Precluding and reducing solutions to credit risk at quang trung branch of vietnam bank of investment and development

FOREIGN TRADE UNIVERSITY BACHELOR PROGRAM IN BUSINESS ENGLISH---* * *---FIELD STUDY REPORT Precluding and reducing solutions to credit risk at Quang Trung branch of Vietnam Bank of Inve

FOREIGN TRADE UNIVERSITY BACHELOR PROGRAM IN BUSINESS ENGLISH

-* *

* -FIELD STUDY REPORT

Precluding and reducing solutions to credit risk at

Quang Trung branch of Vietnam Bank of

Investment and Development

Student: Tran Vu Class: 8B

Supervisor: Luu Thuy Huong

HANOI - 2012

Vietnam economy starts integrating into the world economy and participating ininternational and regional economic organizations such as ASEAN, WTO, and AFTA.Integration leads to the severe competition among domestic and international companies.Sharp rivalry also leads to the risks in production process of companies Nowadays, riskpreventing is also the urgent issue of banking industry in Vietnam In the past few years,activities of commercial banks must operate in accordance with market mechanism andinnumerable credit risk, bringing about losses to the banking industry and the entireeconomy Many commercial banks and credit organizations have very huge unprofitabledebt ratio, even some banks must be bankrupt unless there is interference from thegovernment

Concerning about risks, particularly credit risk in banking industry and Quang Trungbranch of Vietnam Bank of Investment and Development during my internship, I choosethe below topic:

“Precluding and reducing solutions to credit risk at Quang Trung branch of VietnamBank of Investment and Development”

The special subject is presented in three main chapters:

Chapter 1: Overview of risk, significance of precluding and reducing risk in credit

relationships

Chapter 2: Methods of precluding and reducing credit risk in Quang Trung

branch of Vietnam Bank of Investment and Development

Chapter 3: Solutions to precluding and reducing credit risks at Quang Trung

branch, BIDV

Chapter 1: Overview of risk, significance of precluding and

reducing risk in credit relationships

1.1 Risk and risk classification in credit relationships

Credit risks are the losses that the banks must approve of in lending activities Thereason is stated that credit “is a person lends or promises to lend the capital to the others,uses the signature like a guarantee, or a deposit to prove that money is collected“

1.1.2 Kinds of credit risks

Risks of commercial banks are very diversified and complicated The reasons maycome from the banks, from customers, from objective issues, or from the government’sadministrative mechanism In general, there are following risks: interest risk, capital risk,exchange risk, payment risk, and risk of unable to pay

- Interest risks: “are the risks that the bank must bear when the marketinterest varies.” Consequently, when the interest changes the bank possibly dealswith risks When the interest is too low, enterprises tend to borrow much but it isdifficult for the bank to mobilize capital Hence, their action scope is narrowed, andthe revenue will reduce In contrast, when the interest is too high, the bank hasmore mobilized capital yet it is stagnant It is explained that the bank can not lendmoney at too high interest rate That leads to unavoidably losses for the bank

- Capital risk: is represented in two aspects:

+ Redundant capital: commercial banks are the enterprises that earn revenue bythe method “borrow to lend” when the current capital is very little The bank’s maincapital is the mobilized from the inhabitants, from economic organizations, and fromother credit organizations Therefore, the redundant capital is not lent or changed intoother profitable assets As a result, the bank will suffer losses in charging borrowingfee whereas not receiving income

+ Lack of usable capital: this risk happens when the bank does not satisfy thecustomers’ demand for borrowing and investing, even not meet the customers’ demandfor liquidating This kind of risk arises from the exchange function of capital usingperiod and the bank’s capital Besides, political issues, price variation, and thedecreasing reputation promote people to withdraw their money in the bank Hence, thebank’s liquidation is threatened If the bank had changed all their assets into money topay but no result, then, the bankrupt risk is considerably high.

- Capital mobilizing risk:

+ Happens when the bank mobilizes much capital but they can not lend or slowlylend to customers

- Credit investing risk:

+ The customers who have dealt with business risks can not pay the bank money.+ The economies that get difficulties also cause risk to the bank

+ The credit officers carelessly appraise the lending project

1.1.3 Definition of credit risk in banking activities

Risks in credit trading of the bank are the financial losses because the customersborrowed capital from the bank do not pay on time, and not keep their commitment.

