DSpace at VNU: Solutions to improve credit risk management of Vietnam Bank for Agriculture and Rural Development (AGRIBANK)

Solutions to improve credit risk management of Vietnam Bank for Agriculture and Rural Development AGRIBANK Hoàng Ngọc Linh Khoa Quản trị Kinh doanh Luận văn Thạc sĩ ngành: Kinh doanh

Solutions to improve credit risk management of

Vietnam Bank for Agriculture and Rural

Development (AGRIBANK)

Hoàng Ngọc Linh

Khoa Quản trị Kinh doanh Luận văn Thạc sĩ ngành: Kinh doanh và quản lý; Mã số: 60 34 05

Người hướng dẫn: TS Nguyễn Việt Dũng

Năm bảo vệ: 2010

Keywords: Quản trị rủi ro; Tín dụng; Ngân hàng; Quản lý điều hành

Content

vi

TABLE OF CONTENTS

ACKNOWLEDGEMENTS i

ABSTRACT ii

TÓM TẮT iv

TABLE OF CONTENTS vi

LIST OF ABBREVIATIONS xi

LIST OF TABLE xii

LIST OF FIGURES xiii

INTRODUCTION 1

1 Thesis necessity 1

2 Research Objectives 2

3 Research Scope 2

4 Data sources 2

5 Research Methods 2

6 Contributions of the research 2

7 Limitation 3

8 Structure of the thesis 3

CHAPTER 1 4

THEORETICAL FOUNDATION 4

1.1 Commercial banks 4

1.1.1 Main types of Risk in the bank operation 4

1.1.1.1 Liquidity risk 4

1.1.1.2 Credit risk 5

1.1.1.3 Interest rate risk 6

1.1.2 Other types of risk 6

1.2 Bank credit & Credit Risk 8

1.2.1 Bank credit 8

1.2.2 Classification of credits & credit risk 9

1.2.2.1 Classification of credits 9

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1.2.2.2 Classification of credit risks 11

1.2.3 Root causes of credit risk 12

1.2.3.1 External reasons 12

1.2.3.2 Risks due to borrowers 14

1.2.3.3 Risks due to the bank internally 14

1.2.4 Damages caused by credit risks 15

1.2.4.1 To the bank 15

1.2.4.2 To economy and society 16

1.3 Credit risk management 16

1.3.1 Concept 16

1.3.2 Identification of credit risks 16

1.3.3 Preventive and corrective measures against groups of risk signs 18

1.3.3.1 Preventive measures: 18

1.3.3.2 Corrective actions: 19

1.3.3.3 Measures on debt recovery 20

1.3.3.4 Measures against bank officers and relevant bodies: 21

1.4 Risk management from the viewpoint of Basel Committee and criteria for development of a modern risk management model 21

1.4.1 Basel I Banking regulations 21

1.4.2 Methods of credit risk approach as per Basel II 23

1.4.3 Criteria for development of a modern risk management model as per Basel Committee 24

1.4.4 Vietnam’s existing regulations on debt classification, provisioning and use of provisions for settlement of credit risks 26

CHAPTER 2 28

ANALYSIS Of AGRIBANK’S CREDIT RISK MANAGEMENT 28

2.1 Overview on Agribank and its loan system 28

2.1.1 Milestones 28

2.1.2 Organization structure 30

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2.1.3 Operation networks 30

2.2 Overview of Agribank’s business performance in period of 2005 - 2009 and in first 6 months of 2010 31

2.2.1 Business environment in period of 2005 - 2009 and in first 6 months of 2010 31

2.2.2 Business performance during 2005 - 2009 34

2.2.2.1 Total Assets 34

2.2.2.2 Treasury 36

2.2.2.3 Some indicators to assess financial performance 40

2.2.2.4 Trends of capital adequacy of AGRIBANK 42

2.2.2.5 Business results of 2010’s first half 44

2.3 Loan structure and quality during 2005-2009 46

2.3.1 Loan structure: 46

2.3.1.1 Loan structure by economic regions 46

2.3.1.2 Structure of lending by economic sectors in the years 2005-2009 47

2.3.1.3 Loan structure by terms: 47

2.3.1.4 Loan structure by currencies: 48

2.3.1.5 Loan structure by economic industries: 48

2.3.2 Credit quality 49

2.3.2.1 Credit quality by terms 49

2.3.2.2 Credit quality by economic regions 49

2.3.2.3 Credit quality by enterprise types 49

2.3.2.4 Credit quality by branches 49

2.3.3 Assessment on provision for impairment loss and methods to deal with bad debts 52

2.3.3.1 Provision for impairment loss 52

2.3.3.2 Methods to deal with bad debts 53

2.4 Status quo of credit risk management in Agribank 54

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2.4.1 Credit organization structure and risk management: 54

