CREDIT RISK MANAGEMENT FOR PERSONAL BANKING AT MBBANK-SON TAY TOWN BRANCH

Secondly, studying the status of operations and credit risk management in personal customer loans at the MBBank – Son Tay Town Branch, improve risk management capacity to e[r]

Cohort 2015 – 2017

MASTER’S THESIS

CREDIT RISK MANAGEMENT FOR PERSONAL BANKING AT MBBANK-SON TAY TOWN BRANCH

AUTHOR: PHUNG LE SON

SUPERVISOR: ASSOC PROF DR.NGUYEN VAN DINH

Ha Noi - 2017

ACKNOWLEDGEMENT

I declare that this master’s thesis is my own research and the data and the material used

in this thesis have clear sources and references to all the sources The result of this thesis is honest and derived from the actual situation of the organization

In order to complete this master’s thesis I owe a lot of people many thanks for their supporting

First of all, I would like to express my endless thanks and gratefulness to my supervisor

Dr Nguyen Van Dinh His kindly support and continuous advices went through the process

of comletion of my thesis Without his assistance the thesis would have been done effectively

So far, I would like to thank all the lectures and staffs of International school – Vietnam National University Hanoi and University de Nantes for their teaching and supporting me to achieve knowledge and experience

My special thanks to all staffs and management’s branch of MBBank Son Tay for their kind assistances and support in providing me data and advices to complete the research Finally, I would like to express my special thanks to my parents for their endless love and motivation

Thank you!

ABSTRACT

The objective of the topic is to investigate the status of credit risk management for personal customers of MBBank-Son Tay Town Branch, thereby proposing appropriate measures to improve credit risk management for personal customer at the branch

In the research process, the topic uses a variety of methods to analyze and research Research data in the topic is mainly secondary data collected by the author from literature reference Secondary data collected in the topic is data related to business operations, credit activities, and credit risk management activities of Military Commercial Joint Stock Bank-Son Tay Town Branch in period 2014-2016 through annual statements, financial statements, general statements and internal documents of the branch, research works, reference books and legal documents of the State In addition, the author uses methods for data analysis such

as descriptive statistics method, comparative methods, synthetic analysis method, and expert method

From the process of researching the status of credit risk management at MBBank - Son Tay Town Branch in combination with various methods of research and analysis, the topic has pointed out remaining restrictions in credit risk management at the branch Specifically, such restrictions are the ratio of overdue debt and bad debt at the branch tending to increase over the years, ability of assessment and information collection about customers remaining limited, capacity of credit officers remaining limited, internal credit rating system remaining unreasonable From these limitations, the author proposes appropriate solutions to improve credit risk management for personal customer at MBBank-Son Tay Town Branch

TABLE OF CONTENTS

ACKNOWLEDGEMENT 1

ABSTRACT 2

INTRODUCTION 8

1 Rationale 8

2 Objectives 8

3 The subject and the scope of the research 9

4 Research methodology 9

5 Structure of the thesis 9

CHAPTER 1 OVERVIEW ABOUT RESEARCH SITUATION, THEORETICAL BASIS ABOUT CREDIT RISK AND CREDIT RISK MANAGEMENT 10

1.1 Overview about research situation 10

1.2 Banking credit activity 11

1.2.1 Concept of credit activity 11

1.2.2 Concept of personal credit 11

1.2.3 Characteristics of personal credit 12

1.2.4 Credit classification 12

1.3 Banking credit risk 13

1.3.1 Concept of credit risk 13

1.3.2 Concept of personal credit risk 13

1.3.3 Classification of personal credit risk 14

1.4 Credit risk management 14

1.4.1 General issues about credit risk management 14

1.4.2 Credit risk management policies and procedures 15

1.4.3 Criteria of evaluation for credit risk management 21

1.5 Factors affect credit risk management 23

1.5.1 Subjective factors from bank 23

1.5.2 Objective factors 24

CHAPTER 2 RESEARCH METHOD 26

2.1 Approach 26

2.2 Research method 26

2.2.1 Secondary data collection method 26

2.2.2 Data analysis method(Secondary data processing) 26

2.3 Research criteria system 27

CHAPTER 3 STATUS OF CREDIT RISK MANAGEMENT AT MBBANK – SON TAY TOWN BRANCH 28

3.1 Overview about MBBank – Son Tay Town Branch 28

3.1.1 Process of formation and development of MBBank – Son Tay Town Branch 28

3.1.2 Organizational structure, function and task of MBBank – Son Tay Town Branch 29

3.1.3 Business operation results of MBBank – Son Tay Town in 2014-2016 31

3.2 Status of credit activity for personal customer of MBBank – Son Tay Town Branch 36 3.2.1 Credit risk management apparatus at MBBank – Son Tay Town Branch 36

3.2.2 Credit policy for personal customer at MBBank – Son Tay Town Branch 38

3.2.3 Credit procedures for personal customer 40

3.2.4 Credit risk management procedures for personal customer at MBBank – Son Tay Town 41

3.3 Evaluation for status of credit risk management for personal customer at MBBank – Son Tay Town Branch 50

3.3.1 Achievements 50

3.3.2 Existing restrictions 50

3.3.3 Reason for restrictions 51

CHAPTER 4 SOLUTIONS FOR IMPROVEMENT OF CREDIT RISK MANAGEMENT AT MBBANK – SON TAY TOWN BRANCH 53

4.1 General orientation of credit development at MBBank – Son Tay Town Branch 53

4.2.Orientation of developing credit activities for personal customer at MBBank – Son Tay Town Branch 54

4.3 Solutions for improving credit risk management at MBBank – Son Tay Town Branch 54

4.3.1 Improvement and enhancement of customer information collection 54

4.3.2 Improvement of the quality of customer appraisal 55

4.3.3 Improvement of credit scoring system 56

4.3.4 Training and effective use of human resource 57

4.3.5 MBBank – Son Tay Town Branch needs to modernize the information technology system 58

4.3.6 Improvement of loan procedure and policy system for personal customer 58

4.3.7 Strengthening of internal inspection and supervision at the branch 59

4.4 Some other recommendations 59

4.4.1 Recommendations to MBBank 59

4.4.2 Recommendations to the State Bank of Vietnam 61

4.4.3 Recommendation to the Government 62

CONCLUSION 64

REFERENCES 65

LIST OF TABLES

Table 3.1 Capital mobilization of MBBank – Son Tay Town in 2014 - 2016 31

Table 3.2 Credit activity of MBBank – Son Tay Town Branch 33

Table 3.3 Growth of credit outstanding balance for personal customer in 2014-2016 42

