Credit risk management at joint stock commercial bank for investment and development of vietnam, hong ha branch

Therefore, more than ever, credit risk management at commercial banks in general and Joint Stock Commercial Bank for Investment and Development of Vietnam BIDV- Hong Ha Branch in particu

KHOA QUẢN TRỊ VÀ KINH DOANH

QUẢN TRỊ RỦI RO TÍN DỤNG TẠI NGÂN HÀNG TMCP ĐẦU TƯ

VÀ PHÁT TRIỂN VIỆT NAM CHI NHÁNH HỒNG HÀ

LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH

HÀ NỘI - 2019

ĐẠI HỌC QUỐC GIA HÀ NỘI KHOA QUẢN TRỊ VÀ KINH DOANH

QUẢN TRỊ RỦI RO TÍN DỤNG TẠI NGÂN HÀNG TMCP ĐẦU TƯ

VÀ PHÁT TRIỂN VIỆT NAM CHI NHÁNH HỒNG HÀ

Chuyên ngành: Quản trị kinh doanh

Mã số: 60 34 01 02 LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH

NGƯỜI HƯỚNG DẪN KHOA HỌC: TS TRẦN HUY PHƯƠNG

HÀ NỘI - 2019

DECLARATION

I pledge that the findings in the thesis are my own work results obtained primarily during study and research and have not published yet in any other research projects by others

Research findings and other people’s materials (quotations, tables, figures, formulas, graphs, and other materials) used in this thesis have been agreed by the authors and cited

I am fully responsible to the Board of Thesis Defense, School of Business and Management and the law for the above commitments

Author

Hoang Le Thuy

Secondly, I am extremely grateful to all of the lecturers from the Department of Business Administration - HSB for providing me with research methods and professional knowledge during the course, especially the active and creative research skills

My appreciation also goes to the teachers in the thesis review committee for giving me valuable ideas during my thesis completion process

My profound gratitude is also conveyed to my instructor for his helpful assistance and guidance This thesis could have never been completed without his enthusiastic counsel and support

Despite the efforts during the research period, there are still many limitations in the thesis I would hope to receive valuable comments from the teachers and co-workers to make this essay more complete

Thank you very much./

TABLE OF CONTENTS

DECLARATION i

ACKNOWLEDGEMENTS ii

TABLE OF CONTENTS iii

LIST OF ABBREVIATIONS vi

LIST OF TABLES vii

LIST OF FIGURE viii

INTRODUCTION 1

CHAPTER 1 THEREOTICAL BASES OF CREDIT RISK MANAGEMENT AT COMMERCIAL BANKS 9

1.1 Concepts and classification of credit risk 9

1.1.1 Concepts of risk 9

1.1.2 Concepts of credit risk 9

1.1.3 Characteristics of credit risk 11

1.1.4 Classification of credit risks 11

1.1.5 Credit risk evaluation criteria 14

1.2 Necessity of ensuring the credit risk management efficiency in commercial banks 17

1.3 Credit risk management procedures at commercial banks 18

1.4 Credit risk management experience of some commercial banks in the world and in Vietnam 21

1.4.1 Experience of commercial banks in the world 21

1.4.2 Some risk management models being applied in Vietnam 26

1.4.3 Risk management model application orientation 28

CHAPTER 2 CURRENT STATUS OF CREDIT RISK MANAGEMENT AT BIDV-HONG HA BRANCH 30

2.1 Introduction of BIDV-Hong Ha Branch 30

2.1.1 Establishment and development history of BIDV- Hong Ha Branch 30 2.1.2 Organizational structure 30

2.1.3 Business results of BIDV- Hong Ha branch 34

2.2 Current status of Credit Risk Management at BIDV- Hong Ha Branch 36 2.2.1 Current status of Credit Risk Management at BIDV- Hong Ha Branch 36 2.2.2 Evaluation of the risk management process at Hong Ha branch 44

2.2.3 Survey results of credit risk management at BIDV- Hong Ha Branch 58

2.3 Evaluation of credit risk management at BIDV- Hong Ha Branch 66

2.3.1 Achievements 66

2.3.2 Weakness in credit risk management 68

CHAPTER 3 SOLUTIONS TO IMPROVE CREDIT RISK MANAGEMENT AT JOINT STOCK COMMERCIAL BANK FOR INVESTMENT AND DEVELOPMENT OF VIETNAM- HONG HA BRANCH 74

3.1 Mission, vision, objectives of BIDV to 2020 74

3.2 Credit risk management orientation of BIDV-Hong Ha branch to 2020 74 3.2 Some solution to improve credit risk management at BIDV –Hong Ha Branch 77

3.2.1 Strict compliance with the lending procedures 77

3.2.2 Improvement of the credit appraisal and analysis quality 77

3.2.3 Development of an effective information network 78

3.2.4 Development of a policy to limit a large outstanding loan of one or several large customers 79

3.2.5 Perfection of the internal credit ranking system and the risk reserve policy 80

3.2.6 Establishment of the information system for the analysis, assessment, identification, monitoring and prevention of credit risks 81

3.2.7 Solutions to deal with non-performing loans, enhance credit quality control, establish sufficient risk reserves and ensure the system safety 82 3.2.8 Solutions to apply Basel II at BIDV 83 REFERENCES 87

LIST OF TABLES

Table 2.1 Business results in the 2015-2017 period 34 Table 2.2 Capital mobilization scale of BIDV –Hong Ha Branch in the 2015 -

