OverviewintroductionaboutVietinbank
HĐBTbytheMinisterCouncil.Aftermorethan30yearsdevelopment,fromthebeginningeq uitywithjust22billionVietNamdong,atpresentVietinbankhasarchievedt h e e q u i t y b e y o n d 6 7 , 4 5 5 b i l l i o n V i e t Namd o n g ( m o r e t h a n 3 , 0 0 0 t i m e s higher)wh ileauthorizedcapitalis37,324billionVietNamdong.Besidethat,totalassetso f Vietinbankals oincreasedfrom718 billionVietNamdong in 1988 tonearly1,164,435b i l l i o n VietNamd o n g in2 0 1 8 whichmeansencreasedm o r e t h a n 1 ,
Vietinbank has grown significantly since its inception, expanding from 11,380 employees to nearly 23,000 today The bank's structure now includes its headquarters in Hanoi, two representative offices, nine career units, and 155 branches In addition to its operations in Vietnam, Vietinbank has established a 100% capital bank in Laos, two branches in Germany, and a representative office in Myanmar, collaborating with over 1,000 banks in more than 90 countries worldwide Furthermore, Vietinbank has invested in Indovina Bank, recognized as the most efficient joint-venture bank in Vietnam Its mission is to be the leading bank in Vietnam's banking system, offering modern financial products and services that meet international standards, while its vision aims to establish the bank as a leading player in Vietnam and the region, characterized by modernity and multifunctionality.
Table1.1Shareholerstructurebyownership ratiowhichholding5%ormoreof thechartercapital
(Source:Vietinbankannualreport2018)In t h e pastf e w years,Vietinbankhasalwaysb e e n o n e o f bankshavebreakthroughgrowth,d e v e l o p modernproductsandservices,develope f f i c i e n t l y andsustainably.In2017,Vi etinbankmadeanimpressionindeployingthenewCoreBankingsuccessfully.T h i s i s t h e l argestandt h e m o s t c o m p l e x projecti n VietNamBankingIndustryuntilnowandhasmett hetechnologyrequirementsforlongtermandsustainable
3 Figure 1.3 Organisation chart development.A t t h e samet i m e i n 2 0 1 7 , Vietinbankalsoreleasedt o t h e p u b l i c 4 , 2 0 0 b i l l i o n VietNamdongsecondarybonds.Thisisthemostenomousamoutofsecondar yb o n d s amongV i e t NamCommercialBanksw h i c h hasconfirmedt h e t r a d e m a r k a ndp o s i t i o n ofVietinbankonthemarket.Besidethat,Vietinbankhasarchievedmanyarwar dsandaccoladesi n 2 0 1 8 suchasFirst- classLabourM e d a l (fort h e secondt i m e ) andGovernment’sE m u l a t i o n Flag,T o p 4 0 0
M o s t ValuableBankBrandsW o r l d w i d e , T o p 2000LargestEnterprisesWorldwide,V ietNamValue,VietNamExcellentBrand,BestTradeFinance Service,…
In2018,totalassetsofVietinbankwasmorethan1.16millionbillionVietNamdong ,increased6.3%whencomparedwith2017andincreased22.78%whencomparedw i t h 2 0
1 6 Int h i s year,Vietinbankcontinuedt o b e t h e commercialb a n k whichhadlargestassets caleinthemarket.However,thecompetitioninthebankingsystemtowinandretaincustomer s is increasinglyfierce.
Vietinbankisestablishedin1988.After31yearofdevelopment,Vietinbankhasaffir medi t s p o s i t i o n asa leadingcommercialb a n k , h o l d i n g a keyr o l e o f VietNam'sc u r e n c y market.V i e t i n b a n k hasa st ro ng network o f 1 48 branchesi n 6 3 provincesandcities nationwide.Vietinbank–GiaLaiBranchisknownasalargebranchinthesystemw i t h 3 t r i l l i o n d o n g ofcapitalandoutstandingloansof upto 13 trilliondong.
Normally,itoftentakestwoweeksforanewcorporate customerandaweekforoldcustomertofinishaproceduretoborrowthemoneyfromthebank.Firstl y,thecustomerhastoprepareallthedocumentsmeetthebankrequirement.Secondly,thebankoffic er,normallythecorporatebankingdivision,willverifythedocumentsandprepareareport.Thisste pistheonewhichneedmostofthetimeintheprocedureandoftentakeforaweek.Afterthat,thereport willbesendtotheupperlevelinthebankinordertobeapproval.Afterbeingapproval,thesupporting credit department willcheckagain allthedocumenttomakesurethatthereisnomistake.Andfinally,theywilldothefinancingforcusto mer.Ifthereisanymistakeinanystepoftheprocedure,thetotaltimewill belonger.
Short– termloansprocedureofcorporatecustomerswhentheyfirsttimeborrowm o n e y atVietinba nk includes 5steps,whichare:
, creditofficeroftenpresenttocustomersaboutloanconditionsandinstructionsforestablishi ngt h e l o a n d o c u m e n t s A l s o , creditofficerw i l l checkt h e completenessanda c c u r a c y oflegaldocuments,loandocuments,collateralrecordsandespeciallythel e g a l i t y of theloanpurpose.Aftercheckingthedocuments,creditofficerswilldependont h e policiesandt heorientationofVietinbankinordertoidentifywhethercustomersaresubjecttocreditrestrict ionornon-creditextension or not.
Step2:Creditofficerreviewcreditconditions,prepareandsubmitappraisalreport.Depe ndingonthedocumentscollectingfromcustomersandothersources,creditofficeranalysisand r e v i e w t h e f i n a n c i a l s i t u a t i o n , businessp l a n anda b i l i t y t o r e p a y principal andinterestofcustomers.Creditofficerwillgivecommentsandsuggestionsont h e l e n d i n g m e t h o d , l o a n amount,l o a n duration,l o a n s e c u r i t y m e a s u r e s , disbursementschedul e andother conditions.
Step3:Appraisalreportapproval.DependingontheappraisalreportofCorporateCusto merDepartment,theBoardofDirectorswillconsideranddecidethecreditlimitofcustomers.In caseo f e x c e e d i n g t h e a u t h o r i t y oft h e Branch’sB oardo f Directors,t h e reportw i l l b e s u b m i t t e d t o higherlevel,n o r m a l l y relatedt o t h e HeadOffice,t o getapproval.
Step4:Completingcollateralrecords,draftingandsigningcreditcontractinganddis bursing.Oncethecreditlimit hasbeenapproved,collateralcontractandcreditcontractw i l l bepreparedafterreachingagr eementwithcustomersonclauseoftheit Afterthat,disbursementcanbemadebasedon thecustomers’needsandloan purposes.
Step5 : Checking,s u p e r v i s i n g andr e c o v e r i n g d e b t T h i s i s t h e processo f s t e p s afterlendingtoensurecustomershadusedcapitalfortherightpurposeandeffectively.T h i s willhelpdetectrisksanderrorstohaveactionspromptly.Therefore,thisstepwillhelpi mprovingthe qualityofloansandensuringthebenefitsof thebank.
In the Vietinbank system, each branch is assigned a different level based on its total points, which are calculated using a set of criteria These criteria assess effectiveness, credit risk, management skills, and operating risk ratings, detailed in Appendix 1 The total points determine the corresponding level of each branch, with five distinct levels established as outlined in the accompanying table.
Normally,gradingandclassifying branchesisoftenperfomedquaterly.Itisawayt o controlt h e q u a l i t y a n d operationo f allbra ncheseffectively.Ift h e l e v e l o f a brachdecreases,the headquater willhavesomeactions tomanagetheproblemlikereducingthecompetenceof theBranch’sDirector,morestrictrequirementswhengrantingcredit…
(Source:Internalreport ofVietinbank- GiaLaiBranch)A t present,TheCorporateCustomerDepartmentisincludingthreeDivisi on, whichareSmallandMediumEnterprise(SME)Division,LargeEnterpriseDivisionandFD IDivision.TheclassificationprincipleoftwoDivisionSMEandLargeenterpriseisbasedo n thecustomers’revenue describedasthe tablebelow:
MicroEnterprise From20 billion dongtounder60billiondong
SmallEnterprise From60 billion dongtounder200billion dong MediumEnterprise From200 billion dongtounder500billion dong Large Enterprise Over500billion dong
(Source:VietinbankInternalreport)Especially,forthebusinesswhichhasrevenueunder20billion peryearwillbeclassifi edasretailcustomers.