Table 3.4.Outstanding balance by customer objects in 2014-2016 43

Table 3.5 Classification of debt group for personal customer in 2014-2016 44

Table 3.6 Bad debt and overdue debt ratio of MBBank – Son Tay Town Branch in 2014-2016 45

Table 3.7 Result of personal customer risk rating 46

Table 3.8 Collateral rating result 47

Table 3.9 Personal customer credit rating result 47

Table 3.10 Loan outstanding balance ratio with collateral 48

Table 3.11 Situation of risk provision for personal customer in 2014-2016 49

LIST OF FIGURES

Figure 3.1 Organizational structure of MBBank – Son Tay Town Branch 29

Figure 3.2.Capital mobilization by objects 32

Figure 3.3 Capital mobilization by currency type 33

Figure 3.3 Credit outstanding balance by term 35

Figure 3.5 Credit risk management apparatus at MBBank 37

Figure 3.6 Growth of outstanding balance for personal customer 43

INTRODUCTION 1.Rationale

Currently, credit activity plays a significant role in the bank’s business of commercial banks It not only brings the main income to the bank's total income, but also contributes significantly to the growth of the economy However, credit activity is also the most risky activity in the bank's business Therefore, the implementation of credit risk management is a crucial factor in order to ensure the safe business, improve the quality and efficiency of

business activities and the development of commercial banks

In Vietnam, the issue of credit risk and measures to prevent credit risk in business of commercial banks has been mentioned but has not really been paid much attention In recent years, the ratio of bad debt and overdue debt of the bank tends to increase so the problem of credit risk management needs more concerns.In the context of more and more increasing competition and banking -financial market integration, banks are required to have strong reforms to enhance capacity of risk management in each operation Currently, with the development of personal customer market, banks are looking ahead to individual customer as

a potential loyal customer Credit activity for personal customer has been bringing high profit

to banks However, profit and risk are two sides of a problem, high profit means that banks face up to potential risks from personal customers as well as from banks This may lead to each bank having to develop a personal credit risk management strategy for itself Realizing the importance of credit risk management, Military Commercial Joint Stock Bank (MBBank)

in general and MBBank -Son Tay Town Branch in particular have made great efforts in improving the management of credit risk in order to prevent and mitigate risks in credit activities and achieve certain results However, credit risk management at Military Commercial Joint Stock Bank- Son Tay Town Branch still has some limitations From the meaning and importance of this issue, I chose the topic: "Credit risk management for personal

banking at Military Bank - Son Tay Town Branch"

2 Objectives

-Synthetizing and systematizing the theoretical fundamentals about credit risk management

- Analyzing and evaluating the real situation of credit risk management in MBBank Son Tay

- Suggesting some solutions to improve the efficiency of credit risk management

The research questions must be answered to clarify the above objectives:

• What is the basis about credit risk and credit risk management?

• How does the credit risk management at MBBank - Son Tay Town Branch work? What are the advantages and disadvantages?

• How to improve the credit risk management at MBBank - Son Tay Town Branch?

3 The subject and the scope of the research

- The subject of the research is credit risk management for personal banking at MBBank - Son Tay Town Branch

- The scope of the research focuses on the credit risk management at MBBank - Son Tay Town Branch from 2014-2016

4 Research methodology

The topic uses a variety of research methods to take advantage of each methodology as well as analyze the data more effectively, including descriptive statistics method, synthetic analysis method, comparative methods, and expert method Moreover, the data collected in the topic is mainly secondary data from various sources, such as financial statements, business operation result statements, documents and policies of MBBank – Son Tay Town Branch, research works, reference books, journals and legal policies of the Government

related to credit risk management

5 Structure of the thesis

The thesis includes four chapters:

Chapter 1: Overview about research situation, theoretical basis about credit risk and credit risk management

Chapter 2: Research method

Chapter 3: Status of credit risk management at MBBank – Son Tay Town Branch

Chapter 4: Solutions for improvement of credit risk management at MBBank – Son Tay Town Branch

CHAPTER 1 OVERVIEW ABOUT RESEARCH SITUATION, THEORETICAL BASIS ABOUT

CREDIT RISK AND CREDIT RISK MANAGEMENT 1.1.Overview about research situation

Credit risk management is not only a condition for commercial banks to operate stably and develop, but also to prevent negative impacts on the economy In recent years, there have been many studies on credit risk management in banking business operation In particular, with the current business practice of commercial banks in Vietnam, when credit is still a key business, credit risk management is still weightily researched

In the course of implementation of this credit risk management topic, the author has consulted several related research papers as follows:

Master’s thesis on economics by author Dao Thi Thuy Nga (2015) with the topic:

"Strengthening of personal credit risk management at VPbank- Hanoi Branch" The thesis has codified the theoretical foundation of credit and credit risk management for personal customers, thereby learning and evaluating credit risk management activities for personal customers at VPBank - Hanoi Branch On that basis, the thesis has showed the causes and existing limitations and proposed appropriate measures to improve credit risk management for personal customers at the branch

Master’s thesis on economics by author Nguyen Thi Hai Duong (2013) with the topic:

"Personal credit risk analysis at Sacombank - Can Tho Branch" The topic has showed the basic issues of credit and credit risk for personal customers, referred to various types of loans, assessed the current situation of credit risk management at the branch and proposed solutions

to improve credit risk management at the branch

Master's thesis on economics by author Bui Thi Hong An (2014) with the topic: "Solutions for credit risk limitation at Vietnam Bank for Agriculture and Rural Development – Da Nang Branch" The thesis has made in-depth analysis of credit risk, credit risk situation and solutions to limit credit risk in accordance with international standards and drawn lessons for credit risk management of Vietnam Commercial Bank Simultaneously,the author has proposed some solutions to prevent and improve the efficiency of credit risk management Master’s thesis on economics by author Nguyen Thi Thuy Ha (2015) with the topic:

"Credit risk management atVietnam Joint Stock Commercial Bank for Industry and Trade - Phu Tho Branch" The thesis has made in-depth analysis of the situation and proposed solutions related to the measurement and control of credit risk

Doctoral thesis on economics by author Nguyen Tuan Anh (2012) with the topic: "Credit risk management of Vietnam Bank for Agriculture and Rural Development" The thesis has made in-depth research and application of concepts of credit risk and credit risk management

in the context of Vietnamese banks in the period of international economic integration The thesis has pointed out the fundamental signal to recognize Vietnam's credit risk, including a group of early risk detection and warning signals and a group of risk identification factors as well as a measurement of credit risk On that basis, the thesis has proposed a model of credit risk management in accordance with the rules and standards of modern banks that meet the requirements of stable and sustainable development of the banking sector in Vietnam

Furthermore, the author has also consulted textbooks of credit risk management as well as some documents related to credit and credit risk management was issued by the State Bank of Vietnam and the Government to prevent and limit risks, writings on websites, financial statements, annual statements of MBBank – Son Tay Town Branch in period 2014-2016 Based on the above references, the author may synthesize, analyze and provide better judgements on the current situation as well as propose solutions to improve credit risk management in the research process of this topic

1.2 Banking credit activity

1.2.1 Concept of credit activity

According to Assoc Prof Dr Phan Thi Cuc (2009), credit is a relationship of transferring

capital and asset use right from bank to customer in a certain time duration at a certain cost Bank credit has three basic features:

- There is a transfer of capital and asset use right from the owner to the borrower

- The transfer must comply with the principle of repayment upon the time as stated in the

contract

- On due date, the user refunds the owner a larger value and that extra amount is referred to

as profit or interest rate

1.2.2 Concept of personal credit

According to Assoc Prof Dr Tran Huy Hoang (2007), personal credit is a form of credit where the subject of loan is an individual for his consumption purpose or production and business support Individuals may be small traders, farmers, small businesses, students,

household representatives on behalf of family signing credit contracts

1.2.3 Characteristics of personal credit

Firstly, the size of loans is small but the number of loans is large This is partly due to the

moderate value of goods and consumption; on the other hand, the majority of borrowers have made prior accumulationfor valuable assets, so they ask banks for purpose of supporting personal consumption Although the size of this loan is small but the total size of bank

lending is very large due to alarge number of customers demanding personal credit loans

Secondly, the cost of personal loan management is high as banks spend a lot of time and

human resource investigating and collecting information about borrowers before making decision on loan approval In addition, because personal credits are small in value but large in

number, the management of personal credits is not easy for banks

Thirdly, personal credit has a high degree of risk because the financial status of

individuals and households may change rapidly subject to their status of work or health Lending assessment for personal creditsoften meets difficulty due to incomplete information The personal information is regularly asunclear as the corporate financial statements usually

kept private

Fourthly, personal credits often bring quite high profits for banks Due to the high cost and

risk of personal loans, banks typically set interest rate of personal credits larger than of other credits The return on each personal credit is high in a large number so total return earned

from this activity is significant in banks’ total income

1.2.4 Credit classification

According to Assoc Prof Dr Phan Thi Cuc (2009), bank credit is classified as follows:

Based on the purpose of capital use, credit is divided into 2 categories:

- Credit for commodity production and circulation: as a type of credit provided to

businesses to carry out their production and business

- Consumption credit: as a type of credit allocated to individuals to meet their consumption

demand This type of credit is often used to purchase house, vehicle, household appliances…

Based on the credit term, credit is divided into 3 categories:

- Short-term credit: as a type of credit with a term of less than 1 year, commonly used for

payment operations, additional loans for temporary lack of corporate mobile capital or loans

for personal consumption activities

- Medium-term credit: with a term of 1 to 5 years, used to provide loans to meet the

demand for procurement of fixed assets, technical improvement and innovation, expansion

and construction of small works with quick capital return time

- Long-term credit: as a type of credit with a term of more than 5 years, used to provide

capital for basic construction, improvement and expansion of large-scale production As usual, medium and long-term credit is invested to form fixed capital and a minimum capital

for production

Based on the guarantee method for loans, credit is divided into 2 categories:

- Credit without collateral: as a form of collateral-free loan or a third party’s guarantee, the

loan is based solely on customer’s reputation This form is applied onlyfor familiar customers

of banks, customers with good and healthy ability of finance

- Credit with collateral: as a type of loan that borrowers must have collateral or be

guaranteed by a third party

1.3 Banking credit risk

1.3.1 Concept of credit risk

According to Basel Committee, "Credit risk is the ability that a borrower or partner fails

to meet its obligations under the terms agreed The risk of loss to a bank is the bankruptcy of the contractual party, in which the bankruptcy is defined as any serious breach for contractual obligations upon repayment of debt and interest"

Credit risk under Article 2 of the Decision No 493/2005/QD-NHNN dated 22/4/2005 by the Governor of the State Bank of Vietnam (SBV) "on classification of debts, provision and use of provision for dealing with credit risk”, “Credit risk refers to the probability of losses

in banking activities of a credit institution because customers fails to perform or are unable

to perform his/her obligations as committed"

Risks in the operation of commercial banks may be understood simply as risks arising during the process of a bank’s credit grant, manifested in practice by customers failing to pay debts or make late repayment to banks that cause damages to the bank

1.3.2 Concept of personal credit risk

According to Dr Ho Dieu (2001), personal credit risk is a type of financial risk group, which is potential losses generated when granting credit to a personal customer More particularly, individual borrowers fail to pay their contractual debts associated with each

bank credit granted to them

1.3.3 Classification of personal credit risk

Subject to research purposes and requirements, there are many different ways of classifying credit risk According to Dr Nguyen Minh Kieu (2009), personal credit risk is

divided into the following categories:

- Risk of overdue repayment(capital backlog risk): as a credit risk when a borrower delays

in performing his/her contractual debt repayment obligation including principal or interest, or

both principal and interest

- Risk of repayment inability (Risk of partial or whole capital loss): as a credit risk when a

borrower becomes unable to refund Then the bank is impossible to recover the debt and

irrecoverable debt is formed

1.4 Credit risk management

1.4.1.General issues about credit risk management

1.4.1.1 Concept of credit risk

According to Dr Nguyen Van Tien (2009), credit risk management is an activity in which

a bank acts in a scientific way on credit through its management apparatus and tools to prevent, warn and provide methods to limit maximally the inability to recover fully both

principal and interest of the loan or principal and interest on time

Personal credit risk management is part of credit risk management, within the framework

of and in compliance with the general regulations on credit risk management The Board of managers of banks is responsible for developing goals, strategies, and business tasksfor personal customer, in which clearly identifies the bank's risks and returns to set up a system of

effective control and management for personal credit risk

1.4.1.2 Necessity of personal credit risk management in bank

Credit activity is a major profit-making activity for banks However, this is also the most risky activity for banks, causing banks to fail to recover or not recover sufficiently principal and interest when it is due By the time, the nature of credit risk also changes when each individual and enterprise compete more and more severely in their operation sector in order to

occupy domestic and international market share

Personal credits are usually small in size, subject to each bank the size and number of personal customer are also various;however, personal credits are affected by many objective and subjective factors, weak ability of risk management leads to high risk When capacity of credit risk management is weak, if credit is extended, the bank will only suffer more and more losses and may lead to restrictions on bank credit expansion Moreover, banking operation is based on prestige and belief, if just a customer meets risk, it will make negative impacts on the bank’s image, causing the bank to lose good customers and reduce its market share Therefore, expanding capacity of credit risk management is a prerequisite for increasing the

bank’s profit

Currently, along with the development of the economy is the growth of personal customer market This market is considered as the target market of many banks The number of personal customers is growing rapidly at banks, so development of an effective personal credit risk management strategy is essential for every bank

1.4.2 Credit risk management policies and procedures

1.4.2.1 Credit policy and credit risk management policy

Credit policy provides credit officers and managers with a detailed guideline for making credit decisions and orienting banks’ portfolio The content of credit policy includes factors, such as customer policy, loan limits, loan term, interest rate, fee, forms of loan… Subject to the specific characteristics of each bank, the manager may supplement some suitable factors

It has been proved in reality that which bank has built a reasonable credit policy, credit quality in that bank is often higher

b Credit risk management policy

According to Dr Nguyen Van Tien (2009), credit risk management policy is built by manager on basis of credit risk management strategy and other policies related to credit risk management The goal of this policy is to minimize the probability of credit risks and losses

to the extent considered as reasonably by the bank

Credit risk management policy must ensure to be consistent with the business goals and

strategies of the bank, identify all key credit risks as the basis for building and operating the management system, make timely adjustment to the business environment and regulatory framework in relation to bank, ensure to make adequate allocation of resources (financial and human) for credit risk management to achieve goals proposed, ensure compliance with the authority and responsibility of the credit risk management apparatus under provisions of the law It can be said that which bank successfully issues a full and specific credit risk management policy, such bank has made initial success in limiting credit risk

1.4.2.2 Procedures of credit risk management

1.4.2.2.1 Identification of credit risk

In the course of business, there are always potential risks and there often are signs to recognize those credit risks Hence, it is important to identify risk, status of unsafety in credit activity through signs in loans The bank should take measures to identify the initial signs of credit risk to take necessary methods to prevent, limit and minimize their effects on the bank Credit risk identification is a continuous and systematic identification process, sincewhen the bank assesses the loan until the customer repays both principal and interest Any loan may occur problems, early recognition of the problem, and use of prompt and professional tracking measures may help to reduce losses to a minimum extent These warning signs will help the bank to identify and have early solutions to settle problems effectively

For a credit institution, risk identification requirements must be implemented for all credit activities and for each specific credit to customer in order to make decision on issue grant According to Dr Nguyen Minh Due (2007), to identify credit risk, risk managers may use the following methods:

- Analyze of customer's financial situation to determine risk of customer on assets, capital

structure, cash flow, profitability, and payment ability

- Field inspection: as a method of risk identification by directly observing and tracking

the actual situation of the place of the project’s implementation, the plan of production and business, the process of loan use of customers then analyzing and evaluating for risk identification

Contract analysis: This method is based on the analysis of the legal status as well as terms

of economic contracts of customers in order to detect possible risks that may affect the progress of production and business, risks for input and output markets of the production and business process: Risk in contract performance, risk in payment , thereby, negotiation helps customers to build contracts in the direction of risk minimization

Information collection: Banks will collect information from a variety of sources, from the

customer, the Credit Information Center (CIC), from the customer’s partners, journals, television, internet that may help banks to have a general overview, more information on borrowers, overcome risks due to asymmetric information, more information on customer reviews

In fact, banks often combine multiple methods to optimize credit risk identification The application of methods depends on the specific conditions of each bank and the flexible use

of credit officers

Signs of risk identification are often overlooked:

Signs from customers as personal borrowers:

- Customers provide information, applications for loans as not true, low reliability, find every way to get bank loans

- In some cases, the purpose of the loan is unclear; there is lack of basis to prove the purpose of loan The demand for loanincreases sharply compared with the expected demand, seeking funding from many banks

- Some cases of short-term loans but used for medium and long-term purposes, accept the use of loans with high interest rates

- Customers try to delay, avoid, because difficulties to bank officers, do not cooperate in working and checking the use of loan, checking the production and business situation of customers

- Telling credit officer about wrong location of collaterals, hiding unfavorable information related to collaterals

- Avoiding the transfer of income to account to hide income

- Making late payment or inadequate payment of due interest, due principal, customers waitforanother source of money to repay the bank

- Due to weak qualification and management capacity of customers, their production and business activities continuously make loss and meet difficulties in business

Signs from bank

- Because of credit growth criteria or retention of customers, so make subprime loans, ignoring the capital safety target despite knowing that these credits contain potentially high risk

- Failing to comply fully with loan procedures under the loan process, inspection and supervision for customers before and after loans are incomplete

- Some bank officers lose their professional ethics, their sense of and responsibility for

work is not high, their spirit of work is not strict

Other signs:

- Due to changes in policy

- Change in market price directly affects the output of the product invested by such loan