2017 period 35 Table 2.3 Credit scale of BIDV –Hong Ha Branch in the 2015 -2017 period 37 Table 2.4 Credit quality of BIDV- Hong Ha Branch in the 2015 – 2017 period 38 Table 2.5: Non-performing loan ratio of some commercial banks 43 Table 2.6 Characteristics of respondents 59 Table 2.7 Officers’ assessment of the causes of credit risks from BIDV-Main Operation Center 62 Table 2.8 Officers’ assessment of the causes of credit risks from BIDV-Hong

Ha Branch 64

LIST OF FIGURE

Figure 1.1 Classification of risks by the causes 12

Figure 1.2 Credit risk management process at commercial banks 20

Figure 2.1 Organizational structure of BIDV- Hong Ha Branch 32

Figure 2.2 Organizational structure of BIDV 33

Figure 2.3 Internal credit ranking model for corporate customers 52

Figure 2.4 Internal Credit Ranking Scoring Model 54

Investment and Development of Vietnam (BIDV) - Hong Ha branch is also a

unit of continuous development, expansion of retail scale to increase competitiveness, income and market share in the area

Modern banking management science is increasingly developed and in this system, risk management is a component All banks now have a risk management department but the risk still arises, which proves that their objectivity and the performance of the risk management machinery and the improvement of the risk management system of commercial banks still have

to be continued in the coming time

The possibility of credit risk is enormous and the severity of the loss depends on each particular case that does not follow any general rule No talented banker can accurately predict future problems with his or her credit and credit risk

is viewed as a fellow-traveler in the business Strict and aggressive management measures to minimize risks and losses to the Bank are essential

Therefore, more than ever, credit risk management at commercial banks in general and Joint Stock Commercial Bank for Investment and

Development of Vietnam (BIDV)- Hong Ha Branch in particular (hereinafter

referred to as BIDV Hong Ha) becomes increasingly important and necessary

to ensure safe and effective business As a result, the author selected “Credit

Risk Management at Joint Stock Commercial Bank for Investment and Development of Vietnam- Hong Ha Branch” as her research topic

 Analyze the current status of credit risk management at BIDV in 2015,

2016, 2017 Evaluate the strengths/weaknesses of credit risk management Find out the causes of weaknesses

 Propose solutions to improve credit risk management at BIDV - Hong

Ha Branch

3 Research Subject and Scope

 Research subject: Credit Risk Management at Joint Stock Commercial Bank for Investment and Development of Vietnam- Hong Ha Branch

 Research contents: The thesis focuses on theoretical and practical issues of credit risk management at BIDV - Hong Ha Branch

 Research space: Business activities of the bank, focusing on credit risk management at BIDV- Hong Ha Branch

 Research time: Secondary data from 2015 to 2017 collected from the annual reports of BIDV - Hong Ha Branch Primary data is the result of

a survey conducted between June 2018 and October 2018

4 Literature review

With the increasingly drastic development of the economy in general and financial activities in particular, there have been many researches on credit risk management Credit risk management in commercial banks is seen

as a practical, urgent and ongoing issue that is closely linked to the diverse development of the economy There were many researches on credit risk and credit risk management by researchers as well as specialists in the past time Some of these researches are:

 Credit risk management at Vietnam Joint Stock Commercial Bank for Industry and Trade by Nguyen Duc Tu (2012) – Doctoral

Dissertation in Economics, National Economics University The thesis proposed a new concept of credit risk, which differed from that of many economists and managers in Vietnam, emphasizing the possibility for unexpected differences between the real income and expected income on maturity, sufficient principal and interest Credit risk would lead to unexpected financial losses, i.e., decrease in net income and decrease in market value of capital This concept was an important theoretical basis for identifying the specific contents of credit risk management The dissertation developed the theoretical system of credit risk management of banks with the following contents:

Designing the credit risk management model in the direction of approaching modern risk management methods; applying credit risk management evaluation model; improving the efficiency and transparency of bank credit risk management; developing new policies from post-inspection, consultancy to decision-making and manage loans based on the credit analysis and review system

 Credit risk management at Vietnam Bank for Agriculture and Rural Development (Agribank) by Nguyen Tuan Anh (2012) – Doctoral

dissertation in Economics, National Economics University The thesis made new contributions in academic and theoretical terms Applying the concepts of credit risk and credit risk management to Vietnamese commercial banks in the international economic integration period, the dissertation proposed a full range of qualitative and quantitative criteria

to evaluate the efficiency of credit risk management in Vietnamese commercial banks in general, which previous studies in Vietnam have not fully provided These content and criteria were an important scientific basis for developing and ensuring the success of a complete credit risk management strategy at Vietnamese commercial banks in general and Agribank in particular Based on the set forth criteria, the dissertation pointed out the weaknesses of credit risk management at Agribank such as the backdated credit risk management model; the lowest CAR compared to other state-owned commercial banks (SOCBs); low owner’s equity structure; the ineffective customer rating system; incomplete debt classification and imperfect risk reserve establishment The dissertation also proposed risk reserve establishment of Agribank as well as emphasizes the need to quickly change the credit risk management model; set up the Risk Management Committee, reassign the tasks of each unit and build the reporting

system according to international standards The dissertation also gave some recommendations to the State, the State Bank of Vietnam and some relevant ministries to focus on improving the legal environment, amending the Land Law, creating a good legal corridor for the property sales handling regulation

