NATIONAL ECONOMICS UNIVERSITY SCHOOL OF ADVANCED EDUCATION PROGRAMS GROUP ASSIGNMENT TOPIC CREDIT RATING TO CUSTOMERS IN COMMERCIAL BANKS RATIONALITY AND ISSUES Group 08 Class Corporate Finance EEP 61A Teacher Do Hoai Linh Ha Noi, 2022 TABLE OF CONTENTS A THE OVERVIEW OF CREDIT RATING 3 I Credit risk 3 II Credit rating 3 B CREDIT RATING TO CUSTOMERS IN VIETNAM COMMERCIAL BANKS 9 I Credit rating for individual customers borrowing capital at commercial banks 9 II Credit rating method for corporate.
NATIONAL ECONOMICS UNIVERSITY SCHOOL OF ADVANCED EDUCATION PROGRAMS GROUP ASSIGNMENT TOPIC: CREDIT RATING TO CUSTOMERS IN COMMERCIAL BANKS: RATIONALITY AND ISSUES Group: 08 Class: Corporate Finance EEP 61A Teacher: Do Hoai Linh Ha Noi, 2022 TABLE OF CONTENTS A THE OVERVIEW OF CREDIT RATING I Credit risk II Credit rating B CREDIT RATING TO CUSTOMERS IN VIETNAM COMMERCIAL BANKS I Credit rating for individual customers borrowing capital at commercial banks .9 II Credit rating method for corporate customers at commercial banks …………………………………………………………11 C SITUATION OF INTERNAL CREDIT RATE SYSTEM OF COMMERCIAL BANK IN VIETNAM (BIDV) ……………… 13 I Overview of BIDV …………………………………………………… 13 II The overview of BIDV Banking Activities…………………………… 14 III BIDV's internal credit rating principles ………………………………17 IV BIDV Bank's internal credit scoring and rating process………………19 D RATIONALITY AND ISSUES OF CREDIT RATING TO CUSTOMERS IN COMMERCIAL BANKS …………………… 31 I Rationality…………………………………………………………… 31 II Issue…………………………………………………………………….34 E RECOMMENDATIONS TO COMPLETE THE CREDIT RATING TO CUSTOMERS IN VIETNAM COMMERCIAL BANKS ……… 36 I Solution to complete internal credit rating system of BIDV Bank…… 36 II Solution to complete internal credit rating system of Vietnam……… 38 REFERENCE…………………………………………………………… 41 A THE OVERVIEW OF CREDIT RATING I Credit risk Credit risk usually accounts for the highest proportion in the operation of commercial banks, so when borrowers encounter risks leading to failure to repay their loans, it will immediately affect the capital of the bank The State Bank introduced the concept of credit risk in Decision No.493/2005/QD-NHNN dated 22/04/2005: “Credit risk in banking activities of credit institutions is the possibility of losses in banking activities of credit institutions due to customers’ failure to perform or inability to perform their obligations as committed.” In other words, credit risk is the maximum total amount of money that a bank can lose when customers fall into an inability to fulfill their committed financial obligations Basically, credit risk is the risk that a bank will not be able to collect a loan when it is due Credit risk at commercial banks can arise due to many reasons, which can be subjective or objective causes Objective causes belong to external factors, these are the causes that commercial banks themselves are very difficult to eliminate On the contrary, the subjective causes belong to the internal of the bank, commercial banks can offer many solutions to limit these causes In order to limit risks in credit activities, commercial banks can offer many solutions, the traditional solution commonly used is to separate the appraisal and analysis work from the lending to ensure objectivity in credit activities, improve the capacity of the bank's staff, strengthen inspection and supervision after lending, etc Currently, commercial banks often use the results of credit rating to borrowers as a basis for decisions related to lending, assessing loan risks, implementing customer policies This is a solution to advance the quality, limit credit risk II Credit rating History of credit rating Credit rating is a term derived from English introduced by John Moody in 1909 in the "railway securities handbook" when conducting research, analysis and public credit ratings for the first time for 1,500 types of bonds of 250 companies according to a system of symbols consisting of letters ABC which are ranked respectively Aaa to C This has become the international standard However, credit ratings only developed rapidly in the US after the economic crisis of 1929-1933 when a series of debt companies went bankrupt or defaulted During this period, the US government had many regulations: prohibiting investment institutions (retirement funds, insurance funds, reserve banks) to buy bonds with low reliability below the level of safe investment in the credit rating These regulations have made the reputation of credit rating companies increasingly high However, for more than 50 years, credit rating was only popularized in the US, only from the 1970s until now, has the credit rating service expanded and developed quite strongly in many countries Definition of credit rating We can go through some definitions of credit rating as follows: - According to Bohn, John A writes in “Risk Analysis in Transitioning Markets”, “Credit rating is an assessment of the ability of an issuer to make timely payments of both principal and interest to security during its life.” - As defined by Merrill Lynch Securities, “A credit rating is a rating agency's current assessment of the credit quality of an issuer of debt securities, for a given amount of debt In other words, it is a current assessment of credit quality being considered in a forward-looking setting, reflecting an issuer's willingness and ability to pay principal and interest on time The credit rating results also contain the subjective opinions of the credit rating experts.” - According to Moody's, “A credit rating is an opinion on an issuer's ability and willingness to make timely payments on a given debt over