2.4.2 Credit processes 56

2.4.3 Regulations on customer classification as currently applied 58

2.4.4 Some shortcomings in credit risk management 59

2.4.4.1 Shortcomings in provisioning and risk processing: 60

2.4.4.2 Shortcomings in credit policies, customer policies and customer classification 60

2.4.4.3 Shortcomings in credit procedures and credit risk management 61 2.4.4.4 Shortcomings from Staff’s qualification and career ethics 62

2.4.4.5 Shortcomings by insufficient information management system 63

2.4.5 Main reasons caused credit risk in Agribank 64

2.4.5.1 External reasons 64

2.4.5.2 Reasons caused by borrowers 65

2.4.5.3 Internal reasons 66

CHAPTER 3 69

SOLUTIONS AND RECOMMENDATIONS TO IMPROVE AGRIBANK’S 69 CREDIT RISK MANAGEMENT 69

3.1 Agribank’s development goals and orientation in terms of credit activities and credit risk management towards 2015 and 2020 69

3.2 Measures to improve the efficiency and effectiveness of credit risk management in Agribank 71

3.2.1 Strengthening financial conditions 71

3.2.2 Complete credit operation and risk management structure 72

3.2.3 Complete credit procedures 77

3.2.4 Improve the quality of human resources 79

3.2.5 Customer classification and assessment procedures 82

3.2.6 Develop customer policies in credit activities: 84

3.2.7 Credit policies 85

3.2.7.1 Set out prudential ratios in credit activities: 85

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3.2.7.2 Expand loans secured by collaterals 85

3.2.7.3 Disperse credit risks 87

3.2.8 Book provisions to offset risks: 89

3.2.9 Invest in modern information technology 89

3.3 Policy recommendations to improve commercial bank’s credit risk management 91

3.3.1 To the Government 91

3.3.2 To State Bank 92

CONCLUSION 94

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REFERENCE

1 Dr: Ir.Tony Van Gestel and Prof Dr Bart Baesens (2008), “Risk Credit

Management” Oxford University Press

2 Didier Cossin and Hugues Pirotte (2001),“ Advanced credit risk analysis - Financial Approaches and Mathematical models to assess, Price and Management credit risk” , John Wiley and sons, LTD

3 Andrew Fight (2004), “Credit risk management”, Elsevier Butterworth – Heinemann publisher

4 Joetta Colquitt (2007), “Credit Risk Management – How to avoid lending disasters and maximize earnings” McGraw Hill, pp 150-152

5 Univ.Doz.Mag.Dr Josef Christl and Dr Kurt Pribil (2004), “Credit Approval Process and Credit risk Management, guidelines on credit risk management, Oesterreichische National Bank (OeNB) in co-operation with the Financial Market Authority (FMA)

6 Tran Dinh Dinh (2008), Credit risk management in banking according to standard, international rules and Vietnam regulations, judiciary publisher

7 Dr Nguyen Huu Thuy, “Some measures to improve the control of creit activities in commercial banks”, PhD Thesis, 2007

8 Vietnam Bank for Agriculture and Rural Development, “Credit handbook”, 2004’

9 Vietnam Bank for Agriculture and Rural Development, “Annual report”,

2005, 2006, 2007, 2008, 2009

10 The State Bank, “Reports on Deposits”, 2009

11 Agribank’s Income Statements for 2007 – 2009

12 Commercial banks’ annual reports for 2009

13 State Bank of Viet nam, “Decision No 493/2005/QD-NHNN on issuing regulations on making loan classification, making impairment loss and using provision to handle credit risk in banking operation”, 22/4/2005

14 Websites of Commercial Banks, including:

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http://www.acb.com.vn; http://www.techcombank.com.vn;

http://www.sacombank.com.vn; http://www.eximbank.com.vn;

http://www.bidv.com,vn; http://www.vcb.com.vn;

http://www.agribank.com.vn; http://www.vietinbank.vn;

http://www.ocbc.com, http://www.uob.com.sg,

www.dbs.com/sg, www.mayabanks.com, www.boc.cn

15 General Department of Statistics (2005, 2006, 2007, 2008 and 2009), http://www.gso.gov.vn

16 http://www.creditinfo.org.vn