Solution to reduce bad debt at vietinbank – gia lai branch in the period 2017 2019

LIST OF TABLESTable 1.1 Shareholer structure by ownership ratio which holding 5% or more of the charter capital Table 1.2 Level of Vietinbank Branch Table 2.1 Credit balance depend on cu

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

-DUONG PHUONG LINH

SOLUTION TO REDUCE BAD DEBT

AT VIETINBANK – GIA LAI

BRANCH IN THE PERIOD 2017 - 2019

MASTER OF BUSINESS ADMINISTRATION

Ho Chi Minh City – Year 2020

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

-DUONG PHUONG LINH

SOLUTION TO REDUCE BAD DEBT

AT VIETINBANK – GIA LAI

BRANCH IN THE PERIOD 2017 - 2019

MASTER OF BUSINESS ADMINISTRATION

SUPERVISOR: DR LE THI THANH XUAN

Ho Chi Minh City – Year 2020

TABLE OF CONTENT Cover page

Table of content

CHAPTER 1 INTRODUCTION 1

1.1 Overview introduction about Vietinbank 1

CHAPTER 2 PROBLEM CONTEXT 7

CHAPTER 3 PROBLEM IDENTIFICATION 10

3.1 Symptoms Analysis 10

3.1.1 Bad debt increased at Vietinbank - Gia Lai Branch from 2017 to 2019 10

3.2 Potential problems 12

3.2.1 Internal problems 12

3.2.1.1 Weak loan portfolio management 12

3.2.1.2 High workload 13

3.2.1.3 Employees lack of experiences and competences 14

3.2.1.4 Loose process of loan management 15

3.2.2 External problems 16

3.2.2.1 Society problems 16

3.2.2.2 Problems from customers’ side 17

3.3 Problem validation 19

3.4 Problem consequences 20

3.4.1 Reducing profit of the bank 20

3.4.2 Affect the bank’s reputation 21

3.4.3 Indirect affect to other banks 21

CHAPTER 4 CAUSES 23

4.1 Possible causes 23

4.1.1 Internal causes 23

4.1.1.1 Lack of full awareness of loan portfolio management 23

4.1.1.2 Tendency to follow immediate but lack of durable profit 24

4.1.1.3 Inadequate information analysing and forecasting 24

4.1.2 External causes 25

4.1.2.1 Unpredictable changes of macroeconomic environment 25

4.1.2.2 The regulatory environment with the guidance and supervision of the Central bank has not actively supported commercial banks in loan portfolio

management 26

4.1.2.3 The limited activity of the domestic financial market has limited banks' ability to use a variety of tools to adjust the loan portfolio 27

CHAPTER 5 SOLUTIONS 30

5.1 Alternative solutions 30

5.1.1 Changing current loan porfolio management method 30

5.1.1.1 Diversify the credit portfolio by economic sector 31

5.1.1.2 Diversifying the credit portfolio by type of business 32

5.1.2 Developing a human strategy in accordance with risk management requirements 32 5.1.3 Constantly renovating the training and professional development for staff at the bank 33

5.2 Solution validation 34

CONCLUSION 38

CHAPTER 6 SUPPORTING INFORMATION 39

6.1 Methodology 39

6.2 Interview transcript 39

List of tables

List of figures

List of diagrams

Executive sumary

Reference

Appendix

LIST OF TABLES

Table 1.1 Shareholer structure by ownership ratio which holding 5% or more of the charter capital

Table 1.2 Level of Vietinbank Branch

Table 2.1 Credit balance depend on customer category from 2017 to

2019 Table 2.2 Corporate customer classification principle

Table 2.3 Credit balance classification depend on loan duration

Table 2.4 Credit balance and bad debt of banks in Viet Nam in 2019

Table 3.1 Debt classification regulation

Table 3.2 Debt classification in Vietinbank – Gia Lai Branch in period 2017 – 2019