the life of the debt.” - According to the stock market dictionary, “Credit rating is the official estimate of the creditworthiness of an individual or a company to date of its ability to pay, including all test data, analysis, records, records records of the creditworthiness of individuals and business companies.” In many countries around the world, most large companies and lending institutions have established credit ratings for their current and future customers From the above definitions, we can understand as: “Credit rating of an enterprise is an assessment of the financial capacity, current operating situation and future development prospects of a rated corporation, from which it can be determined the level of risk of default and the ability to repay in the future” Credit rating in Viet Nam Credit rating has long been no stranger to the world Most developed countries in Southeast Asia have organizations operating in this field However, in Vietnam, credit rating is still very new and this activity is only at the beginning In Vietnam, there are organizations implementing credit rating, such as the Credit Information Center of the State Bank, credit information businesses, and commercial banks - Credit Information Center of the State Bank (CIC): To provide information to commercial banks about borrowers, the State Bank of Vietnam has established a Credit Information Center (CIC: Abbreviated from Credit Information Center) In the first years, CIC only provided credit institutions with customer information about the number of related credit institutions, outstanding balances at those credit institutions, and this information was incomplete and not up-to-date Therefore, the significance of this information to prevent credit risk is not high Currently, the information provided by CIC is more complete, including financial analysis information, the number of related banks, outstanding balance, and status about debt, which has partly met the requirements of credit institutions - Credit information corporation: In addition to the credit information center of the State Bank and the internal credit rating system of commercial banks to assess the creditworthiness of borrowers, currently in Vietnam, there are only two enterprises operating in the field of providing credit information are "Corporate Information and Rating Company (C&V) for short", which was separated from Vietnam Solution Company in 2004 and "Central Vietnam" Vietnamnet Credit Assessment Center (abbreviated as CRV)” went into operation on June 4, 2006 The main services of C&R are providing credit information, corporate credit ratings, and market surveys by the economic sector Meanwhile, even though the ambition of CRV has just been born, it is not small when it claims to provide a lot of related services such as information collection, assessment, and rating of business norms, etc The objects of C&V and CRV are the investors, businesses, or the domestic and international banking system - Credit rating of commercial banks: Currently, all Vietnamese commercial banks have built a credit rating system (CRS) to serve internally for credit risk management and customer policy The CRS of commercial banks has not been unified, especially of joint-stock commercial banks The financial criteria in the rating system of commercial banks are quite similar, but the non-financial criteria are much different At commercial banks, the CSR has different names because CSR is only a part of customer analysis and evaluation Credit rating of Vietnam commercial banks 4.1 Overview of credit activities in commercial banks 4.1.1 Definition of bank credit: Bank credit is a relationship of transferring capital ownership from a bank to a customer for a certain period of time with a certain cost Credit relations are based on trust between the borrower and the lender This is also considered a prerequisite for establishing a credit relationship And borrowers also believe in the ability to promote the effectiveness of the loan 4.1.2 Classification of credit: a According to time to maturity: - Short-term credit: From 12 months or less - Medium-term credit: From over year to years (or years) - Long-term credit: Over years (or years) b According to the debt payer: - Indirect credit: is a form of credit where the borrower and the borrower are two different subjects - Direct credit: is a form of credit where the borrower is also the person who directly pays the debt c According to the essence of guarantee: - Secured credit: All loans have equivalent collateral: mortgage, discount, pledge, guarantee - Unsecured Credit: Loans that not require collateral will rely solely on the mortgage Customers will have to ensure that they have a clear and reputable financial position from the credibility of organizations and individuals to provide credit capital d According to the credit operation territory: - Domestic credit: A credit relationship arising within the territory of the country - International credit: A credit relationship arising between countries or between a country and an international financial-credit institution e According to the purpose of using the loan: - Goods production credit: For enterprises and other business entities to use for the goods production and circulation purposes - Consumer credit: A form of credit for individuals to meet personal consumption needs such as building houses, vehicles, etc - Study credit: Applied to students for school fees or studying abroad f According to risk: Classified by groups of debts: According to Clause 1, Article 10 of Circular 11/2021/TT-NHNN - Group 1: Qualifying debt - Group 2: Debts needing attention - Group 3: Sub-standard debt - Group 4: Doubtful debt 4.2 The overview of credit rating to customers in commercial banks 4.2.1 Definition of credit rating to customers in commercial banks: Internal credit rating is a commercial bank's assessment of the customer's ability to repay debt, the level of risk of the loan, thereby serving as a basis for granting credit, managing risks, and developing appropriate policies for customers with each customer according to the ranked results “The internal credit system is a system consisting of: a) Sets of financial and non-financial indicators, processes for assessing customers' solvency and payment ability based on qualitative and quantitative terms of finance, business situation, governance, reputation customer credit b) Methods of assessment and rating for each group of different customers, including those subjects to credit restrictions and their related people” (“According to Clause 1, Article of Circular 11/2021/TT-NHNN”) 4.2.2 Classification of credit rating to customers in commercial banks: The internal credit rating system uses a separate scoring and rating method for each subject: - Group of individual customers - Group of corporate customers - Group of financial institutions customers 4.2.3 Principles of building internal credit rating system: According to “Clause 2, Article of Circular 11/2021/TT-NHNN”, the internal credit rating system is built according to the following principles: - “First, build on the basis of data and information of all customers that have been collected during at least one year preceding the year of building the internal credit rating system; - Second, at least once a year, the internal credit rating system must be reviewed, revised, and supplemented on the basis of data and customer information collected during the year; - Thirdly, there are regulations on corresponding ratings with risk from low to high; - Fourthly, be approved by the Board of Directors (for credit institutions being joint-stock companies), Members' Council (for credit institutions being limited liability companies), General Director or Director (for credit institutions being limited liability companies) for foreign bank branches) for approval.” 4.2.4 Credit rating process Based on the credit policy and relevant regulations of each bank to establish the credit rating process A credit rating process includes the following basic steps: (1) Collecting information related to the criteria used in the analysis and evaluation, the rating information of other credit institutions related to the rating object In the process of collecting information, in addition to the information provided by the client himself, the appraiser must use many other sources of information from the mass media, … (2) Analyzed by the model to conclude the rating Using both financial and non-financial indicators at the same time Especially, non-financial indicators must be used very flexibly, objectively, suitable for each type of business and each business item The final rating is decided after consulting the Rating Council In credit ratings of commercial banks, the ratings are not publicly available (3) Monitoring the credit status of the rated subject to adjust the rating The adjustment information is kept Aggregate rating results in comparison with actual risk and based on the frequency of rating adjustments made to customers to consider adjusting the rating model 4.2.5 Purposes of credit rating - Make credit decisions: loan approval/disapproval,the credit limit, interest rate - Supervise and evaluate customers - Forecast the future status of the customers to avoid bad consequences - Develop a marketing strategy to target customers with lower risks - Estimate bad debts to make provisions for possible loan losses B CREDIT RATING TO CUSTOMERS IN VIETNAM COMMERCIAL BANKS I Credit rating for individual customers borrowing capital at commercial banks Concept of individual credit rating: Credit rating is a judgment about the level of credit for financial responsibility or an assessment of credit risk depending on factors including the ability to meet financial commitments, the ability to easily default when business conditions change, the borrower’s sense and willingness to repay For individual credit ratings, borrowers are individual customers Subject of individual credit rating: Credit rating system approaches all factors related to credit risk; commercial banks not use credit rating results to show the value of borrowers, but simply give current opinions Based on risk factors, thereby having an appropriate credit policy and loan limit A high rating by a borrower is not a guarantee of full repayment of principal and interest, but only a basis for making an informed creditadjusted decision Projected level of credit risk associated with the borrower and all of that customer’s loans Borrower ratings mainly predict default risk according to three basic levels of danger, warning and safety based on the probability of default (PD) The basis of this probability is data on the customer’s past debts within the previous years, including outstanding debts, outstanding debts and uncollectible debts The data is grouped into three groups: a) Group of financial data related to the financial ratios of customers as well as the ratings of rating agencies; b) Group of non-financial qualitative data related to management level, ability to research and develop new products, data on industry growth; c) A group of warning data related to signal of insolvency, deposit balance, overdraft limit These groups of data are put into