improving credit limit system in Vietcombank

Tài liệu tham khảo tài chính ngân hàng improving credit limit system in Vietcombank

THEORETICAL FRAMEWORKS ON CREDIT LIMITAT COMMERCIAL BANKS.9101.1 Bank Credit 910

1.1.1 Definition 910

1.1.2 Characteristics of bank credit 1011

1.1.3 Roles of bank credit 1112

1.2 Credit limit system in commercial bank 1415

1.2.1 Definition of credit limit system 1415

1.2.2 Roles of credit limit system 1415

1.2.3 Basis for credit limit system 1617

1.3 Factors effecting credit limit system in banks 2728

1.3.1 External factors 2728

1.3.2 Internal factors 2930

Chapter 2 CREDIT LIMIT SYSTEM AT VIETCOMBANK 3132

CREDIT LIMIT SYSTEM AT VIETCOMBANK 3132

2.1 Overview of Vietcombank and its performance 3132

2.1.1 Introduction to Vietcombank 3132

2.1.2 Vietcombank’s major performance indicators 3536

2.2 Credit activities at Vietcombank 3738

2.2.1 Overview of credit operation at Vietcombank 3738

2.2.2 Credit policies in Vietcombank 3941

2.2.3 Credit activities 4143

2.2.4 Types of credits 4648

2.3 Credit limit system at Vietcombank 4850

2.3.1 Structure of the system 4850

2.3.2 Regulations of credit limit system 5253

2.3.3 Procedure for approving credit limit 5254

2.3.4 Process of determining the credit limit 5355

2.3.5 Process for credit coring and rating customer at Vietcombank 5961

2.4 Assessing credit limit system at Vietcombank 6870

3.1.2 Objectivities of VCB’s credit activities to 2012 7578

3.2 Solutions to improve credit limit system at VCB 7779

3.2.1 Improve structure of VCB 7779

3.2.2 Improve credit policies 78

3.2.3 Improve credit scoring and rating 8082

3.2.4 Improve information technology systems 8183

3.2.5 Strengthen human resources 8183

3.3 Recommendations 8284

3.3.1 Recommendation to related agencies 8284

3.3.2 Recommendation to the State Bank 8385

CONCLUSIONS 8587LIST OF REFERENCES 8688

First of all I would like to express the profound gratitude to my supervisorAssoc.Prof.Dr Nguyen Van Dinh for his valuable advice and comments on myresearch work I am sincere thank to his for kindly accepting my proposal to be mysupervisor.

I am grateful to professors for giving me advices and comments from step ofpresenting outline of thesis It is the column of helping me to complete successfullymy thesis I would like to give my special thanks to my colleagues at the workingplace, the Joint Stock Commercial Bank for Foreign Trade of Vietnam(Vietcombank) – Thanh Cong branch for their valuable supports cooperationthroughout my study.

In addition, I would like to thank all professors in NEU Business School fortheir knowledgeable lectures, who have kindly given me their helpful feedback tomy research and inspiring me to deliver the report today.

CAR Capital adequacy ratioCEO Chief executive officerCIC Credit information centerFDI Foreign direct investmentGSO General statistics officeH.O Head office

IT Information technologyL/C Letter of credit

ROI Return of investmentROA Return on assetsROE Return on equityBOD Board of directorSBV State bank of Vietnam

SMEs Small and medium enterprises

VCB Vietcombank – Joint Stock Commercial Bank for ForeignTrade of Vietnam

WTO World trade organization

LIST OF TABLES

Table 2.1: VCB business result in period of 2004-2008 35

Table 2.2 : Outstanding Structure by customers 43

Table 2.3: Loan structures by industries 44

Table 2.4: Loan structure by term and currency 45

Table 2.5: VCB outstanding debts & result of credit performance 48

Table 2.6: α 51

Table 2.7: β 51

Table 2.8: Identify the credit risk for customer 54

Table 2.9: Level of risk 57

Table 2.10: Credit limit depend risk 59

Table 2.11: Scope of business 61

Table 2.12: Customer point for commercial & service company: 63

Table 2.13 : Financial capital 64

Table 2.14: Management level 64

Table 2.15: Credit prestige rating 65

Table 2.16: Summery of nonfinancial indicators: 66

Table 2.18: Customer rating 67

Table 2.19: Over due ratio 69

LIST OF CHARTS

Chart 2.1: VCB structure (Parent company structure) 33

Chart 2.2: VCB structure (Operation structure) 34

Chart 2.3: Total Assets of VCB in the period of 2004-2008 36

Chart 2.4: Vietcombank ROA & ROE in 2004-2008 36

Chart 2.5: Vietcombank ROA & ROE in 2004-2008 42

Chart 2.6: Outstanding debts by industries (31/12/08) 44

Chart 2.7: Outstanding debts by geographic (31/12/08) 45

Chart 2.8: Loan structure by term and currency 46

1 Rationale of the research

Expanding credit activities is one of the most important requirements of a fastgrowing economy and commercial banks need to maintain and improve theircompetitive positions However, expanding credit means increasing risk in creditactivities of banks Credit limit system is designed to help commercial banks settlethe conflict between growth target and risk management.

Bank for Foreign Trade of Vietnam is one of the leading commercial banks inVietnam with constantly increasing total assets, loans and equity As other commercialbanks, designing and maintaining a credit limit system is crucial to Vietcombank’sdevelopment,

Although Vietcombank has already implemented its credit limit system andcredit activities clearly and uniformly but a lot remains to be done for the finalpurpose of the perfection of this system.

Therefore, the author decided to choose the theme ‘’improving credit limitsystem in Vietcombank’’ in order to find out some feasible solutions for the bank.

