(LUẬN văn THẠC sĩ) solutions to limit credit rish at vietinbank ba dinh branch

Significance of the study and problem statement

Credit activities are a primary revenue source for commercial banks in Vietnam, yet they also carry substantial risks that can adversely impact profitability These credit risks lead to increased bank costs from higher provisioning, reduced loan interest income, potential capital loss, and damage to the bank's public image.

Effective credit risk management is crucial for commercial banks, as inadequate loan portfolio management can lead to significant issues, according to the Basel Banking Supervision Committee (2000) Additionally, research by Ping (2015) indicates that poor credit risk management can diminish the value of a bank's lending portfolio and decrease its total assets Consequently, commercial banks prioritize robust credit risk management practices to safeguard their financial stability.

Effective management of credit risk is crucial for commercial banks, particularly in today's volatile global financial environment Establishing an expected loss rate for credit activities is essential in the bank's overall operational strategy When losses remain at or below this expected rate, it indicates successful risk management To achieve safe and effective credit growth, banks must implement various measures to minimize credit risks This focus on managing credit risk is a key concern for banks as they navigate the complexities of the current economic landscape (Ping, 2015).

Over the past decade, credit risk management in Vietnam's banking system has seen significant developments Between 2010 and 2012, the rapid credit growth led to an increase in non-performing loans (NPLs), rising from 2.52% to 4.47% However, the accuracy of the reported NPL ratio in 2012 remains questionable, with the Banking Supervision Agency of the State Bank of Vietnam indicating figures as high as 8.6% Furthermore, Fitch Ratings assessed Vietnam's NPL ratio at 13% of total outstanding loans To mitigate the risk of banking sector instability and protect national financial security, the Vietnamese Government and the State Bank have implemented measures to restructure the banking system and address the issue of non-performing loans.

After five years of restructuring the banking system in Vietnam, significant progress has been made in managing non-performing loans (NPLs) By the end of 2018, the NPL ratio across the commercial banking system was recorded at 2.4%, reflecting a slight decrease of 0.1% from 2017 The total value of non-performing loans reached approximately VND 163 trillion, with potential NPLs stemming from debt structures, corporate bonds, and entrusted receivables Banks with high NPL ratios, particularly those under special control or classified as weak, have shown slow improvement Nonetheless, credit risk provisions increased by 30.1% compared to the end of 2017, indicating a proactive approach to managing credit risk in the sector.

Literature review of previous researhes

In Vietnam, in recent years, some researches are conducted to investigate the credit risk of commercial banks and Vietnam banking sector It is introduced some researches as follow:

Vo Minh Huong (2015) investigated credit risk management in banking industry – case study Joint stock commercial bank of foreign trade of Vietnam in the period of 2012 -

In 2014, a study investigated the correlation between high credit growth and rising bad debts, utilizing qualitative methods and expert interviews The analysis revealed that increased credit growth is often linked to a significant rise in bad debts To enhance credit risk management, the author recommended that Vietcombank should focus on improving staff quality, upgrading its information systems, and implementing effective business strategies.

Nguyen Anh Dung (2014) examined the causes and effects of non-performing loans in Vietnam's banking sector between 2011 and 2013 The study offered an overview of non-performing loans, identifying four primary causes: poor asset quality, insufficient capital capacity, liquidity shortages, and inadequate provisions for capital However, the research was limited by its short timeframe, resulting in less in-depth findings.

Nguyen Dinh Thanh (2014) conducted a study on the management of non-performing loans at the Bank for Investment and Development of Vietnam (BIDV) – Quang Trung branch from 2010 to 2013 Utilizing both qualitative and quantitative methods to analyze relevant data, the research highlighted key factors contributing to credit risk at BIDV – Quang Trung Branch The findings indicated that macroeconomic conditions, borrower characteristics, and bank practices significantly influence the credit risk status of the institution.

The Trung branch study provides valuable insights into reducing non-performing loans in banks, highlighting the strengths of its analytical methodology and research process However, the research is limited by its small scale and the challenges of applying findings from a single branch to a broader context Additionally, the short duration of the study poses further constraints on its applicability.

From previous studies, some limitations were found as follow:

 Lack of a comparison between banks in a study by the authors

The author conducted a comprehensive investigation into credit risk at banks, specifically comparing Vietinbank with other leading commercial banks in Vietnam Focusing on the ten largest banks by total assets in 2015, the study employs a comparative method to provide an overview of the credit risk landscape Vietinbank was chosen for its significant credit growth, allowing for an initial exploration of the relationship between credit growth and credit risk While the research does not utilize quantitative models like previous studies, it combines analytical methods with descriptive statistics to objectively reveal the realities of credit risk amid increasing credit growth.

Research objectives

This study aims to evaluate the credit quality of the Vietnam Joint Stock Commercial Bank for Industry and Trade To achieve this overarching goal, the author emphasizes specific research objectives that will provide a clearer understanding of the topic.

- Researching on the rationale related to credit risk and credit risk management activities in commercial banks;

- Analyzing, commenting and evaluating the status of credit risk management and credit risk management activities at Vietinbank Ba Dinh branch;

- Researching international experience and practices on credit risk management and improving credit risk management quality in commercial banks;

- From the research results found, the author proposes some solutions to improve the quality of credit risk management at Vietinbank Ba Dinh branch.

Research questions

To clarify the research objectives set out, this study answers some of the following questions:

- What are the rationales related to risk of credit risk management in commercial banks?

- What situation of credit risk and credit risk management activities at Vietinbank Ba Dinh branch?

- What experiences and international practices on credit risk management and credit risk management quality improvement in commercial banks?

- What solutions are proposed to improve the quality of credit risk management at Vietinbank Ba Dinh branch?

Methodology and scope

The scope of the study includes spatial scope and time range

Scope of space: Vietinbank Bank Ba Dinh branch

Time range: The study was conducted over a 10-year period from 2009 to 2018

The research utilizes secondary data sourced from the branch's business performance, financial, and annual reports, as well as from books, newspapers, magazines, and international studies to provide a comprehensive overview Data collection methods include gathering materials during the internship at the branch and downloading relevant information from the Internet.

Descriptive statistical methods are essential for summarizing and interpreting the fundamental characteristics of research data These techniques include graphical representations and summary tables, which effectively illustrate and compare the collected data.

Structure of the study

The thesis is structured into four chapters, beginning with an introduction that outlines its objectives, the author's goals, and the methodologies employed The second chapter delves into the fundamentals of credit risk, credit risk management models, and the correlation between credit risk and a bank's performance The third chapter evaluates the strengths and weaknesses of previous research methodologies while presenting findings on credit risk and management at Vietinbank – Ba Dinh Branch from 2009 to 2018, along with an analysis of factors influencing the effectiveness of their credit risk management Finally, the concluding chapter summarizes the discussions and offers recommendations for enhancing the effectiveness of credit risk management.

THEORYTICAL BACKGROUND OF CREDIT RISK FOR

Theoretical framework of credit risk

1.1.1 Definition of risk and credit risk in commercial bank

Credit risk, as defined by the Basel Treaty of 2010 and referenced by Rose (2002), refers to the potential loss banks face when borrowers fail to meet their loan obligations, which can arise from events like customer bankruptcy or deliberate non-payment According to Circular No 02/2013/TT-NHNN, credit risk encompasses possible losses incurred by credit institutions due to customers not fulfilling their commitments Despite variations in terminology, the core concept of credit risk remains consistent: it represents the financial losses banks may experience when customers default on their payments.

Credit risk poses a significant challenge for commercial banks, impacting their performance, reputation, and overall viability This risk can lead to diminished asset value, capital losses, and compromised solvency According to Bessis (2002), banks must prioritize managing credit risks, as even a small number of insolvent customers can result in substantial losses This concern is particularly acute for banks that rely heavily on credit as their primary source of profitability, making effective credit risk management essential for their success.

According to Decision No 493/2005/QD-NHNN issued on April 22, 2005, by the Governor of the State Bank of Vietnam, credit risk in banking refers to the potential losses that credit institutions may face when customers fail to fulfill their obligations.

Credit risk can be identified in two characteristics:

(1) Risk margin shows the damage that the risk caused

(2) The frequency of the risk represents the occurrence of that risk more or less, whether or not there is a rule

Credit risk arises when parties in a credit contract fail to fulfill their payment obligations Commercial banks, acting as financial intermediaries, lend money to borrowers while managing risks from both creditors and debtors One aspect of credit risk is liquidity risk, which occurs when depositors wish to withdraw funds but the bank cannot provide them Additionally, credit risk manifests when borrowers default on loans, failing to repay principal and interest on time, leading to a high ratio of overdue debts.