a predefined model for processing, from which the probability of customers’ default is calculated It can be a linear model, a unit probability model and is usually built by professional consulting organizations Loan ratings are based on borrower ratings and factors including collateral, loan term, total outstanding balance at credit institutions, and financial capacity The risk of a loan is measured by the probability of expected risk EL (Expected Loss) This probability is calculated by the formula EL = PD x EAD x LGD In which, EAD (Exposure at Default) is the total outstanding balance of the customer at the time of default, LGD (Loss Given Default) is the estimated loss ratio Methods of individual credit rating: Internal credit rating for individual customers uses main methods: expert method and statistical method Concept Advantages Expert method A method of collecting and processing predictive assessments by gathering and consulting experts in the banking and finance sector to determine the risk and quality of a credit Easy to build, simple 10 Statistical method It is a method based on practical data such as debt level, the capacity of repayment and systematic testing method to detect variables affecting credit risk - Objective assessment - Credit rating results are Enterprises cannot fulfill their commitments on debt repayment The bank may not be able to recover part of the principal and interest • 35 – 44: The corporate is very weak – Rating: OLD Business enterprises make losses, it is difficult to recover The possibility of not recovering the principal with interest in this business is very high • – 34: The enterprise is particularly weak – Rating: EASY Business enterprises suffer long-term losses and are unlikely to recover The bank cannot recover both principal and interest Comparison for the internal credit rating system between BIDV and Techcombank 3.1 Comparison for individual customers between banks Criteria Income and personal information Assessment Techcombank Information to be collected includes: • Age, gender • Academic level • Status of Residence • Number of dependents • Marital status, family structure • Current job time • Personal income/year • Family income/year • Job • Working time • Other information 29 BIDV Information to be collected includes: • Age • Academic level • Status of Residence • Number of followers • Family structure • Current working time • Occupational risks • Criminal • Life insurance • Nature of current job Income and customer relationship Assessment Calculate the total score • Relationship with other credit institutions (debt situation, debt repayment, interest payment ) • Relationship with Techcombank (customer relationship, debt situation, debt repayment, interest payment ) • Stable monthly income • Payout/Income ratio • Principal and interest payment situation • Services used = Total score of previous steps = Score for the personal indicator × weight for the indicator of personal identity (40%) + score for the indicator of debt repayment ability × weight for the indicator of ability to repay debt (60%) 3.2 Comparison for institutional customers Criteria Industry Classification Techcombank BIDV • The main production and • The industry that brings in business field is the activity more than 50% revenue that brings in 50% or more of continuously for years is the the total annual revenue of the main business of the customer customer • If the business unit is multi• In case of multi-sector industry but none of them business, none of which meet earns more than 50%, the main the above requirements, the business is the most promising branch is entitled to choose industry in the future the most promising operation for ranking 30 Determined based on net revenue, equity, total assets, import and export payment Business Scale turnover, foreign currency trading enterprises, number of employees Liquidity Analysis Ratios Determined based on equity size, labor size, net revenue, total bank loan balance • Short-term solvency ratios • Quick Ratios • Current Ratios • Cash Ratio Operating Ratio • Inventory turnover • Average collection period • Efficient use of assets • Working capital turnover • Inventory turnover • Accounts receivable turnover • Efficiency in using fixed assets Degree of Financial Leverage • Liabilities/Total Assets • Liabilities/Equities • Overdue debt/Total outstanding balance at the bank • Total liabilities/Total assets • Long-term debt/Equity source • Total income before tax/Revenue • Total pre-tax income/Total Revenue Ratio assets • Total income before tax/equity • Gross profit/Net revenue • Operating profit/Net revenue • Profit after tax/Equity • Profit after tax/Average total assets • (Profit before tax + Interest expense)/Loan interest expense D RATIONALITY AND ISSUES OF CREDIT CUSTOMERS IN COMMERCIAL BANKS 31 RATING TO I Rationality The credit rating system helps commercial banks manage credit risk by advanced methods, helps control credit levels of customers, and sets lending interest rates in accordance with the forecast about the risk of each customer group Commercial banks can evaluate the effectiveness of their loan portfolio by monitoring changes in outstanding loans and classifying loans in each ranked customer group, thereby adjusting the portfolio in the direction of prioritizing resources on safe customer groups The best efficient investment decision for banks It is worth noting that no bank would like to give money to a risky customer With the credit rating, the bank gets an idea about the creditworthiness of the borrower (an individual or company) and the risk factor attached