LIST OF FIGURES

Figure 1.1 Shareholer structure by ownership ratio

Figure 1.2 Vietinbank Gorvernance model and structure

Figure 1.3 Organisation chart

Figure 1.4 The short – term loans procedure

LIST OF DIAGRAMS

Diagram 3.1 Initial Diagram of symptom and potential problems of Vietinbank – Gia LaiDiagram 3.2 Initial Diagram of symptom, potential problems and problem consequences

of Vietinbank – Gia Lai Branch

Diagram 4.1 Initial Cause and effect map

Diagram 4.2 Final cause and effect tree map

EXECUTIVE SUMARY

Risks are always present in the operation of commercial banks today, includingVietinbank Banks always try to develop credit scale but at the same time ensure safety inoperations The rapid increase in bad debt can lead to serious consequences, possiblyeven bankruptcy of the bank As one of the credit-scale branches in the top of the bigbranches of the Vietinbank system, Vietinbank Gia Lai branch has always controlled thebad debt situation since its inception However, in the past 3 years, the rapid increase ofbad debt has affected many aspects of the Branch's business operations Therefore, theurgent need is to find the underlying causes that lead to the rapid increase of bad debtproblems in recent years to find suitable solutions for sustainable development Authorconduct this research to study the business activities of Vietinbank – Gia Lai Branch,especially focus on the bad debt increasing in the period 2017 – 2019 The method ofcomparison, interviewing were used to find out the main problem the Branch is facing,the main cause leading to the problem and recommend some possible solutions to dealwith the problem Author hope that the research will contribute a small effort in helpingthe organisation develop and gain maximum profit in the future

CHAPTER 1 INTRODUCTION 1.1 Overview introduction about Vietinbank

Vietinbank was established in July 8th in 1988 in accordance with DecreeNo.53/1988/NĐ-HĐBT by the Minister Council After more than 30 years development,from the beginning equity with just 22 billion Viet Nam dong, at present Vietinbank hasarchieved the equity beyond 67,455 billion Viet Nam dong (more than 3,000 timeshigher) while authorized capital is 37,324 billion Viet Nam dong Beside that, total assets

of Vietinbank also increased from 718 billion Viet Nam dong in 1988 to nearly 1,164,435billion Viet Nam dong in 2018 which means encreased more than 1,600 times At thebeginning, all system of Vietinbank just had 11,380 employees with the structureincluding headquater in Hanoi (under 100 employees), 32 level I branches and 42 level IIbranches Now all the system has nearly 23,000 employees who are working atheadquater in Hanoi, 2 representative offices, 9 career units and 155 branches.Vietinbank has not only operated in Viet Nam but also in other countries Vietinbank hasestablished a 100% capital bank in Laos, 2 branches in Germany and set a representativeoffice in Myanmar At this time, Vietinbank has cooperation with more than 1,000 banks

of more than 90 countries all over the world Moreover, Vietinbank also contributedcapital in Indovina Bank which is known as the most efficient joint-venture bank in VietNam Its mission is “To be No.1 bank in Viet Nam baking system, providing modernfinancial and banking products and services with full utilities and meeting internationalstandard” The vision of the organisation is “To become a leading bank in Viet Nam and

a regional player, being modern and multi-functional that conforms to internationalstandards”

10%

65% IFC Capitalization (Equity) Fund, L.P.

Other shareholders

Figure 1.1 Shareholer structure by ownership ratio

(Source: Vietinbank annual report 2018)

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Table 1.1 Shareholer structure by ownership ratio which holding 5% or more of the

charter capital

Shareholder structure Number of shares Ownership Percentage (%)

(Source: Vietinbank annual report 2018)

Figure 1.2 Vietinbank Gorvernance model and structure

(Source: Vietinbank annual report 2018)

banks havebreakthrough growth, develop modern products and services, develop efficiently andsustainably In 2017, Vietinbank made an impression in deploying the new CoreBankingsuccessfully This is the largest and the most complex project in Viet Nam BankingIndustry until now and has met the technology requirements for longterm and sustainable

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development At the same time in 2017, Vietinbank also released to the public 4,200billion Viet Nam dong secondary bonds This is the most enomous amout of secondarybonds among Viet Nam Commercial Banks which has confirmed the trademark andposition of Vietinbank on the market Beside that, Vietinbank has archieved manyarwards and accolades in 2018 such as First-class Labour Medal (for the second time)and Government’s Emulation Flag, Top 400 Most Valuable Bank Brands Worldwide,Top 2000 Largest Enterprises Worldwide, Viet Nam Value, Viet Nam Excellent Brand,Best Trade Finance Service,…

In 2018, total assets of Vietinbank was more than 1.16 million billion Viet Namdong, increased 6.3% when compared with 2017 and increased 22.78% when comparedwith 2016 In this year, Vietinbank continued to be the commercial bank which hadlargest asset scale in the market However, the competition in the banking system to winand retain customers is increasingly fierce

Vietinbank is established in 1988 After 31 year of development, Vietinbank hasaffirmed its position as a leading commercial bank, holding a key role of Viet Nam'scurency market Vietinbank has a strong network of 148 branches in 63 provinces andcities nationwide Vietinbank – Gia Lai Branch is known as a large branch in the systemwith 3 trillion dong of capital and outstanding loans of up to 13 trillion dong

Vietinbank – Gia Lai Branch was established in 1999 The organisation structure

is as the figure below:

Figure 1.3 Organisation chart

(Source: Vietinbank – Gia Lai Branch internal report)

3

The main departments which bring profit to the bank is corporate department andretail department.