As of December 31, 2019, Vietinbank's Gia Lai Branch reported a short-term debt balance of VND 6,173 billion, reflecting a decrease of VND 225 billion or 3.52% from the start of the year In contrast, the medium and long-term loan balance increased to VND 5,502 billion, marking a rise of VND 309 billion, which accounts for 47.13% of the total loan balance, with a growth rate of 5.95% These loans primarily funded hydropower projects such as the SeSan3 and SeSan3 A Hydroelectric Plants, as well as investments in the construction sector, including the BOT project for National Highway 14 and various hotel developments The branch has focused on expanding capital investment for production and business households, along with non-state enterprises, to diversify risks and foster growth over the years.
(Source:VietStockFinance) Ascanseefromthetableabove,theaveragebaddebtrationofbankingindustryi n Viet
Nami n 2 0 1 8 was1.78%.T h i s ratiow a s declinedi n t h e n e x t yearwhichwas1.63%.Badd e b t ratioo f Vietinbankwasu n d e r averagei n t w o yearsandhashada significantchangefrom year2018to 2019.
SymptomsAnalysis
BaddebtincreasedatVietinbank-GiaLaiBranchfrom 2017 to 2019
Creditactivitiesi s t h e m a i n sourceb r i n g p r o f i t o f n o t j u s t Vietinbankb u t al lComercialBanksinVietNam.Inrecentyears,Vietinbankhasgrownstronglyandcreatedvaluefo rbothitselfandtheeconomy.Viswanadham(1)hasaffirmedtheroleofbankingintheeconomi cdevelopment.However,thisgrowthalsomeansthatcreditriski s higherandcanleadtoman ygreatloss.ReinhartandRogoff(2)statedthat baddebtratiocanbeusedasasign ofcreditriskwhichcanthenleadto debtcrisis.
NHNN,outstandingdebtsisdebtsthatisinpartori n wholeprincipalandinterestoverdue.Mor especific,outstandingdebtsiscreditswhicharenotrepaidontimeandarenoteligibletoberestr ucturing.OutstandingdebtsinVietNamcommercialbanks areclassifiedinto 5groupsdependingon length:
Table3.1Debtclassificationregulation Debtclassification Debtgroupname Characteristics
10daysandbelow90days Group3 Substandard debt Theoriginaldebtorinterestonoverduem o r e t han 90daysandbelow 180days Group4 Doubtfuldebt Theoriginaldebtorinterestonoverduem o r e t han180daysandbelow360days Group5 Lossdebt Theoriginaldebtorinterestonoverduem o r e t han360days(Source:Decision No 493/2005/QD-NHNN)Baddebtsornon-performingdebtsaredebtingroup3,4and5.
Inthe periodfromyear2017 toyear2019,standarddebt(group1debt)acount fora highproportioni n totalcreditbalanceandt h i s proportionreduceds h a r p l y throughyea rs.
In 2018, bad debt rose significantly, reaching 302 billion dong, a staggering increase of over 12 times compared to 2017 Specifically, irrecoverable debts surged more than fivefold from the previous year, largely due to a challenging economic climate in the province The agricultural sector faced severe difficulties, exacerbated by unfavorable weather conditions and prolonged heat, which drastically reduced the production and prices of key crops like pepper and coffee This downturn adversely affected the overall commercial and production activities of local enterprises Additionally, electricity producers, such as the Sesan 3A hydroelectric plant, experienced critical water shortages, leading to decreased electricity output Notably, debt groups classified from 3 to 5 represented about 2% of the total credit balance but showed a tendency to increase.
In2019,baddebtcontinouslyincreasedalotwhilestandarddebtreduced.Totalba ddebtin2019was1,896billiondongwhichwasmorethan6timeshigherthan2018.Standar ddebtinthisyeardecreasedlargely,evenlowerthanthatof2017.Itjustcountedf o r only83.76
Table3.2.Debtclassificationin Vietinbank–GiaLaiBranchin period 2017–2019
(Source:Internalreport ofVietinbank- GiaLaiBranch)T h e increaseinbaddebthasledtomanysubsequences.In2019,levelofVieti nbank–
GiaLaibranchmovedfromlevel1tolevel4duetothepointsreducingal o t W h e n t h e leve lr e d u c e d , t h e a u t h o r i t y t o m a k e creditd e c i s i o n s o f t h e Boardo f directorsa lsoreducedandcreditactivitieso f branchwascontrolm o r e s t r i c t l y byt h e HeadOffice.
FromtheinformationinTable2.4,baddebtratioofVietinbankGiaLaiin2019is3 8 0 % andismore than 3times higherthan whichofVietinbank.Besidethat, most of banksinVi etNamhavebaddebtratioin2019lowerthan3.50%.Whencomparingwitht h e averagebadde btratioofVietinbankandotherbank,itcanbeseenclearlythatthisratioofVietinbankGiaLaiis reallyhighandcannot beignored.
Potentialproblems
Internalproblems
Creditriskoftheloanportfolioisoneofthemostimportantareasofriskmanagement.Itpl aysanimportantr o l e p r i m a r i l y f o r b a n k i n g institutions.T h e y tryt o developt h e i r o w n creditr i s k assessmentmodelst o increaset h e q u a l i t y o f t h e bank's portfolio(3).Weakloanportfoliomanagementwasfoundtobeoneofthelargestfactor
Mr Thinh, the Director of the Branch, highlighted a significant issue facing the bank: the limited number of current customers, with most credit balances concentrated among a small group of key clients This poses a risk, as difficulties experienced by any of these main customers could substantially impact the bank's credit balance structure Additionally, the region's economic activities are primarily tied to agriculture, particularly coffee and pepper, which are often traded as raw materials The reliance on these crops makes the bank vulnerable to adverse weather conditions, as poor weather can severely affect crop yields and, consequently, the bank's financial stability.
Loanp o r t f o l i o managementi s t h e inherentprocesso f r i s k i n t h e managedandco ntrolledcreditprocess Creditrisks canbeoriginatedbyanundiversifiedloan portfolio.Ato olwhichisalwaysusedincreditriskmanagementinbanksofallovertheworldisloanportfoliom anagement.Loanportfoliomanagementreducestherisksthroughidentifying,forecastingan dcontrollingrisklevelofanydifferentmarkets,customers,creditproductsandoperatingcondit ions.Manyresearcheshavebeenbelievedt h a t diversifyingisthebestwaytopreventcreditr isks.Aloanportfoliowhichdependso n anindustryorafewcustomersisveryunsafecauseal ltheindustrieshaverisks.Itcans a y thatpoorloanporfoliomanagementcanbecomethemaj orcauseofbanklossesandfailures.
Moralhazardhypothesissuggestedt h a t relativelyl o w capitalbanksencouragemoralh azardbyincreasing t h e portfolio'sr i s k levelwhichw i l l leadt o higheraveragenon- performingloans inthefuture(5) Theresearchalsofound thatabankcanhashigherbaddebtratiothanotherbanksbecauseitspecialisedmoreinsometype ofloans.Besidet h a t , theloanportfolioisveryimportantoftheoperationofabank.Itshouldb ep r o a c t i v e l y positionedinorderto managethreatsand maximizeopportunities(6).
Swalehe( 7 ) f o u n d o u t thatt h e proportiono f loandefaultersdecreasesd u e t o pro perandthoroughp r e - s c r e e n i n g m a d e bycreditofficersb e f o r e l o a n disbursement.W h e n conducttheint erviewwithMr.ChungQuangVu,anemployeewhoismanagingt h e baddebtcustomer,t he authorreceivet h e answer:“ A l t h o u g h I knowt h a t i t i s very
14 important toobservethecashflow andbusinesssituation ofcustomersto realiseanysigno f baddebt,Idon’thaveenoughtimeforthisactivity.MyKPIisquitehighandIn eedtof i n d lotsofnewcustomerstoarchievetheKPI.Ioftenfeelstressduetothehugeamounto f work.Therefore,it is hard for meto managetimefor so manyactivitiessuchas findingnewcustomers,o b s e r v i n g t h e cashf l o w a n d b u s i n e s s s i t u a t i o n o f customers ,realisings i g n o f b a d d e b t a n d dealingwith baddebt.”