to them By evaluating credit rating reports, a bank can make a better lending decision In addition, credit ratings enable the bank to save time and effort in analyzing the financial strength of a borrower This is because the bank can depend on credit rating reports done by a credit agency when making a lending decision 1.1 Being the fundamentals of choosing borrowers Through the customer credit rating results, the bank will assess the creditworthiness of each borrower, determine the level of risk when providing loans, and the ability to repay loans Based on the credit rating results, the bank will decide to lend or refuse to lend to ensure objectivity and science 1.2 Develop customer policy For each group of customers, commercial banks will have different behaviors to both attract customers and ensure risk management Through the results of customer credit ratings, the bank will divide customers into groups based on the level of risk Customers with high credit, low risk will enjoy more preferential policies than customers with higher risk level Customer policy includes policy on credit mechanism, policy on loan interest rate, fee Credit rating can help banks determine the interest rate: offers a loan at a particular range of interest rate based on the market’s conditions and subject to changes in line with money market conditions One of the major factors that determine the rate of interest on a loan is the credit history of a borrower which is obtained through a credit rating report The higher the credit rating of a borrower, the lower the loan’s interest rate for the borrower The interest rate on the loan is 32 very important to the borrower since it has a big impact on the cost the borrower is paying for borrowing the money (loan) A lower interest rate on a loan is easier to repay than a higher interest rate because there is less interest added on top of the loan amount 1.3 Build a credit portfolio Based on the results of the bank's credit rating, the bank will assess the risk level of each enterprise, each customer's business field, thereby building an appropriate credit portfolio 1.4 Classify and manage loan Currently, most commercial banks carry out the classification for loan and make allowance for loan loss according to Article of Decision No 493/2005/QDNHNN dated April 22, 2005 of the State bank However, when credit institutions have built their own internal credit rating system, they will classify loans and make allowance for loan loss according to the rating results of the internal credit rating system Efficiency in the Investment Markets - Credit rating agencies improve efficiency and transparency in the credit market by helping to reduce the knowledge gap between borrowers and lenders (banks) The knowledge gap I am referring to is the borrower’s creditworthiness Nowadays, most of the stock markets of countries in the world have credit rating agencies, this is a trend that is suitable with the current world economic conditions, because the credit rating results are as follows: As a source of information for investors, credit rating results clear the information gap between lenders and borrowers The important role of credit ratings in financial markets is: - Investors use credit rating results to implement strategies investments so that the risk is lowest but the results are as desired; - Borrowing organizations, need to mobilize capital, use credit rating results to create confidence with investors, thereby implementing the strategy of raising capital at low cost and raising the desired amount of capital; - Through credit rating, other organizations use credit rating results to promote their organization's image, provide information to partners, and create market confidence Benefit for rated business 33 - To assess the credibility of the market for the business itself CSR is performed by an independent organization, this result can reflect the creditworthiness of the market for the enterprise, the high or low CSR result shows the high or low level of trust of the market towards the enterprise - Create trust for investors, lenders to increase the ability to raise capital The ranking results indicate the level of risk when lending or investing in businesses, the higher the CSR results show that the risk is low, investors will feel more secure when investing in businesses - Enterprises through the credit rating results to promote the image of their business Disclosure of CSR results is also a way to promote the image of the business, announce to the market the operation status and transparent information To summarize, we shared those banks and financial institutions are using credit rating agencies to check the credit ratings of loan applicants (potential borrowers) to determine their creditworthiness With the credit rating, the bank gets an idea about the creditworthiness of an individual or company (borrower) and the risk factor attached to them, hence enabling a bank to make a better lending decision Also, we have seen other benefits of having effective credit rating agencies for both the banks (financial institutions) and consumers Credit rating agencies improve efficiency and transparency in the credit markets by helping to reduce the knowledge gap between borrowers and lenders (banks) and help to promote fairness in lending by playing a huge role in determining the correct interest rate charged on loans II Issues Issues about financial indicators 1.1 Lack of many important indicators reflecting the financial position and operational capacity of the enterprise: - Failing to include indicators of development prospects of industries