2 Objectives of Research

This study aims at finding out Vietcombank’s issue, the weaknesses andrecommends solutions to improve its credit limit system This objective will beachieved by performing the following tasks:

- To summarize major aspects of credit limit system in a commercial bank andthe basis to design this system

- To analyze and evaluate current status of credit limit system of Vietcombank- To propose some solutions to improve credit limit system at Vietcombank

3 Research Methodology: Survey/short interview

The research will cover fact, concepts; techniques and approaches exploredfrom credit limit in identifying problems and therefore find out necessarysolutions for Vietcombank The research also gives a quantitative and qualitativeanalysis of this application process

To find out disadvantages of credit limit system, I chose one company; usesecondary data such as financial report, introduction of the company, information ofcompany on website, newspaper…to evaluate all qualitative and quantitative indicators.

I also have short interviews with manager or transaction staff of the company toget more and confirmed information before giving out final decision.

4 Scope and Limitation

Credit limit system in Vietcombank applied for all kind of customers suchas: financial institutions, enterprises, households and individuals In this thesis,the scope of credit limit system in banking only focuses on customers whichare enterprises to analyze then issue recommendations to improve credit limitsystem in Vietcombank

The research refers to theoretical frameworks on Credit scoring and ratingat commercial banks and the actual credit limit system in Vietcombank Afteranalysis, the research will show some problems in VCB then give somerecommendations to improve

The research also refers to actual Vietcombank credit activities and therole of credit performance to business operation

Nowadays, changes in banking business are very fast but the policies andregulations of officers, State-banks and Vietcombank can not be changedimmediately So sometimes, these hinder the Vietcombank’s business Besides, theinnovation of credit products is more flexible and modern so the type of enterpriseis changing and becoming more difficult to measure Therefore, creditors andmanagers need to improve their skills, find more useful methods to measure, scoreand rate them accurately.

5 Structure of the thesis

The thesis consists of three main chapters as follows:

Chapter I: Theoretical frameworks on Credit limit at Commercial bankChapter II: Credit limit system at Vietcombank

Chapter III: Proposed solutions to improve credit limit system at Vietcombank

Chapter 1

THEORETICAL FRAMEWORKS ON CREDIT LIMIT ATCOMMERCIAL BANKS

1.1 Bank Credit1.1.1 Definition

Credit relationship is established and existed as objective demands of capitalcirculation process to tackle excess or, deficiency of capital that often occurs in theeconomy

A credit is a legal contract where one party receives resource or wealth fromanother party and promises to repay him on a future date along with interest Insimple terms, a credit is an agreement of postponed payments of goods bought orloan With the issuance of a credit, a debt is formed (10)

In other definition, credit is a temporary transfer of value (assets) from theowner to the user in a certain period of time, Users have to return a larger value ondue date There are three categories of credit: temporary transfer of value, limit timeand reimbursement.

There are many types of credit such as state credit, business credit, personalcredit and bank credit In which bank credit is transferring assets (capital) betweenbanks with other entities in the economy In this relationship, the bank has role asborrowers (debtors) and role as the lender (creditor) This is an indirect relationshipwhere the depositor, through the intermediary role of banks, invests capital on whoneed

Bank credit is operation that the bank agree to client use assets (in cash,property or reputation) the principle of repayment by granting loans, discounts(rediscount), financial leasing, guarantee bank and other operations.(21)Distinguishing the credit and lending: any transferring right of temporary using(with repayment) assets is reflected credit relations, this relation is reflected in theforms: granting loan, discount, guarantee and leasing Thus, credit is broader thanloan but granting loan is the most important activity and accounts for the largestproportion in credit activities of commercial banks Therefore, the term credit andloan is mixed and is often used interchangeably.

1.1.2 Characteristics of bank credit

Bank credit bases on trust Banks only grant loans if they are trust in usingloan for right purposes, in efficiency of project, and ability in repaying (principaland interest) on due date of customers.

Credit is a transferring asset in a limited period Banks are financialintermediaries ''borrowers to lenders’’, so all bank credits must have duration to ensurerepayment mobilize capital To determine a reasonable period of loan, the bank mustbase on term of capitals and process of capital rotation of borrowers If the bank hasmuch stable long-term capital, it can grant long term loans On the other hand, term ofloans must be matched with the rotation cycle of borrower for repayment on due date.If the banks determine the loan period must be less than the rotation period of capitalfor borrowers, the customers do not have enough resources to pay debts on due, thiscause difficulties for customers Conversely, if the term is longer than rotation cycle ofcustomers, customer use loans improperly, this cause credit risk for banks.

Credit must be repaid on the principle of principal and interest Refund valuemust be greater than original value, this means in addition to refund the originalvalue, the customer must pay the bank an interest, and this is the price of the usingloans Interest amount is always more than 0, this offsets operating costs, generatesprofits for banks and, reflects the nature of bank business.

Credit operation is potential high risk of the bank Attracting credit dependsnot only on customers, but also on the business environment, this beyond thecontrol of clients such as fluctuations in prices, interest rates, exchange rates,inflation, rising economy, markets, natural disasters When customers havedifficulties in repayment because of changing business environment, the bank getcredit risk.

Credit must be based on the commitment to refund unconditionally Processgranting loan places on the basis of strict legal grounds such as credit contracts,agreements for a loan, collateral contract, guarantee that the borrower mustcommit to a return unconditionally to the bank on due date.

1.1.3 Roles of bank credit

As any other business, one of main objectives of a bank is to make ‘’profits’’for its shareholders out of the services provided to the public.