Normally, it often takes two weeks for a new corporate customer and a week for oldcustomer to finish a procedure to borrow the money from the bank Firstly, the customer has

to prepare all the documents meet the bank requirement Secondly, the bank officer, normallythe corporate banking division, will verify the documents and prepare a report This step isthe one which need most of the time in the procedure and often take for a week Afterthat, thereport will be send to the upper level in the bank in order to be approval After beingapproval, the supporting credit department will check again all the document to make surethat there is no mistake And finally, they will do the financing for customer If there is anymistake in any step of the procedure, the total time will be longer

Short – term loans procedure of corporate customers when they first time borrowmoney at Vietinbank includes 5 steps, which are:

Step 1: Credit officer collect documents from customers and check them At this

step, credit officer often present to customers about loan conditions and instructions forestablishing the loan documents Also, credit officer will check the completeness andaccuracy of legal documents, loan documents, collateral records and especially thelegality of the loan purpose After checking the documents, credit officers will depend onthe policies and the orientation of Vietinbank in order to identify whether customers aresubject to credit restriction or non-credit extension or not

Step 2: Credit officer review credit conditions, prepare and submit appraisal

report Depending on the documents collecting from customers and other sources, creditofficer analysis and review the financial situation, business plan and ability to repayprincipal and interest of customers Credit officer will give comments and suggestions onthe lending method, loan amount, loan duration, loan security measures, disbursementschedule and other conditions

Step 3: Appraisal report approval Depending on the appraisal report of Corporate

Customer Department, the Board of Directors will consider and decide the credit limit ofcustomers In case of exceeding the authority of the Branch’s Board of Directors, thereport will be submitted to higher level, normally related to the Head Office, to getapproval

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Step 4: Completing collateral records, drafting and signing credit contracting and

disbursing Once the credit limit has been approved, collateral contract and credit contractwill be prepared after reaching agreement with customers on clause of the it Afterthat,disbursement can be made based on the customers’ needs and loan purposes

Step 5: Checking, supervising and recovering debt This is the process of steps

after lending to ensure customers had used capital for the right purpose and effectively.This will help detect risks and errors to have actions promptly Therefore, this step willhelp improving the quality of loans and ensuring the benefits of the bank

In short, the loan procedure is discribed as below:

Figure 1.4 The short – term loans procedure

(Source: Vietinbank Internal report)

In Vietinbank system, every Branch has a different level depend on its point Inorder to calculate the points, there are a list of criterias including criterias measuringeffectiveness, credit risk, management skills and operating risk rating Each criteria isdescribed in Apendix 1 Depend on the total points after grading depends on thesecriterias, every Branch of Vietinbank will have a level corresponding There are fivelevels as the table below:

Table 1.2 Level of Vietinbank Branch

3 From 70 to under 75 points

4 From 60 to under 70 points

5(Source: Vietinbank Internal report)

Normally, grading and classifying branches is often perfomed quaterly It is a way

to control the quality and operation of all branches effectively If the level of a brachdecreases, the headquater will have some actions to manage the problem like reducing thecompetence of the Branch’s Director, more strict requirements when granting credit…

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CHAPTER 2 PROBLEM CONTEXT

The Corporate Customer Department and Retail Customer Department currently holds most of the Branch’s credit balance

Table 2.1 Credit balance depend on customer category from 2017 to 2019 Unit: million

dongYear 2017 Year 2018 Year 2019Credit balance of retail 4,661,000 5,235,620 5,404,660customers

Credit balance of corporate 6,192,000 6,356,000 6,270,800customers

Table 2.2 Corporate customer classification principle

classification

Micro Enterprise From 20 billion dong to under 60 billion dongSmall Enterprise From 60 billion dong to under 200 billion dongMedium Enterprise From 200 billion dong to under 500 billion dongLarge Enterprise Over 500 billion dong

(Source: Vietinbank Internal report)Especially, for the business which has revenue under 20 billion per year will beclassified as retail customers

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Table 2.3 Credit balance classification depend on loan duration