InordertoattractthecustomersandarchievehighKPI,creditofficermayignores o m e stepsinloanproceduretomakeiteasierorlowerthe“perceivedcreditrisk”causei t dependon aperson’sjudgement(1).WaweruandKalani(8)claimedthatbankmanagersf o u n d itwasdif ficulttofo llow prudent creditpoliciesduet o thepressureofhigherprofitsin an extremelyhighcompetitivemarket.
Mr.D a n g Q u o c T h i n h , Directoroft h e B r a n c h , said:“Experiencesa n d co mpetenceso f e m p l o y e e s i s v e r y i m p o r t a n t I n recentyears,t h e r e a r e l o t s o f newemployeesh a s beenrecru itmentd u e t o h i g h demand.T h i s h a s l e d t o m a n y employeeswereg r a d u a t e s t u d e n t s w h o d i d n ’ t haveenoughexperiences.B e s i d e t h a t , causes o m e g o o d employeeshasm ovedtoanotherbank,it’sverydifficultforVietinbank–GiaLaibranchtorecruiteand train newemployeesto meet therequirementin a short time.”
Besidethat,Mr.TaQuangBinh,managerofHumanResourcesDepartment,saidt h a t thetimeandschedulefortrainingnewemployeesisdependingontheHeadOfficearrang ement.Normally,i t takes3 –
4 weekst o completingt h e t r a i n g programo f t h e HeadOffice.However,newemployeesha vetomovetoHCMcitytojoininthetrainingprogram.Allnew employeescannotjoinin t h e programatonetimebecausethis will leadt o t h e lackingofhu ma n resourcewor ki ng d i r e c t l y att h e bank.Therefore,i t oftentakesa l o n g t i m e f o r allt h e newcomerst o completet h e trainingprogram.Afterbeingtrained,theystillneedatimetoadapttotheenvironment,underst andcustomersandhaveacumenatwork.
Infact,asAndersson’sideacitedinBeislandetal(9),experiencehastheinfluenceo nt h e d e c i s i o n – making.Emloyeest h a t d o n ’ t haveenoughexperiencesandcompetenceslikelytocausecredit
15 risk.Morespecific,ifanemployeelackofknowledgeaswellasexperiences,hewon’tbeablet o e x p e r t i s e andprocessinformationt h e n
15 evaluatecustomersunexactly.This willleadtolowcreditqualityandhighrisk.Besidet h a t , ifcreditemployeedoesn’tfollowloanproceducesuchasfinancing beforecollectingenoughdocumentsordoesn’tcheckouttheloanpurpose,capitallosingcaneasil yhappen.Moreover,ifcreditemployeedoesn’thaveresponsibilityandeasilytobetemped,h e m a y b e affectedbyt h e r e l a t i o n s h i p w i t h t h e borrowersandd i s m i s s t h e n e c e s s a r y conditions.
AccordingtoSchreinerascitedinBeislandetal(9),experiencehasbeenapprovedt o h a v e a s s o c i a t i o n w i t h r i s k Creditofficersl e a r n t o avoidr i s k y c u s t o m e r s whenthe yhavemoreexperience.
Ms.LeThiNhuKieu,anemployeewhoisworkinginbaddebtdealingdepartment,sai dt h a t“Asf r o m m y understanding,t h e b a d debtincreasedt h i s yeari s relatedt o m a n y l o a n s i n t h e y e a r s before.I t c o u l d b e a g o o d l o a n a t t h a t t i m e b u t becausecus tomermanagementcompetencesisquitelooseandloanmanagementprocessh a s m a n y gap hasledto thissituation.”
Creditriskcancomefromthelackoffollowingcloselyinmanagementactivities.Credit officerneedapprovalofhighermanagerlevelsbeforedisbursement.Therefore,ifmanagersd o n ’ t e x a m i n e ande v a l u a t e whethert h e creditofficer’sd e c i s i o n i s suitable,creditrisk will beveryhigh.
1 1 ) t o e x a m i n e t h e relationshipw i t h currentb a d debt.Theses t u d i e s suggestt h a t ahig hlevelofnon-performingloansinthepastshowspoorbanks'abilitytomanager i s k s i n l e n d i n g andwillhaveapositiveimpactoncurrentbaddebts.
Anincomplete,inconsistentandunifiedcreditpolicywillleadtoimpropercreditp r o v i s i o n , potentiallyriskyforthebank.Ontheotherhand,inordertoattractcustomersan dgainmarketshare,m a n y commercialbankshaveignoreds o m e s t e p s i n t h e creditprocess,t h e l e n d i n g mechanismhasbeens i m p l i f i e d , a r b i t r a r i l y loweredc u s t o m e r evaluations tandards.Forexample,the2008globalfinancialcrisisstemming fromtheUSfinancialmarkethadthedeeprootfromsubprimeloans.Thesearelowqualityloans witha highlevelofrisk.Theseloansarenotscrutinizedforsolvencysuchas:annualincome,c areerbiography,a s s e t s andareu s u a l l y guaranteedbyveryl i t t l e o r n o p r o o f o f t h e
16 borrowerfinancialcapacity.Althoughtheseloansrepresentonly16%ofthetotalloan,itaccount sformorethan 50%ofbaddebtin theUnited Statesatthattime.
Thet a s k o f t h e i n s p e c t i o n andcontroli s t o e a r l y detectviolationsi n lending activitiestopreventrisks.However,iftheinspectionandcontrolofbanksaretooweakandl o o s e , i t w i l l leadtot h e u n t i m e l y detectionandhandlingo f violationsandn o n performi ngloansareinevitable.
Externalproblems
Likeallotherobjectsinthemarket,commercialbanksalsoareaffectedbymanyfactorss uchaseconomicenvironment,politic,legal,culture,ect…
Whentheeconomyiss t a b l e andtendtodevelophealthily,demandforinvestmentinsociet ywillincreaseandb r i n g convenienceto creditactivities.
14)haveexaminedtheeffectofchanginginthemacroeconomicenvironmenttonon- performingloan.RajanandDhal(15)throughanalysingbaddebto f c o m m e r c i a l banksi n Indiahadshowedt h a t highGDPgrowthreflectsfavorablemacroeconomicconditionsandgood businessenvironmentwhichm a k e t h e baddebtt e n d s t o decrease.Fofack( 1 6 ) examin edt h e relationshipbetweencreditriskandnon-performingloaninSub-
SaharanAfricain1990.Theresearchhighlightt h e n e g a t i v e impacto f GDPo n n o n - p e r f o r m i n g l o a n A prolongede c o n o m i c crisisandinflationwillencrease baddebt.
AliandD a l y ( 1 7 ) usedcomparativeanalysism e t h o d t o investigatemacroeconom icvariablest h a t areimportantf o r Australiaandt h e U n i t e d States.T h e y alsostudy theeff ectsofmacroeconomicshockso n defaultrates inb o t h countries.The resultsindicatet h a t t h e sameseto f m a c r o e c o n o m i c variablesd i s p l a y differentdefaultratesf o r t h e t w o c o u n t i e s A d d i t i o n a l l y t h e s t u d y f i n d s t h a t t h e U S e c o n o m y i s m u c h m o r e suscep tibletoadversemacroeconomicshockswhencomparingtoAustralia.Polat
(18)alsoconcludedt h a t countriesw i t h differentmacroeconomicc o n d i t i o n s havedifferent non-performingloanratioswhenanalysingdataof TurkeyandSaudiArabia.
However,whene c o n o m i c problemso c c u r l i k e i n f l a t i o n o r p r i c e fluctuati onats o m e itemswhichaffecttoagroupofindustryonthemarket,bankswilllikely facetoc reditrisks So me customerscanad ap t andovercome thedifficultiesbut therearealso
17 manycustomerswholossandcannotpaybackloansforthebanks.Besidethat,changingi n eco nomicandpoliticalpoliciesalsoaffectbanksandcorporatesu s i n g capitalfroml o a n s The refore,i n c o m p l e t e economicandp o l i t i c a l policiescanb r i n g difficultiesf o r corporat esin theabilitytopaybackloansandthreatenthesafetyof thebanks inlending.