And how does a bank make profits?

As you all know, the principal business of a commercial bank is to receive moneyfrom customers either on current account or on deposit account The money thusdeposited will form a cash base for granting credit to other customers for various reasons.In both cases, interest is involved However, the rate of interest charged on advances ishigher than that applied to deposit accounts The difference between interest earned andpaid represents profit made by the bank This is the main source of income for a bank Ofcourse a bank also makes its profits from buying and selling foreign exchange,commission/fees charged for services provided and income from investments.

It may be unfair to say that a bank gives credit simply to make profit for itself.In many ways bank lending promote the economic growth of a country Forexample, companies who want to expand their business or who are in need ofadditional working capital can approach their bankers for assistance Also, bank canadopt a credit policy that wills encourage industrial development and investments,thereby creating employment opportunities and improving the standard of living Aspurchasing power is increased, people will stimulate further economic growth.

You may perhaps have another question: how much of the customers’ depositscan a bank lend out?

Obviously banks cannot lend out all the money deposited with it because theyhave to make provision to meet customers’ request of withdrawing the whole or partof their money on demand or at a fixed future time On the other hand, we cannotleave too much money lying idle as this will not generate any profit It is thereforeimportant that banks should carefully employ bank’s resources and maintain areasonable spread of them among the various forms of assets, advances andinvestments so as to obtain the maximum profit.

It’s necessary to take a look at the role of credit in the capitalist economy

For the economy

The fundamental role of bank credit for the economy is to transfer capital fromthe people (individuals, households, companies and governments) that have capitalsurplus (due to spending less than income) Loan capital is not only for businessesbut also for consumer demands Why is transferring capital from saver to usersimportant to the economy? The answer is that savers often have not manyinvestment opportunities Thus, transferring capital between entities in the economywould have been congested without banks’ existence Therefore, transferring capitalchannel through banks takes an important role in promoting efficiency of theeconomy.

Bank credit is not limited only on the traditional function which is transferringcapital but also expanded on allocating effectively allocation of financial resourcesin the economy Through bank credit, capital is transferred from people who lack ofefficient investment projects to those who have efficient investment projects butlack of funds The result is growing the economy, creating jobs and increasing laborproductivity.

Capital bank invested in the credit lines, key sectors helps promotingdevelopment, modernization, efficiently of those sectors

Bank credit contributes to circulating currency, commodities, regulatingmarket, controlling value money and expanding economic exchanges betweencountries.

Bank credit brings huge revenues to the state budget through income taxes andinterest from capital investment of the government

Bank credit is transmission fund channel to agriculture, rural areas, povertyreduction, political stability and social.

For customers

First, bank credit meet promptly demand for quantity and quality capital forclients With advantages such as safe, convenient, fast, accessible and able to meetthe large capital requirements, bank credit satisfy various needs of customers

Second, bank credit helps investors capturing business opportunities,expanding production, improving of individual life.

Third, bank credit constraints customer repaid principal and interest during thefixed term as agreement Thus, this force clients attempt most of their ability to useloans effectively, speed up the process of reproduction, profitable business andensure debt repayment obligations to the bank.

For banks

First, credit is traditional activities, accounting for the largest proportion oftotal assets and bring major source of income for banks (from 70 to 90%) Althoughthe proportion of credit activities tends to decrease, but bank credit is alwaysprofessional using the most important capital of the bank

Second, via credit activities that banks diversify the portfolio assets minimize risk Third, through credit activities, the bank expanded types of services such aspayment, deposit, foreign currency trading, consulting

1.2 Credit limit system in commercial bank

1.2.1 Definition of credit limit system

A credit limit is the maximum amount of credit that a financial institution or

other lender will extend to a debtor for a particular line of credit cần cắt bỏ đoạn trongngoặc như hôm trước đã thao luận For example, the maximum that a credit cardcompany will allow a card holder to borrow at any given point on a specific card.

Credit limit system of a bank is a set of credit limits which apply to variouscustomers or various groups of customers.

These limits are based on a variety of factors ranging from an individual'sability to make interest payments, an organization's cash flow and/or ability to repay

the principal, to the credit standards employed by the lender A credit limit is alsobased on the borrower's recoverable assets in the event of default.

Credit limits are most often seen by consumers in the form of revolving linesof credit known as credit cards They are also used in the extension of open accountcredit terms from business to business Other examples include home equity lines ofcredit, residential mortgages/owner-occupier home loans with redraw facilities, acommercial line of credit or a Bank guarantee The limit imposed in most cases isfixed for the life of the product, except in the case of credit cards that may be raisedupon application by the card holder or offer by the card issuer.

Roles of credit limit system

Credit activities are one of the main activities of commercial banks Each bankhas a credit procedure and the most important step is the evaluation of whether ornot granting loan To make a decision whether or not a loan, credit officers use a lotof financial and non-financial information However, each credit officers interestedin a different aspect of the business, the assessment is correct or not depends verymuch on qualification and experience of credit officers If credit officers wellqualified, the evaluation results are exact and reduce risks for banks and vice versa.This also causes difficulties in the approval of managers In addition, there is nobasic for evaluation what maximum amount that can be offer for a customer.Therefore, to create unity in the evaluation of credit, banks have built a system ofgrading and credit ratings On that basis the bank built a total limit for eachcustomer based on the ability of the enterprise, based on the maximum rate thatcredit officers may have grounds to consider loans Besides, credit limit helpbranches are active in lending in the limit.