Depending on the classification criteria, the credit risk is divided into different categories Based on the causes of risks, credit risks are divided into the following categories

Trading risk is a form of credit risk that is caused by limitations in transaction process and loan approval and customer evaluation Trading risks include the following types:

- Risk of choice: the risk related to credit evaluation and analysis process, loan plan to decide bank financing

- Guaranteed risks: the risks arising from guaranteed standards such as loan rates, types of collateral assets, guaranteed subjects, etc

Business risks in lending encompass the challenges associated with managing loans, particularly through the implementation of risk rating systems and effective problem loan processing techniques Portfolio risk, a significant aspect of credit risk, arises from constraints in managing a bank's loan portfolio, which can be categorized into various classifications.

- Internal Risks: the risk comes from the characteristics of operating and using capital of borrowers, economic sectors

- Concentration risk: the risk that banks focus on lending too much to some customers, an industry or in a certain geographic area or the same type of high-risk loan

In order to actively prevent credit risks effectively, it is necessary and useful for banks to recognize the characteristics of credit risks Credit risk has the following basic characteristics:

Credit risk is an inherent aspect of commercial banking, stemming from the challenges posed by asymmetric information that hinders banks' ability to fully assess risk indicators Consequently, every loan carries a degree of risk for banks Despite these challenges, the banking sector operates within an acceptable level of risk, which is often aligned with the potential for corresponding profits.

Credit risks are inherently diverse and complex, stemming from the various causes, forms, and consequences associated with a bank's role in monetary business financial intermediation To effectively prevent and manage these risks, it is crucial to pay close attention to all risk indicators and understand the underlying nature of their causes and consequences, enabling the implementation of appropriate precautionary measures.

Third, credit risk is indirect In credit relations, banks transfer the right to use capital to customers Credit risk occurs when customers experience losses and failures in using capital

In other words, the risks in the business operations of customers are the main cause of bank credit risk.

Factors influence on credit risk of commercial banks

The credit policy of a commercial bank encompasses a strategic framework aimed at regulating the provision of credit to meet the bank's objectives while mitigating risks and ensuring operational safety Effective credit policies must achieve three primary goals: maximizing bank profits, maintaining low-risk security, and promoting the overall health of credit Key components of a robust credit policy include careful assessment of credit expansion and contraction measures.

- Limited geography, credit investment sector

- Limit of repayment period and loan term

- Minimum financial standards that customers need to achieve

- Loan rates for a customer or a group of customers

- Authority and procedures for liquidation of debt recovery

A well-defined credit policy serves as a guiding framework for credit activities, steering them in the right direction An effective credit policy not only attracts a diverse customer base and fosters lending growth but also ensures profitability while adhering to legal standards and mitigating risks Banks must tailor their credit policies to align with their operational characteristics and scale, ensuring compliance with regulations to prevent exploitation of loopholes that could jeopardize their financial stability To enhance the effectiveness of the credit policy, it should be clearly articulated, focusing on specific goals and strategies aimed at generating substantial recoverable credits and ensuring profitability.

The credit process involves a structured sequence of steps governed by the bank's regulations for granting credit This process encompasses everything from document preparation to the conclusion of the credit relationship A well-constructed and implemented credit process, aligned with lending regulations, is essential for minimizing risks and enhancing credit efficiency.

The success or failure of business activities, particularly in the banking sector, hinges on the quality of its personnel To mitigate inherent risks, banks must employ highly qualified staff who possess strong market insights and analytical skills Additionally, credit officers are required to demonstrate integrity, responsibility, and ethical conduct Any corruption, collusion with customers, or the creation of fraudulent documents can lead to significant financial losses for the bank.

Credit information is crucial for effective credit quality management and risk assessment It enables bank officers to evaluate customers' current and future loan usage and repayment capabilities This analysis allows banks to identify potential risks and implement timely prevention strategies Consequently, the accuracy and timeliness of credit information significantly enhance the effectiveness of credit risk mitigation efforts.

Regular internal control is essential for banks to identify and rectify errors that may occur during the credit implementation process This proactive approach enables management to mitigate risks and maintain high credit quality As internal control measures become increasingly frequent and stringent, banks are better positioned to enhance their operational efficiency and safeguard their business practices.

The economic environment significantly influences business activities, as it encompasses various factors that can affect a bank's performance Both positive and negative economic variables play a crucial role in shaping credit risks, impacting the overall stability and success of financial institutions.

The economic environment significantly influences a borrower's financial capacity and overall success, which in turn affects bank operations A stable and thriving economy fosters favorable conditions for production and business growth, enhancing customers' ability to repay loans and reducing credit risk However, if banks do not manage credit effectively, the surge in capital demand from expanding enterprises can lead to excessive credit issuance, compromising credit quality and increasing risk Conversely, during economic recessions, stagnant production and business activities result in decreased investment demand and stagnant bank credit, making it challenging for banks to recover loan capital and inevitably jeopardizing credit quality.

In today's era of strong internationalization, banks in Vietnam face challenges not only from the domestic environment but also from global dynamics While integration has brought numerous economic advantages to Vietnam, the influx of foreign investment has led to an imbalance in money supply and demand, resulting in high inflation and eroding public trust in banks As individuals realize that bank interest rates fail to keep pace with currency depreciation, they are increasingly hesitant to deposit their money, significantly reducing banks' capital supply Concurrently, the economic recession has slowed business activity, diminishing market opportunities and lowering capital demand among enterprises Consequently, stagnant businesses struggle to meet their debt obligations to banks, heightening financial risks for these institutions.

Each different economy has a different development situation, so it will affect the operation of the bank in different directions Whatever environment exists, banks need to find appropriate adaptation measures

The legal environment plays a crucial role in governing all societal subjects, including businesses like banks, which primarily focus on lending Banks face inherent risks in credit activities, such as potential capital loss from customer defaults or inability to repay debts due to unforeseen circumstances To ensure business sustainability and protect their interests, banks require a consistent and unified legal framework that establishes a solid legal corridor This legal foundation is essential for resolving disputes and complaints, highlighting the law's significant impact on banking operations Even minor changes in the legal environment can introduce additional risks for banks, underscoring the importance of a stable legal system in the financial sector.

A robust legal framework is essential for credit participants, providing a clear standard for compliance and guiding their behavior according to legal provisions When all parties adhere strictly to credit agreements, it fosters a mutually beneficial relationship, enhancing credit quality and minimizing risk Conversely, a weak legal environment with ambiguous regulations can lead to opportunities for borrowers to misappropriate funds or delay repayments, resulting in ineffective banking operations and increased credit risk.

Vietnam has recently opened its monetary market, making it easier for banks to enter This increased openness in banking laws has intensified competition, presenting challenges for banks in their operations Additionally, both the economic and legal environments significantly influence the operational landscape for commercial banks and businesses overall.

Natural disasters, fires, and epidemics pose unforeseen challenges that can result in significant losses for both banks and their customers This is particularly evident in the agriculture and forestry sectors, where adverse environmental conditions can hinder investment effectiveness When loans are issued without a reliable repayment source, banks face increased difficulties in debt recovery, heightening credit risk Additionally, the social dynamics, particularly the trust between banks and their clients, play a crucial role in influencing credit risk indirectly.

Credit is fundamentally a borrowing relationship built on mutual trust between borrowers and lenders This relationship hinges on three key factors: customer needs, customer capabilities, and the trust established between banks and their clients A reputable bank fosters high levels of trust, enabling it to attract substantial capital When customers enjoy greater trust from their bank, they benefit from simplified loan procedures and reduced risk Conversely, a lack of education or understanding among customers can negatively impact the quality of a bank's credit activities, complicating credit management for the institution.

When customers engage in transactions with a bank, they provide the necessary information, which may sometimes require further inspection by the bank This situation often leads to "asymmetric information," where one party possesses more or better information than the other Insufficient information can result in adverse selection and moral hazard for the bank To mitigate these risks, it is crucial for banks to develop an effective customer evaluation system that enables them to make informed decisions and navigate potential challenges posed by customers.