 Credit risk management at Joint Stock Commercial Bank for Investment and Development of Vietnam- Hanoi Branch by Le Khac

Thai (2014); Master’s thesis of VNU- University of Engineering and Technology The thesis systematized credit risk and credit risk management on the basis of application of Basel principle in designing the credit risk management model for commercial banks in Vietnam The thesis analyzed and evaluated the current status of credit risk management at BIDV - Hanoi Branch

In sum, the above dissertations focused on the clarification and systematization of credit risk and credit risk management according to Basel principles and the Moody’s and Standard & Poor's methods in designing the credit risk management model for commercial banks in Vietnam However, due to the relentless transformation of the economy and the objective and subjective risk factors as well as the particular characteristics of the economy

in each country, the application of economic models and methods in the world

to Vietnam needs to be transformed and adapted to the economy As a result, the development of a credit risk management model for commercial banks in Vietnam also needs to change The criteria for assessing and classifying individual and corporate customers must be take a closer look at more angles

It is essential to update Basel II Principles and Circular No NHNN dated January 21, 2013 by the State Bank of Vietnam on classification

02/2013/TT-of assets, deduction level, method 02/2013/TT-of risk reserve establishment to deal with risks in the operations of credit institutions and foreign bank branches,

thereby perfecting the credit risk management model for commercial banks in Vietnam in general and BIDV - Hong Ha Branch in particular

Although there are a lot of topics on credit risk management at banks,

at present, there is no research topic with the same space and time as that of the author, in particular the research at BIDV-Hong Ha Moreover, the author

is an officer who directly works in the credit field, so it is easy for her to access accurate data and understand the credit field As a result, the thesis still ensures the novelty and practical applicability

5 Research methods

To conduct this research, the author used the qualitative research methods, mainly comparison, reconciliation and case study Collected data included primary data and secondary data In particular, the secondary data were collected through newspapers and monographs on risk management, the consolidated reports of the branch, the comparison data from other commercial banks, etc to have the most comprehensive look on risk management and retail credit of banks in general

The primary data were collected through two methods, including depth interviews with risk management experts and credit officers and the sociological survey methods through questionnaires The author focused on the direct interview method through built-in scripts and sociological surveys

in-on a variety of respin-ondents Interview scripts and questiin-onnaires are presented

in detail in the appendix of this thesis

 Research steps: To conduct this research, the author used the following research process:

Source: The author (2018)

of causes from the Main Operation Center; (3) Evaluation and identification of causes from BIDV -Hong Ha

 Questionnaire form 2: is used to survey customers This form only contains some questions about the relationship between banks and customers in the lending and debt collection process

 Sample description

Due to the number of credit officer of Hong Ha branch was not large (about 50 staff), so the author sent 50 samples to credit officers of BIDV-Hong Ha After delivering 50 samples to credit officers, 39 valid ones and 11 invalid ones were collected

The data collected from the questionnaires was processed and analyzed

by using a support tool- Excel software The analytical method used is the descriptive statistics with the aim of pointing out the respondents’ ideas on the information of respondents, their opinions on the cause of difficulties in credit risk management at BIDV-Hong Ha, which is an important objective basis that the author used in analyzing and explaining the weaknesses in BIDV-Hong Ha’s credit risk management in the recent years

6 Design of the thesis

Apart from the introduction and conclusion, the author intends to divide the thesis into 3 chapters:

 Chapter 1: Theoretical bases of Credit Risk Management at Commercial Banks

 Chapter 2: Current status of Credit Risk Management at Joint Stock Commercial Bank for Investment and Development of Vietnam- Hong

Ha Branch

 Chapter 3: Solutions to improve Credit Risk Management at Joint Stock Commercial Bank for Investment and Development of Vietnam- Hong Ha Branch

CHAPTER 1 THEREOTICAL BASES OF CREDIT RISK

MANAGEMENT AT COMMERCIAL BANKS

1.1 Concepts and classification of credit risk

1.1.1 Concepts of risk

There have been no uniform definition of risk so far Different schools and different authors have given different definitions of risk According to the Vietnamese Dictionary published by Hanoi Dictionary Center in 1995, “Risk

is a bad thing which is not good and occurs unexpectedly” According to the Oxford Dictionary, “Risk is the possibility to be in danger or to be hurt, suffer damages, etc.” In the “Risk management and insurance” book by C.Arthur William, Jr Micheal, L Smith, wrote “Risks are potential fluctuations in results Risk can appear in almost every human activity When there is a risk, one cannot predict the result exactly The presence of risk causes uncertainty The risk arises whenever an action leads to the unpredictable gains or loss.” Frank Knight, an early 20th century American scholar, defined “Risk is measurable uncertainty.”