The economic strength of Gia Lai relies heavily on its industrial products, particularly coffee and pepper In 2015, the price of dried pepper was $10 per kg, prompting farmers to take substantial loans for pepper cultivation However, recent weather conditions and macroeconomic factors have led to a sharp decline in pepper prices, now at just $2 per kg, severely impacting farmers' ability to repay bank loans Coffee prices have also dropped, though not as drastically According to Mr Dang Quoc Thinh, Director of Vietinbank Gia Lai, this issue extends beyond just Vietinbank, affecting all banks in the region Consequently, this situation is not the most critical challenge facing Vietinbank Gia Lai at this time.
Ins o m e cases,t h i s c a n b e t h e m a i n reasonwhichleadt o creditr i s k Itcanbesepara tedinto manytypes:
Fisrtly,duetobusinessloss,customerscannotpaybacktheloansalthoughatthebe ginning,theyworkedeffectively.Lowfinancialcapacityofenterprisesiswilldirectlyaffectt heirbusinessperformance.Ontheotherhand,thepoormanagementalsoleadstoineffective businessoperations,therebyaffectingtheabilityto repaybankdebts.
Secondly,themainproblemisthatcustomersweredishonest.Nowadays,trickstofaked o c u m e n t aremoreandm o r e delicate.Ifcreditemployeesdon’thaveenoughexperienceo r t h e a p p r a i s a l processi s n o t careful,bankcane a s i l y b e cheated.M o r a l hazardwithi nthefinancialsystemcanbeoneof th e main elementswhichbringsbankcrisis(19).
Someenterprisesi n t e n t i o n a l l y r e p o r t inaccuratefinancialfigures,w h i c h ca usedeviationsi n appraisala n d creditp r o v i s i o n andleadt o difficultiesi n recoveringbankd ebt.Ormaybet h e enterprisei t s e l f lacksawarenesso f l o a n us i n g anddebtrepaymentdespitei tsfinancialcapacity.Some businessesh a v e thethoughtofb r e a k i n g thelawto cheat,u s e capitalf o r t h e w r o n g purposet o makea profitandborrowm o n e y w i t h n o intentiontorepaythedebt This isalsoknownasmoralhazard.
Finally,maybet h e p r o b l e m fromcustomers’sidei s t h e i r l o a n purpose.Afterdi sbursement,customersusestheloansnot for theoriginalpurpose.Causethesepurposesarenotbeenanalysedandevaluatedbythebank,itca nbeuneffectiveandleadtocreditr i s k
Ms.NguyenT h i H o a , c h i e f a c c o u n t a n t o f D u c P h u G i a company,s a i d t h a t t h e co mp an y justborrowmoneyfromVietinbankGiaLaifrom2016untilnow.Thec o m p a n y atpresentownshotelchainsnamedCiciliawhichislocatedinNhaTrang,DaN a n g an dH C M city.Sheknowsthat ittakesa lotoftimeto collectingdata,checking invoicesand disburesementdocumentsandcompletingtheloanapproval.However,shewasverysati sfiedwiththeemployee’sattitudeandsupport.Besidethat,shealsoappreciatedVietinbankin havingnewideastoreducingthetimeofwaitingandencreasingtheproductivity.
Problemvalidation
Throughthecustomers’opinion,althoughtheyarenot100%sastifiedwithVietinban kG i a Lai’sservice,theys t i l l t h i n k iti s acceptable.A n d causet h e o u t s i d e problemse s p e c i a l l y t h e macroeconomics i t u a t i o n cannotb e controlbyt h e bank,t h e authorj ustfocusoninsideproblemsinordertofindoutthecausesandsuggestthemostsuitablesolution.
AsMr.DangQuocThinh,DirectorofVietinbankGiaLai,whoistheonehastheovervie waboutt h e operationo f t h e organizationanddecidess t r a t e g y f o r t h e Branch,ensuresthat themainproblemtheorganizationisfacingis“Thenumberofcustomersis
20 toos m a l l a n d 8 0 % o f thet o t a l creditb a l a n c e isj u s t dependo n o n l y 20%numbero f c ustomers.T h i s meansthatt h i s g r o u p o f customersw i l l havegreatinfluenceo n t h e ope rationoftheBranch.Ifonlysomecustomersinthisgroupcannotpaybackortheymovet oanotherbank,theBranch’sprofit will beaffectedimmediately”.
Mr Nguyen Tan Viet, Deputy Director of the Branch and head of the Corporate Customers Department, highlighted that the market share for corporate customers remains low, with many potential clients not utilizing the Branch's services He emphasized the significant development potential in this area, noting that some credit officers are hindered by outdated mindsets, focusing primarily on agriculture and often dismissing new projects While agriculture, particularly cash crops, is a regional strength, it is crucial to recognize the presence of other economic sectors The success in expanding corporate customer fields hinges on employees’ competencies and their approach to portfolio management Broadening the business fields for corporate customers will not only stabilize profits for the Branch but also mitigate credit risks.
Ins h o r t , weakl o a n portfoliomanagementi s t h e m a i n t h i n g illustratedast h e centralprobleminthe organisation now Therefore,int h i s case,if weak loan portfolio managementstilloccurs andthe managementdoesnothave anyprocessestoimprove,b addebtw i l l continuet o increaseandb r i n g m a n y consequencest o t h e organisation.Henc e,itisneccesarytofindthesolutionforthisproblemassoonaspossibleinordertot o increasepr ofitsandenhancetheorganization’ssustainabledevelopment.
Problemconsequences
Reducingprofit ofthebank
Whencreditr i s k s h a p p e n e d , bankscannotgetbackt h e principalsandinterests.Mean while,bankshavetopaytheduedepositprincipalsandinterests.Besidethat,banksalsohavetopa
21 yformanyexpensesrelatedtosettlingthesebaddebts,including:expensestostrengthensuper visionofoverdueborrowersandtheir collaterals,expenses
21 foranalyzingandnegotiat ing with customersonthese loans, expensesformaintenancea ndhandling ofcollaterals,expensesrelatedtotheprotectionofthebank'sreputationands a f e t y forregula toryagenciesandfinancialmarkets,additionalcoststoensurethequalityo f o t h e r l o a n s …
T h e i n c r e a s e i n expensesm a d e t h e r e m a i n i n g p r o f i t a l s o lowert h a n o r i g i n a l l y planned.T h u s , baddebtincreasest h e costandt h e r e b y reduces t h e financiale f f i c i e n c y of thebank.
Identifying factors that influence credit risk is crucial for managers to ensure financial stability and enable banks to adopt more responsible management practices According to Berger and DeYoung, when a loan transitions into bad debt, banks incur significant costs related to nonperforming loans and must allocate resources for underwriting and monitoring, which ultimately affects loan quality Additionally, banks face opportunity costs in securing new loans, leading to diminished credibility and a slower credit cycle that reduces cost efficiency Research indicates a negative correlation between credit risk and bank profitability, evidenced by declines in Return on Assets (ROA) and Return on Equity (ROE).
( 2 2 ) studiedt h e impacto f creditr i s k o n businessperformanceo f E t h i o p i a n commer cialbanksfrom2 0 0 3 -
2 0 0 4 U s i n g t a b l e dataandmultivariateregressionanalysis,thestudyresultsshowedthatc reditriskcanbemeasuredbybaddebtratio,estimationofcreditriskprovisionaffectingthebus inessperformanceofEthiopiancommercialb a n k s T h e s t u d y r e s u l t s s u g g e s t e d t h a t creditr i s k managements h o u l d b e improvedinorderto improvebankingbusinessefficiency.
Morever,increasingbaddebtrequireshigherprovisionwhichmakesthebanktob e u nstable, reduceprofitsandleadsto therisk ofbankruptcy.
Affectthebank’sreputation
Creditriskcanreducethereputationofbanks.Whenfacingwithriskandtheinefficientbusine ssoperation,reputationonthemarketwillbereduced.Thisisanenormouslosswhichisnoteasilytose e.ThishasbeenconfirmedintheresearchofZribiandBoujelbène(20).
Indirectaffectto otherbanks
22Risksi n lendingactivitiesalsocauseindirectlossest o otherbanks.B a n k s p l a y a n importa ntrolein themarketeconomy.Itisrelatedtoallsectorsand alleconomicsectors,and itisessentialtoprovidecapitalfortheeconomy.Therefore,thebankhasagreatinfluenceonmonetary policy,o n macro- regulatoryinstrumentso f t h e country.I f t h e r e i s a b i g lossincreditactivityevenatanaffiliatedle nder,it maycausea"chainreaction"whichthreatensthesafetyandstabilityofthewholebankingsystem,cau singgreatconsequencestothedevelopmentoftheeconomy(24,25).