Unit: million dong

term loans

(Source: Internal report of Vietinbank - Gia Lai Branch) At December 31, 2019,

short-term debt balance was VND 6,173 billion, a decrease of VND 225 billion compared

to the beginning of the year, the rate decreased by 3.52%; medium and long-term loan

balance is VND 5,502 billion, an increase of VND 309 billion compared to the

beginning of the year Medium and long-term loan at December 31, 2019 was VND

5,502 billion, accounting for 47.13% of the total loan balance, the increased rate was

5.95% compared to the beginning of the year Medium and long-term loans are mainly

loans for investment in hydropower projects such as Se San 3 Hydroelectric Plant, Se San

3A Hydroelectricity, Ry Ninh II Hydroelectricity, Hoang Anh Thanh HoaHydroelectricity, etc and some project in construction sector like BOT project of

National Highway 14, some hotel projects Regarding investment structure by

economic sectors: The Branch continued to expand capital investment for production and

business households and non-state enterprises in order to spread risks andgrow over the years

Table 2.4 Credit balance and bad debt of banks in Viet Nam in 2019

Unit: Billion dong

LienViet Post 2,030 1,680 20.82 140,523 119,193 17.89 1.44% 1.41%Bank

(Source: VietStock Finance)

As can see from the table above, the average bad debt ration of banking industry

in Viet Nam in 2018 was 1.78% This ratio was declined in the next year which was

1.63% Bad debt ratio of Vietinbank was under average in two years and has had a

significant change from year 2018 to 2019

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CHAPTER 3 PROBLEM IDENTIFICATION

3.1 Symptoms Analysis

3.1.1 Bad debt increased at Vietinbank - Gia Lai Branch from 2017 to 2019

Credit activities is the main source bring profit of not just Vietinbank but allComercial Banks in Viet Nam In recent years, Vietinbank has grown strongly andcreated value for both itself and the economy Viswanadham (1) has affirmed the role ofbanking in the economic development However, this growth also means that credit risk

is higher and can lead to many great loss Reinhart and Rogoff (2) stated that bad debtratio can be used as a sign of credit risk which can then lead to debt crisis

In Decision No 493/2005/QD-NHNN, outstanding debts is debts that is in part or

in whole principal and interest overdue More specific, outstanding debts is credits whichare not repaid on time and are not eligible to be restructuring Outstanding debts in VietNam commercial banks are classified into 5 groups depending on length:

Table 3.1 Debt classification regulationDebt classification Debt group name Characteristics

Group 1 Standard debt The original debt or interest on overdue

below 10 days

Group 2 Watch debt the original debt or interest on overdue more

than 10 days and below 90 days

Group 3 Substandard debt The original debt or interest on overdue

more than 90 days and below 180 days

Group 4 Doubtful debt The original debt or interest on overdue

more than 180 days and below 360 days

Group 5 Loss debt The original debt or interest on overdue

more than 360 days(Source: Decision No 493/2005/QD-NHNN)Bad debts or non-performing debts are debt in group 3, 4 and 5

In the period from year 2017 to year 2019, standard debt (group 1 debt) acount for

a high proportion in total credit balance and this proportion reduced sharply throughyears

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In 2018, bad debt increased both in number and percentage Total bad debt at theend of 2018 was 302 billion dong, 279 million dong equivalent with more than 12 times

higher than which of 2017 More specific, irrecoverable debts was increased sharply

which is more than 5 times higher when compared with last year In this year, the debt of

all groups increased sharply due to the difficult economic situation in the province

Starting from the difficulty of agricultural sector; unfavorable weather, prolonged hot

weather, has led to sharply reduced production and price of pepper, coffee and affected

the entire commercial and production activities of corporates in the province such as

agriculture enterprises experienced large fluctuations in prices, and electricity producers

and distributors such as the Sesan 3A hydroelectric suffered from severe water shortages,

resulting in low electricity production Debt groups from 3 to 5 accounted for about 2%

of total credit balance but tended to increase

In 2019, bad debt continously increased a lot while standard debt reduced Totalbad debt in 2019 was 1,896 billion dong which was more than 6 times higher than 2018

Standard debt in this year decreased largely, even lower than that of 2017 It just counted

for only 83.76% in total credit balance, decreased 13.37% when comparing with 2018

This really a serious warning in credit activities in Vietinbank – Gia Lai Branch

Table 3.2 Debt classification in Vietinbank – Gia Lai Branch in period 2017 – 2019 Unit:

(Source: Internal report of Vietinbank - Gia Lai Branch) The increase in bad debt has

led to many subsequences In 2019, level of Vietinbank – Gia Lai branch moved

from level 1 to level 4 due to the points reducing a lot When the level reduced, theauthority to make credit decisions of the Board of directors also reduced and credit

activities of branch was control more strictly by theHead Office

From the information in Table 2.4, bad debt ratio of Vietinbank Gia Lai in 2019 is3.80% and is more than 3 times higher than which of Vietinbank Beside that, most of

banks in Viet Nam have bad debt ratio in 2019 lower than 3.50% When comparing with

the average bad debt ratio of Vietinbank and other bank, it can be seen clearly that this

ratio of Vietinbank Gia Lai is really high and cannot be ignored

3.2 Potential problems

With the symptoms “Increasing bad debt at VietinBank Gia Lai”, the author haveplan and conducted the interview with three kind of informants: the person who is

responsible for the symptom, the person who is directly related to the symptom, the

person who is have the knowledge of the symptom

Recent research (1) indicated that the problems of bad debt increasing are related

to both internal and external factors According to the analyses depending on the financial

reports, the meeting and indepth interviews with members of Vietinbank – Gia Lai

Branch, some potential problems are listed as following:

3.2.1 Internal problems

3.2.1.1 Weak loan portfolio management

Credit risk of the loan portfolio is one of the most important areas of riskmanagement It plays an important role primarily for banking institutions They try to

develop their own credit risk assessment models to increase the quality of the bank's

portfolio (3) Weak loan portfolio management was found to be one of the largest factor

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contributed to non-performing loans (4).

According to Mr Thinh who is Director of the Branch, he shared that “The

problem which the bank is facing is the number of current customers is not big enough Most of the credit balance is focused on a small number of main customers Therefore, if just one of these customers has difficulty in business, it will affect a lot to the credit balance structure of the bank Beside that, due to the region’s characteristic, most of the loan purpose is related to agriculture (mainly coffee and pepper) Most of the coffee and peeper which is traded is raw materials And this is depend a lot on the weather conditions That will lead to a consequence that if the weather is not good, the crops will

be effected and cause a huge impact on the bank.”

Loan portfolio management is the inherent process of risk in the managed andcontrolled credit process Credit risks can be originated by an undiversified loanportfolio A tool which is always used in credit risk management in banks of all over theworld is loan portfolio management Loan portfolio management reduces the risksthrough identifying, forecasting and controlling risk level of any different markets,customers, credit products and operating conditions Many researches have been believedthat diversifying is the best way to prevent credit risks A loan portfolio which depends

on an industry or a few customers is very unsafe cause all the industries have risks It cansay that poor loan porfolio management can become the major cause of bank losses andfailures

Moral hazard hypothesis suggested that relatively low capital banks encouragemoral hazard by increasing the portfolio's risk level which will lead to higher averagenon-performing loans in the future (5) The research also found that a bank can has higherbad debt ratio than other banks because it specialised more in some type of loans Besidethat, the loan portfolio is very important of the operation of a bank It should beproactively positioned in order to manage threats and maximize opportunities (6)

3.2.1.2 High workload

Swalehe (7) found out that the proportion of loan defaulters decreases due to proper andthorough pre-screening made by credit officers before loan disbursement When conductthe interview with Mr Chung Quang Vu, an employee who is managing the bad debt

customer, the author receive the answer: “Although I know that it is very 13

important to observe the cash flow and business situation of customers to realise any sign of bad debt, I don’t have enough time for this activity My KPI is quite high and I need to find lots of new customers to archieve the KPI I often feel stress due to the huge amount of work Therefore, it is hard for me to manage time for so many activities such

as finding new customers, observing the cash flow and business situation of customers, realising sign of bad debt and dealing with bad debt.”

In order to attract the customers and archieve high KPI, credit officer may ignoresome steps in loan procedure to make it easier or lower the “perceived credit risk” cause

it depend on a person’s judgement (1) Waweru and Kalani (8) claimed that bankmanagers found it was difficult to follow prudent credit policies due to the pressure ofhigher profits in an extremely high competitive market

3.2.1.3 Employees lack of experiences and competences

Mr Dang Quoc Thinh, Director of the Branch, said: “Experiences and

competences of employees is very important In recent years, there are lots of new employees has been recruitment due to high demand This has led to many employees were graduate students who didn’t have enough experiences Beside that, cause some good employees has moved to another bank, it’s very difficult for Vietinbank – Gia Lai branch to recruite and train new employees to meet the requirement in a short time.”