and fields of operation of enterprises into the ranking system; reflect the ability to pay loan interest - Failing to include criteria on the ability to repay debt from cash flows into the system of criteria for ranking - Management qualifications of business leaders have not been assessed - External factors affecting the business have not been focused on 34 - Input data for credit society also depends mainly on the financial statements published by the customer ⇒ For example: some businesses may use "tricks" to beautify financial statements (maybe it only has book meaning) to conceal information to carry out bank loans That is why it has caused credit institutions in general to have a lack of transparency, cause a lot of information chaos, hinder customer appraisal, and then finally make the opposite choice - Many criteria to calculate rating points are not necessary: The criteria put into the rating system must cover the financial situation, operational ability, and business results of the customer, predicting the prospect of operation in the coming time - Many financial indicators are not appropriate, not need to be included or can be included in non-financial indicators such as: Revenue growth rate, profit growth rate 1.2 The criteria to evaluate the size of enterprises are not reasonable: To determine the size of an enterprise based on only two criteria, namely equity and labor, is not reasonable because there are industries that require a lot of labor but have little capital, on the contrary, there are industries that require very high capital but very little labor The fact that the size of the business depends not only on equity ownership, labor but also depends on the revenue, assets, profits obtained 1.3 Unreasonable use of bonus and penalty point: In addition to financial and non-financial criteria for calculating rating points, the bank's rating system also includes bonus points, deduction of penalty points and cases of downgrade This is unreasonable as all of these can be converted into financial and non-financial metrics for scoring in the rating system: - Inappropriate bonus points: + Send complete and accurate financial statements on a quarterly, yearly basis to the bank row If the customer has a relationship with the bank, it is mandatory to send the financial statements to the bank, including this indicator in the bonus score is not properly reflected + Bonus points for self-financing coefficient: The self-financing coefficient has been calculated and scored in the financial indicators section, so when adding bonus points to this indicator, the self-financing coefficient is considered and scored twice 35 - In the rating system, there is a provision for deduction points (penalty points), but it does not specify in detail which cases will be deducted, so the ranker has difficulties in implementing this indicator and in the ranking system In fact, deducting points is rarely applied Issues about non-financial indicators: 2.1 Non-financial indicators are not appropriate: Non-financial information is collected by credit specialists and customer relations officers of the bank, so it often has subjective factors, as well as errors in the collection process and handling Data collected is from many different sources, not all information can lead to separate documents Therefore, banks need more complex operations such as accessing, screening, verifying data before choosing to include them as credit rating and rating criteria 2.2 The ranking process is not clear because of biasness: Only give instructions on how to calculate the criteria, the credit rating achieved by the customer in proportion to the score but have not yet provided a process for the rating including steps to proceed, where to start investing, and when it's finished, who will be responsible at each implementation step In fact, the credit rating of customers at BIDV is largely done by credit officers, so the rating results depend a lot on the subjective opinions of the credit officers, the rating results may not really accurate, objective 2.3 Rating object is not suitable: Currently, in many small businesses, the information reflected on the financial statements is not really accurate For the purpose of concealing information, avoiding taxes, but a lot of information and data was not included in the accounting records of the business, so the data on the accounting books does not accurately reflect the business results actual business of these enterprises Medium and largesized enterprises have more complete and accurate accounting data and records than small-sized enterprises In fact, small-scale businesses are very effective, but in many cases, the accounting books and income statements still show losses Therefore, to properly reflect the nature of enterprises, it is required that rated enterprises must satisfy a certain size, only then will the ranking results accurately reflect the actual financial situation, business results of the enterprise 36 E RECOMMENDATIONS TO COMPLETE THE CREDIT RATING TO CUSTOMERS IN VIETNAM COMMERCIAL BANKS I Solution to complete internal credit rating system of BIDV Bank Improving input quality Currently, the scoring and internal credit rating of commercial banks in general and BIDV depends on input sources of information Meanwhile, these inputs can come from many different sources Therefore, it is necessary to take measures to improve the quality of input data to make the internal credit rating more accurate, efficient and profitable Firstly, credit officers need to strengthen the selection and control of input information to improve