“Risk is an uncertainty that may be related to an unexpected event,” Alain Willet said Thus, the definitions are different but they are consistent in the content: “the risk is an unexpected thing that causes damages and can be measured Risk leads to unexpected losses and damages and risk is also the uncertainty, so it does not depend on the subjective will of man Therefore, for the goal of survival and development, businessmen should be early predicted and diagnosed the possible risks and solutions to prevent and accept risks at reasonable levels to minimize the possible losses

1.1.2 Concepts of credit risk

Concept of credit granting: Credit granting is an agreement for organizations or individuals to use a sum of money or a commitment to allow

the use of a sum of money on the principle of repayment by lending, financial leasing, factoring, bank guarantee and other credit operations (According to the Law on Credit Institutions (2010))

Pursuant to Circular No 02/2013/TT-NHNN dated January 21, 2013 on

“Regulations on classification of assets, deduction level, method of risk reserve establishment to deal with risks in the operations of credit institutions and foreign bank branches”, credit risk in banking activity is the potential loss

to a debt of a credit institution or a foreign bank branch due to a customer’s failure or inability to perform part or all of its obligations under the commitment “Simply, credit risk is defined as the possibility of the borrower

or the bank’s partner’ failure to perform obligations under the agreed terms” (Basel II) “Credit risk occurs when the creditors, obligors or partners fail to perform or are unable to perform part or all of their committed obligations” (Draft Circular on Regulations on Risk Management System in Banking Operations (2014))

Accordingly, credit risk is understood as the risk arisen due to the borrower’s failure to comply with the provisions of the credit contract with the specific expression such as late debt repayment, incomplete debt repayment or no debt repayment of principal and interest on maturity, resulting in financial losses and difficulties in business activities of commercial banks

Factors constituting credit risk:

 Different customers and different professions have different risks;

 Different products (consumer loans or production and business loans, secured loans or unsecured loans, etc.) have different risks;

 Credit officers’ qualification and virtues, credit management policies and resources of the bank (including IT system) can make a positive contribution to reducing credit risk

1.1.3 Characteristics of credit risk

According to Joel Bessis (2011), Risk Management in Banks

(Vietnamese translation version), Labour and Social Publishing House, credit risk has the following characteristics:

Credit risk is passive: Credit losses for a bank occur only after the bank

disburses loans, or in other words, in the process of using loans by the customer The customer directly uses loans, so she/he have sufficient information of the quality and efficiency of using the loans Therefore, the bank often remains passive because it knows the information later or has inaccurate and insufficient information of the customer’s difficulties and failures in business in general and in the use of loans in particular, making it often delayed in response

Credit risk is diversified and complicated: The diversified and

complicated nature of borrowers, creditors, credit types, causes and consequences, etc make credit risk become more diverse and complicated As a result, banks must focus more on credit risk management, from the establishment of credit policies, the use of risk management tools to management processes in the identification, measurement, processing and control of credit risk

Credit risk is indispensable: Any business activity is associated with risk,

in which the credit activity of the bank is no exception Risk acceptance is inevitable

in banking credit operations based on a “risk-profit” relationship in order to find out opportunities to achieve a profit that is compatible with the acceptable risk The Bank will ensure safe and effective operation when the risk is acceptable and controllable and within its financial resources and business capacity

1.1.4 Classification of credit risks

There are many different ways of classifying and approaching credit risk According to Assoc Dr Dinh Xuan Hang, MA., Nguyen Van Loc

(2012), “Credit management at commercial banks” textbook, Finance

Publishing House; the exact classification of credit risk should be based on the following criteria:

1.1.4.1 Causes of risks

 Transaction risk: means the risk involved in each individual loan or

individual customer This type of risk originates from the weaknesses in the operation process such as credit appraisal and approval, disbursement, post-lending control or loan security and commitments in the credit agreement

 Credit portfolio risk: is the risk that is caused by the limitations of the

bank’s credit portfolio management, including internal risk and concentration risk Internal risk derives from the internal factors of each customer or industry, economic sector and depends on the customer’ operation or loan use characteristics Concentration risk refers to the case where the bank concentrates excessive credit on one or several customers

in one/some sectors/fields or in one/some certain geographic area

Figure 1.1 Classification of risks by the causes

Source: “Credit management at commercial banks” textbook

Credit risks

Transaction risk

( Related to each credit item)

Credit portfolio risk (Related to credit portfolio)

g in credit managem ent)

Guarantee risk (occurring

in the terms of the Contract and Collateral )

Internal risk (relative to the characteristi

cs of each type of credit product)

Concentr ation risk (due to undiversif ied credit portfolio)

1.1.4.2 Loss levels

 Risk of stagnant capital (due to late debt repayment): The risk occurs

when the bank has not collected debts on the due date under the agreement yet, leading to the frozen capital (less liquid) and affecting the bank’s capital use plan, causing difficulties in liquidity management

 Risk of capital loss (due to borrower’s insolvency): The risk occurs

when the customer is unable to repay principal and/or interest, forcing the bank to dispose of the collateral for debt collection The risk of capital loss increases the cost of bad debts and supervision cost and reduces the profits due to the increase in credit risk reserve

1.1.4.3 Origin of risks

 Risks from the Bank: are risks caused by the Bank’s policies,

research, forecasting, monitoring, management of credit risk, credit officers, ineffective supervision and control

 Risk from the borrower: is the main risk in the types of credit risk

For example: Weak financial capacity risk, business operation risk, etc

 Risks from other causes: are the risks related to the management of

the State Bank; policies; environment; unusual fluctuations in the economy, etc Or objective causes such as natural disasters, enemy sabotage, disappearance or death of borrowers and other force majeure events that result in credit losses meanwhile the customer and the bank has strictly followed the credit policies and procedures as well as the contents stipulated in the credit contract

1.1.4.4 Risk occurence time

 Risks before lending: occurs during the record preparation and credit

analysis process that leads to loan disbursement to ineligible customer who is unable to repay the loan in the future

 Risk during lending: occurs during the disbursement process The causes

of this risk are: disbursement errors, late disbursement, failure to update customer information regularly or failure to forecast potential risks