Credit risk assessment in commercial banks

1.3.1 Process of credit risk assessment

This is a traditional, qualitative method to assess risks through studying customer loan records In the 6C model that banks used to use, these Cs include:

Credit officers play a crucial role in assessing loan applications by clarifying the intended purpose of the loan and ensuring it aligns with the bank's credit policy They must evaluate the borrowing history and repayment behavior of existing customers, while for new clients, it's essential to gather information from external sources like the Credit Risk Prevention Center (CIC) to make informed lending decisions.

In accordance with the laws of the country, the capacity to sign credit contracts varies for individuals and enterprises Individuals under the age of 18 are not permitted to enter into credit agreements, while enterprises must rely on their business licenses, establishment decisions, and the appointments of executives to determine their eligibility.

To effectively assess a borrower's ability to repay, it is crucial to identify the sources of cash flow, which may include revenue generated from sales, income streams, or funds obtained from the sale or liquidation of assets.

To effectively manage finances from securities issuance, it is essential to analyze borrowers' financial situations using key financial ratios, including liquidity, debt balance, operational efficiency, and profitability indicators.

 Collateral: This is a condition for banks to provide credit and a second asset that can be used to repay loans to banks

Commercial banks establish specific conditions based on their credit policies, which are periodically adjusted to align with the central bank's monetary policy For instance, export loans are contingent upon payments being processed through commercial banks.

 Control: Focus on issues such as changes in laws and regulations whether or not to affect borrowers Whether the borrower's credit requirement meets the bank's criteria

1.3.2 Qualitative criteria for credit risk assessment

Indicators on the customer side:

 The full legal basis, economic and technical basis of plans, production and business projects using bank loans

 The feasibility of business plans and projects

 Purpose of borrowing seriously, using capital for the right purpose, clear repayment plan

 Responsibilities of borrowers with loans

 Capacity, management experience, business, market power of customers

Indicators on the bank side:

 The correct implementation of the credit process

 Human level in credit work

1.3.3 Quantitative criteria of credit risk assessment

 The ratio of outstanding loans to mobilized capital

This ratio is calculated using the formula below:

The lending ratio indicates the extent to which a bank utilizes its mobilized capital, showcasing its efficiency in generating profits This metric highlights the bank's proactive approach in leveraging its capital to maximize returns.

A high ratio indicates the bank's effectiveness in utilizing mobilized capital for lending When this ratio exceeds 1, it suggests that the bank is underperforming in capital mobilization, leading to a lower participation in lending activities Conversely, a ratio below 1 signifies that the bank is not efficiently utilizing all available mobilized capital, resulting in potential waste.

 The ratio of overdue debt

Overdue debt is the most important ratio showing the credit quality of banks

Clause 6 Article 3 Circular 02/2013 / TT-NHNN has regulations on asset classification, appropriation and risk provisioning methods as well as provisioning to handle operational risks of foreign credit institutions and bank branches

The overdue debt index indicates the capital provided by banks to customers who fail to make timely payments on principal or interest A higher overdue debt ratio signifies lower credit quality for the bank, while a lower ratio suggests better credit quality.

Commercial banks aim to minimize overdue debts; however, achieving this goal can be challenging Therefore, it is essential for banks to effectively manage and control overdue debt levels, ensuring they remain reasonable and do not threaten the bank's overall operations.

International standards dictate that commercial banks should maintain a maximum net overdue debt ratio of 5%, indicating a healthy banking operation This ratio is derived from the total overdue debts divided by outstanding loans, minus the reserve fund, and must not exceed 5% The term "net" signifies that any overdue amounts, including interest and principal, are classified as overdue debt, even if the repayment period has not yet lapsed Therefore, a 5% net overdue debt figure does not necessarily indicate poor performance; rather, it reflects the bank's proactive measures to manage and recover these debts, as newly identified overdue debts are promptly addressed through provisions and treatment options In essence, while overdue debt levels may appear high, the bank's capacity to recover these amounts remains significant.

This is to alert early bank administrators to a problematic loan If there is no timely preventive measure from the beginning of the problem, the consequences will inevitably be unpredictable

Circular 02/2013 / TT-NHNN, non-performing loan is debt of groups 3, 4 and 5 According to Article 10, Circular 02/2013 / TT-NHNN:

Group 3 debts, classified as sub-standard debt, encompass overdue payments ranging from 91 to 180 days, first-time debt rescheduling, and debts where interest payments are partially or fully waived due to the customer's financial difficulties Additionally, this category includes debts undergoing recovery based on inspection findings.

+ Debts of customers or securers are organizations and individuals that are not eligible for credit under the provisions of law by credit institutions and foreign bank branches;

Debts secured by stocks of credit institutions or their subsidiaries involve loans utilized to invest capital in another credit institution, where the securing assets are shares of the originating credit institution itself.

Unsecured debts and loans with preferential terms that exceed 5% of a credit institution's own capital are granted to customers facing credit restrictions as mandated by law, including foreign bank branches.

+ Debts granted to subsidiaries, affiliates of credit institutions or enterprises in which the credit institution holds control rights with a value exceeding the limit rates prescribed by law;

+ Debts with a value exceeding the credit limit, except where the limit is allowed by law;

+ Debts violating the provisions of the law on credit provision, foreign exchange management and safety ratios for foreign credit institutions and bank branches;

+ Debts violate internal regulations on credit granting, loan management, risk reserve policies of credit institutions and foreign bank branches

Group 4 debts, categorized as doubtful debts, encompass overdue accounts ranging from 181 to 360 days, as well as first-time rescheduled debts overdue for less than 90 days within the new payment terms This category also includes debts that have undergone a second restructuring of their repayment deadline and debts identified for recovery based on inspection findings that have remained unresolved for up to 60 days past their due date.

Impact of credit risk on financial performance of commercial banks and

Credit risk is an inherent challenge in the banking sector, leading to significant repercussions that can influence various facets of a nation's socio-economic landscape and even extend globally When credit risk materializes, it primarily impacts banks and their borrowing customers, subsequently affecting the broader economy.

Consequences of credit risks for banks

The inability to recover debts, including principal, interest, and fees, has resulted in significant capital losses for commercial banks, which must continue to pay interest on their operating capital This situation leads to declining profits, forcing banks to utilize their own capital to cover losses, potentially shrinking their scale Additionally, a high rate of overdue debt undermines the bank's credibility and financial reliability, reducing its ability to attract capital In severe cases, this can create liquidity risks, pushing banks toward bankruptcy and threatening the overall stability of the banking system.

Consequences of credit risk for customers

Borrowers unable to repay their loans face significant challenges in accessing bank financing, as their lost credibility limits opportunities for capital from banks and other sources Additionally, heightened credit risks lead commercial banks to restrict lending, further reducing access for other borrowers This situation poses a threat to depositors, who risk losing both their deposits and interest if banks encounter financial instability or bankruptcy.

Consequences of credit risks for the banking system

The operation of a bank is closely linked to the overall banking system and the economic, social, and personal organizations within the economy Poor performance by a bank can lead to bankruptcy, triggering a chain reaction that negatively impacts other banks and economic sectors Without prompt intervention from the State Bank and the Government, widespread fear of financial loss can cause depositors to withdraw their funds en masse, putting additional pressure on commercial banks and risking their insolvency.

Consequences of credit risks to the economy

The banking system plays a crucial role in the economy by facilitating the flow of funds to organizations, businesses, and individuals Credit risk significantly influences economic growth; low credit risk restricts access to capital, hindering production and consumption expansion Conversely, high credit risk can jeopardize a bank's stability, potentially leading to bankruptcy and triggering a chain reaction that destabilizes the entire banking system This scenario can result in a broader economic crisis, adversely affecting social welfare and national development.

Credit risk in banks manifests at various levels, starting with reduced profits due to provisions for uncollectible loan interest The most severe consequence arises when banks fail to recover both principal and interest, leading to significant losses and potential capital depletion Persistent high rates of bad debt can ultimately result in bank bankruptcy, posing serious threats to the overall economy and the stability of the banking system Consequently, it is crucial for bank managers to exercise caution and implement effective risk mitigation strategies in their lending practices.

Experiences on credit risk management

1.5.1 Experiences from Vietnam commercial banks

Experience of managing credit risk of HDBank

HDBank is a pioneer in implementing an internal credit rating system that encompasses nine ranking criteria for four customer categories: financial institutions, economic organizations, business households, and individuals This system enhances HDBank's ability to assess credit quality, categorize customers, quantify credit, classify loans, manage provisions, and oversee credit quality comprehensively Between 2014 and 2018, HDBank achieved notable success in credit risk management, consistently maintaining a low non-performing loan (NPL) ratio.