Diagram3.2InitialDiagramofsymptom,potential problemsandproblemconsequenceso f Vietinbank–
Possiblecauses
Internalcauses
The lack of awareness among bank executives regarding the importance of independent risk management and loan portfolio management contributes to ineffective strategies in modern economies Vietnamese banks, for example, have traditionally focused on managing individual loan transactions without recognizing the significance of loan portfolio management As the economy develops, the risks associated with concentrated loan portfolios may be masked by economic growth, leading banks to underestimate potential threats While short-term lending can yield significant profits, reliance on centralized risk management becomes problematic during economic downturns, revealing the vulnerabilities of such an approach Furthermore, depending solely on signals from the Central Bank can be detrimental, as their interventions may lag behind real-time economic changes Therefore, banks that proactively implement effective loan portfolio management strategies can mitigate risks and avoid severe consequences.
Moreover,t h e factt h a t managersd o n o t h a v e f u l l awarenessaboutt h e needo f l o a n portfoliomanagementisalsoreflectedinthewayofsettingtheKPI.TheKPIjustfocuseso nincreasingthecreditscaleandignoresloan portfoliostructure.Thisleadstouncontroll edlevelo f r i s k o n t h e portfolioandoncet h e s e p o t e n t i a l r i s k s becomereallosses,theb ankwillsufferheavydamage.
AsM r DangQ u o c T h i n h , Directoro f VietinbankG i a Lai,shared:“Actually,m o s t ofthemanagersintheBranchstillcannotthinkoutofthebox.Imeanstheirwayof
24 thinkingandactingareaccording totheirhabit.Withthemindset that themain economicactivitiesarerelatedtoagriculture,they havejustfocusedonloanonthispurposeandofcourse,dismissedotherloan purposes.”
Besidethecausenotfullyawareoftheneedfor loanportfoliomanagement,undercompetitivepressure,thebanktendstochaseprofitsandlack ofdurabilitywhichaffectst o t h e efficiento f l o a n portfoliomanagement.Morever,subjec tivec a u s e s relatedt o ethicalissuescannotbeexcluded.Someemployeesorevenmanagersi ntentionallyl e n d i n g beyondtheallowedlimit.AlthoughLawonCreditInstitutionsorIntern alLawofVietinbankregulatesl o a n s a f e t y l i m i t s , s o m e caseso f m i s c o n d u c t c a n s t i l l occur.T h e r o o t causeofthissituationcanbederivedfromthe"cross- ownership"relationshipbetweenb a n k s , enterprisesands t a t e agencieswhichhavebeenp o p u l a r i n Vietnam'se c o n o m y inrecentyears.
MrChungQuangVusaidthat:“Asacreditemployee,thetargets setformeatthe beginningo f t h e yeara r e alwayshigh.Employeesnearlyhavet o t h i n k a b o u t t h e t a r g e t s everydayandtrytoarchievethem.However,thecompetitionintheindustrynowi s extremel yintense.In somecases,we areforcedtofindwaystobypasstherulesinordert o have newcustomers.”
E s h l a g h y andShahriari(26),t h e m a j o r causeo f banklossesandfailuresweresupposedto becausedbyloanportfolioproblems,whethert h e creditstandardwasweak.
An essential aspect of managing a loan portfolio is effective risk analysis, which necessitates detailed information about customers, industry trends, market conditions, competitors, and regulations to accurately forecast potential risks However, banks often face challenges due to inadequate information analysis and forecasting capabilities, hindering their ability to design loan portfolios proactively In commercial joint-stock banks, the process of collecting information for credit analysis remains limited, particularly in gathering data on economic sectors to assess industry risks for internal credit ranking Currently, a Credit Information Center (CIC) is in place to address some of these challenges.
Central banks provide essential information to assist commercial banks in the credit analysis process; however, this information is often outdated and presented in raw form, limiting its usefulness Additionally, detailed customer information, aggregation, and forecasts are typically unavailable, hindering effective portfolio management As a result, the design of loan portfolios is negatively impacted from the outset of establishing loan strategies To enhance proactive portfolio management methods, it is crucial to complete the information necessary for accurate economic forecasting within the banking system.
WhenbeingaskedaboutthesupportofinformationgivenbyCreditInformationCenter ,Mr.NguyenTanViet,DeputyDirectoroftheBranch,givessomeopinions:“Forme,a t present
,t h e i n f o r m a t i o n f r o m C I C i s justhelpu s knowa b o u t t h e s i z e l o a n o f customers atotherbanksandwhethertheyhavebaddebtornot.Itcannotshowusthew a r n i n g i f customersr e a l l y risky.Therefore,I agreet h a t t h e C e n t r a l b a n k n e e d t o u p g r a d e thesystemandcollectmoreinformationtohelpcommercialbanksinanalysinga n d fo recastingcustomers loan status.”
Externalcauses
Changes in the macroeconomic environment significantly impact the quality of a bank's loan portfolio, as highlighted by Fest et al (28) Favorable economic conditions lead to improved solvency, reduced default probabilities, and a lower ratio of non-performing loans Mileris (29) has developed a model that illustrates the ability to forecast loan portfolio credit risk, emphasizing the critical role of economic analysis in credit risk management, as fluctuations in the economic landscape directly influence bank performance Additionally, Heitfield et al (30) analyze Syndicated National Credits (SNC) portfolios, revealing that portfolio risk positively correlates with name and industry concentration.
Theo v e r h e a t i n g andu n c o n t r o l l e d developmento f t h e Goverment'si n v e s t m e n t portfolioasw e l l ast h e l o a n portfolioo f commercialbanksc a n l e a d t o s e r i o u s consequences,especiallyrelatedtonon- manufacturing industriessuchassecurities,realestate,andcommercialbusiness.T h e rapidg rowtho f t h e s e industriescanleadt o animbalancebetweensupplyanddemandinthemarket. Andwhentheconsequencesoftheimbalancebetweensupplyanddemandareserious,causing recessionandbankruptcyint h e s e industries,bankscannotavoidheavylossesandevenaf fecttheoperationale f f i c i e n c y inlateryears.
Itcanb e s a i d t h a t commercialb a n k s a r e o n e oft h e i m p o r t a n t factorscausing i n s t a b i l i t y oftheeconomywhentheyhavenotrestrainedandchasedaftermarketdemanda ndincreasedcreditfornon- productionsectors(whichdonotdirectlyproducegoodsforsociety).However,theyaretheba nksthemselveswho becomev ic ti ms laterwhentheyhavetobeartheheavyconsequences ofrelatedbaddebts.Untilpresent,thesebanksares t i l l confusedaboutthes o l u t i o n t o d ealwith theconsequences.Itisclearthattheeconomicinstabilityhasagreatimpactontheshort- termbusinessstrategyofthebanks,e s p e c i a l l y theirportfoliodesigningplans (31).
4.1.2.2 Theregulatoryenvironmentw i t h t h e g u i d a n c e a n d supervisiono f t h e Centralb a n k has notactivelysupportedcommercialbanksin loan portfoliomanagement.
Thei n s t a b i l i t y i n t h e e c o n o m y aswellasi n b a n k i n g operationsasm e n t i o n e d abovei s alsop a r t l y d u e t o t h e lackofs u p e r v i s i o n fromt h e Centralb a n k (19).Ift h e Centralbankhadregulationsonsafelendinglimitsforeconomicsectors(especiallynon- productionsectors)tocreatealegalcorridorforcingbankstocomply,theresultmayben o t so bad.ThesupervisionoftheCentralbankontheactivitiesofthebanksismostlydelayed,pa ssivewiththeactualdevelopments,sotheefficiencyisnothigh.TheCentralbankstillattache sgreatimportancetotheissueofcheckingandsupervisingcompliancefromcommercialban ks(32)butthefunctionofremotemonitoring bringswarningsarer a r e l y mentioned.
Whenbeingaskedaboutthiscause,Mr.Vietsaidthat“Frommypointofview,t h e C entralB a n k j u s t h a s t h e overals u p e r v i s i o n f o r a l l o f thebanksont h e market.Bec auset h e proceduresrequiredt o i s s u e a s p e c i f i c regulationt a k e a l o t o f t i m e a n d t h r o u g h m u l t i p l e levelso f approval,t h e regulationso f t h e Centralbankw i l l oftenb e ou tdatedo r evenn o l o n g e r s u i t a b l e f o r marketchanges.A l t h o u g h t h i s i s s u e h a s a l s o improvedsignificantly,ithasnotbeenabletomakeagreatimpactontheloanportfoliomanag ementof commercial banks.”