Commercial banks apply credit limit system as a method to manage riskaccording to international standards

In operation of credit, there are two levels of risk in general: (i) overall risk forcustomers, and, (ii) risk of specific transactions Overall risk is understood asbusiness losses, inability in repaying debts Transaction risk means that transaction

is not effective In business, company does a lot of transactions Risks of atransaction may not lead to overall risk, but if overall risk occurs, the system willoffer all risks.

Credit limits focus to overall risk, not to transaction risk Therefore, the creditofficers must still assess the risks of specific transactions in each granting loans.However, the credit limit helps credit officers do not repeat overall risk assessmentof customers

From management point of view, roles of credit limit are as follows:

Control overall risk for customer:

Previously, each professional departments asses risk of their customer bythemselves For example, credit limit for lending of credit department isindependent to credit limit for L/C free deposit of Trade finance department Therefore, customer’s information is distributed.

In nature, all credit products from lending to opening L/C-free deposit bringsrisk for the bank So it is necessary to having a measure to manage all aspects ofrisks, and credit limit is one of important measure.

Enhance collectivity, objectivity in credit activities:

The bank empowers self-determination to people who have ability to decidegranting loan or not (director or deputy director of branch) The decentralization iscreating a proactive and flexible for credit department when working with clients,but also contains certain risks because decisions of individuals are notcomprehensive, objective.

To solve this problem, the bank first determine maximum credit for eachcustomer (is credit limit) Credit limit is approved by board of credit, not by anyindividuals In determined credit limit, manager of branch can decide on his ruling.Thus, the integration of the individual judgments on the credit limit to ensure safetyand objectivity of individual’s decisions

Expand initiative of branch in credit activities to meet flexible needs ofcustomers

In determined credit limit, the branch can pre-determined actively possiblelevel of transactions for their customers (as evaluation of the branch), does notdepend on customers request officially or not All credit limits are exceededauthority, the branch must submit to head office for approving

Depend on credit limit, the branch can approach needs of customers actively,even refuse customers that are not good.

1.2.2 Basis for credit limit system

To determine credit limits in a credit limit system, the first step and also themost important step is credit scoring and rating Credit scoring and rating counts to70% workload in the process of determining the credit limit

Credit limit system includes credit scoring system and credit rating system.After determining the class of business, based on equity, collateral, field of thebusiness, credit officers can determine credit limit for customers.

1.2.3.1 Credit scoringCredit scoring

A statistical technique used to determine whether to extend credit (and if so,how much) to a borrower Credit scoring is often considered more accurate than a

qualitative assessment of a person's credit worthiness, since it is based on actual

data When performing credit scoring, a creditor will analyze a relevant sample ofpeople (either selected from current debtors, or a similar set of people) to see what

factors have the most effect on credit worthiness Once these factors and theirrelative importance are established, a model is developed to calculate a credit score

(a number indicating how credit-worthy the applicant is) for new applicants The

officerinputs applicant-specific information for each variable in the model, and canthus find out how credit-worthy he/she is Developing a credit scoring model is

usually a time-consuming, complicated process given that creditors often have tolook at a large sample and consider many different variables Thus, these models areusually developed at the firm level as opposed to the individual credit office level.Some of the factors considered when developing a credit scoring model are

outstanding debt, the number of credit accounts maintained, age, income, credithistory, etc As required by the Equal Credit Opportunity Act, a credit scoringmodel cannot consider race, sex, marital status, national origin, or religion If age isconsidered, the analysis should be such that older people are given equal

consideration in a credit application (311)

Lenders, such as banks and credit card companies, use credit scores toevaluate the potential risk posed by lending money to consumers and to mitigatelosses due to bad debt Lenders use credit scores to determine who qualifies for aloan, at what interest rate, and what credit limits The use of credit or identityscoring prior to authorizing access or granting credit is an implementation of atrusted system.

Credit scoring is not limited to banks Other organizations, such as mobilephone companies, insurance companies, employers, and government departmentsemploy the same techniques Credit scoring also has a lot of overlap with datamining, which uses many similar techniques.

Describes methods of credit scoring

Credit scoring is a method to assess credit risk of customers throughevaluating all information of customer Criteria are applied differently to differenttypes of customers

Credit scoring for three different types of customers: financial institutions,enterprise and individuals This thesis refers to scoring enterprises

Principal of credit scoring enterprise:

- If point of customer is between two level, chose higher point - Ranked point is result of the initial point and weight.

Using credit scoring system

Scoring division

Credit officers are those who are responsible for credit scoring and rankingcustomers

Manager is in charge of controlling credit scoring and ranking customer

Results of credit ratings:

The rating is used for credit purposes: - Define credit limit

- Refuse or accept granting loan, duration, interest loan and collateral - Assess current status of customers

- Manage credit list and extract credit risk reserve

Credit scoring and ranking enterprise

Type of ownership

Type of ownership affects quite a lot of ability to payable of enterprise.Enterprises can be divided into four groups:

o State-owned enterpriseo Private enterprise o Mixed owned enterprise

o Enterprise owned by individuals and organizations abroad.

All type of enterprises has their own advantages and disadvantages, but ingeneral, depending on the characteristics of each economy that type has differentstrengths Vietnam is an example Vietnam’s economy is affected by former regimeof the planned economy which used to get all support from the State Thesepriorities are expressed through preferential policies; financial support by theState Enterprise that is guaranteed by state has a lot of advantages But it does notmean other businesses do not have their advantages Joint venture or 100% foreigninvestment enterprise that have entered Vietnam market have many advantages as

machinery, modern technology and supporting by the Government throughencourage policies to open investment These businesses work often moreeffectively than state-owned enterprises In addition, private enterprise develops notequally This fact arises from ability of leaders capital invested in businesses,further more because they received little support from the state This type ofenterprise is less favorable than most others.