In 2014, HDBank's bad debt ratio stood at 1.4%, with HDBank at 1.27% and HDFinance at 4.83% By 2018, HDBank achieved a notable reduction in its non-performing loan (NPL) ratio to 0.97%, well below the 2% target As of June 30, 2019, individual NPLs represented only 1% of the parent bank's total customer loan balance, while the consolidated NPL ratio, which includes consumer finance, decreased to 1.4% from 1.5% at the beginning of the fiscal year.

HDBank has established a robust risk management framework that adheres to international standards, incorporating various departments such as Risk Management, Valuation, Legislation, Internal Control Inspection, and Debt Processing These interconnected departments facilitate a comprehensive appraisal process to effectively manage both credit and non-credit risks, including liquidity, exchange rate, legal, and human risks Additionally, the bank has standardized numerous internal documents and streamlined the appraisal and approval processes to enhance remote monitoring and develop risk management standards This approach not only simplifies loan procedures but also enables rapid disbursement within three days for valid applications, ultimately enhancing customer credibility and satisfaction.

Experience of managing credit risk of VIB

VIB maintains a well-defined governance structure that distinguishes the roles of the Board of Directors (BOD) and the Executive Board, with the BOD responsible for strategy formulation and the Executive Board focused on strategy execution This clear delineation helps prevent conflicts of interest Additionally, independent committees, such as the independent credit committee led by the Chairman of the Board and including a BOD member, enhance the BOD's understanding of the credit landscape while ensuring transparency and maintaining high credit quality at VIB.

Risk management in Vietnam often struggles with either an excess or deficiency of data, making it challenging to effectively analyze opportunities and assess risks To address this issue, VIB has established specialized departments and consistent models across business units The implementation of a three-layer protection model—comprising business units, management units, and internal audits—enhances the management and oversight functions within VIB and the broader system This model also mitigates vulnerabilities associated with various risks, including anti-money laundering and anti-terrorist financing VIB is actively working to transform its risk management culture to better adapt to these challenges.

VIB has successfully transitioned from a "controlling" approach to a "cooperating" model in credit risk management, maintaining high-quality standards Over the past five years, VIB has made significant progress, with its non-performing loan (NPL) ratio decreasing from 2.82% in 2013 to 2.51% by the end of 2014 By the end of 2018, the NPL ratio slightly increased to 2.52%, yet remained lower than the 2.64% recorded at the beginning of the year Notably, VIB's NPL ratio consistently stays 3% below the average of the State Bank.

1.5.2 Experiences from International Commercial banks

Experience of managing credit risk of ANZ

Australia's ANZ Bank, a prominent financial institution, boasted assets totaling $507 billion in 2009 and employs over 30,000 individuals worldwide Notably, ANZ's credit risk management showcases several distinctive features that set it apart in the banking sector.

- Quantitative risk measurement: Because it has built an integrated and centralized data system, ANZ can apply internal credit measurement model and RAROC model

ANZ utilizes an internal credit measurement model in line with Basel II regulations, focusing on the probability of default as a critical factor in assessing borrower credibility during the customer rating process The bank's credit rating system aligns with the standards set by Standard & Poor's and adheres to the stringent requirements of Basel II.

ANZ Bank utilizes the KAROC method as a loan effectiveness strategy, ensuring that loans are approved solely when they provide value to shareholders The bank assesses each loan by comparing its Risk-Adjusted Return on Capital (RAROC) to the Return on Equity (ROE); loans with a RAROC lower than the ROE are declined, while those with a higher RAROC receive approval.

- Centralized risk management organization ANZ measures risk according to the centralized risk management organization model, specifically as follows:

First, ANZ's risk management strategy decisions are focused on the Board of Directors

To facilitate transparent credit decisions, ANZ's risk management framework is organized into three key divisions: Business and Customer Relations, Risk Management, and Debt Management.

Third, for large loans, the final decision is made by the Risk Management Committee and Risk Board

ANZ effectively manages double credit risk within a well-established financial market, ensuring that all banking credit activities are rigorously monitored by shareholders and the market This oversight enhances the transparency and accessibility of ANZ's information, reinforcing trust and accountability.

In addition, ANZ also focuses on building a comprehensive internal credit control system including:

- The system warns of abnormal signs of the credits studied and put into operation so that it can be promptly overcome to avoid losses;

The "crisis test" activity is conducted regularly or during periods of economic instability to accurately assess risks This process aims to implement preventive measures, establish risk provisions, and develop suitable pricing strategies.

- Internal audit activities with unexpected inspection methods are being maintained very effectively to ensure absolute compliance in the system

Experience of managing credit risk of Commercial banks in the US

US commercial banks effectively manage credit risks by fostering long-term, integrated relationships with borrowers to address all their financial needs This approach allows lenders to gain a deeper understanding of their customers' financial situations, leading to increased profits through the sale of diverse financial products Additionally, borrowers benefit from consistent, long-term support in their credit services.

Emphasizing loan appraisal over loan control is crucial, as neglecting the appraisal process can result in increased bad debt Furthermore, providing loans with high risk is not justified when considering the extensive effort required to prevent overdue payments.

Commercial banks utilize credit scoring methods to accurately evaluate each borrower's financial status This scoring system employs specific formulas to measure and predict the risk level of potential customers, thereby enhancing the loan appraisal process Traditionally, credit scoring is primarily applied to consumer loans, playing a crucial role in the approval of credit cards and auto loans, which are essential components of the customer acquisition chain.

Third, avoid using brokers because brokers are not motivated to bring higher quality loans, since they are paid based on loan quality

Methodology in this thesis

In order to complete the thesis’s objective, the following approach is proposed

It will be used during researching, literature review and data collection of data regarding financing sources will use 3 approaches:

(1) Collect and research information available on website, journals, or other official sources of these financing sources;

(2) Evaluate feasibility of financing source for thesis and directly approach these sources to continue finding more detailed information;

To effectively assess credit risk in banks, it is essential to classify sources and prioritize them based on established criteria, ensuring maximum feasibility and benefits This approach not only enhances the evaluation process within individual banks but also facilitates meaningful comparisons with other banks and the broader Vietnamese banking sector.

To complete the thesis, the author employed a combination of complex research methods, including descriptive statistical, analytical, and comparative methods The descriptive statistical method utilized tables, graphs, and charts to analyze financial performance, business activities, and credit risk Additionally, the analytical method was implemented to identify and summarize the factors influencing credit risk and credit risk management in banking.

1.6.2 Evaluation criterion using to assess credit risk of Vietinbank - Ba Dinh branch

In the scope of thesis, some indicators are selected to measure status of credit risk in

Vietinbank – Ba Dinh Branch, which consist the following index and their formula as well:

 Rate of overdue loan = Total overdue loan

 Loan portfolio by maturity, type of customers

 Rate of bab debts = Total bad debts

The basis of calculation of bad debts and non – performing loan from offcical financial data are pursuant to current Vietnamese regulators like the Circular No 02/2013/TT

The NHNN has issued guidelines on the classification of assets, the levels and methods for establishing risk provisions, and the utilization of these provisions to address credit risk within credit institutions and foreign bank branches, as outlined in Circular No 09/2014/TT-NHNN, which amends Circular No 02/2013/TT-NHNN Non-performing loans (NPLs) are categorized as groups 3, 4, and 5, with group 5 specifically representing non-compliant loans Regular and overdue loans are classified within groups 2, 3, 4, and 5.

The thesis primarily utilized secondary data for analysis, drawing from a diverse range of sources including bank annual reports, audited financial statements, official websites, and annual reports from the State Bank of Vietnam (SBV) Additionally, relevant finance journals and banking sector reports from both national and international organizations were incorporated To provide a comprehensive conceptual review of credit risk and its relationship with factors such as Credit Risk Management (CRM), various papers, international publications, and research studies related to credit risk and non-performing loans in commercial banks were also referenced.

SITUATION OF CREDIT RISK MANAGEMENT AT

Overview of Vietinbank - Ba Dinh branch

2.1.1 General information of Vietinbank - Ba Dinh branch

Established in 2008, the Vietinbank Ba Dinh branch has undergone significant construction, development, and innovation, aligning with the industry's modernization phases As part of the broader banking system, the branch has diversified its activities and expanded its business operations, contributing to its rapid and robust growth This progress reinforces its position as a leading commercial bank in the region, highlighting its key role in the financial sector.

