisioning in the banking operation of credit institutions, bad debt ratio over the total debt balance is the ratio to assess the credit risk level of credit institution

Debts of commercial banks are grouped in five (5) categories in which bad debts are classified from category 3 to category 5: a) Undue debt (category 1) including the following: a) Debts are not due that are assessed by credit institution to be able to pay principal and interest of debts in full and in a timely manner; b) Debts are overdue for less than 10 days and assessed by the credit institution to be able to pay in full the overdue principal and interest and pay in full the principal and interest on time In case the customers have paid the principal and interest in rescheduled maturity at least a year for medium and long term debts, three months for short term debts and it has been assessed by credit institution to be able to pay principal and interest in full and on time based

on rescheduled maturity, credit institution classify that debt into category 1

Debts require attention (category 2) including: a) Debts are overdue from

10 to 90 days; b) Debts have been rescheduled the maturity for the first time (to