Credit risk can be defined as the potential losses which the bank must bear whenlending customers without being paid on schedule It means that when the bank providescredits to each customer, the forecasted income from the profitable assets may not be fully-returned in both quantity and time- limit

To sum up, credit risks are the problems that happen in credit trading process,causing the losses of capital and reputation (or brand name) for the commercial banks Incentral planning economy, risks in banking industry are generally ignored All the bankswere the State-owned Commercial Banks So the losses were subsidized by thegovernment by methods such as releasing more money and tight money management Butwhen stepping into the market economy, competition is a vigorous catalyst Consequently,economic posting is mainly independent This originates the potential of losing liquidationand bankruptcy In changing business environment, the stability of the enterprises is onlyrelatively Hence, when the customers get trouble, the same situation with the bank is easy

to understand Realizing credit risks will help the banks to find out efficiently preventingmethods, and then they have more efficient business result

Credit risks are diversified and sophisticated It could be when the bank has stagnantcapital, lacks of usable capital, unequal ratio of lent capital and mobilized capital,guaranteed asset risks or risk of not taking back debts

In this paper, credit risks are examined in the situation that the bank can not recoverdebts, being called bad debts

For principal and interest debts, credit risks may occur in four cases It is when thebank can not recover the interest on schedule Depending on each case, the bank enters inthe accounts with different items such as hanging interests and overdue debts When notbeing paid on time, risks are at the low level and posted as arising hanging interests If thebank can not collect the interests, risks are posted as hanging interests, except the case thatthe bank remitted that item If the bank cannot reclaim the capital on time, it will cause baddebts Yet this item is not regarded as absolute loss of the bank Because for some reasons,enterprises slowly refund the principal but they still pay all after the contracted period Ifthis debt can not be paid, the bank will highly deal with credit risks

Credit risks remain in many forms Those forms always vary The result is that thebank is unable to recover In the beginning, enterprises may slowly pay the interest andthen slowly pay the principal It really makes the bank at risk But the credit risks are notalways shown through all the above forms There is the situation that enterprises payinterests but do not pay the principal So the bank only posted it as arising bad debt andthen changed it into unrecoverable bad debts

The above cases are only general ones When researching credit risks, people usuallypay attention in the danger of risks such as hanging interest and arising bad debts Frozenhanging interests and actual debts are usually examined to solve the problem and to inferlessons

1.2 Criteria to determine credit risks.

Criteria of measuring include:

Overdue debts:

Gross overdue debts

Gross debts

Low overdue debts rate proves that the credit quality is high When absolutenumeric value of the overdue debts goes down, if the gross debts increase then overduedebts rate has not reflected the nature of credit

- Classification according to time period, there are arising risks:

+ Less than 180 days

Not collect enough interest

Not collect enough lent interest

UnrecoverabledebtsOrForgiving

Overdue debts arise

Frozen hanginginterestOrInterest remission

+ Greater than 360 days

- Classification of unpaid debts and unrecovered debts

- Classification of guaranteed and unguaranteed risks

Number of customers having

Overdue debts Ratio of customers = * 100

having bad debts Gross numbers of customers

Having credit relationship

Losing capital situation:

Losing capitalDebts Ratio of losing capital = * 100

Gross debts

Bad debts situation:

Bad debts Ratio of bad debts = * 100

Gross debts

Unrecoverable debts:

Unrecoverable debtsRatio of unrecoverable debts = * 100

Gross overdue debts

1.3 Significance of precluding and reducing risks in credit relationships

Precluding and reducing risks in credit relationships will help the bank avoid badconsequences Those kinds of credit risks not only affect on the bank itself but also on theeconomy Therefore, precluding and reducing credit risks has a very importantsignificance

For the bank:

Risks directly impact the revenue of the bank If the risk is at low level, the bankcan use its profit or its capital to make up But if it is a big risk, the bank can not use itsprofit to compensate, it will be bankrupt For this reason, precluding and reducingcredit risks helps the bank prevent and minimize damage, stabilize profit, maintain

economic security, and maintain prestige and brand In doing credit business, prestigeand brand is extremely important, directly affect customers’ behavior.

For the customers:

A bank that is good at preventing and reducing credit risks will positivelyinfluence on customers The bank has created its prestige and brand name Thecustomers will consider the bank as a reliable address to deposit money as well as toborrow money For all business activities, the customers are always important ones.The same situation is in the credit- banking activities When the bank is free from risk,customers will trust more and choose the bank as their partner more In the situation ofintegrating into world economy, there will be many international banks enter andcompete A free- risk bank will leave the customers belief- it is very important

For the economy:

Credit and banking are sensitive financial business activities So it directlyinfluence on the social economy If the bank preclude and reduce risks then the cashflow will circulate normally It will not cause redundancy as well as deficiency Theeconomic security will be ensured When the risk occurs, customers will be puzzled.They will simultaneously withdraw money Thus, the bank will be lack of capital Thereason is the bank chiefly mobilizes capital from customers Then organizations whowant to borrow capital also get trouble In fact, economic organizations form aneconomy When those organizations that will have huge impacts on the social economy

as a whole face crises

Chapter 2: Real situation of credit risks at Quang Trung

- BIDV, Quang Trung Branch will take the development of modern banking service

as the operational background, pledging to bring about more and more facilities and addedvalue for customers being civilians or enterprises of every economic element;