Functions of Vietinbank Ba Dinh branch:

 Being the receiving point, organizing the implementation of products / services, managing products / services at the branch (product management)

We specialize in the direct sale of retail and non-credit retail credit products and services, including capital mobilization, payment solutions, currency exchange, card services, e-banking, treasury management, and financial advice Our primary focus is on developing marketing programs, attracting new customers, and providing exceptional customer care and consultation.

 Complete the application procedures and retail credit procedures according to the authority and regulations and professional processes of Vietinbank

 Implementing the after-sales policy: analyzing and evaluating customers and proposing measures to take care of, maintain and increase the use of customers' products / services (customer management)

Duties of Vietinbank Ba Dinh branch

 Selling banking products / services and Retail banking services (Retail credit, other personal and non-credit deposits)

 Customer management: update customer information, evaluate customers, take care of customers and implement and propose measures to attract, maintain relationships and develop customers

 Product / service management: a focal point for deploying and managing major retail banking products and services at branches, organizing deployment, reporting, proposals

2.1.2 Organization structure of Vietinbank - Ba Dinh branch

As of December 31, 2018, Vietinbank Ba Dinh branch has 8 functional rooms with 4 transaction offices

Organization model of Vietinbank - Ba Dinh branch

2.1.3 Key financial performances of Vietinbank - Ba Dinh branch

Vietinbank Ba Dinh focuses on maximizing profitability while managing acceptable risk levels, aligning with its business objectives The following table illustrates the bank's performance over the past three years, highlighting its commitment to achieving these goals in the competitive banking sector.

Business results of Vietinbank Ba Dinh in the period of 2016-2018

Total outstanding loans at the end of the period (VND billion) 4.953 5.207 6.146 5,1% 18,0%

Capital mobilization at the end of the period (VND billion) 6.159 7.648 8.759 24,1% 14,5%

1 Profit before tax (VND billion) 183,45 196,00 237,7 0,7% 21.3%

2 Net service revenue (VND billion) 35,7 28,9 33,4 -8% 15,5%

(Source: Integrated Planning office of Vietinbank Ba Dinh)

The pre-tax profit of Vietinbank Ba Dinh has demonstrated consistent growth and stability over three years, with a 0.7% increase in 2017 compared to 2016, followed by a significant 21.3% rise in 2018 The average annual growth rate from 2016 to 2018 was 14% The bank's operational scale has also expanded, with key metrics such as total assets, capital, and outstanding loans showing positive growth Vietinbank's total assets increased from 6,851 billion VND in 2016 to 9,319 billion VND in 2018 Additionally, the continuous rise in income from credit activities has enhanced financial efficiency, providing resources for Vietinbank to bolster the financial capacity of its branches and reinvest in retail operations.

Vietinbank Ba Dinh prioritizes customer development and care as a key criterion for business success and growth Between 2016 and 2018, the bank achieved significant results in expanding its customer base, demonstrating its commitment to enhancing both the scale and quality of its services.

Statistics of customers of Vietinbank Ba Dinh branch in the period of 2016-2018

Total customers 88.075 120.861 132.218 37,23% 9,40% 23,31% Total individual customers 86.296 118.734 129.672 37,59% 9,21% 23,40%

Universal customers 83.363 115.193 125.907 38,18% 9,30% 23,74% Proportion of individual customers/total customers 97,98% 98,24% 98,07%

Between 2016 and 2018, Vietinbank Ba Dinh experienced a steady increase in its customer base In 2016, the branch served 86,296 individual customers, representing 97.98% of its total clientele This number surged by 37.59% in 2017, reaching 118,734 individual customers.

2018, the number of individual customers reached the absolute value of 129,672 people, an increase of 9.21% compared to 2017.

Credit operation of Vietinbank - Ba Dinh branch

2.2.1 Credit products of Vietinbank - Ba Dinh branch

Vietinbank offers consumer loans designed for individuals and households with stable income and the financial capacity to repay These loans cater to various borrowing needs, including the purchase of consumer goods and household items, enhancing the quality of life for customers.

- Loan amount: maximum 80% of the cost

- Interest rate: fixed, floating; overdue interest rate is 150% of due interest rate

- Loan security: with or without assets as collateral or third-party guarantor

- Disbursements: full disbursement or in partial disbursements (multiple disbursements)

- Repayment of principle and interest: single or multiple principle payment, monthly repayment on interest or regular repayment as negotiated

Vietinbank branches/transaction offices or E-banking

Vietinbank uses automated system (IPCAS) to track customer information, accounts, amounts of interest payment, etc with the highest security and accuracy

 Loans for new construction, repair, renovation, upgrading, buying residential houses

Vietinbank offers financial support for construction, repair, renovation, and upgrading of homes for Vietnamese households or individuals with legal land use rights This assistance is also available for Vietnamese citizens residing abroad, who are allowed to purchase land according to Decree No 81/2001/ND-CP dated November 5, 2001, provided that their properties are not restricted from renovation or reconstruction in compliance with planning and building permits.

- Maximum loan amount: up to 85% of total capital requirements according to estimates or of the total contract value stated in the purchase or sale contracts of customers

- Lending rates: fixed, floating Overdue interest rate not exceeding 150% term loan interest rate

Direct mail, branches/transaction offices, ATM’s, Mobile Banking, Internet Banking

Vietinbank uses automated system (IPCAS) to track customer information, accounts, signatures, photos, amounts of interest payment, etc with the highest security and accuracy

“Loans against valuable papers” is a product of Vietinbank credit for individual customers who legally own the pledged assets, having the needs for loans serving their lives

Pledgeable papers must be legally issued and transferable, including savings books, commercial bank-issued bills of exchange, treasury bills, treasury bonds, public debt instruments, as well as shares, bonds, and fund certificates from enterprises.

- Term: not exceeding the remaining term of the valuable papers With listed stocks, bonds and fund certificates: not exceeding 06 months

- Loan amount: up to 80% of the total costs in the contract

- Interest rate: fixed, floating; overdue interest rate is 150% of due interest rate

The maximum loan amount is limited to the original price plus interest, minus any interest paid during the loan period For listed securities, it cannot exceed 50% of the market price at the time of lending In the case of IPO shares from state-owned companies or joint-stock companies increasing capital, the limit is also set at 50% Additionally, the loan amount must not surpass 75% of the value of pledged assets, which is determined by the difference between the average bid price and the preferential price for employees purchasing preferred shares from the state-owned issuing company.

- Loan security: by valuable papers, the rate prescribed by the Governor of the State Bank in each period

- Repayment of principal and interest: once and receive valuable papers back

If the value of collateral stock falls to 60% of its initial price during the loan period, customers are required to supply additional assets or guarantees within two working days Failure to do so will result in Vietinbank collecting the loan before the specified due date in the contract.

Vietinbank provides credit product "installment loan" for all customers having needs and meeting conditions to repay the loan over the term

- To use credit product "installment loan" of Vietinbank, customer needs to have regular income and pledged assets for the loan

- Tenor must conform to business cycle and the ability to repay over the agreed upon installment payment

Vietinbank offers a specialized credit product designed for individuals and households seeking loans to purchase vehicles, including cars, motorbikes, and other modes of transport.

- Term: Short, medium, long term

- Loan amount: maximum 85% of the total cost

Individuals and families with students studying abroad can utilize the "Loans for Overseas Studying" credit product to finance living expenses and tuition fees for their relatives overseas.

- Term: Short, medium, long term

- Loan amount: negotiable, up to 85% of total cost

- Loan guarantee: with/without the guarantee of assets; guarantee by the third party

 Short term loans for production, business operation

Vietinbank provides loans for customers including individuals and households to cover the shortage of working capital for production and business

- Type of loan: Short-term

- Loan amount: upon negotiation Customers must have equity participation of at least 10% of the total capital needs

- Loan security: with or without assets as collateral and third-party guarantor

Vietinbank uses automated system (IPCAS) to track customer information, accounts, signatures, photos, amounts of interest payment, etc with the highest security and accuracy

 Loans for crop season intervals

Vietinbank offers a credit product specifically designed for individual and household customers engaged in intensive rice cultivation This financial solution supports those with rice-growing areas that also intersperse short-term crops in the following season, catering to their production loan needs.