So type of business impact performance business, it also affects to payableprincipal and interest There are impacts not only due to the preferential policies ofthe state but also the subject of business The subject is more important, the safetyof loan is higher Considering to type of ownership helps bank evaluate in eachperiod, enterprises which have advantages get higher corresponding points This is anecessary criterion in the process of grading business.

Business fields

In current market economy, number of active enterprises is not small.Enterprises are variety in skill, kinds of goods, business cycle, and level of risk…Therefore, to evaluate customer accurately, banks also need to arrange enterprisesthat have similar features to same group This arrangement helps banks see thepotential of each enterprise in each specific period This outlook comes from thecharacteristics of each economy Each country select different direction ofdevelopment depends on its strength Developing countries focus on trade oncommerce, services and industry For developed countries, agriculture is always keysector economy The choice depends greatly on the social, geographic characteristicseach country, as well as the development strategy that the State selected.

In parallel with the identification of key sectors of each country, it also needsto understand the development trend of countries, particularly in transitioncountries In a transition economy, enterprises are in sector that State setdevelopment goals have many advantages Singapore is an example Before 2002,the strength of the Singapore is tourism and information technology, but from 2002to date, Singapore gradually shifted to biotechnology, a new and potential sector.

This is a right direction With this conversion, the biological research center inSingapore is invested with high capital, improved infrastructure, and procurementof machinery In the near future, biotechnology surely becomes strength of thiscountry So loans granted for customers in biology field are safer Of course banksscore these companies higher than others

The question arises: is dividing enterprises into groups in credit scoringnecessary? The answer is yes Key or basic sector are supported by the State.Moreover, enterprise in key sector is in favorable conditions If the State doses notinvest in key sector, fail of this sector impact to overall economy So in creditscoring, dividing enterprise into groups is necessary Bank builds a frame score forbusinesses But this frame needs to change in each period

Scale of equity

Scale of enterprises is a synthetic criterion includes many indicators such asobligations to the state, the total value of assets, equity, and revenue Scale of equityis top priority indicator It is understood that all business’s capital is spend toconduct business; this capital can be added or reduced during operation Not onlybusiness owners but also creditors care to this capital monitored On balance sheet,total capital includes short-term loans, long-term from credit institutes, payable andreceivable, capital gain from the activity bond issuance, equity and other types ofcapital Cost of capital from loan is lower than from equity Business realizesadvantages of using loan, not only of low cost but also low risk Therefore, businessuse loans to expand production Of course the loan is only made when debtor meetrequirements of lender These requirements are in order to ensure repayment ofenterprise In the request, equity is a very important part Investors find peace ofmind when the equity counts safe proportion in total capital So scale of equity isincluded in scoring table when bank evaluate customers.

However, the same scale of equity enterprises may have not same score Scoredepends on business sectors For each sector, required capital in operation varies.Trade and services sector has faster cycle of working capital , they can make

effective business capital, so should usually not need more capital but still gainconsiderably stable profit margin Meanwhile, construction field need large amountof capital because of time depreciation, proportion of equity in this field is usuallysmaller than loans so scoring model is different with other sectors Agricultural,forestry and fisheries sectors bear more objective risks such as season, materialsprice… In generally, each sector has specific characteristics so same scale of equitynot means same risk

Proportion of equity ensures safety for investors So this indicator isnecessary.

Financial indicator

This indicator reflects overall financial capital and also reflects ability ofrepaying of business The most important target of bank is collecting principal andinterest from borrowers so analyzing financial indicator is necessary

This indicator includes 5 criteria as follows:

- Growth criteria: help analyzer compare operation of enterprise throughrevenue and profit in 2 years:

o Revenue growth rate = (revenue-revenue previous year)/revenue previous year o Profit growth rate = (profit-profit previous year)/profit previous year.- Performance criteria include:

o Inventory turnover = Cost of goods/Average Inventory

o Repayment of capital ratio = receivable / average revenue a day o Performance using property = Revenue / Assets.

- Liquidity criteria:

o Current ratio = current assets / current liabilities

o Quick ratio = (current assets - Inventories) / Current liabilities.- Income criteria:

o Return on Assets (ROA) = (Profit before tax / total assets) * 100%

o Return on Equity (ROE) = (Profit before tax / Capital) * 100% o Profit margin = (Profit before tax / Revenues) * 100%.

- Balance capital criteria:

o Debt ratio = (Total outstanding debt / total assets) * 100% o Debt and interest repayment ratio

o Ratio of overdue debt on total outstanding loans.

Obviously businesses goes well, use capital efficiently will get a score higherthan companies are struggling financially However, these indicators base on thefinancial statements of the enterprise, so they may have unwanted fluctuations.Bank assess the importance of each criteria focusing on two indicators reflect thedebt balance and profitable When indicators are completed bank bases on thesecriteria to give out decision of granting loan.

Non-financial indicators

Financial indicators are necessary but not enough because they base on pastfigures by companies banks rely on to predict financial capacity of enterprises.Bank can use other factors determines success or failure of business Consideringnon-financial factors help the bank assess business accurately Some indicators thatbank interest when building scoring system as follows:

- Prestige in credit relations include: the number of loans extended, thenumber of deferred interest, overdue debts Businesses do not make the debtrepayment obligations in case: difficult finance or not aware of repayment Need tofind out the customers in which case Customers do not have good credit past willnot be high scoring, hard to be granted credit or not much.