Beside that, Mr Ta Quang Binh, manager of Human Resources Department, saidthat the time and schedule for training new employees is depending on the Head Officearrangement Normally, it takes 3 – 4 weeks to completing the traing program of theHead Office However, new employees have to move to HCM city to join in the trainingprogram All new employees can not join in the program at one time because this willlead to the lacking of human resource working directly at the bank Therefore, it oftentakes a long time for all the newcomers to complete the training program After beingtrained, they still need a time to adapt to the environment, understand customers and haveacumen at work

In fact, as Andersson’s idea cited in Beisland et al (9), experience has theinfluence on the decision – making Emloyees that don’t have enough experiences andcompetences likely to cause credit risk More specific, if an employee lack of knowledge

as well as experiences, he won’t be able to expertise and process information then 14

evaluate customers unexactly This will lead to low credit quality and high risk Besidethat, if credit employee doesn’t follow loan proceduce such as financing before collectingenough documents or doesn’t check out the loan purpose, capital losing can easilyhappen Moreover, if credit employee doesn’t have responsibility and easily to betemped, he may be affected by the relationship with the borrowers and dismiss thenecessary conditions.

According to Schreiner as cited in Beisland et al (9), experience has beenapproved to have association with risk Credit officers learn to avoid risky customerswhen they have more experience

3.2.1.4 Loose process of loan management

Ms Le Thi Nhu Kieu, an employee who is working in bad debt dealing

department, said that “As from my understanding, the bad debt increased this year is

related to many loans in the years before It could be a good loan at that time but because customer management competences is quite loose and loan management process has many gap has led to this situation.”

Credit risk can come from the lack of following closely in management activities.Credit officer need approval of higher manager levels before disbursement Therefore, ifmanagers don’t examine and evaluate whether the credit officer’s decision is suitable,credit risk will be very high

Beside that, the bad debt ratio in the past was been used by Salas and Saurina (10)

or Klein (11) to examine the relationship with current bad debt These studies suggestthat a high level of non-performing loans in the past shows poor banks' ability to managerisks in lending and will have a positive impact on current bad debts

An incomplete, inconsistent and unified credit policy will lead to improper creditprovision, potentially risky for the bank On the other hand, in order to attract customersand gain market share, many commercial banks have ignored some steps in the creditprocess, the lending mechanism has been simplified, arbitrarily lowered customerevaluation standards For example, the 2008 global financial crisis stemming from the USfinancial market had the deep root from subprime loans These are low quality loans with

a high level of risk These loans are not scrutinized for solvency such as: annual income,career biography, assets and are usually guaranteed by very little or no proof of the

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borrower financial capacity Although these loans represent only 16% of the total loan, itaccounts for more than 50% of bad debt in the United States at that time.

The task of the inspection and control is to early detect violations in lendingactivities to prevent risks However, if the inspection and control of banks are too weakand loose, it will lead to the untimely detection and handling of violations and nonperforming loans are inevitable

3.2.2 External problems

3.2.2.1 Society problems

Like all other objects in the market, commercial banks also are affected by manyfactors such as economic environment, politic, legal, culture, ect… When the economy isstable and tend to develop healthily, demand for investment in society will increase andbring convenience to credit activities

Several studies (12-14) have examined the effect of changing in themacroeconomic environment to non-performing loan Rajan and Dhal (15) throughanalysing bad debt of commercial banks in India had showed that high GDP growthreflects favorable macroeconomic conditions and good business environment whichmake the bad debt tends to decrease Fofack (16) examined the relationship betweencredit risk and non-performing loan in Sub-Saharan Africa in 1990 The researchhighlight the negative impact of GDP on non-performing loan A prolonged economiccrisis and inflation will encrease bad debt

Ali and Daly (17) used comparative analysis method to investigatemacroeconomic variables that are important for Australia and the United States Theyalso study the effects of macroeconomic shocks on default rates in both countries Theresults indicate that the same set of macroeconomic variables display different defaultrates for the two counties Additionally the study finds that the US economy is muchmore susceptible to adverse macroeconomic shocks when comparing to Australia Polat(18) also concluded that countries with different macroeconomic conditions have

different non-performing loan ratios when analysing data of Turkey and Saudi Arabia

However, when economic problems occur like inflation or price fluctuation atsome items which affect to a group of industry on the market, banks will likely face tocredit risks Some customers can adapt and overcome the difficulties but there are also

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many customers who loss and cannot payback loans for the banks Beside that, changing

in economic and political policies also affect banks and corporates using capital fromloans Therefore, incomplete economic and political policies can bring difficulties forcorporates in the ability to payback loans and threaten the safety of the banks in lending