- Term: Short term, not exceeding the term of the next crop

- Loan amount: not exceeding the actual balance of the previous loan contract Customers need to have equity participation of at least 10% of the total capital requirements

- Interest: interest rate applicable at the time of loan

- Disbursements: full disbursement or multiple disbursements

Repayment of principle and interest: single or multiple principle payment, monthly repayment on interest or regular repayment as negotiated

Vietinbank uses automated system (IPCAS) to track customer information, accounts, signatures, photos, amounts of interest payment, etc with the highest security

Vietinbank provides individual and household customers with “fixed assets loan” for buying fixed assets such as factories, heavy equipment and industrial machinery for project purposes

- Term: medium to long term

- Loan amount: upon negotiation, customers must have equity participation of at least 15% of the total capital needs

Branches/transaction offices, borrowing groups, enterprises, credit institutions or Internet Banking

 Short-term working capital loan

Vietinbank provides short-term working capital loan for individual customers that need short-term working capital loans regularly

- Term: short term, not exceeding the duration of the next financing

- Loan amount: not exceeding loan amount of the previous credit contract, customers must have equity participation of at least 10% of the total capital needs

- Interest rate: rates applicable at the time of loan

Branches/transaction offices, borrowing groups, enterprises, credit institutions or Internet Banking

Individual or household customers with borrowing needs for business operations much larger than standard limits allowed by Vietinbank can apply to use

- Loan amount: customers must have equity participation of at least 10% of the total short term capital needs and of 20% of total medium to long term capital needs

- Loan security: with or without assets as collateral, or by 3rd party guarantor

- Lending method: single or multiple lending as requested by customers

 Loans to projects as directed by the Government

Vietinbank offers a specialized credit product called "Loans to projects as directed by the Government" for individual and household customers who meet the necessary loan conditions for government-funded production and business projects.

- Term: short, medium and long term

- Loan amount: specified in Government’s instructions

 Loan for issuing credit card

Vietinbank provides product "Loan for issuing credit card" for individual customers with a maximum loan amount up to VND 100 million for the gold cardholders

- Loan limit: 80% of the amount spent on cards; Maximum VND 100 million for gold cards, VND 50 million for standard cards, VND 30 million for domestic debit cards

- Loan security: cash deposit, saving books or valuable papers issued by Vietinbank or loan without security depending on type of customers

- Disbursements: full disbursement or multiple disbursements depending on customer needs

To ensure effective repayment of both principal and interest, a minimum monthly payment of 20% of the total monthly card transactions is required It's important to note that the spending on the card will not be subtracted from the amount held as loan security.

- Repayment before term: interest calculated from the date of borrowing to the date of repayment Total fees paid before the term is stated in the contractual agreement

- Overdue penalty: overdue interest rate equals to 150% of due interest

 Loan to repay foreign debts before due date

Vietinbank offers a credit product designed for individual customers, including Vietnamese citizens living abroad for more than 12 months and foreign nationals residing in Vietnam for the same duration, who wish to settle their foreign debts ahead of the due date.

- Loan limit: Customer equity participation of at least 20% of the total demand for loans

- Disbursements: full disbursement or multiple disbursement

 Flexi loan over credit limit

Vietinbank offers individual and household customers a "flexi loan over credit limit," designed to support production and business operations when expenses exceed initial projections.

- Term: short term, medium and long term

Customers can negotiate their flexi loan amount, but they must contribute at least 10% equity for short-term capital needs and 20% equity for medium to long-term capital needs.

- Fees: fees are scheduled whether enterprise uses over credit limit loan or not

Individual and household customers having transaction accounts at Vietinbank can choose to use “commercial overdraft”

- Customers have the flexibility to draw extra money from transaction account

- Loan security: with or without assets as collateral, by guarantee

- Repayment of principle and interest: automatically on deposit account

- Overdue penalty: overdue interest rate is 150% on due interest rate

 Cash advances for selling securities

Individual customers with transaction accounts at Vietinbank can access cash advances for securities trading through Vietinbank Securities Company (Agriseco) after selling their securities.

Type of securities: Listed securities

- Term: not exceeding 3 working days from the time of receipt of trading result confirmation

- Loan amount: the maximum amount would equal to the amount the seller receives from the transaction after deducting related fees

- Interest rate: interest is calculated on short-term interest rates at the time of the loan divided by (:) 30 days, plus (+) a minimum of 0.01% per day

- Loan security: without assets as collateral based on trading result confirmation of Agriseco or its branches

- Methods: full disbursement directly into account opened at Agriseco or Agriseco’s branches

 Loans to buy shares for capital contribution

This is a credit product of Vietinbank that individual customers who are shareholders of joint-stock companies can use for the purpose of buying shares to increase their capital contribution

- Term: no more than 5 years (for foreign investors: not exceeding the time allowed residing in Vietnam or the remaining time of business license)

- Pledging such shares as collateral for the loan: maximum loan amount equals 50% total value of shares purchased

- Pledging by other assets: loan amount shall not exceeding 75% value of secrutiy assets

- Loan security: secured by assets formed from loan capital or other assets as prescribed

- Disbursements: one-off, directly into account of company

- Overdue penalty: overdue interest rate is 150% on due interest rate

This is a credit product of Vietinbank for those households in need of loans to build infrastructure

- Term: short term, medium and long term

- Loan amount: maximum at 70% of the total estimated costs of infrastructure project

2.2.2 Credit growth of Vietinbank - Ba Dinh branch in the period 2009 – 2018

Credit granting activity is one of the fundamental activities of each bank It is part of the Bank's basic activities of borrowing and re-lending In the period of 2009 -

In 2018, Vietinbank Ba Dinh experienced stable credit growth, with total outstanding loans reaching 6,146 billion dong by December 31, 2018 The average annual credit growth rate for the branch was 7.5%.

Results of credit granting activities at Vietinbank Ba Dinh in the period of 2009 -

Total outstanding loans at the end of the period (VND billion) Credit growth

Credit risk management at Vietinbank - Ba Dinh branch

2.3.1 Credit risk management model at Vietinbank - Ba Dinh branch

Vietinbank Ba Dinh branch implements a centralized risk management model in line with Basel Committee recommendations and international standards, addressing legal, market, technological, and human factors The branch separates its operations into distinct functions: customer relations, credit analysis, and operational tasks The customer relations department focuses on identifying and nurturing client relationships, assisting customers with loan documentation, and subsequently forwarding all relevant information to the credit analysis department for further evaluation.

The credit analysis department gathers and verifies information through various channels, including banks, the Credit Information Center (CIC), and mass media This comprehensive analysis evaluates customers' general and financial situations, loan plans, projects, and guarantees Once the credit approval results are finalized, they are stored by the credit analysis department and forwarded to the customer relations department to facilitate the next steps in the credit process.

The model of credit risk management at Vietinbank is applied as follows

The Business Units, including the Private Client Division, Small and Medium Enterprise Banking Division, and Corporate Customer Division, are dedicated to identifying customers while adhering to established policies, regulations, and procedures related to credit and credit risk management These divisions also collaborate with Credit Divisions to develop innovative credit products that support sustainable growth for the bank.

The Verification Unit at VietinBank plays a crucial role in assessing and scoring customers to ensure that the bank's credit practices align with its policies and risk management regulations This function is essential for minimizing bad debt rates and maintaining the financial health of the institution.

- Strategy and Risk Analysis Department has the following functions:

Annually lead the development of risk and risk appetites, providing a report to the Risk Management Committee, while also evaluating the yearly execution of the strategy and risk appetite during the committee meetings.

Oversee the comprehensive credit policies across the entire system, including the credit policy, problem debt management strategy, and credit limit approval process, while also ensuring effective implementation and regular reassessment of these policies.

 Develop a customer rating system (Scorecards) and coordinate with functional Risk Management Departments to manage these systems

- The Division of Business Credit Risk Division has the following functions:

Effective quality management of the retail credit portfolio involves collaboration with relevant units to produce a comprehensive risk analysis report This report encompasses critical elements such as the overall credit risk landscape, characterization of bad debts, and the adequacy of provisioning levels.