the quality and accuracy of information Secondly, information from the Credit Information Center (CIC) needs to be exploited and thoroughly selected by credit officers, such as checking customer information save here In addition, the information that CIC uses about its financial position must be audited or, at a minimum, approved by the tax authority for its annual tax return Third, banks need to set up their own department or team that specializes only in searching, selecting, analyzing, and evaluating data and information in order to have the best quality input data possible Completing the criteria system to evaluate 2.1 For individual customers Adding personal information to the individual scoring criteria such as criminal records, criminal records, etc Besides, it is necessary to remove some unnecessary criteria that cause repetitive information such as working time and current working hours This has inadvertently doubled the customer's score in this indicator in the case of no change of workplace in the past or the score is reduced if the customer has a higher income or is promoted to a higher position Adding criteria to assess the ability of collateral to secure loans because most of the requirements and criteria of BIDV, customers must meet the conditions of collateral when BIDV exercise credit relationship When personal income is only considered at 120 million VND/month, it is optimal This leads to the case that for a customer who borrows a few million VND compared to a customer who borrows a few tens of billion VND, the debt 37 repayment obligation between these two customers is no different Therefore, it is necessary to consider increasing the maximum personal income Grade personal loans by repayment status and credit rating according to five levels: Qualified debt, notable debt, subprime debt, doubtful debt, and potential default 2.2 For corporate customers - For small and medium sized enterprises, it is necessary to develop a separate credit rating system - For enterprises operating in the fields of light industry trade and consumer goods, it is necessary to adjust the proportion of the set indicators - Changing the criteria system to match the loan term - For enterprises that have been listed on the stock market, it is necessary to add a group of indicators to analyze the valuation in the market - Adjusting more reasonably the distance between benchmark levels - The bank issues more documents as a basis to guide the assessment of nonfinancial indicators because the rating system is still limit because it still suffers from many subjective problems of the rating staff, especially non-financial indicators in the system - Adding criteria to assess the ability of collateral to secure loans because most of the customers must meet the conditions of collateral when BIDV exercise credit relationship Upgrading the information processing system In the current era of technology revolution 4.0, in order to keep up with the rapid development of information technology, to prevent risks from network security, it is more and more important to upgrade the information processing system Banks need to be fully equipped with modern equipment and invest in the bank's IT system BIDV needs to equip its Head Office and branches with a professional IT team to promptly fix technical problems, update modifications and additions to the system In addition, it is necessary to regularly check and upgrade the banking system to help the credit rating system operate as smoothly as possible Training for bank staff on the internal credit rating system In fact, although BIDV has issued guiding documents on the credit building system However, because of the automatic rating software, many credit officers 38 still rely on and not really understand how to identify each criterion This is partly because BIDV has only issued it in theory Therefore, it is necessary to organize training sessions to improve knowledge for credit officers to be able to absorb and apply the credit rating system easily and effectively At the same time, training on customer evaluation methods in a more comprehensive and scientific way Other solutions BIDV also needs to strengthen checking the customers in order to promptly collect information about customers' movements to adjust the most accurate credit rating results, thereby replacing change credit policy accordingly II Solution to complete internal credit rating system of Vietnam Building an independent credit rating agency The experience of countries with market economies shows that countries often build an independent credit rating agency, not managed by the state, owned by shareholders to socialize the organizations’ credit The formation of an organization like this plays a huge role in the transparency of economic information Southeast Asia is also known as an early participant in this field Since 1982, the Philippines has established its own credit rating center This was followed by Malaysia in 1991, Thailand in 1993 and Indonesia in 1995 Learning from the experiences of countries with market economies, Vietnam also needs to build an independent and reputable CSR organization to conduct credit assessment of businesses This independent CSR organization operates under the model of a joint-stock enterprise, no one organization or individual can dominate, this will make the CSR results more objective, thereby creating trust with users Creating an environment for credit business to develop Nowadays, the problem of research on customers has become an indispensable need in the market economy, when more and more opportunities are 39 opened, and