Ingeneral,thedevelopmentandimplementationoflegalrulesaccordingtointernatio nalstandardsinVietnamarestillweak.Therefore,itcanbesaidthatthelegalenvironmentw i t h t h e supervisionandguidanceo f t h e Centralb a n k hasn o t a c t i v e l y supportedbankst o do well theirloanportfoliomanagement.
4.1.2.3 Thelimitedactivityof thedomesticfinancialmarkethas limitedbanks'abilitytou s e avarietyof tools to adjust theloan portfolio.
Intheworldfinancialmarket,newfinancialinstrumentscalledcreditderivativeshavebe enrapidlydevelopingoverthepastfewyears.Atypeofcreditderivativecalledl o a n portfo lioswap,c a n helpt h e bankm a n a g e creditr i s k froml e n d i n g operationsbysecuringagains tt h e borrower'screditq u a l i t y decline.Ifa borrowerd e f a u l t s , t h e bankw i l l sufferlosse sontheloan,buttheselossescanbeoffsetbytheprofitsfromtheloanportfolioswap.Theref ore,i f u s e d properly,s w a p p i n g l o a n portfoliosc a n reducet h e bank'soverallcreditris k(33).
In Vietnam, advanced financial instruments such as debt trading, credit risk swaps, and securitization have not been widely adopted, leaving currency derivatives as the primary tool for managing exchange rate and interest rate risks This limitation stems from a lack of awareness regarding the importance of credit derivatives in contemporary financial markets, coupled with concerns over the global bank collapses linked to these instruments Additionally, there is a shortage of knowledgeable investors and insufficient legal frameworks to support a derivatives market As a result, bank managers in Vietnam have not had the opportunity to utilize flexible and sophisticated tools for effective loan portfolio management.
According to Mr Dang Quoc Thinh, Director of Vietinbank Gia Lai, the primary issue affecting loan portfolio management is a lack of comprehensive awareness among staff He emphasizes that while various factors contribute to the current challenges, the root cause lies in human resources Many managers at the branch are middle-aged and may lack the necessary knowledge and adaptability to rethink their approach to portfolio management To address this problem, the branch must implement detailed and thorough solutions, focusing on enhancing the understanding of loan portfolio management among both managers and all employees.
Theloanportfolioisgenerallythelargestassetofabankandthemostimportantsource o f i n c o m e , ando n e o f t h e m a i n sourceso f r i s k Therefore,p o o r l o a n portfoliomanag ementhasremainedthemaincauseofproblemsin thisarea(31).
Alternativesolutions
Changingcurrentloanporfoliomanagementmethod
Stefaniaetal(34)usedmathematicalmodelstotestthehypothesesregardingtheimpac to f diversificationo n t h e bank'sl o a n portfolioo n r i s k , performanceandcapitalizationatA ustraliancommercialb a n k s S u r v e y s u b j e c t s w e r e 9 6 largestcommercialbanksinAustralia(intermsofassetsize)overthe7yearsfrom19 97-
2003.T h e conclusionpublishedafterthestudyshowstheclearbenefitsofdiversifyingtheloan portfolioforbankperformance.Inparticular,diversification,especiallydiversifyingl e n d i n g industries,willreducetheprovisionforbaddebtsinthefutureandthebankmayoperatew i t h lowerc a p i t a l , therebyr e d u c i n g c o s t s , savingresourcesandincreaset h e bank'spro fitability.Accordingtothisstudy,Australianbanksagreedthatweakportfoliomanagementwa st h e m a i n reasonf o r t h e d e c l i n e i n l o a n porfolioquality.S i n c e t h e n bankshavesup posedthatit is necessarytoapplydiversificationin portfoliomanagement,e s p e c i a l l y thestrengtheningofsupervisionbytheBaselcommitt ee(throughsafetystandardsaswellasmonitoringprocess)isthenecessaryconditiontosuccess fullymanagetheloanportfolioatbanks.
Diversification of loan portfolios is essential as a risk mitigation strategy, aiming to minimize specific risks by considering various criteria such as industry, trade, production, geographic area, and scale Establishing a diversified loan portfolio not only promotes efficient and sustainable credit growth but also balances the goals of maximizing profits while minimizing risks Additionally, the branch must align its credit targets with Vietinbank's annual objectives, focusing on industries with stable growth By setting flexible growth targets that comply with Central Bank requirements, the quality of documentation and customer profiles will improve, thereby reducing credit risk through careful appraisal and selection of loans.
However,i t i s veryimportantt o b u i l d a l o a n p o r t f o l i o t h a t i s suitablen o t o n l y w i t h t h e fluctuationso f themarket,t h e a b i l i t y tocontrolandbearri sks b u t alsot o t h e capabilitiesandh u m a n resourcesoft h e bank.Ifh u m a n resourceso f t h e Branhcannotm e t re quirement,theBranchcansuggestsupportingfrom theHeadOffice’sexperts.
Itis necessaryt o c h e c k t h e financialconditionandrepaymenta b i l i t y o f t h e customersregularly.Byth atwaydefectwhichhasabilitytoreducecreditqualitycanbef o u n d s o o n D e b t classifica tionm e t h o d c a n helpwarningaboutcreditr i s k s Assessingcreditriskaccordingtointernati onalstandards(BaselIIstandard)willhelpthebanktoi d e n t i f y creditr i s k e a r l y , s o t h a t i t canb e givesolutionst o limitbaddebtandreadjustcreditportfolio.
The bank must regularly assess and restructure its problematic loans to align its credit portfolio with the socio-economic conditions of the area According to modern portfolio management theory, different combinations of loan types will produce varying portfolio structures By diversifying loans within a portfolio, banks can reduce overall risk compared to the risks associated with individual loan types This diversification effect has been validated by numerous studies in developed countries The bank's goal is to select an optimal combination of assets that maximizes efficiency while considering its internal resources and anticipated losses Consequently, establishing a loan portfolio involves determining the appropriate size and proportion of each loan type within the overall portfolio.
Iti s n e c e s s a r y toi n c r e a s e t h e proportiono f investmenti n creditcapitalf o r t h e p roductionandprocessingo f e x p o r t s asinfact,t h i s i s a goodands t a b l e v a l u e - a d d e d productionindustrybothinthedomesticsupplysourceandthetraditionalexportm arketo f overseascustomers.Besidethat,theproportionofcredittoenterprisesoperatinginthefi eldoftrade– servicesshould bereducedcautiously,especiallyinagribusinesssector.W h e n choosingt hetargetcustomer,thebankalsoneedtobecarefulwithsomeindustrieswhicharehighlysensitiv etoretiredforeignmarketssuchasiron,steel,fertilizer,plasticresinsandlarge- scalecreditenterprisesovertheyears.
Thebankcontinuet o accessandi n c r e a s e l e n d i n g t o s m a l l andm e d i u m - s i z e d enterprises,p r i v a t e enterprises,householdsandi n d i v i d u a l s w h o havec o n s u m e r l o a n s becausethisgroupofcustomershaveahighlevelofloansecurity.Thereforet heriskoftheircapitallossisquitelow.WiththescaleofVietinbank–
GiaLaiBranchatpresent,iti s m o r e convenientto expandanddeveloplendingto this group ofcustomers.
Itisalsoagoodideatoapproachthegroupofcorporatecustomerswithforeigndirectin vestmententerprises.ButastoMr Thinh’sopinion, withtheeconomiccharateristicsofGia Laiprovinceandneighboringprovinces,itisveryd i f f i c u l t toincreasethecreditproportionf or thisgroupofcustomers.Thesearebusinesseswithgoodmanagement,clearandprofessionalbusi nessstrategies,depthandsustainability,butwitht h e scaleofVietinbank–
H o w e v e r , t h e Branchc a n b u i l d a gradualapproacht o b u i l d p o t e n t i a l sourcesof customersto develop in thefuture.
Inordertodevelopandapplya newloanportfoliomanagementmodelandm e t h o d , t h e costthattheorganisationneedtopayis about 400,000,000VND.