- The operation of BIDV, Quang Trung Branch will help enhance the businessoperation of Bank for Investment and Development of Vietnam The upgradation of QuangTrung Transaction Bureau into BIDV, Quang Trung Branch (Level I branch) will expandthe operational network of Bank for Investment and Development of Vietnam in HanoiCity, assisting Bank for Investment and Development of Vietnam to seize and take the

opportunity to expand the customer objects, through which contributing an active part inthe socio-economic development of the Capital and some adjacent areas under the satelliteurban chain bordering Hanoi;

- Expanding the operation of BIDV, Quang Trung Branch is a measure to improvethe financial capability and increase the competitiveness of Bank for Investment andDevelopment of Vietnam in the framework of globalization and integration;

- Establishing and putting into operation the BIDV, Quang Trung Branch will helpboost the exploitation, clearing the capital source, increasing the capability of supplyingcredit, banking services, therefore, increasing profits for the Bank, concurrently,contributing a remarkable part in the unceasing development of the system of Bank forInvestment and Development of Vietnam;

- The operation of BIDV, Quang Trung Branch will help publicizing the trademark,heightening the position, image about an advancing, modern Bank for Investment andDevelopment of Vietnam in the perception of the customers and in the business market;

2.1.2 Scope of operation

2.1.2.1 Legal status:

* Full name in Vietnamese:

“CHI NHANH NGAN HANG DAU TU VA PHAT TRIEN QUANG TRUNG”

* Acronymed: “Chi nhanh Ngan Hang DT & PT Quang Trung”

* The international transaction name:

“Bank for Investment and Development of Vietnam, Quang Trung Branch”

* Abbreviated name: BIDV, Quang Trung Branch

* Headquartered at: No 53 Quang Trung, Hai Ba Trung, and Hanoi

Quang Trung Branch is an affiliated subsidies operating from 2003 but split from theTransaction headquarter and officially came into operation from 01/04/2005 At the time ofestablishment, the branch had a staff of 72 people, in which there were 65 trade unionmembers At first, the activity of the branch mainly focused on stabilizing organization,establishing the order and strengthen professional skills beside the daily professionoperation

- BIDV, Quang Trung Branch is a Level I Branch, under Bank for Investment andDevelopment of Vietnam, with its own stamp and financial balance sheet, has a task tooperate the activities of Bank for Investment and Development of Vietnam according tothe authorization of the General Director of Bank for Investment and Development of

Vietnam, being an accounting unit under the system of Bank for Investment andDevelopment of Vietnam;

- BIDV, Quang Trung Branch was established according to the decision of theManagement Board of Bank for Investment and Development of Vietnam on the basis ofthe approval of the State Bank Governor;

2.1.2.2 The content of operation

BIDV, Quang Trung Branch is the organization to operate monetary business andBanking service according to the Law of Credit Organization, suitable to the “Charter onorganization and operation of Bank for Investment and Development of Vietnam”,operating according to the regulation of organization and activities promulgated by theManagement Board of Bank for Investment and Development of Vietnam; and according

to the authorization of the General Director of Bank for Investment and Development ofVietnam, especially paying attention to developing the advanced, modern Banking serviceand the Banking products, services with high rate of advanced technology, combining inharmony with the traditional banking profession, creating the stable customer background,ensuring reasonable profit mechanism, manage well risks, being efficient, safe in businessoperation

 The advanced Banking service

The operational content and specifically oriented targets:

- Forming and developing wide and popular ATM network, creating the basis ofcrowded customers to use the products and services on ATM technology in a stable andsustainable way Building the system to accept POS/EDC linked with the bank to deploymany added facilities integrated in ATM-BIDV such as: paying invoices of goods,services, recording debts … operating the link of card payment with VISA International,MasterCard International, and AMEX, etc, and then issuing international credit cards ofBank for Investment and Development of Vietnam

- Applying the Home-banking service for the customers, helping customers tomanage and control their accounts closely, effectively, with such functions as accountenquiries, banking information enquiries, next is to perform transactions via the Internetand by electronic documents

- Performing the purchase of traveler’s cheques and international cheques, buildingthe network of collecting and exchanging traveler’s cheques to the Branch to ask forclearance;

- Supplying the service of authorized paying salaries (automatically) for individuals,payment of overseas exchange, connecting with the profession of capital mobilization;

- Supplying the service of managing the customers’ personal accounts according tothe norms of modern banking with high quality Performing counseling and managinginvestment portfolios as authorized by the account owners;

- Willing to organize Mobile banking when necessary, researching to deploy newproducts and services as requested by the customers and the market

 Clearance and budget services

- Supplying domestic and international clearance products and services;

- Performing the professions of purchasing-selling, converting foreign currencies toserve credit activities, international payment and aiming to serve the business operation ofthe Branch Executing other foreign relations banking services as ruled, authorizing of theGeneral Director of BIDV;