Economic strength of Gia Lai is products of industrial plans like coffee andpepper In 2015, the dried pepper price was 10 USD/kg and the farmers have borrowedlots of money from banks in order to invest in planting pepper However, in recent years,due to the affect of the weather conditions and the macroeconomic components, thepepper price has been reduced sharply and just be at 2 USD/kg at present This situationhas affected a lot to the farmers’ ability to repay the loan for banks Coffee price alsohave the same situation with pepper’s although the reduction in price is not so high.Based on Mr Dang Quoc Thinh’s opinion, Director of Vietinbank Gia Lai, this is not theonly problem of Vietinbank Gia Lai but the problem of all the banks in the area.Therefore, actually, this is not the most serious problem of Vietinbank Gia Lai at present

3.2.2.2 Problems from customers’ side

In some cases, this can be the main reason which lead to credit risk It can beseparated into many types:

Fisrtly, due to business loss, customers cannot payback the loans although at thebeginning, they worked effectively Low financial capacity of enterprises is will directlyaffect their business performance On the other hand, the poor management also leads toineffective business operations, thereby affecting the ability to repay bank debts

Secondly, the main problem is that customers were dishonest Nowadays, tricks tofake document are more and more delicate If credit employees don’t have enoughexperience or the appraisal process is not careful, bank can easily be cheated Moralhazard within the financial system can be one of the main elements which brings bankcrisis (19)

Some enterprises intentionally report inaccurate financial figures, which causedeviations in appraisal and credit provision and lead to difficulties in recovering bankdebt Or maybe the enterprise itself lacks awareness of loan using and debt repaymentdespite its financial capacity Some businesses have the thought of breaking the law tocheat, use capital for the wrong purpose to make a profit and borrow money with no

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intention to repay the debt This is also known as moral hazard.

Finally, maybe the problem from customers’ side is their loan purpose Afterdisbursement, customers uses the loans not for the original purpose Cause these purposesare not been analysed and evaluated by the bank, it can be uneffective and lead to creditrisk

Ms Nguyen Thi Hoa, chief accountant of Duc Phu Gia company, said that thecompany just borrow money from Vietinbank Gia Lai from 2016 until now Thecompany at present owns hotel chains named Cicilia which is located in Nha Trang, DaNang and HCM city She knows that it takes a lot of time to collecting data, checkinginvoices and disburesement documents and completing the loan approval However, shewas very satisfied with the employee’s attitude and support Beside that, she alsoappreciated Vietinbank in having new ideas to reducing the time of waiting andencreasing the productivity

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Diagram 3.1 Initial Diagram of symptom and potential problems of Vietinbank – Gia Lai

Branch

3.3 Problem validation

Through the customers’ opinion, although they are not 100% sastified withVietinbank Gia Lai’s service, they still think it is acceptable And cause the outsideproblems especially the macroeconomic situation cannot be control by the bank, theauthor just focus on inside problems in order to find out the causes and suggest the mostsuitable solution

As Mr Dang Quoc Thinh, Director of Vietinbank Gia Lai, who is the one has theoverview about the operation of the organization and decides strategy for the Branch,

ensures that the main problem the organization is facing is “The number of customers is

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too small and 80% of the total credit balance is just depend on only 20% number of customers This means that this group of customers will have great influence on the operation of the Branch If only some customers in this group can not payback or they move to another bank, the Branch’s profit will be affected immediately”.

According to Mr Nguyen Tan Viet, Deputy Director of the Branch, who is

directly in charge of Corporate Customers Department, mentioned that “As I see, our

market share in Corporate Customers is still very low There are too many customers who don’t use any services of the Branch Therefore, development potential is very large Many of our credit officers just carry old thoughts and think in the rut when finding customers just in agriculture field and tend to reject any new project Also our region’s strength is agriculture, especially cash crop, the area still has other economic groups This is also depend on the employees’ competences but it is more related to their way of thinking about portfolio management Because of that, I think business fields of corporate customers need to be broaden as much as possible It will not only bring the stable profit to the Branch but also help reduce the credit risk.”