that's the need to evaluate business opportunities On the other hand, economic integration requires high transparency of business information such as finance, operating capacity, applied technology, etc Hong Kong has about 300,000 corporates, but there are up to 40 trusted information companies Vietnam has nearly 145,000 enterprises and about 2.3 million other business entities, but so far Vietnam has only had enterprises operating in the field of credit information Therefore, in the coming time, it is necessary to issue legal documents, creating a mechanism and environment for credit business to develop Improving the quality of CIC's credit information The State Bank of Vietnam has the advantage of being provided by commercial banks with documents, financial and legal records of borrowers, outstanding balance and the level of creditworthiness in the credit relationship So, State Bank is able to assess customer credit more accurately Currently, the State Bank's CIC center performs the function of providing credit information to credit institutions, businesses and has a fee, but the information source provided by CIC is not complete and accurate In order to improve the quality of information that CIC provides to organizations, it is required that CIC be improved in the following directions: - Providing information must be prompt; - Information sources must be updated and accurate; - Non-financial information must also be included Building a data system to provide business information quickly, completely and accurately To assess customer credit, information is required, the more reliable the information, the more accurate the rating Therefore, to assess the credit, enterprises must be responsible for providing fully and accurately documents and information about the financial and non-financial situation within their scope at the request of the rating organization price In addition, it is necessary to create conditions for evaluation staff in the process of checking and re-evaluating information accurately However, most Vietnamese enterprises tend to hide the truth about themselves, promote their good points and strengths, hide real financial 40 information and their limitations This is also a big difficulty in assessing credit rating in Vietnam of credit rating companies In the market economy, information plays an extremely important role in business activities Fast and accurate information provides the basis for administrators to make timely and effective decisions, bringing business results to the enterprise In Vietnam, the information system for businesses is still very weak and limited It is very difficult to collect information about an enterprise in terms of its financial position, business results, creditworthiness with credit institutions, etc except for those listed in the Securities Trading Center, the financial records of these entities are publicly available to the outside To make economic information transparent, and to create a source of information that is publicly available to those in need, the State must build a system to provide information quickly, fully and accurately => Credit ratings is an assessment of the borrower's risk level, the borrower's ability to repay in the future A full credit rating system should cover all the content about the financial situation, business situation and industry in which the enterprise is doing business The ranking system must capture the best of the world, but at the same time, it must still be suitable with the environmental economic of Vietnamese corporates REFERENCE Textbook: 9th Bank Management & Financial Services – Peter S.Rose 41 Luận văn thạc sĩ kinh tế “Hồn thiện phương pháp xếp hạng tín nhiệm khách hàng doanh nghiệp ngân hàng đầu tư phát triển Việt Nam” - Thủy Ngọc Thu BÁO CÁO “Xếp hạng tín nhiệm khách hàng cá nhân NHTM Việt Nam” -Ttrường Đại học Kinh tế TP.HCM Luận văn thạc sĩ kinh tế: “Hoàn thiện hệ thống xếp hạng tín nhiệm doanh nghiệp Ngân hàng thương mại” TP Hồ Chí Minh – Trần Đại Sinh Báo cáo tài BIDV – BIDV.com Credit Rating – Investopedia.com Credit Rating and Default Probabilities of Vietnamese Commercial Banks – researchgate.net What is a Credit Rating? – corporate finance institute.com The benefits of effective credit ratings to banks and customers - Empower GROUP MEMBERS AND TASKS 42 Full name Tasks receipt Group Assessment - Assign the work for members Chu Nguyễn Khánh Vân - Leader (11195706) - Summarize and complete the words - Collect information Part D 100% - Collect + Complate information: News brief - Presenter Vũ Thị Mai Hà – vice leader (11191609) Đào Huyền Trang (11195201) Ngụy Hoàng Minh (11193412) Hồ Tuấn Kiệt (11192692) Lê Cẩm Chi (11190815) Vũ Hồng Phúc (11194162) - Complete and fix the final words - Collect information Part B - Collect information: News brief 100% - Presenter - Collect information Part C - Presenter - Collect information Part D - Presenter - Collect information Part A - Make Slide Collect information Part E - Collect information Part A - Make Slide 43 100% 100% 100% 100% 100% ... OF CREDIT RATING I Credit risk II Credit rating B CREDIT RATING TO CUSTOMERS IN VIETNAM COMMERCIAL BANKS I Credit rating for individual customers borrowing... corporate credit rating indicates its relative ability to pay its creditors It is important to keep in mind that corporate credit ratings are an opinion, not a fact Indicators in corporate credit rating. .. according to the rating results of the internal credit rating system Efficiency in the Investment Markets - Credit rating agencies improve efficiency and transparency in the credit market by helping