- Performing the service of authorized receivable and payable Supplying the service

of collecting and paying cash for customers;

Performing other payment services delegated by the General Director of BIDV;

- Performing other capital mobilization forms allowed by law;

 Loaning and securing

- Performing short-medium-long term loans in Vietnam dongs foreign currencies toentitled customers, BIDV;

- Discounting valuable documents;

- Performing securing services;

- Performing credit professions after being approved by General Director of BIDV;+ Being the key or member capital contributors to be engaged in co-sponsor of anyinvestment projects exceeding the limit assigned and authorized by General Director ofBIDV to the Branch Director;

+ Performing the profession of loaning, guaranteeing or re-guaranteeing for foreignorganizations and individuals, except the case of responsive guaranteeing for foreigncustomers taking part in bidding, performing the contract in Vietnam and other casesinstructed by the General Director of BIDV and/or distributing the levels; specificallydelegated to the Branch Director;

+ Investing in the form of capital contribution, joint ventures, purchasing stakes andother forms of investing outside the BIDV system;

+ Dealing with gold, silver, precious stones (including imports and exports);

- Performing other activities and tasks delegated, assigned by the General Director ofBIDV;

2.1.2.3 The scope of operation

- Geographically: BIDV Quang Trung Branch operating on the location of HanoiCity;

- About the fields of operations: within the legal scope allowing BIDV to performand regulations of BIDV;

+ Purchasing insurance for the asset;

+ Accounting into the expense of risk reserves;

- Performing rightly the Decree on Accounting and Statistics, accounting - andauditing regime;

- Establishing the Quarterly, Annual financial reports according to the form, sendingBIDV according to the present regulations;

- Being responsible for the preciseness, honesty of the reported statistics;

- Being active in business, ensuring growth to secure and develop the capital;

- Enjoying privileges according to the State regulations;

2.1.3 Organizational machine

Organizational model

The organizational model of BIDV, Quang Trung Branch was built according to themodel of modernized banking, in the orientation of renovation and advancement, suitable

to the scale and operational characteristics of the Branch (details are as Appendix 1)

1 Directing the operations of the BIDV, Quang Trung Branch is the BranchDirector

2 Assisting the Branch Executive Director is one or several Deputy Directors,working as being assigned and delegated by the Branch Director;

3 The organizational model of the BIDV, Quang Trung Branch up to the end of

+ Monetary – Budgeting Department;

+ Planning – Capital Source Department;

+ Assessment and Credit Management Department;

+ Finance-Accounting Department;

+ Personnel-administration Department;

+ Interior Supervising Department;

+ Computing Department;

3.2 The underlying unit: Nguyen Dinh Chieu Transaction Bureau

During the operational process, the organizational machine will be adjusted tocorrespond to the business operation situation of the Branch;

4 The BIDV, Quang Trung Branch is allowed to launch second level branches,Transaction bureau, Saving funds; Foreign exchange desk at necessary locations withinHanoi City area; being allowed to establish assistant counseling council if necessary suchas: Credit council; Risk control council; scientific council, the Competition – Rewarding –Punishment Council …

5 The specific functions, tasks of the Departments, units under BIDV, Quang TrungBranch are instructed by the Director of BIDV, Quang Trung Branch; being suitable to theregulations of BIDV and operational requirement of the Branch.

2.2 Real situation of credit risks at Quang Trung branch

2.2.1 Real situation of overdue debts

Situation of overdue debts at the branch has been cared by both the leading board andstaff in recent years From 2008- 2011, some main activities in precluding and managingrisks has been done and achieved certain results such as classifying, evaluating risk ofcredit and overdue debts

The quality of credit is considered as the top objective of the bank Therefore, thebranch has broadened their market share, enhanced quality of bank loan The branch alsoperfects the credit process, upgrades professional skills, dignifies the process of appraisingprojects, and ensures the effectiveness of projects From that point, the credit capital of thebranch has high coefficient of safety

Table 1: General situation of overdue debts

Unit: VND billion

Year Target 2008 2009 2010 2011

Debt collecting turnover 1583 1829 2134 2230

Overdue debts/ total debts 0.6 % 0.39 % 0.56 % 0.73 %

(Source: Credit department of BIDV)

From the above table, we can see that the branch has positively activities incollecting bad debts as well as dealing with overdue debts Overdue debts ratio is alwayslower than 1 % compared to the total debts In detail, overdue debts over total debts are0.60 % in 2008, 0.39 % in 2009 reduces in comparison with 2008.It means that the bankhad certain methods and achievements in precluding and reducing risks In 2010, the rate

of overdue debts increased to 0.56 % While the total debts grew to VND 109 billion, theoverdue debts increased to VND 4 billion Until 2011, the overdue debts ratio sharply