- Preferential loan, designation by the Government

1.4.2.2.2 Credit risk measurement

After identifying and analyzing the causes of risk that banks may encounter in their credit operations, banks should assess and measure credit risk

Credit risk measurement involves in calculating specific figures about the degree of risk that the Bank is encountering and calculating the losses caused by credit risk Credit risk measurement is extremely important in risk management at commercial banks at the current time and this is considered as the most difficult step To measure credit risk, bank managers often have to use credit risk measurement models

There are two basic methods for analyzing and measuring credit risk as qualitative method and quantitative method There are many models of credit risk analysis that represent quantitative models and qualitative models These models of credit risk analysis are not mutually exclusive; banks may simultaneously coordinate multiple models to complement each other or assess the extent of credit risk under different approaches

a Qualitative method for credit risk

Model 6C

According to Dr Phan Thi Thu Cuc (2009), Analyzing 6 features of customer as character, capacity, capital, cash flows, collateral and conditions

- Character: Credit officers must ensure that the borrower has a clear purpose for credit

and has a good faith to strictly pay debt when it is due

- Capacity: the borrower must have the legal capacity and civil capacity; the borrower

must be the legal representative of a business

- Cashflow: Identification of payment source of the borrower

- Collateral:as the second source of revenue that may be used to repay the loan to the

Bank

- Conditions: The Bank provides regulations on conditions subject to the credit policy

from time to time

- Control: Assessment of effects caused by changes of the law, operational statute, the

ability of customer to meet the Bank's standards

Use of qualitative model which is also referred to as a traditional model for credit risk analysis has the advantage of being relatively simple, but the restriction of this model as consuming much time, depending on the accuracy of income information source, forecasting ability as well as level of analysis and evaluation by credit officers and, be subjective Therefore, banks constantly improve method of customer assessment to decide on lending Quantitative model has the advantage compared with the traditional models as permitting a rapid settlement of a large number of loan applications, quantification of bankruptcy probability, and classification of borrowers into different risk groups with low cost

b Quantitative method for credit risk

Internal credit rating system model

Internal credit rating system model is a popular model and is often used by banks This model includes a system of criteria related to each customer, each criteria has different scores depending on their nature and importance Based on the customer's financial and non-financial criteria and the bank's scoring scale, thereby the respective score will be determined for each criteria related to the customer, then the total score shall be added up Highly scored customers mean that such customers are well appreciated by the bank, and the the ability of loan as well as the conditions of loan are more favorable than that of the low scored customers Each bank may choose its own system of criteria and scoring scales based

on its credit policy

Bankruptcy probability prediction model

According to Basel II, banks will use internal data-based system to determine the possibility of credit losses Banks will define variables, such as PD (Probability of default); LGD (Loss given default); EAD (Exposure at default) Through these variables, the bank determines El (Expected Loss)

For each specified term, estimated losses may be calculated based on the following formula:

EL = PD x EAD x LGD

If each loan is treated as a test, if there is sufficiently data on risk statistics, we may fairly accurately determine the risk-taking probability for each type of asset of the bank from time

to time, each type of credit and investment sector

However, the calculation of any of the threecriteria PD, LGD, or EAD is extremely complex, requires banks to have a modern database All of these issues require commercial banks to invest their resources in finance, human resources, much time, in particular, science paths

1.4.2.2.3 Credit risk control

According to Dr Nguyen Minh Kieu (2009), credit risk control is the use of measures, techniques, tools, strategies and operational programs to control and minimize losses, undesirable effects that may happen to the bank Credit risk control measures are often used: risk avoidance, loss prevention, loss minimization, risk transfer, risk diversification…

Risk avoidance: as avoidance of objects, activities or causes of possible losses or

damages Through the assessment, classification and screening of customers, for customers who are clearly exposed to contain high risks and unconformity with loan policy, the best method is to avoid or refuse loan

Loss prevention: Commercial banks may prevent credit risk by eliminating the causes of

risk, for loans where risk factors are identified but may be overcome, the Bank may consider lending and conduct its supervision so as not to occur any risk In credit risk management, loss prevention is performed through regular inspection and supervision of the bank for the loan customer in the course of loan use, or in periods of market fluctuationto detect timely: risks from customers, adverse factors affecting the object of control and respond ability of borrowers, to have the appropriate settlement, such as temporary suspension of loan, adjustment of debt term, additional loan to prevent possible losses

Loss minimization: is a measure to reduce the extent of damage caused by the risk if it

occurs Method of loss minimization: Applying appropriate products and loan procedures; Applying terms stated in the contents of credit contracts, loan security contracts; valuation of loan with risk compensation; Applying loan security methods; Provision for risk

Risk transfer: is the arrangement of some objects to suffer the whole or partial loss It

may be transferred to an insurance company, risk trader or to the state budget Methods of risk transfer: risk transfer to risk trader (insurance companies); risk transfer to debt purchaser; risk transfer to the state budget (for loans designated by the Government); Use of derivatives; loan securitization

Diversification: is the implementation of diversification for investment sectors, portfolios,

and investment objects to disperse or neutralize risk Focusing too much funding on a few sectors and objects, it will easily lead to reducing the probability of risk on total assets and much reducing overall loss as much as the risk to one sector/object

In credit risk management, diversification is accomplished by diversifying customer object, diversifying terms and loan products and limiting the involved customer group

1.4.2.2.4 Settlement of losses when risk occurs

Loss settlement is the use of measures to offset existing credit risks, to ensure that the bank's operations are not affected In commercial banks, risk settlement measures are specified by the nature and extent of loss and the funding for risk settlement Risk settlement measures include: using their own financial resource to cover losses incurred by the use of the provision fund to offset credit risks to make the bank's financial condition healthy, or the bank may sell customer’s collateral or use external funds to offset losses through insurance contracts or insurance premiums

1.4.3.Criteria of evaluation for credit risk management

Evaluating the results of credit risk management through criteria of credit risk reflection

is extremely important Comparing the changes in these criteria shows the effectiveness of the use of banking credit risk management measures Within the framework of the master’s thesis, the following criteria of evaluation may be given:

Growth of outstanding loan:

Growth of outstanding loan=

Outstanding loan year t – Outstanding

loan year (t-1) x 100% Outstanding loan year (t-1)