- Product, market and position of the enterprise:

o Market: before going into operation, a business has to determine demand ofmarket, and find out target market This market plays crucial role for the existence of

the business, and bank also care about when evaluating customer Credit institutes needto find out the trend development, size and ability to consume of market in future.

o Product: banks studying product of enterprise need to consider some thefollowing: quality, price, compete of product with others on market? Is inputproduct stable? Products are at which stage of life cycle etc Answers of abovequestion help bank evaluate appropriately point of business.

o Position of the enterprise: position target is difficult to assess accurately,only be measured by qualitative It bases on: the popularity of the business throughpeople known Fluctuation of the market in changing of the enterprise; attitude ofcompetitors;

Studying targets, analysts can evaluation is more accurate; avoid setting uphigh point for business in bad situation

- Experience, qualifications and abilities of leadership and management.

Enterprise still succeeds and expands production with small capital if theyhave proper oriented direction That is true So analyzers can not ignore this factor.Which is the number of years of operation, number of years as much as convenientfor enterprises because they make these ideas more wisely? But that does not meanhaving many years experience as leaders can do

- Collateral

Collateral is used to increase repayable of customer These assets are oftenunderestimated than market price and value of loan always is lower than value ofcollateral Provisions not only helps prevent credit risk, but also give enterprisemore chance of receive loan The bank is not a pawn name, their mission is not aliquidation of assets but is lending, and credit amount for their customers is huge.For that reason, banks should be very interested in collateral.

The non-financial indicators show responsibility for repayment of business.Business does not always work well, they can not afford to repay on time, bank can

base on non-financial indicators to evaluate the future of that debt and have policiesconsistent with the enterprise

1.2.3.2 Credit ratingCredit rating

A credit rating assesses the credit worthiness of an individual, corporation, or

even a country Credit ratings are calculated from financial history and currentassets and liabilities Typically, a credit rating tells a lender or investor theprobability of the subject being able to pay back a loan However, in recent years,credit ratings have also been used to adjust insurance premiums, determineemployment eligibility, and establish the amount of a utility or leasing deposit

A poor credit rating indicates a high risk of defaulting on a loan, and thusleads to high interest rates, or the refusal of a loan by the creditor.

The rating that follows – an opinion on creditworthiness—is generated by ananalytical team, a report is prepared with the rating and rationale, this is put to therating committee made up of senior officials, and a final determination is made inprivate The decision is subject to appeal by the issuer Issuer credit ratings can beeither long or short term S&P use the following nomenclature for long term issuecredit ratings

AAA - (highest/ extremely strong capacity to meet financial commitments AA - very strong capacity to meet financial commitments

A – strong capacity to meet financial commitments, but susceptible toadverse affects of changes in circumstances and economic conditions

BBB - adequate capacity to meet financial commitments

BB – less vulnerable in the near term than other lower rated obligators, butfaces major ongoing uncertainties

B – more vulnerable than BB – but adverse business, financial or economicconditions will likely impair obligator’s capacity to meet its financial commitments

Purpose of credit scoring and ranking customers

The purpose of credit scoring is based on test data, analyze data from records,financial statements and audit reports of the enterprises to evaluate the workingsituation, profitability, liquidity in the present and future business in order todetermine the ability to withdraw capital of bank.

The credit scoring and ranking is implemented to support bank in:

- Decision granting loan is determining credit limit amount of loan/guarantee,term, interest rates/fees, and security measures for credit

- Monitoring and evaluating customer when remain outstanding loans to helpbank anticipate the signs of bad loans and give out countermeasures in time.

In term of managing the entire portfolio of credit, credit scoring and rankingcustomers to:

- Develop marketing strategies towards customers to less risk - Estimated bad debts to extract up reserve credit risk

In short, the purpose of credit scoring and ranking is to anticipate the risksmay occur in the business.

Principles of credit scoring and ranking

In the process of credit scoring, staff gets the initial point and total point torank customers

- Initial point is point of each grading criteria that credit officers identifiedafter analyzing of the criteria

- General points to rank customers are the initial point multiplied with weightnumber

- Weight number of the level of importance of each credit scoring criteria(financial or non-financial indicators) considers to perspective of the impact ofcredit risk.

In the process of credit scoring, staff uses standard tables to evaluate the creditscoring criteria as follows:

- For each criterion, indicator is closed to which actual value will apply thatvalue to ranking, if the point is between two priorities, toward the higher.

- Where customers are guaranteed fully (greater than or equal to 100% ofcredits amount) of a strong organization, staff can use results of the credit rating ofguarantor to determine the customer's credit rating (if the guarantor are also graded).Grading process for guarantors like process applied to customers If customer isguaranteed partially, staff grades only that customer.

Grouping customers in credit scoring

Because of the difference among customers, in order to score and rankcustomer accurately, science, bank divides borrowers into three groups:

- The enterprise customer

- The individual customers (including individuals and households) - The credit institutions customer

Customers that are not eligible to be scored (such as administrative unit ) beconsidered under specific instructions in each period whichCredit officers are thosewho are in Refusetheir own s the planned economy which used to financial sdoestheir sthat have enterredes characteristicsIn p theof ona transition economyThe asthecsvarieser cycle of working capital y stable margin

1.3 Factors effecting credit limit system in banks1.3.1 External factors

1.3.1.1 Legal system on accounting, statistics, public informationregulations

Legal system relating to credit activities includes laws and sub-law documents.Complete and uniform legal system facilitate all activities in economic life -society However, the legal system really only works when compliance seriouslyunder the supervision of agencies Complete legal environment is important factorfor ensuring the formulation of the credit limit of commercial banks

Legal system, policies of the state is incomplete, lack harmony, manyloopholes, lax management or harassment cause difficulty in managing credit riskof commercial banks Result is overdue debts, bad debts and high credit risk.Conversely, full and uniform policies of the state contribute to effectivemanagement of credit risk positively

System credit limit subject to the Bank Law, Law on Credit Institutions wasalso influenced by the laws on accounting, statistics and regulations publishedinformation The texts are very big influence to collect information from customers.