 Regularly update the results of the Debt Collection system to adjust and orient credit policies

 Manage credit lines of products / programs, exception approvals in product / program products to ensure that they do not exceed the specified limit

 Build and manage the classification system and set up risk provisions;

 Conducting direct credit monitoring periodically or by topics such as by industry, business location of customers, customer segments, etc in business units;

 Proposing the transfer of debts from credit monitoring results to debt structure flows (financial solutions) or debt handling (litigation)

- Structure and debt recovery Department:

 The focal point for appraisal of structural plans for problem debt under the financial flow from units such as Credit Monitoring Department, business unit;

 Monitor and manage restructured customers before being transferred to Vietinbank's regular flow in each period and synthesize periodic reports;

 Proposing the flow of debt handling for unqualified debt structures or proposing to move to a normal flow

The Risk Management Committee at Vietinbank, guided by the Board of Directors, plays a crucial role in overseeing risk management practices By enhancing and diligently monitoring these practices, the committee aims to effectively minimize operational risks within the bank.

The Internal Audit Division at Vietinbank conducts thorough inspections within the bank's system, focusing on professional areas such as credit operations Their primary responsibility is to identify credit-related issues and mistakes across various Business Units, including the Risk Management Division and the Appraisal Unit.

2.3.2 Policies of credit risk management at Vietinbank - Ba Dinh branch

Vietinbank aims to enhance its credit activities by focusing on safety, efficiency, sustainable growth, and risk control, while aligning with international practices To achieve these goals, the bank has established a comprehensive credit risk management policy that outlines key principles and guidelines for effective risk oversight.

Establishing a comprehensive framework of credit documents, regulations, processes, and procedures is essential for fostering a structured and lawful environment for credit activities It is crucial to implement clear and consistent guidance on regulatory documents pertaining to credit operations, ensuring uniform application across the entire system.

To establish an effective decentralization mechanism for credit approval, it is essential to adhere to legal regulations governing credit operations while prioritizing safety, quality, and efficiency This involves granting autonomy and self-responsibility to executive levels in credit operations, ensuring compliance with the entire credit approval process The approach must align with the unique organizational characteristics, scale, capabilities, and operational features of each unit, as well as consider the complexity of loan objects, types of credit risks, credit duration, and competitive dynamics among credit institutions.

VietinBank strategically identifies its target market and lending sectors by selecting credit objects based on specific criteria, including industry focus, key products, geographic regions, customer profiles, and types of credit and financial products This approach enables the bank to effectively expand its credit offerings in alignment with its business objectives.

Building safety limits in credit activities is essential for banks to align with legal provisions and State Bank guidelines Banks should establish these limits based on their business strategies, which include overall credit limits for the system, specific limits for various industries and products, and individual customer credit limits Additionally, there should be a maximum rate limit for the use of short-term capital in funding medium and long-term loans.

To enhance credit activities, banks should establish tailored customer policies by categorizing clients based on financial and non-financial criteria, ensuring that each customer group receives specific and relevant policies.

 Loan security assets: VietinBank's regulations on loan security are implemented in accordance with current laws and in line with the bank's business strategy

Assessement of credit risk control at Vietinbank - Ba Dinh branch

2.4.1 Loan structure at Vietinbank - Ba Dinh branch

Credit structure by debt group of Vietinbank - Ba Dinh branch in the period of

2009 - 2018 is shown in the table below

Credit structure by debt group of Vietinbank - Ba Dinh Branch in the period of 2009 –

Year Group 1 Group 2 Group 3 Group 4 Group 5

Total outstanding loans at the end of the period (VND billion)

The debt structure analysis of Vietinbank Ba Dinh branch reveals a stable trend in group 3 and group 4 debts However, it is important to highlight that the bank's credit debt balance in group 5 has experienced a decline over the past three years, decreasing from 88 billion dong.

2.4.2 Overdue debt ratio at Vietinbank - Ba Dinh branch

The total value of overdue debt of Vietinbank Ba Dinh branch in the period of 2009 -

2018 is shown in the table below

Total value of non-performing loan of Vietinbank – Ba Dinh Branch in the period 2009 –

2018 (VND billion) Year Debts of Debts of Debts of Debts of Overdue

Group 2 Group 3 Group 4 Group 5 debt

From 2009 to 2018, Vietinbank - Ba Dinh Branch experienced a significant rise in overdue debts, escalating from VND 196 billion in 2009 to VND 362 billion in 2018 This trend indicates a growing credit risk for the bank, largely attributed to the increased scale of its loan portfolio, particularly in high-risk sectors such as consumer lending.

Despite a rise in overall value, the overdue debt ratio at Vietinbank - Ba Dinh Branch experienced a decreasing trend from 2013 to 2018 This trend is illustrated in the accompanying chart of overdue debt ratios for the branch.

The above chart shows that Vietinbank's overdue debt ratio - Ba Dinh Branch tends to decrease from 10.21% in 2013 to 5.89% in 2018 This shows the positive in the bank's risk management activities

2.4.3 Restructed debt ratio at Vietinbank - Ba Dinh branch

The value of restructured debt of Vietinbank - Ba Dinh Branch in the period of 2009 -

2018 is shown in the table below

Restructured debt of Vietinbank - Ba Dinh Branch in period of 2009 – 2018 (VND billion)

Year Total outstanding loans at the end of the period (VND billion)

Between 2009 and 2018, the restructured debt of Vietinbank's Ba Dinh Branch showed a significant upward trend, rising from 24.54 billion VND in 2009 to 52.43 billion VND by 2018 Additionally, in the last three years of this period, the restructuring debt ratio increased from 0.29%.

2016 to 0.85% in 2018 This also shows that part of the bank's credit risk is increasing

2.4.4 Total nonperforming loan at Vietinbank - Ba Dinh branch

Vietinbank's bad debt - Ba Dinh Branch includes debt group 3, 4 and 5 The total value of bad debts of banks is presented in the table below

Bad debts of Vietinbank - Ba Dinh Branch in the period 2009-2018 (VND billion) Year Group 3 Group 4 Group 5 Non-performance loan

Between 2009 and 2018, the value of bad debt in banks rose significantly, increasing from 83 billion VND in 2009 to 127 billion VND in 2018 This upward trend is largely attributed to a rise in group 4 debt over the last three years of the period.

2015, the bank kept the bad debt ratio below 100 billion VND

Non-performance loan ratio of Vietinbank - Ba Dinh branch in the period of 2009 -

Bad debt ratio of Vietinbank Ba Dinh branch in the period of 2009 - 2018 was kept at below 3% This shows the effectiveness in managing the bank's credit risk Notably, in the

Over the last three years, the non-performance loan ratio in banks has significantly decreased, falling from 2.57% in 2016 to 2.07% in 2018 Notably, Vietinbank's Ba Dinh branch recorded its peak bad debt ratio of 2.81% in 2010, while in 2014, it achieved its lowest rate of 1.64%.

2.4.5 Capital use efficiency at Vietinbank - Ba Dinh branch

Outstanding loans/Mobilized capital index shows the ability to proactively source capital in business of Vietinbank - Ba Dinh branch

Effective use of capital Vietinbank - Ba Dinh Branch period 2009 - 2018 (VND billion)

Total outstanding loans at the end of the period (VND billion)

2.4.6 Credit risk provision at Vietinbank - Ba Dinh branch

Risk provisioning is crucial for the banking sector as it equips banks with the financial resources necessary to manage credit risks, thereby ensuring operational safety Establishing these provisions demands strict adherence to regulatory requirements Vietinbank has implemented risk provisions in alignment with Circular 02/2013/TT-NHNN, demonstrating its commitment to regulatory compliance.

Provision for credit risks of Vietinbank - Ba Dinh Branch period 2009-2018

Year Total outstanding loans at the end of the period (VND billion)

Rate of credit loss provision (%)

From 2009 to 2018, Vietinbank - Ba Dinh Branch experienced a rise in its bad debt ratio, leading to a consistent increase in provisioning for credit risk The total provision value surged from 39 billion VND in 2009 to 76 billion VND in 2018 Additionally, the provisioning rate rose from 1.03% in 2016 to 1.23% in 2018, ensuring that sufficient capital is available to address potential risks effectively.

The reason for credit risk of Vietinbank – Ba Dinh branch

2.5.1 Survey results on the causes of credit risk

The author categorizes the causes of credit risk identified in the survey into three distinct groups: unpopular, popular, and very popular The findings are detailed in the table below.