This criterion shows the growth rate of credit outstanding balance of banks over the years The growth of outstanding loans increases steadily and consistently in line with the economic conditions, showing the effective management of banking credit risk and the development of banking credit operation

Groups of debt

Under Decision No 493/2005/QD-NHNN dated 22/4/2005 and Decision No 18/2007/QD-NHNN dated 25/04/2007, outstanding balance is classified into 5 groups as follows:

- Group 1: Pass debt

In term-debts that the credit institution assesses as being capable of fully recovering both principal and interest in due course

- Group 2: Special mention debt

Overdue debtswithin less than 90 days; Debts that are assessed by the credit institution as being capable of fully recovering both principal and interest with signs of deterioration of the customer's ability to repay

- Group 3: Substandard debt

Overdue debts within 90-180 days; including debts are assessed as being impossible to recover both principal and interest in due course

- Group 4: Doubtful debt

Overdue debts within 180-360 days; including debts that are assessed as being highly probable to cause losses

- Group 5: Loss debt

Overdue debts within more than 360 days; including debts are assessed as being unable

to recover, or capital loss

After classification, the bank shall calculate the following indexes:

Bad debt ratio

Bad debt ratio =

Total bad outstanding

balance

x 100%

Total outstanding balance Bad debt is defined as irrecoverable debts or debts with signs of difficult recovery, including debts from group 3 to group 5 If bad debt ratio of the bank tends to increase over the years,it will show that the bank's credit risk management operation is in trouble and needs to be reviewed Therefore, bad debt ratio is a basic criterion for evaluating bank credit quality Bad debt reflects the difficult ability to recover capital, capital of the bank is no longer at the normal level of risk but in risk of capital loss and irrecoverable debts

Overdue debt ratio

Overdue debt ratio =

Total overdue outstanding balance

x 100%

Total outstanding balance Overdue debt is a debt that either a part or the whole of principal and/or interest is overdue, including those of group 2, 3, 4, and 5 Overdue debt, which is an important measure of evaluating the institutional health, affects all areas of banking operations

Overdue debt arises when the loan is due but the customer fails to repay the whole or a part of principal or interest Overdue debt is often a manifestation of a customer’s financial weakness and a sign of credit risk for a bank In the banking credit activities, overdue debt is inevitable but if overdue debt in excess of the allowed ratio will lead to loss of solvency of a bank

Loss ratio

Loss ratio = Loss debt x 100%

Total outstanding balance Loss debt are debts of group 5 The higher the loss ratio is, the greater the damages to the

bank become because it reflects the lost credit and must use the provision fund to offset

Provision ratio

Under Decision 493/2005/QD-NHNN dated 22/4/2005 and Decision No

18/2007/QD-NHNN dated 25/4/2007, subject to the level of risk, banks must make credit risk provision

from 0 to 100% of the value of each loan (after deducting the value of revaluated collateral)

Thus, if the more risky loan list a bank has, the higher the risk provision ratio is The specific

provision ratio for each group of debt are as follows: group 1 as 0%, group 2 as 5%, group 3

as 20%, group 4 as 50%, and group 5 as 100%

Specific provision amount for each debt is calculated under the detailed formula:

R = max (0, (A-C))* r

In which,

R : Specific provision amount;

A : Outstanding principal amount of the debt;

C : Deductible value of collateral;

r : Specific provision ratio

Risk provision ratio for deductible outstanding balance:

Risk provision ratio=

Risk provision amount

x 100%

Deductible outstanding balance This criterion also measures credit risk If this ratio increases, this will mean an increase

in the bank's financial cost when making risk provision

1.5.Factors affect credit risk management

There are two main factors that affect bank credit risk management: subjective factors

from bank and objective factors of customer and the operating environment of bank

1.5.1 Subjective factors from bank

Firstly, business strategy This is the first factor affecting credit performance Business

strategy relates to the ability of successful competition in the market It involves in strategic

decisions on selecting products, meeting customer needs, gaining competitive advantage

compared with competitors, exploiting and creating new opportunities Based on a business

strategy established, banks shall transfer it into action by banks, create departmental plans

for each period to ensure the proposed objectives; in particular, plans have a direct impact on the effectiveness of loan, such as credit growth plan, marketing plan, and human resources policy

Secondly, policies and regulations of the bank It is the customer care policy before and after the loan is thoughtful or not; Regulations on interest rate and credit fee which are high

or low, flexible and suitable for the current income of people or not; Regulations on credit term and debt period, collateral, disbursement and repayment procedures, loan application procedures are complicated or simple, how long it takes to assess a loan application

Third, the quality of credit officers Credit officersarewho directly contactthe customer, receives the file, instruct the customers to make loan procedures, collect and process information about customers to make a loan decision as well as supervisors after loans and debt collection Therefore, every credit officer must have professional qualifications, professional ability, ability of analysis evaluation and take responsibility forhis/her work on the basis of selecting customers with legal capacity, adequate financial capacity and good ethics Thanks to such creditors, loans will be safer and more efficient;loansbecome quicker and more convenient

Fourthly, information work Based on the information received, banks perform credit analysis to assess the customer's current and potential ability to use the loan, as well as the ability to repay the loan to the bank The bank will look for situations that may lead to risks

to the bank, anticipate the bank's control ability for such risks, and prepare measures of possible loss prevention and limitation Thereby, that is the basis for making credit decisions, approving or disapproving loan

Fifthly, technology of banks Modern technology helps banks to provide modern and diversified services to serve the increasing and diversified demands of customers Meanwhile, the specificity of personal consumer loan is a transaction with a large and varied number of customers; banks have to make a large number of loan contracts Therefore, the modern system of banks may help to both save credit officers' time and effort, and minimize mistakes in transactions with customers This is also banks’ aim to increase the application

of new technology in banking operations in order to provide services in a quick, convenient, objective, transparent and effective manner

1.5.2 Objective factors

a Objective factors from customer

Firstly, business strategy This is the first factor affecting credit efficiency Business strategy relates to the ability of successful competition in the market It involves in strategic decisions about product selection, meeting customer needs, gaining competitive advantage over competitors, exploiting and creating new opportunities Based on a business strategy established, the bank will transfer that into action, make departmental plans for each period to ensure the set goals; in particular, plans make direct impacts on the effectiveness of loans such

as credit growth plan, marketing plan and human resources policy

Secondly, needs, habits and ethics of customers In addition to these factors, there arecounted for externally objective factor that affectpersonal customer loan, is customer’sethics