 Risks after lending: occurs when the bank fails to grasp the situation

and the purpose of using the loan, changes in the financial position as well as the debt repayment goodwill of the customer

1.1.4.5 Range of credit risks

 Particular credit risk: occurs only for a single loan of a customer, a

portfolio or a specific sector/field Some causes of a particular risk are characteristics of the industry/business area of customers, abnormal changes in the financial position, management capacity as well as goodwill, ethics of customers

 Systematic credit risk: occurs not just for a credit, a customer, a bank

but for the whole system with the spreading effect throughout the banking sector Some causes of systematic risk are changes in government policies affecting the financial position and debt repayment capacity of customers, negative macroeconomic impact on customers and social and political unrest and unforeseen causes from the natural and external environment

1.1.5 Credit risk evaluation criteria

Credit risk is associated with the most important and largest activity of commercial banks - credit activity Although risk is often associated with the benefits (The higher the risk is, the greater the expected return for the bank is), when performing a specific financing activity for the customer, the bank tries to analyze the factors of the borrower to ensure the highest safety of the loan and the bank only decides to grant credit when it sees that credit risk is impossible However, it is difficult to predict exactly what will happen in the

future, the repayment capacity of customers can be changed for many reasons Moreover, many bank officers are not able to analyze credit appropriately As

a result, from an overall bank management perspective, credit risk is objective and unavoidable Banks need to evaluate the customers’ loan use opportunities based on the risk-benefit relationship in order to find opportunities to obtain benefits that are worth the risk that the bank can accept In business, risk can be taken precautions and limited but cannot be eliminated Therefore, the anticipated risk is always predetermined in the bank’s general operational strategy

Credit risk can occur in 4 cases of interest and principal debt, including late interest repayment or insufficient interest repayment or late principal repayment or insufficient principal repayment that all lead to overdue debts When the interest is not paid on time, the risk is low and only included in the unpaid interest If the bank cannot collect interest fully, there will be frozen interest, except for cases where the bank exempts customers from that interest If the principal is not collected on the due date, the bank will have overdue debt However, this overdue debt cannot be considered as a complete loss of the bank because it is possible for some reason that customer delays principal repayment and will pay it after the committed due date under the contract If this principal cannot be recovered (due to customer’s insolvency), then the bank is considered to be exposed to high credit risk

Credit risk exists in many forms, which are constantly changing but the final level is irrecoverable debt When studying credit risk, people often focus on the potential risks such as unpaid interest, especially overdue debt, frozen interest and irrecoverable overdue debt that are considered as real risk situations, so they are often considered to address the consequences and draw lessons

The Bank’s bad debt ratio of below 3% is considered to be within the permitted safety limit under the Government’s Resolution No 01/NQ-CP

dated January 03, 2015 on major tasks and solutions to direct the management and implementation of the socio-economic development plan and state budget estimates in 2015 According to Assoc Prof Dr Dinh Xuan Hang, MA.,

Nguyen Van Loc (2012), “Credit management at commercial banks”

textbook, Finance Publishing House, the criteria for evaluating credit risk at commercial banks play a particularly important role as it directly reflects the bank’s credit risk, which consists of two main components: overdue debt and bad debt, namely:

Overdue debt ratio = Overdue debt balance/ Total outstanding loans

Percentage of customers with overdue debt = Number of customers with overdue debt / Total number of customers with the outstanding loans

If the bank has the high indicators of overdue debt and the number of customers with overdue debt, then the bank is at high risk and vice versa

1.1.5.2 Non-Performing Loan (NPL)

Non-performing loan includes debts of groups 3, 4 and 5; debts

overdue for more than 90 days and being suspected of repayment capacity and ability to recover the principal due to the borrower’s continuous loss, bankruptcy or asset dispersal, insolvency, etc Non-Performing loan will clearly reflect the credit quality of the bank Based on the late payment time and repayment capacity of customers, Non-performing loans are classified

into 3 groups: Group 3 (Substandard outstanding loan), Group 4 (Doubtful outstanding loan) and Group 5 (Potentially irrecoverable outstanding loan)

Indicators reflecting the Non-performing loans are:

 “Non-performing loan ratio” is the ratio of total non-performing loans (Group 3 to group 5) and total outstanding loans (Group 1 to Group 5) According to the World Bank, this ratio of below 5% is acceptable and

is the best at 1-3%

 NPL ratio = NPLs/total outstanding loans

 NPLs on Owner’s equity = NPLs/Owner’s equity

 NPLs on Loss Reverse funds= NPLs/ Loss reserve fund

1.2 Necessity of ensuring the credit risk management efficiency in commercial banks

For commercial banks, credit risk management is necessary because:

 Firstly: Credit risk is one of the problems that all commercial banks

encounter Credit risk prevention and limitation is a complicated problem because credit risk is objective, always associated with credit, at the same time, very diverse and complicated It is often difficult to control credit risk, so it leads to the capital and income losses of the bank

 Secondly: If the credit risk prevention and limitation is well

implemented, it will bring benefits to the bank such as: (1) reducing costs, improving income, preserving capital for commercial banks; (2) creating trust for depositors and investors; (3) creating a premise to expand the market and increase the prestige, position, image and market share of the bank

 Thirdly: Good credit risk prevention and limitation will benefit the

whole economy In the current economic era, financial institutions are closely related to one another If a commercial bank faces a negative

problem, it will immediately affect other banks Thus, credit risk management makes the market safe and stable