In short, weak loan portfolio management is the main thing illustrated as thecentral problem in the organisation now Therefore, in this case, if weak loan portfoliomanagement still occurs and the management does not have any processes to improve,bad debt will continue to increase and bring many consequences to the organisation.Hence, it is neccesary to find the solution for this problem as soon as possible in order to

to increase profits and enhance the organization’s sustainable development

3.4 Problem consequences

In some researches, credit is supposed to be the main cause of a bank bankruptcy(20) Credit risk is the oldest and most important financial risk and also is the cause of thefinancial crisis Credit risk can bring losses to banks such as increasing costs andreducing profits, reducing the reputation of the bank (21, 22)

3.4.1 Reducing profit of the bank

When credit risks happened, banks cannot get back the principals and interests.Meanwhile, banks have to pay the due deposit principals and interests Beside that, banksalso have to pay for many expenses related to settling these bad debts, including:expenses to strengthen supervision of overdue borrowers and their collaterals, expenses

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for analyzing and negotiating with customers on these loans, expenses for maintenanceand handling of collaterals, expenses related to the protection of the bank's reputation andsafety for regulatory agencies and financial markets, additional costs to ensure the quality

of other loans… The increase in expenses made the remaining profit also lower thanoriginally planned Thus, bad debt increases the cost and thereby reduces the financialefficiency of the bank

Finding out factors affecting credit risk is an important issue for managers tomaintain financial stability and allow banks to pursue more responsible managementpolicies Berger and DeYoung (23) claimed that when a loan transfer into bad debt, bankhave to spend lots of money for the extra costs associated with nonperforming loans and/

or to control for underwriting and monitoring expenditures that influence loan quality.Beside that, bank can lose the opportunity cost for finding new loan, reducing credibility,slow credit cycle and thereby reducing the bank's cost efficiency Researches about therelationship between credit risk and the bank cost effieciency (21, 22), the results allindicate that credit risk affects negatively profitability (ROA, ROE) of the bank Gizaw et

al (22) studied the impact of credit risk on business performance of Ethiopian commercialbanks from 2003-2004 Using table data and multivariate regression analysis, the studyresults showed that credit risk can be measured by bad debt ratio, estimation of credit riskprovision affecting the business performance of Ethiopian commercial banks The studyresults suggested that credit risk management should be improved in order to improvebanking business efficiency

Morever, increasing bad debt requires higher provision which makes the bank to

be unstable, reduce profits and leads to the risk of bankruptcy

3.4.2 Affect the bank’s reputation

Credit risk can reduce the reputation of banks When facing with risk and theinefficient business operation, reputation on the market will be reduced This is an enormousloss which is not easily to see This has been confirmed in the research of Zribi andBoujelbène (20)

3.4.3 Indirect affect to other banks

Risks in lending activities also cause indirect losses to other banks Banks play animportant role in the market economy It is related to all sectors and all economic sectors, and

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it is essential to provide capital for the economy Therefore, the bank has a great influence onmonetary policy, on macro-regulatory instruments of the country If there is a big loss incredit activity even at an affiliated lender, it may cause a "chain reaction" which threatens thesafety and stability of the whole banking system, causing great consequences to thedevelopment of the economy (24, 25).

Diagram 3.2 Initial Diagram of symptom, potential problems and problem

consequences of Vietinbank – Gia Lai Branch

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CHAPTER 4 CAUSES 4.1 Possible causes

The fact has proven that no industry is not at risk Especially for the banking industry,risk is always hidden in relation to all activities of the bank The Bank must bear risks notonly due to its subjective reasons, but also from risks incurred by customers Vietinbank

is not out of the system, non performing loan is always standing due to the followingmain reasons

4.1.1 Internal causes

4.1.1.1 Lack of full awareness of loan portfolio management

This cause comes from awareness of bank executives Applying the passivemanagement method and not establishing an independent risk management department isderived from the lack of proper awareness about the need as well as the method of loanportfolio management appropriate for the bank's operations well in modern economy.This can also be explained by the Vietnamese banks who are only used to managing eachloan transaction for a long time, not yet aware of loan portfolio management On theother hand, in the context of the economy is developing, the concentration of risks on theloan portfolio will be obscured by the growth of the local economy Banks' profits canincrease dramatically from lending activities and short-term success makes banks believethat such management method is effective However, when the economy shows signs ofrecession, the negative consequences of centralized risk will become clear Lack ofinitiative in loan portfolio management and reliance on signals from the Central bank isnot a way to bring good results In fact, the intervention of the Central bank is sometimeslate, not keeping pace with what is happening In this context, if any bank takes theinitiative in its strategy, it will avoid serious consequences

Moreover, the fact that managers do not have full awareness about the need ofloan portfolio management is also reflected in the way of setting the KPI The KPI justfocuses on increasing the credit scale and ignores loan portfolio structure This leads touncontrolled level of risk on the portfolio and once these potential risks become reallosses, the bank will suffer heavy damage

As Mr Dang Quoc Thinh, Director of Vietinbank Gia Lai, shared: “Actually, most of the

managers in the Branch still cannot think out of the box I means their way of 23