If customers are well aware of debt repayment, low credit risk will stimulate banks to expand their loan activities and regulations will not be too strict

b Factors of operating environment of bank

Firstly, characteristics of the market where banks operate If it is an urban or densely populated area with relatively high income and high qualification, the demand for personal loans is higher than in a rural and secluded area where farmers yearly only know about their fields

Secondly, economic and political environment The economic and political environment influences the personal customer loan If the economy develops well, the per capita income

is high and the political environment is stable, personal customer loan will also be smooth, developed stably and less trouble occurs If the environment is a fierce competition among banks for gaining customers, the bank's loan is difficult

In banking business, encountering credit risk is unavoidable Recognition of natural riskratio in banking business is a reasonable objective request Credit risk management aims

to limit credit risk so that this level of risk is at the lowest acceptable rate

CHAPTER 2 RESEARCH METHOD 2.1 Approach

The approach of the thesis is to start from the theoretical base of the research subject, survey and practical summary, then compare the practice with the theories,thereby givecomments, analyze, evaluations, finally solutions introduced to improve the credit risk management at banks

2.2 Research method

2.2.1 Secondary data collection method

Data collection is an important task of scientific research The collection of data from prior scientific research materials, from observation and experimentation, is the basis of scientific theory in order to find the research issue Within the research scope of the topic, the author mainly uses the method of data collection from the document reference Secondary data collected in the topic is data related to business operations, credit activities, and credit risk management activities of MBBank - Son Tay Branch in period 2014-2016 through its annual statements, financial statements, general statements and internal documents of the branch

In addition, the topic also collects relevant secondary data that has been researched and published by individuals and organizations in publications such as textbooks, reference books

on credit and credit risk, results of studies, articles of authors in relation to credit risk and credit risk management are published in specialized journals, doctoral theses, master’s theses, research subjects with similar contents, related legal documents, guidelines and policies of the State and the State Bank of Vietnam

2.2.2 Data analysis method(Secondary data processing)

a Descriptive statistics method

In this topic, the author collects and aggregates data from different sources, categorizes according to each specific criteria, then analyzes and presents the research data by tables and charts to assess the situation of increase and decrease of criteria related to banking business, results and current status of credit risk management at MBBank – Son Tay Town Branch from

2014 to 2016 Based on the data provided from the relevant professional department, from the summary report, annual evaluationabout credit work and credit risk management Thereby, the status of credit risk management at MBBank – Son Tay Town Branch may be showed

b Synthetic analysis method

Synthesis analysis method is used to analyze the criteria reflecting the study subjects in different directions such as components, by time or location, then review and compare the

level of impact of each part on the whole as well as the level of performance and achievements in each period or level of contribution of each part

In the topic, synthesis analysis method is used to systematize the published data, synthesis criteria, detailed criteria, general criteria, and specific criteria to analyze and synthesize to make evaluations about the actual state of business operation of the bank, in which, focusing

on analyzing the current situation of credit risk management at the bank

c Comparative method

On the basis of counted and described information, comparison method is used to compare criteria and data by time with the same criterion, the same nature and similar content, expressed in number of times or percentage Thereby,it points out the stable or unstable, effective or ineffective sides to seek a good solution for the research issue Comparative method is used in the thesis to evaluate credit activities, credit risk management activities and MBBank's business activities from 2014 to 2016

Comparative method include the following forms:

- Comparison of tasks and plans

- Comparison through different stages

- Comparison of similar objects

d Expert method

Expert method is the method of using the understanding and ability of a team of highly qualified specialists to examine the nature of a scientific event or a complex fact to seek optimal solutions for such events During the implementation of the study, the author has studied and consulted by instructors as well as lecturers at Hanoi National University, Hanoi and the viewpoints of banking specialists and managers with long length of seniority in banking sector to get the right perspectivesof the research subject as well as shorten the time

of thesis preparation and achieve desired results

2.3.Research criteria system

- Criteria about capital mobilization

- Criteria about customer loan outstanding balance

- Criteria about growth of credit outstanding balance

- Criteria about credit outstanding balance by business scope and time of loan

- Criteria about credit quality, credit procedures and internal credit rating system

- Criteria about bad debt ratio, overdue debt ratio, risk provision ratio…

CHAPTER 3 STATUS OF CREDIT RISK MANAGEMENT

AT MBBANK – SON TAY TOWN BRANCH

3.1 Overview about MBBank – Son Tay Town Branch

3.1.1 Process of formation and development of MBBank – Son Tay Town Branch

Military Commercial Joint Stock Bank (MBBank) was officially established and put into operation on 04/11/1994 by Decision No 00374/GP-UB byHanoi People's Committee and under Operation License No 0054/NH-GP dated 14/09/1994 by the Governor of the State Bank of Vietnam Born in the early years of the cause of renovation initiated by the Party, with the right orientation of the central military committees and Ministry of National Defense, overcoming many difficulties with the spirit of solidarity and effort, over the past

20 years, the bank has made strong and comprehensive steps, step by step affirmed itself to become one of the leading commercial joint stock banks in Vietnam

With continuous development efforts, MBBank has always been ranked A by the State Bank of Vietnam and continuously won great domestic and international awards such as Vietnam Strong Brand, Vietnam Prestigious Brand, Top 100 Vietnam Strong Brands, Vietnam Gold Star Award, VNR500 (500 largest enterprises in Vietnam), Prestigious Securities, and Best Payment Reward awarded by Citi Group, Standard Chartered Group and many prestigious international financial groups MB is one of the two commercial joint stock banks getting emulation flag by the Government for 2 consecutive years 2009 - 2010, the annual emulation flag by the State Bank every In 2010, MBBank was rated by the world prestigious rating organization as Moody's at E+, the highest credit rate for Vietnamese banks

Military Commercial Joint Stock Bank- Son Tay Town Branch was established in July