 Fourthly: Because the bank’s equity is much smaller than its total

assets, with only a small percentage of non-performing loans, it is easy for it to go bankrupt Especially, corporate loans are often of great value, so the losses due to loan irrecoverableness will cause severe damages to the bank

1.3 Credit risk management procedures at commercial banks

In business operations, the Bank is always exposed to specific types of risks that may have adverse effects on its business operations Therefore, the Bank must maintain a comprehensive risk management system in order to achieve the ultimate goal of minimizing the negative impacts of the risks on its business results and owner’s equity In fact, in order to manage credit risk, banks have to build their own model which is appropriate to their particular scale, products and risk appetite However, these models are fundamentally similar to the four basic steps: risk identification, risk measurement, risk control and risk settlement

 Risk identification: credit risk identification is a continuous and

systematic identification process Generally, risks are identified based

on the principle of “Anything that hinders the achievement of a goal is considered as a risk.” In business, the bank must identify and understand the causes of the risks involved with the existing and new products and identify the linkage and interactions between risks Any loan may be problematic, so early identification of the problem and prompt and professional follow-up measures can help minimize its impact The warning signs will help the bank to identify and solve problems effectively Common identification signs are financial signals and non-financial signals of borrowers

 Credit risk measurement: Credit risk measurement is the quantification

of the levels of risk as well as the probability of the risk, the level of losses to assess the acceptability of the bank Once the risk has been identified, the Bank must conduct risk measurement and assessment by each transaction and portfolio to quantify the frequency, severity and determine its short-term and long-term impact on capital and profitability of the Bank, which is the basis for banks to make loan decisions as well as to develop the appropriate and rapid response measures when credit risks happen In order to measure credit risks, banks often build the appropriate models to quantify the risks

 Credit risk management and control: The credit risk management and

control is the most central part in the credit risk management of a commercial bank, which is the soul of the credit risk process Credit risk management and control is a system of tools, policies, standards and measures to prevent and deal with credit risks in a bank: credit policy, credit process, credit risk management, credit limits

 Credit risk settlement: Credit risk settlement is the last step in credit risk

management At this step, the bank will make decisions and take measures

to fund, remedy and minimize the risk costs and losses of the bank

The four steps in the credit risk management process are closely interrelated and significantly affect the risk management efficiency In these 4 steps, step 1 and step 3 are considered the most important steps because, the sooner the risk is detected, the more active the bank is in managing and controlling the risk, thereby minimizing the losses in credit activity

Thus, it can be seen that the core issue of the banking credit management is to provide solutions and methods for early detection of risks

At present, many banks have established the early risk warning system,

conducted credit assessment and consolidated the MIS system, etc., which are the ways to detect credit risks early

However, it must be noted that these measures still have certain limitations in the implementation process For example, the warning indicators of the early risk warning system are still relatively simple, focusing mainly on cash flow on accounts, overdue status, excessive balances but are not covered the main causes of credit risk or the credit assessment is still limited and the risk assessment quality is not high

From the above four steps, the author builds the following credit risk management process simulation model at commercial banks:

Figure 1.2 Credit risk management process at commercial banks

Source: Data synthesized by the Author (2018)

1.4 Credit risk management experience of some commercial banks in the world and in Vietnam

1.4.1 Experience of commercial banks in the world

 Credit risk management experience of ANZ – Australia

Risk measurement at ANZ: An Expert System Approach: An Expert System Approach is a traditional credit risk measurement method that ANZ has adopted In this system, credit officers have the right to make their own credit decisions based on experience and historical customer data

Risk Compensation Method: ANZ requires a risk compensation as the required rate of return to compensate for the high risk that the bank incurs in lending activity High risk loans will have higher interest rates to compensate for high risk For example, at ANZ, there is a gap between the interest rate applicable to the institutions and the installment loans and the interest rate applicable to the exchequer bills rate and there is a gap between the first-grade installment loan and second-grade installment loan For example, Australian bond yields rose from 6.1% to 6.5% in 2007, ANZ applied the interest rates of 6.5% -7.9% to standard installment loans and the higher interest rate to secondary loans than common loans

Internal Credit Measurement: ANZ applies the probability of default as

a key criterion for assessing the credibility of a borrower This standard is implemented by ANZ’s credit rating process expressed through the internal rating system for customers This database is based on historical customer data including: irrecoverable loans According to Basel II, the customer’s debts within one year is calculated based on the outstanding loans in the previous five years

RAROC Method: RAROC is essentially a quantitative approach, which measures the level of profitability that leads to a risk RAROC is not identical with risk management RAROC is a part or one of many tools that modern

banks are using in risk management Derived from probability statistics, RAROC’s conception of risk is different from conventional concepts For example, in the conventional sense, the credit risk is the customer’s potential default meanwhile according to RAROC, credit risk is the level of volatility

of net income (profit) caused by fluctuations in credit losses

ANZ applies the RAROC method as a method of calculating the loan efficiency According to ANZ, the RAROC method ensures that a loan is only approved when it gives value to the shareholders If RAROC of a loan is lower than ROE, the loan will be refused and otherwise, it will be approved