1.3.1.2 Sources of information

Maintaining credit information in bank system is extremely important becausecredit information create centralized databases of customers to serve process forcredit analysis and credit management, credit risk management Credit informationhelps searching and early detecting of problem and appreciating the level of risk,and foreseeing the possibility of a loan can be transferred to bad debt.

A full information system of customers such as: History and development,financial capacity, the level of confidence, quality manager is very important helpfor credit scoring The adequate system will affect greatly the ability of evaluating,classifying customers

To apply the method of scoring and credit rating, banks must have a creditinformation system to automatically collect information accurately and fully tocustomers This is a very important factor, to determine the accuracy of the resultscredit scoring Quality of information sources is expressed by four factors:

- Fully and timely

Periodically or upon arising, credit information must be collected, recordedand processed in time to reflect accurately the level of risk and ability inimplementing their obligations with bank, and help bank adjusting properly forcredit activities Information about deposit and loan of customers or never have arelationship with the bank but is big business, must be recorded, stored.

- Honest, objective:

Credit information must be collected from other sources to provide a legalbasis or practical basis to ensure the integrity and objectivity All informationobtained from other sources is not valid only use for reference purposes

- Ethics of customers: customers intentionally deceptive, cheat the bank thiscase cause difficulty for credit officers in evaluating customer

1.3.2 Internal factors1.3.2.1 Strategy of the bank

Credit policies take an important role in orientation of the bank A reasonablecredit policy brings high profits for banks and reduces risk But today, creditpolicies of commercial banks still face many difficulties such as credit policiessubject to increase higher debt than focusing improving credit quality, interest incollateral than the effectiveness of the plan Strategy of the bank affects to staff

psychology in building credit limit, credit limit for enterprise will tend to be higherif the bank extend credit - extent risk and vice versa.

1.3.2.2 Structure, procedures and policies

Before applying credit limit for customer, the bank has to build credit scoringprocess, including: steps, indicators, standards for process grading, ranking business credit scoring system is more detail, evaluation of the business is more accurate.In addition, the credit scoring models have been implemented, the Bank will issuethe policies, procedures and regulations to legalizing the role of work in the creditscoring process for the loan, and established an independent board to check,monitor errors when the model is introduced.

1.3.2.3 Qualifications and experience of staff

Man is the most important factors that determine the quality of the credit limitbecause human organizes and implements financial activities by his method,technique Man is center to link, coordinate other factors in the management anddominant factors affecting the quality of the credit limit.

In the bank activities, credit officers are directly gather information from othersources and implement entire process of building credit limit: which information?Where? How about Quality? Applying which methods, indicators, technicalanalysis all depends on experience of credit officers

Building credit limit is not an easy profession; requiring credit officers mustknowledge on lending, investment, economics, law and quick in practice.

1.3.2.4 Technology

Along with fast growing information technology, banks continuouslymodernize their information systems Constructing credit limit is supported bymodern equipment Modern computers and software help banks storage historicaldatabases from which calculate indicators quickly and accurately.

In short, the factors affect to credit limit is very diverse Good factors need tobe strengthened; bad factors need to be precaution So commercial banks achievethe objective of building the credit limit for customers accurately

Chapter 2

CREDIT LIMIT SYSTEM AT VIETCOMBANK

2.1 Overview of Vietcombank and its performance2.1.1 Introduction to Vietcombank

The Bank for Foreign Trade of Vietnam (Vietcombank or VCB) is one ofstated-owned commercial banks of Vietnam Established on April 1st, 1963, theBank for Foreign Trade of Vietnam is ranked one of 23 special corporations by theState Vietcombank is one of the first members of the Vietnam Bankers Associationand a member of many other associations including the Asian Bankers Associationand the Asia Pacific Bankers Club

With long experience in banking services and a contingent of well- trained,dynamic and enthusiastic staff, Vietcombank continues to play a crucial role inVietnam's banking sector More specially, Vietcombank has always been regardedas the most prestigious bank in Vietnam in terms of foreign exchange trading,international payments and other international banking and financial services.

- 4 joint- venture enterprises

Vietcombank has become one of the most modern banking institutions inVietnam With an integrated advanced technology system connecting all of itsproducts and services, Vietcombank is able to provide customers with modern andhigh quality banking products and services.

Structure of Vietcombank:

Organizational structure of the VCB, after equalization, is built toward themodel of Parent company with the key bond is the commercial bank-the parent one,which is the major field of business activities; The VCB shareholders have therights and responsibilities to VCB and to all the enterprises, which is owned,dominated, invested by VCB

As directed by government, the Subsidiaries of the VCB will be equalization

to diversify forms of ownership, utilize the experience of strategic partners,especially the foreign strategic partners to contribute to building and developmentof VCB Accordingly, investors can hold shares in these enterprises, or VCB, orboth, and have rights and responsibilities under the Charter of that unit.