2008, with its registered office located at 57 Pham Ngu Lao Street, Le Loi Ward, Son Tay Town, Ha Noi After more than 9 years of its operation, overcoming the initial difficulties,

up to now, with flexible solutions in line with socio-economic situation, the branch has been step by step developing and contributing to the development of Son Tay Town The branch has maintained its position in the area and increasingly developed to attract more customers

to the branch

Although established quite late, for thepast years, MBBank -Son Tay Town Branch has been considered as one of the branches of commercial joint stock banks with fast growth

3.1.2 Organizational structure, function and task of MBBank – Son Tay Town Branch

a Organizational structure

Figure 3.1 Organizational structure of MBBank – Son Tay Town Branch

(Source: General Administration Department of MBBank - Son Tay Town Branch)

The management apparatus of MBBank - Son Tay Town Branch is carried out by the online model under direct management of the Board of Directors This model demonstrates dynamism, efficiency in compliance with management requirements and business mission of the bank

- The Board of Directors of the Branch: consisting of 03 persons (01 Director and 02 Deputy Directors); being generally responsible for all activities of the Branch, ensuring the safe and effective operation of the Branch, completing business plans assigned by General Director; has task of building developmental strategies of the Branch in each period in line with the general development orientation of the entire banking sector, submitting them to the Head Office for approval and implementing approved strategies Director of the Branch shall take responsibility before law and General Director and the Board of Directors for all operating aspects of the Branch

- International Payment Department: Performing international payment operations, providing international payment services to customers; Ensuring the operation of the Branch

in accordance with the financial and banking regulations

- Accounting and Customer Service Department: Performing banking accounting operations, providing payment services, accounts to customers; Mobilizing savings, mobilizing and managing capital sources, proposing interest rate policies; Ensuring the operation of the Branch in accordance with the financial and banking regulations Being

International

Payment

Department

Accounting and Customer Service Department

Personal Customer Department

Credit Management Department

Corporate Customer Department

General Administration Department

THE BOARD OF DIRECTORS

responsible for cash receipt and payment, cash transactions with the State Bank of Vietnam (SBV) in the area, treasury management

- Personal Customer Department: Performing the task of supplying and developing products of personal customer division, including products and services such as credit, capital mobilization, card business, internet banking, andoverseas national currency exchange

- Credit Management Department: Conducting the credit re-appraisal and guarantee for the reports in credit appraisal and guarantee by Sales Department; Carrying out market analysis in the business area of the Branch; Researching and developing new products according to the market demand and ensuring the safety of the products; Researching and proposing credit policies and regimes

- Corporate Customer Division: Performing the task of credit appraisal, guarantee operation, capital mobilization from customers as enterprises and private enterprises performing import and export operations and other business operations

- General Administration Department: Being responsible for reception, clerical, logistics tasks; Being responsible for personnel work and training; Being in charge of brand advertising programs of the Bank

b Function and task of the Branch

MBBank – Son Tay Town Branch is one of the branches of MBBank, with independent accounting MBBank – Son Tay Town Branch is responsible for implementing all operations

of MBBank, as follows:

- Capital mobilization from enterprises, organizations and residents: The products of capital mobilization by MBBank – Son Tay Town Branch are diversified, including savings deposit, personal and corporate deposit accounts Savings product of the bank includes traditional savings products, cumulative savings, prepaid savings with various terms and interest rates In addition, the bank also receives investment capital trust of internal and international organizations and individuals

- Credit - Guarantee: Providing customers with a various range of credit products, including short, medium and long-term loans in VND and foreign currencies for production, business and service purposes; Funding, co-financing projects; Providing instalment loan for consumption purposes; Providing instalment loan for car purchase; Providing instalment loan for purchase, construction and repair of civil buildings; Providing loan for study abroad purpose; Providing instalment loan for buying shares of equitized enterprises; Providing

guarantee services, include loan guarantee, payment guarantee, bid security, contract performance guarantee, product warranty guarantee…

- International payment, import-export finance: With a network of nearly 300 agent banks

in nearly 70 countries around the world, MBBank – Son Tay Town Branch fast and securely provides customers with products and services under international standards

- Card services: To improve further utility services to customers, in 2008, the bank implemented ATM Active Plus card services for customers This card gives customers superior features than card products of other banks, such as providing card holders with personal insurance service at Military Insurance Company In addition, thanks to the successful connection with banks in the alliance system, customers can conduct their transactions at all locations of accepting MBBank's card and nationwide ATM system of alliance banks

- Trading in foreign currency: As a quite strong field of MBBank With a team of professional staff and modern support system, the bank may successfully meet customers' demand for foreign currencies with a reasonable competitive price and fast and convenient procedures In addition, the bank may advise customers to manage, prevent risk and other appropriate and useful business forms

- Other services: In addition to the above products, the bank also provides customers with many other services, such as financial advisory services, treasury services, payroll services, fast remittance services, overseas national currency exchange services

3.1.3 Business operation results of MBBank – Son Tay Town in 2014-2016

a Capital mobilization

Table 3.1 Capital mobilization of MBBank – Son Tay Town in 2014 - 2016

Unit: Billion dong

Criteria Year 2014 Year 2015 Year 2016

By objects 280.254 176.181 251.100

- Capital mobilization by credit organization 0.01 0.01 0.01

- Capital mobilization from economic

organizations and residents

- Demand deposit 72.909 67.462 30.463

Deposit by currency type 280.254 176.181 251.100

- Deposit in foreign currency 7.170 2.712 3.023

(Source:Business operation result statement of MBBank – Son Tay Town Branch

in 2014-2016) According to the above table, the situation of capital mobilization at MBBank – Son Tay Town Branch has not really developed effectively Particularly, in 2014, the mobilization was 280.25 billion dong, but then decreased sharply to 176.18 billion dong, equivalent to 37% in 2015 However, in 2016, the situation of MBBank- Son Tay Town Branch's capital mobilization gradually stabilized and reached 251.1 billion dong, increasing 42.6% compared with year 2015 The sharp decrease in capital mobilization in recent years was caused by the difficulties and effects of the global economic crisis Despite the pressure from these difficulties, MBBank – Son Tay Town Branch has tried to have effective policies and measures to raise capital so that the capital mobilization will gradually stabilize

Figure 3.2.Capital mobilization by objects

(Source: Business operation result statement of MBBank – Son Tay Town Branch