VAR method: Based on information from ANZ’s internal auditing system, historical data, overdue interest rates of non-performing loans as well as profit differences, VAR of each loan is calculated For example, at confidence of 97.5%

of the difference in interest rates of loans, VAR was US$ 0.8 million in 2005 and increased to US$ 1.1 million in 2006 At confidence of 99%, VAR was US$ 1.2 million in 2005 and US$ 2.3 million in 2006

Some evaluation ideas of ANZ’s credit risk management:

Firstly, ANZ successfully applied the credit risk management models in a flexible and appropriate manner ANZ has implemented a credit risk management system that included modern and traditional risk management practices The use

of expert system approach, risk compensation method, internal rating system, RAROC and VAR methods was appropriately structured

Secondly, ANZ applied credit risk management on both individual risk and portfolio risk ANZ’s remarkable success is the individual risk management and portfolio risk management through a centralized credit line ANZ’s loan list is diversified to reduce the geographic and industry risks as well as to maximize profitability by setting a concentration limit for each group of customers accurately

 Credit risk management experience at Korea Development

Bank (KDB)

KDB’s credit risk management system is characterized by five key areas: (i) risk strategy and appetite; (ii) risk management model; (iii) risk limit management system; (iv) credit approval system; (v) Credit risk control system

(i) Strategy, limits and risk management infrastructure

KDB defines a risk strategy to maximize profitability within an acceptable range of risks that optimizes risk capital allocation The philosophy of KDB is that risk should be considered on both sides - opportunities and challenges and not only on its impact on quantitative aspects such as capital, income fluctuations, etc but also on its potential impacts on the organizational structure, performance results and reputation of the bank

(ii) Risk management model

In line with its operational objectives, KDB is developing a roadmap towards a modern risk management model with the following steps:

Step 1 of Credit risk management is compliance with the Basel II’s management principles by establishing an internal credit rating system to calculate three PD components - the probability of customer’s default, LGD - expected loss ratio (%) in case of customer’s default and EAD - risk loan balance Based on the results of the PD, LGD and EAD calculations, banks will develop applications in credit risk management in many respects, of which the first is to calculate and measure credit risk through EL - Expected loss and UL - Unplanned loss at a particular customer level: ELi = PD x LGD x EAD

However, the measurement and calculation of the minimum capital is necessary to offset the risks for loans, not limited to individual loans but also the risk of the entire loan portfolio

Step 2: is portfolio risk management by quantifying the expected loss (ELp) and unplanned loss (ULp) of the whole portfolio based on determining

the relative risk of Asset/ default level of risky assets and the level of concentration risk of the whole portfolio

Step 3: The bank can manage its capital and evaluate the loan at the corresponding risk level When the credit risk measures including EL and UL have been quantified, the bank has the basis to determine the loan rates in line with the motto of “high risk, high profitability; low risk, low profit” through the risk compensation price calculation mechanism

Step 4: Higher than capital management and risk-based loan evaluation, the bank targets at Active credit portfolio management (ACPM) instead of passive portfolio risk management by identifying and transferring risk actively through the use of Credit Treasury and Securitization

Step 5: The most comprehensive model the bank has achieved is based management (VBM) All risk-adjusted values of a single credit to a portfolio are identified, helping to manage the risk effectively and accurately (iii) Risk limit management system

value-Limit management at KDB consists of two levels, which are mainly credit limits by sector and by customer

By sector, the credit limit is determined on the basis of a combination of evaluation between the Sign (long-term vision) and the rating (short-term vision) to provide direction for growth, retention or retreat The goal of setting limits by sector is to prevent risk from focusing on a specific sector and optimizing the efficiency of risk management criteria for each sector

In addition to the risk limits for each customer, the KDB also sets the risk limits for the group of relevant customers

Where the risk limit of a customer or a group of relevant customers exceeds the allowable limit, credit decisions must be approved by the Chairman of Board of Directors For high risk transactions, the system provides strict risk identification and risk management criteria

(iv) Credit approval system

The credit approval system of the bank is reflected in the role, function and authority of each department and individual during the credit approval process The system is set up by each customer: large enterprises, small and medium-sized enterprises, financial institutions KDB’s credit risk control system is set independently for each individual credit, including off-balance sheet credit and the entire credit portfolio of the bank on the principle of day-to-day management and early warning whenever the system discovers a risk The system also allows the bank to check the loan status from credit issue terms, customer ratings, disbursement conditions, risk provisions, risk limits and compliance levels The system also serves as a tool for banks to re-evaluate risk strategies as well as pre-risk policies The credit risk control results will be reported directly to the Risk Management Committee

 Experience of Japan

Banking operations and the Japanese economy are closely linked When the economy has a problem, the banking activity is immediately affected In contrast, banking operations support the manufacturing and service sectors However, the banking system can also worsen the situation and slow down the stability of the economy if the banking system is in trouble

If most loans granted to enterprises by the bank are unhealthy, not only banking operations is ineffective but the economy will also be affected In fact, the credit activity of Japanese commercial banks shows that the loose lending together with the ambitious expansion policy is further stimulated by the competition in the market results in the losses of banks On the other hand, due to the lack of experience in dealing with the previous severe losses, Japanese banks are unaware

of the management of credit gains/losses In case where the bank makes losses which excess the capacity of commercial banks, the state will use the national funds to intervene and replace the Senior Executive Board

Currently, Japanese banks have successfully dealt with issues relating to irrecoverable loans The Financial Service Agency plays an important role in forcing banks to take the necessary preventive measures and deal with non-performing loans that have previously caused losses for many years at most banks These are valuable lessons for Vietnamese commercial banks in developing and perfecting the credit risk management process to help mitigate credit risk, thus contributing to the healthy operation of the banking system and increasingly orienting towards the comprehensive integration of international practices