Chart 2.1: VCB structure (Parent company structure)

websitehttp//:www.vietcombank.com.vn)

By the VCB Restructure technical associated project, which was fundedby WB and the Government of Netherlands through the management of SBV,VCB has developed their own model for organization and patternmanagement practices, in accordance with international best practices

The VCB operation model is divided into blocks of activities, subjects tothe unified management from Head office to affiliates as follow:

45% of Joint venture Life

Securities Company

VCB Fund Management

CompanyNon-life

insurance (Proposed)

VCB Fund management of Investment

in infrastructure development

Company (proposed)

Asset Management

Finance & credit Pledge

Company (proposed) Finance & consumer

credit Company (proposed)Enterprises &

commercial banks dominated by

VCBReinsurance

Transfer (proposed)

VCB Card Company (Proposed)

16% stock VCB-Bonday70% Joint-stock VCB

52% stock VCB-

Joint-Ben Thanh

Bonday-Real estate Investment Company

Fifth Road Joint-stock

Infrastructure investment

VCB Training

VCB Institute –

The Parent CompanyVietnam joint-stock bank for Foreign Trade (Vietcombank)

Foreign strategy investor (in negotiation)Domestic

Investors

Chart 2.2: VCB structure (Operation structure)

(Source: VCB Credit manual)

In fact, Vietcombank is gradually applying organizational models mentionedabove as well as the pattern in corporate governance standards and internationalbest practices today And now, under the direction of Government, VCB ispreparing the conditions for formation of corporation finance investment in VCBorganization model and management in accordance with international best practices(model Corporation financial investment - Financial Holdings) It is expected that inthe year 2020, VCB will officially switch to model of Financial Holdings

Wholesale business

Congress Shareholders

BOM & BOD

Internal auditControllers

Risk Management

Credit Committee

Internal Inspectorate

Other Committee

Treasury&Trading

Retail business

Risk Mngmt &

Impaired Assets Mngmt

2.1.2 Vietcombank’s major performance indicators

Through 5 years from 2004-2008, Vietcombank has achieved many targetsabout the development in total assets, outstanding loans, funds mobilization, equityand profit In December 31st, 2008, VCB has total outstanding debt of about108.534 billion VND, total mobilized capital 221.950 billion USD and equity reachabout 13,790 billion VND With net income reached VND 2.536 billion in 2008, theratio of profit after tax on equity of VCB was 18.03% (the highest ratio incomparison to the 4 biggest banks in Vietnam in 2008) From 2006 to 2008, VCBnet income annual growth was 37.2% in average, total assets was 17.7% per yearand raise capital from customers was 12.6% per year VCB's growth strategy is alsosupported by a solid capital base with the Capital Adequacy Ratio (CAR) reached8.9% at December 31st, 2008, higher than the 8% minimum standards prescribed bythe SBV to commercial banks.

For more details, we can also analysis the VCB business result in period of2004-2008.

Table 2.1: VCB business result in period of 2004-2008.

Return on Equity (ROE)%13.1315.3521.1221.2 18.03 Capital Adequacy Ratio (CAR)%7.009.5712.609.208.90

(Source: Balance sheet of Vietcombank)

By this table, we can see VCB had a great success in increase its financialindicators VCB total assets has increased sharply (up to 84.95%) in the period of 5years Besides, the credit activities double the scale with over 108 VND bil in 2008(account for 10% total outstanding loans of Vietnam Bank System) And as thecertain, the VCB net profit, ROE, CAR are in good condition in comparison to all

the other banks.

The profit increased each year, especially in 2006 One of the reasons is thedevelopment of security market in 2006 lead to revenue from investment and financialincrease significantly In 2007, after the Director 03/2007/CT-NHNN governing thatsecurities backed lending ratio allowed to account for 3% of bank’s total outstandingloans lead to go down sharply of securities, investment and financial income As aresult, the profit of 2007 is lower than 2006, ROA and ROE also lower.

Chart 2.3: Total Assets of VCB in the period of 2004-2008

Chart 2.4: Vietcombank ROA & ROE in 2004-2008

Credit activities at Vietcombank

2.1.3 Overview of credit operation at Vietcombank

Organizational structure of credit activities at VCB

Credit organizations operating in the VCB are classified into two levels: Headoffice, branch

Head office

Risk management committee

Risk management committee was established to support the Board ofDirectors in the management of risk Head of the committee is chairman of theBoard Members of the committee activity sell and often the leader representing theBoard or who is assigned in charge of managing the office operations of large fieldsuch as Treasury department, Credit management department, Economic analysisdepartment, Technology department The main task of the committee issuing thepolicy or the regime set out measures to effectively manage the different types ofrisks in banking operations, which of course include the type of credit risk use

Central Council of Credit

Credit Central Council was established to support the Executive Board in theprovision of credit products to customers Chairman is Director-General Vice-chairman is a deputy general director in charge of credit Council members are theChief Manager of credit, investment projects, general economic analysis, customerrelationship and rule of law office The main task of the Council is to consider anddecide on the loan beyond the competence of the Director of the ruling branch.

Credit management Department

Credit management department perform three main duties: monitoring andmanaging credit risk, guidance and promulgate policies and regimes related tocredit activities Construction plans and credit-oriented activities in each period.

Investment projects department

Investment projects department implemented two basic tasks: re-evaluation ofinvestment projects beyond the limit of the ruling branch director, direct lenders toconsider the evaluation of major projects in Hanoi and the Northern provinces(except the province has branches VCB)

Due Department

This department is responsible for the debt management tracking all bad loans(over 180 days), the tracking computing deduction for a reserve fund and handlerisks from bad debt reserve fund risk Evaluate exemptions judgment interest inexcess of the branch director

Credit Information Department

Responsible for monitoring and collecting information related to theprevention of risk in credit activities in particular and in other activities involved.Coordination of activities collected information prevents risks among branches.Synthesis, analysis, evaluation, forecasting and information service activities in thewhole credit system and information service management A relationship