Causes Unpopular Popular Very popular

There are no specific orientations and strategies for managing credit risk

No system to monitor the structure and overall quality of credit portfolio

No credit risk measurement system yet 90% 5% 5%

No team of credit risk management experts 64% 26% 10%

Staff are weak in credit risk management 40% 36% 24%

Activities of inspection and supervision have not been properly focused

Credit officers lack supervision before and after lending 7% 33% 60%

Database, credit information is incomplete 80% 13% 7%

Information asymmetric about customers, economic environment, investment industries

Preserving and evaluating collaterals not often, only checking dossiers

Appraisal has difficulty in analyzing financial and non- financial situation

Customers use capital for wrong purposes, inefficient 6% 24% 70%

Customers do not have goodwill in paying debts, intentionally cheating on banks

2.5.2 The reasons from macroeconomic environment

The unstable business environment, driven by natural disasters, epidemics, and unpredictable fluctuations in the global market such as economic crises and inflation, leads to significant losses for borrowers.

Financial liberalization and integration can heighten the risk of bad debt due to increased competition among businesses and banks As companies strive to survive in a fiercely competitive market, they may encounter losses and stringent selection criteria Additionally, domestic banks with underdeveloped management systems face greater bad debt risks, as foreign banks attract financially robust customers, leaving local institutions vulnerable.

The unfavorable legal environment poses significant risks for banking operations, as the State Bank of Vietnam (SBV) and related agencies have issued numerous laws and guidelines for bank credit activities However, challenges arise in the enforcement of coercive debt recovery measures, which allow banks to handle loan security assets when customers default In practice, commercial banks lack the authority to forcibly retrieve these assets, as they are economic entities rather than state authorities Consequently, the process of transferring loan security assets to the courts for resolution complicates the ability of banks to address outstanding debts and recover assets effectively.

The Credit Information Center (CIC) in Vietnam faces significant challenges, primarily due to the lack of a comprehensive mechanism for disclosing information about businesses and banks While the CIC has made some progress in providing timely credit operation information, the data remains limited and often lacks the necessary depth Currently, the CIC only offers insights into outstanding loans at credit institutions, neglecting non-financial information and the management capabilities of business leaders and individuals Additionally, information on individuals and businesses without existing credit relationships is not updated, further hindering the effectiveness of the CIC.

Misusing capital and failing to repay debts can significantly harm a business's reputation While most enterprises that secure bank loans have clear and viable business plans, a minority engage in fraudulent activities to misappropriate funds Such incidents, although infrequent, can have severe repercussions, damaging the credibility of officials and negatively impacting other businesses in the industry.

Unmanaged business activities can lead to serious issues, including a lack of financial information, absence of structured business plans, and an inability to adapt to market changes Many businesses struggle with weak financial capacity and limited management skills, often prioritizing physical asset investment when borrowing from banks for expansion Unfortunately, few companies focus on innovating their management and financial monitoring systems to meet industry standards As a result, the overwhelming size of the business can hinder effective management thinking, ultimately causing the failure of otherwise viable business plans.

Many customers' financial statements do not adhere to the Vietnamese accounting standards, leading to a lack of thorough and honest record-keeping by enterprises Consequently, the accounting records submitted to banks often appear more formal than they are, increasing the risk of fraud and inaccuracies As a result, when bank officials analyze these financials, they frequently find the data lacks practicality and authenticity This situation has prompted banks to view collateral primarily as a means to mitigate credit risks.

Non-willing customers often settle debts even when business operations are running smoothly, which can lead to a loss of credibility for the company Assessing customer reputation is crucial yet challenging, necessitating that credit officers possess the necessary skills and experience to make accurate determinations.

 Business operations are not favorable

 The main source of reimbursement from basic income is lost or reduced due to job loss, poor job transfer or inability to work

 Individual customers experience many unusual things in life, so they have to use a large amount of money to influence the ability to repay the bank

 Poor moral individuals deliberately mislead the bank, using the loan for the wrong purpose

2.5.4 The reasons from the bank

From the bank's perspective, understanding the root causes of overdue debts is crucial for minimizing credit risks at Vietinbank Current statistics indicate that the bank lacks a specific risk management process, which contributes to the prevalence of overdue debts Key reasons for these overdue debts must be identified to develop effective solutions.

Vietinbank has faced challenges due to its limited operational scale, which has helped mitigate credit risks From 2009 to 2012, credit officers were responsible for the entire lending process, impacting their performance as they handled tasks such as appraising, monitoring customer capital usage, and managing mortgage debts However, starting in 2013, Vietinbank has shifted its model to enhance credit management, allowing credit officers to focus on customer acquisition and debt monitoring, while centralizing the appraisal process at the Head Office to further reduce credit risk.

The appraisal process is hindered by insufficient information and the absence of benchmarking standards, making it difficult to draw accurate conclusions It fails to consider critical factors such as the actual business size of customers, their competitiveness in the market, and the sources of their clientele, which are essential for determining appropriate lending levels and effective monitoring.

On the other hand, customer reputation is an important factor associated with goodwill to repay customers' loans, often forgotten during the initial appraisal process;

Verifying customer-provided information poses a significant challenge for banks, as they currently lack connections with agencies like tax and customs to authenticate financial data In the face of intensifying competition among commercial banks, the role of the Credit Information Center (CIC) becomes crucial for supplying timely and accurate information to aid in sound lending decisions However, the CIC's database remains incomplete, with monotonous and outdated information that is not processed promptly.

The appraisal skills of officials remain inadequate, leading to challenges in evaluating the diverse businesses of borrowers Many credit officers lack essential information and knowledge about the specific sectors in which these businesses operate Consequently, investment projects often suffer from improper assessments of capital capacity, labor resources, and the abilities of business owners As a result, completed projects frequently fail to launch, leaving companies unable to repay their bank loans.

The bank's post-lending inspection and supervision processes are fraught with loopholes and errors, hindering effective monitoring of customer loan usage and timely debt recovery While some loan options yield effective sales proceeds, customers often fail to repay the bank, diverting funds to inefficient and unprofitable uses instead This issue primarily stems from the bank's lax control measures.

FOR CREDIT RISK MANAGEMENT IN

Tiêu đề	Solutions To Limit Credit Risks At Vietinbank- Ba Dinh Branch
Tác giả	Lê Diệu My
Người hướng dẫn	TS. Nguyễn Thị Kim Oanh
Trường học	Đại Học Quốc Gia Hà Nội
Chuyên ngành	Quản Trị Kinh Doanh
Thể loại	thesis
Năm xuất bản	2020
Thành phố	Hà Nội

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Tài liệu tham khảo	Loại	Chi tiết
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2. Basel Committee on Banking Supervision (2006). International Convergence of Capital Measurement and Capital Standards, A Revised Framework. Technical report, Bank for International Settlements, Basel	Khác
3. Bjorn Imbierowicz and Christian Rauch (2013). The relationship between liquidity risk and credit risk in banks	Khác
4. Brigitte Godbillon – Camus and Christophe J. Godlewski (2005). Credit risk management in Banks: Hard information, Soft information and manipulation	Khác
5. Henderson, T (2011). Counterparty Risk and the Sub-prime Fiasco. 2011 -01-02	Khác
6. Edward I. Altman (2001), Managing credit risk: A challenge for the new millennium 7. Nguyen Anh Dung (2014). Non – performing loan. Case study in Vietnam: Causes,consequences and effects	Khác
8. Nguyen Dinh Thanh (2014). Improving the management of Non – performing Loan in Joint Stock Commercial Banks – The case of the bank for Investment and Development of Vietnam (BIDV) – Quang Trung Branch	Khác
9. Myrna R. Berrios (2013). The relationship between bank credit risk and profitability and liquidity. The International Journal of Business and Finance Research. Vol. 7. P.105 – 118	Khác
10. Moses Ochieng Gweyl (2013). Credit risk mitigation strategies adopted by commercial bank in Kenya. International Journal of Business and Social Science, Vol.4, No. 6, June 2013. P. 71 - 78	Khác
11. Olawale Luqman Samuel (2013). The effect of credit risk on the performance of commercial banks in Nigeria	Khác
12. Tony Van Gestel and Bart Baesens (2008), Credit risk management: Basic concepts: financial risk, components, rating analysis, models, economic and regulatory capital, Oxford University Press	Khác
13. Ping Han (2015), Credit risk management of Commercial Banks. Journal of Business Administration Research, Vol.4, No. 1	Khác
14. Rekha Arunkumar, G. Kotreshwar (?). Risk management in commercial bank – A case study of public and private sector banks	Khác
15. Vo Minh Huong (2015). Credit risk management in banking industry. Case study – Joint – stock commercial bank for Foreign trade of Vietnam	Khác