Developingahumanstrategyinaccordancewithriskmanagementrequirements
Humanresourcea r e t h e centralelementw h i c h i s a foundationf o r detecting,ass essingandtimelylimitingcreditrisksbutatthesametimeiscauseofthelossfromt h e ris ksstemmingfrommoralfactorsandcompetences.TheBranchneedstopayattentiontothequalit yofemployeesrightfromtherecruitmentstage.Itisnecessarytohaveastrictandsynchronou sprocedureandregulationsonthewholesystem,ensuringt h e inputstandardsoftheem ployeeswithgoodconpetencyandmoralcharacter.Thisisanimportantsteptolimitcreditris kthatcanoccuratthehumanfactor.Therecruitmentprocessshouldbecarriedoutmore strictlyaccordingtocriteriasuchasregulartrainingat
33 universities, proficientinforeignlanguagesa n d informationtechnology,goodhealth,goodsocial understandingandabilitytoincreasesocial communication.
From2015,Vietinbankhasbeeninterestedincreditportfoliomanagementwheni t beg ant o restructuret h e bankw i t h t h r e e s e c u r i t y lines:OperationsD i v i s i o n , R i s k ManagementDivision,andSupervisoryBoard.However,infact,these divisionshavenotyetfullyd e v e l o p e d theirfunctions.Thesedepartmentsonlyperformthef unctionofoperationalcontrollingandhavenotyetimplementedtheforecastingandoperationori entation.
Therefore,inthecomingtime,thebankmustpromotethesethreedepartmentstofu llypromote t h e i r f u n c t i o n s d u r i n g t h e operation.Inordert o managecreditportfolioeffe ctively,itisnecessarytosynchronouslyimplementasystemofsolutionsfromdevelopingcred its t r a t e g y andcreditm a n a g e m e n t t o d e v e l o p i n g a completel o a n portfoliomanagemen tmodelandmethod.Moreover,itisnecessarytobuildaspecializedd i v i s i o n forloanportfol iomanagement.ThisdivisionwillbelongtotheRiskManagementDivision,butoperateinde pendentlyandhavethefunctionofbuildingandorientingthecreditportfolio fortheBranch.
Thecostf o r e s t a b l i s h i n g anindependentd i v i s i o n whichm a i n t a s k i s analysin ginformation,forecasting andmanagingloanportfoliois about250,000,000VND
2 Settingroom, facilitiesf o r t he lo an portfoliomanagementd i v i s i o n
Constantlyrenovatingthetrainingandprofessionaldevelopmentforstaffatthe
Allactivitiesi n t h e bankingi n d u s t r y arechangingeveryday.N e w k n o w l e d g e ,newproductsandnewregulationsissuedbyt h e Governmentisusuallyupdated.Therefore,t h e bankneedst o r e g u l a r l y organizet r a i n i n g courses,s h o r t - t e r m
Solution validation
Comparingallt h e abovefeasibilitys o l u t i o n , t h e trainingprogramaboutl o a n p ortfoliomanagementfortheBranchemployeesisthemostsuitablesolutionthatBoardo f Dire ctorsofVietinbank–GiaLaiBranchcanusetoimprove knowledgeaswellasthea b i l i t y oftheemployeessothattheBranchcanreducebaddebtandde velopsustainably.T r a n i n g inworkplaceisanefficientwaytobringjobsatisfactionandtheco hesionamongemployees( 3 8 ) A s t r o n g workforcemeanst h a t e v e r y e m p l o y e e u n d e r s t a n d s andi s committedtothevaluesandgoalsoftheorganization,andisadrivingfo rcethatnotonlyhelpsemployeest o d o well,b u t alsohelpst h e m t o archievet h e i r target.
35 wayprocesswhereeveryorganizationneedstoworkhardtoengagei t s staffand,importantl y,theemployeesthemselvesdecidehowtheywillstickwiththe organization.Itisasymbioticrelationshipthatboththeorganizationanditsstaffsupporteacho ther.Ifonesidechanges,thelevel ofattachmentwilldeterioraterapidly.T hi s isalsot h e s a m e aso p i n i o n o f M r T h i n h aboutt h e s o l u t i o n H e s u p p o s e d t h a t t h e m o s t im portantfactorto develop anorganisationis theemployees.
Besidet h a t , i t i s e a s i l y toseeth at t h e costf o r trainingprogrami s lowestwhencomp aringthecostof threesolutions.
AsMs.NguyenThiHoa,chiefaccountantofDucPhuGiacompany,shared:“ I perso nallypreferworkingwithexperiencedandqualifiedcreditofficers.Theycanevenadviseme foreffectivebusinessinvestmentoptions.Therefore,Ithinkworkingcapacityisveryimportant. Itisnotonlyusefulforcreditofficersthemselvesbutalsocreatestheirattractionandengag ementwithcustomers.IfVietinbankcanregularlytraintodevelopi t s professionalcompe tence,it will be amajorcompetitive advantageforotherbanks.”
Duetotheproblemcanleadtoseriousdamage,itisurgentforBoardofDirectorst o setana ctionplanassoonaspossible.Thetablebelowisanactionplanof6monthsofVietinbank– GiaLaiBranch.Theresult will beevaluatedattheendof theyear2020.
Tasks Department June July August Sep Oct Nov Dec
Collect as well as researchthe data andinformati onaboutcred itemployees at the
HumanReso ucesDepart ment,Custo merRelation shipDepart ment
Testing thecurrentkn owledgeo f creditemplo yees
HumanReso ucesDepart ment,Testin gorganisatio n about loanportfoli omanageme
Evaluatingan ddividingcr editemployee sinto suitable groups
CustomerRe lationshipDe partment,Hu manResouce sDepartment
HeadOffice, CustomerRe lationshipDe partment,Hu manResouce sDepartment
HeadOffice, HumanReso ucesDepart Receivefeed ment backand makecorrect ion
HumanReso ucesDepart ment Listallt h e e mployeeswh ichhavel ow score
Receivefeed backfromem ployeeswhic hhavelo w sc ore
HeadOffice, HumanReso ucesDepart Correctiona ment nd re- evaluate.
Re- opent h e tra iningclass if neccesary
Theoperationo f a banki n a markete c o n o m y isalwayse x p o s e d t o m a n y risksand challenges.Banksneedtoknowtheriskofbaddebtsandtakemeasurestominimizebaddebts.B yt h e o r e t i c a l andp r a c t i c a l researchesatVietinbank–
G i a Laibranch,t h e t h e s i s studiedt h e situationo f t h e branchi n t h e periodo f 2 0 1 7 -
2 0 1 9 , exploredt h e problemo f t h e symptomincreasingb a d debt,causesandp r o p o s e d s o l u t i o n s t o reducebaddebtsinthecomingtime.Thetopiciswrittenbasedontheoryandpractic alexperienceo f t h e a u t h o r Iti s expectedt h a t t h i s s t u d y w i l l contributea s m a l l partt o reducingnon-performingloansforVietinbank–GiaLaiBranch.
Methodology
Them e t h o d s usedi n theresearchprocessi n c l u d i n g statisticalresearchm e t h o d , c omparativeresearchmethod,generalmethod…
Interviewtranscript
PL Yes,o f course.T o d a y I needyout o helpm e o u t w i t h aninterviewt o sharemeyourthin gkingaboutt h e currentsituationo f t h e Branch.It’smayt a k e 1 5 –
QT OkLinh,youcanaskmeaboutwhatyou’re concerned.
PL IhavereadtheBranchinternalreportin3yearsfrom2016to2018andIseethatt h e badde btratiohasbeenincreasingrapidly.Canyouexplain moreaboutthis?
QT Yah,a c t u a l l y theBranchn ow i s goingthrougha tought i m e A s you’vea l r e a d y k n o w n , thebaddebtratiowasincreasingrapidlyinrecentyearsbecausewehaves o m e c ustomerswhichhavelargeamountofcreditbalancebuthavedifficultyinrepayingt h e l o a n s , f o r e x a m p l e HoangA n h T h a n h H o a HydroelectricJ S C w i t h m o r e than 1,300billiondongortheDucLongBOTprojectwith980billiondong.T hi s h as leadto theamount ofbaddebtincreasedalot, especiallylastyear.
PL Sowhatproblem doyouthink theBranchis facingnow?