1.4.2 Some risk management models being applied in Vietnam

Currently in Vietnam, Joint Stock Commercial banks usually apply two main risk management models, namely, the centralized risk management model and the scattered risk management model Each model has its advantages and disadvantages depending on the scale of business, technology and human resource quality However, the general tendency of banks is to focus on the risk management system through the concentrated credit issue process at the Main Operation Center

 Centralized risk management model

This model has an independent separation between the three functions: risk management, business and operation The separation between the three functions is aimed at minimizing risks at the lowest level and maximizing the professional skills of each credit officer Some Joint Stock Commercial banks that are applying this model are Techcombank; VP Bank; MB bank, etc

business units and improves risk supervision and measurement capabilities

 Develop a unified risk management policy for the whole system

 Suitable for large scale banks

Disadvantages:

 The development and implementation of this centralized risk management model requires a lot of effort, an advanced IT system and time-consuming conversion

 Staff must have the necessary knowledge and practical application of the theory, customer care is dispersed by separation of functions and duties for many different departments

 Scattered risk management model

This model has no separation between risk management, business and operation In particular, the bank’s credit department performs three functions and is responsible for all the preparation of a loan; Competence of credit decision is divided into many levels based on the value of loans, products and customers Some banks that are applying this model are BIDV; Agribank; Vietinbank, etc In particular, BIDV is orienting towards changing the scattered

credit risk management model to the centralized credit risk management;

Vietinbank is piloting this model for some individual credit products

Advantages:

 Compact

 Simple organizational structure

 Centralized customer care

 Suitable for small-sized banks

Disadvantages:

 Many jobs are concentrated in one place, lacking the specialization

 The management of credit activities is carried out remotely based on the data reported by the branches or indirectly managed through credit policy

1.4.3 Risk management model application orientation

Derived from the practical requirements of credit operations, as recommended by the Basel Committee and in compliance with the international practices, based on the general conditions of law, market, technology, human resources and the model of Vietnamese commercial banks, many experts recommend the application of the centralized risk management model

At the Main Operation Center: separate the credit decision from credit

management on the basis of clearly assigning responsibilities and functions between credit assessment and approval, credit management and credit risk management

At the branches: carry out the Sales function (customer contact,

marketing, etc.), credit analysis function (analysis, appraisal, forecast, customer assessment, etc.) and operation function (Document handling, monitoring, loan monitoring, debt collection, interest collection, etc.)

With this model, the Customer Relations Department is responsible for finding, developing and taking care of customers This Department will find out customer needs, guide them to complete their loan application and then send all their applications and customer-related information to the Credit Analysis Department

Credit analysis checks information, collects additional information via banking information channels, inquires information through the CIC and the mass media, etc Based on that information, the Credit Analysis Department analyzes and evaluates all contents from the general situation of customers, the financial position, the loan plan and project to loan security The Credit Analysis Department directly reports the customer assessment results to the

Credit Approval Department The credit approval result will then be sent to the Credit Analysis Department for information storage and then sent to the Customer Relations Department for subsequent steps of the credit process

Summary of Chapter 1: In this chapter, the author has clarified

concepts, views on risk and risk management in general After that, the author presented the the credit risk management situation at commercial banks and credit risk classification according to different methods, stated the factors that might affect credit risk as well as credit risk assessment indicators such as overdue debts and non-performing loans The author made references to the credit risk management model in the world and in Vietnam and analyzed the advantages and disadvantages of each model At the same time, after referring

to various sources, the author has identified an appropriate risk management process for commercial banks

In Chapter 2, the author is expected to use the data collected during the survey and interview to clarify: (1) Introduction of BIDV Hong Ha; (2) Current status of risk management activities at BIDV Hong Ha; (3) Evaluation of the achievements and weaknesses, thereby indicating their causes

CHAPTER 2 CURRENT STATUS OF CREDIT RISK

MANAGEMENT AT BIDV-HONG HA BRANCH

2.1 Introduction of BIDV-Hong Ha Branch

2.1.1 Establishment and development history of BIDV- Hong Ha Branch

Under the direction of Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) in the network development as well as with the objective of promoting retail activities of BIDV, after a period of material preparation, in November 2013, Hong Ha branch was officially put into operation under Decision No 1909/QD-BIDV dated October 29, 2013 by the Board of Directors of BIDV At first, despite many difficulties, the Board

of Directors and all staffs of Hong Ha Branch made a great effort and determination in the operation and actively cooperated with Transaction Center 1, Hanoi branch, Dong Do Branch to complete the handover of customers and data accurately, fully and safely, thereby well serving customers’ needs immediately from the first days of operation and not affecting service quality

BIDV- Hong Ha Branch is one of three first retail branches established under the retail bank model of BIDV, which is a banking model of serving individual customers and supersmall-sized enterprises After 3 years of operation, in 2016, BIDV-Hong Ha Branch was licensed to operation under the mixed retail and wholesale bank model by the Main Operation Center, serving all individual customers and small and medium-sized enterprises and larger corporate customers

2.1.2 Organizational structure

BIDV-Hong Ha Branch is a legal representative of BIDV with its seal and dependent accounting in its system BIDV -Hong Ha Branch is responsible for carrying out banking activities and other related business