The bank is currently facing a challenge due to a limited number of active customers, with most credit balances concentrated among a small group of primary clients If any of these key customers encounter business difficulties, it could significantly disrupt the bank's credit balance structure Additionally, the region's economic activities are heavily tied to agriculture, particularly coffee and pepper, which are primarily traded as raw materials This dependency on agricultural output makes the bank vulnerable to adverse weather conditions, as poor weather can negatively impact crop yields, leading to substantial repercussions for the bank's financial stability.
PL Soyoumeanthat this is themainproblem oftheBranch?
QT Yes.Thenumberofcustomersistoosmalland80%ofthetotalcreditbalanceisj u s t d ependo n only2 0 % n u m b e r o f customers.T h i s meanst h a t t h i s groupo f custo merswillhavegreatinfluenceontheoperationoftheBranch.Ifonlysomecustomersin thisgroupcannotpaybackortheym o v e toanotherbank,theBranch’sprofit will beaffectedimmediately.
PL Therei s o p i n i o n t h a t employeesw h o lackofexperiencesandcompetencesw i l l leadt o this problem What doyouthink?
QT Experiencesandcompetencesofemployeesi s v e r y important.Inr e c e n t years,there arelots of newemployeeshasbeenrecruitmentdue tohighdemand.This hasl e d t o manyemployeesw e r e graduates t u d e n t s w h o d i d n ’ t haveenough experiences.Besidethat,causesomegoodemployeeshasmovedtoanotherbank,i t ’ s veryd i f f i c u l t forVietinbank–
PL Whydoyouthinkthat the managementoftheloan portfoliohasnotbeengivenenoug hattention?
QT Actually,mostofthemanagersintheBranchstillcannotthink outofthebox.I mea nst h e i r wayo f t h i n k i n g anda c t i n g a r e a c c o r d i n g t o t h e i r habit.W i t h t h e mindsetthatthemaineconomicactivitiesarerelatedtoagriculture,theyhavejustf ocusedon loan on this purposeandofcourse,dismissedotherloanpurposes.
Usuallyatt h e b e g i n n i n g o f t h e year,I askt h e h e a d s o f departmentst o setu p a spec ific developmentplan fortheirdepartment andreviewit monthly.Infact,mosto f thechiefsanddeputy managerswhenassigned targetsatthe beginningoftheyeardonothaveaspecificdevelopmentorientation.Noindustry grouphasbeengivenaprioritytodevelop,resultinginaspreadinfindingpotentialcusto mersandp u r s u i n g them This will greatlyaffectthegoalcompletionrateofthe rooms.
QT Forthepursuit ofprofitthat ignorescapitalsafetyregulations,Ithinkthisisnott h e caseatt h e Branch.A l l employeesatt h e b a n k arep e o p l e w i t h goodmoralqualiti esandability towithstandhighpressureofwork.TheBankalsoregularly inspectsa ndsignsofviolations andhasyettodetecterrorsrelatedto this issue.
Asf o r externali n f l u e n c e s , o t h e r banksw i l l bes i m i l a r l y affected.H o w e v e r , t h e expressionofeachbankiscompletely different.Therefore,itcannotbesaidthatt h e s e arethemainreasonsfortheineffectivemanagementofthecreditportfolioatt h e branch.
QT Forme recognizes that the root cause of current issues in loan portfolio management stems from human resources A heightened awareness of effective loan portfolio management is crucial for efficiency Many branch managers are middle-aged, which may limit their adaptability and knowledge in evolving portfolio management strategies To address these challenges, a comprehensive solution is necessary The primary focus for the branch should be to enhance the understanding of loan portfolio management among both managers and all employees.
QT Ialwayswanttofocusontheemployeescausethepeopleisthemostimportantinanorgani sation.Therefore,I wantt o p e r f o r m trainingaboutl o a n portfoliomanagementf o r allt h e employeest o helpt h e m gaink n o w l e d g e andwo r k m or e effectively.
PL Hi Mr.Viet.CanIinterviewyousomeissuesabout Vietinbank–GiaLaiBranch?
TV It’smypleasure.Whatdoyouwant to know?
PL What doyouthinkaboutcurrentsituation of theBranch?
TV AsIsee,ourmarketshareinCorporateCustomersisstillverylow.Therearetoo manycustomerswhodon’tuseanyservicesoftheBranch.Therefore,developmentp o t e n t i a l isverylarge.Manyofourcreditofficersjustcarryoldthoughtsandthinki n theru twhenfindingcustomersjustinagriculturefieldandtendtorejectanynewproject.Alsoour region’sstrengthisagriculture,especiallycashcrop,theareastillhasothereconomicgro ups.Thisisalsodependontheemployees’competencesbuti t ismorerelatedtotheirway ofthinkingaboutportfoliomanagement.Becauseoft h a t , Ithinkbusinessfieldsofc orporatecustomersneedtobebroadenasmuchasp o s s i b l e Itwillnotonlybringth estableprofittotheBranchbutalsohelpreducet h e creditrisk.
TV Forme, atpresent,th e in f o r matio n fromCICi s j u s t helpu s k n o w aboutt h e s ize l o a n ofcustomersatotherbanksandwhethertheyhavebaddebtornot.Itcannots h o w u sthe warning ifc u s t o m e r s really risky.Therefore,I agreethatthe Centralbanknee dtoupgradethesystemandcollectmoreinformationtohelpcommercialbanksinanalysin gandforecastingcustomersloanstatus
TV Frommypointofview,theCentralBankjusthastheoveralsupervisionforalloft h e b anksonthemarket.Becausetheproceduresrequiredtoissueaspecificregulationtakealoto ftimeandthroughmultiplelevelsofapproval,theregulationso f t h e Centralbankw i l l oft enb e outdatedore v e n n o longers u i t a b l e f o r marketchanges.Althoughthisissuehasa lsoimprovedsignificantly,ithasnotbeenabletom a k e agreatimpactontheloanportfoli omanagement ofcommercialbanks.
Interviewee:Ms.NguyenThiHoa,chiefaccountant ofDucPhu Giacompany
PL Hi Ms.Hoa,howareyoutoday?
Trang,DaNangandHCMcity.Iknowthatittakesalotoftimetocollectingdata,checking invoicesanddisburesementdocumentsandcompletingtheloanapproval.However,Iwas verysatisfied with theVietinbankemployee’sattitude andsupport.Besidethat,IalsoappreciatedVietinbankinhavingnewideastoreducingthet imeo f waitingandencreasingtheproductivity.
Ip e r s o n a l l y p r e f e r w o r k i n g w i t h experienceda n d qualifiedcreditofficers.T h e y canevenadvisem e f o r effectivebusinessinvestmento p t i o n s Therefore,I think wo rkingcapacityisveryimportant.Itisnotonlyusefulforcreditofficersthemselvesb u t alsocreatest h e i r attractionandengagementw i t h customers.IfVietinbankcanregular lytraintodevelopitsprofessionalcompetence,itwillbeam a j o r competitiveadvan tageforotherbanks.
PL Hi Mr.Vu.What doyoufeelaboutyourcurrentwork?Doyoufeelstress?
QV Asacreditemployee,thetargetssetformeatthebeginningoftheyeararealwayshigh.Empl oyeesnearlyhavet o t h i n k aboutthetargetseverydaya n d t r y t o archievethem However, thecompe titioninthe industry nowisextreme ly intense.Insomecases,weareforcedtofind waystobypasstherulesinordertohave newcustomers.
AlthoughI knowthatit i s very importanttoobserve thecashf l o w andbusinesssitu ationofcustomerstorealiseanysignofbaddebt,Idon’thaveenoughtimefort h i s activit y.MyK P I i s q u i t e highandI n e e d tof i n d l o t s o f newcustomerst o archievetheKPI. Ioftenfeelstressduetothehugeamountofwork.Therefore,iti s hardformetomanaget imeforsomanyactivitiessuchasfindingnewcustomers,observingthecashflowand businesssituationofcustomers,realisingsignofbaddebt and dealingwith baddebt.
Interviewee:Ms.LeThiNhuKieu-baddebt dealingdepartment’semployee
PL Hi Ms Kieu,canIinterviewyousomeissuerelatedtoyourcurrentjob?
This year's increase in bad debt is largely attributed to loans issued in previous years While these loans may have been sound at the time, inadequate customer management and significant gaps in the loan management process have contributed to the current challenges.
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Criteria Calculation Pointsscale Propo rtion
Group3 60 points Group4 40 points Group5 20 points
Group2 80 points Group3 60 points Group4 40 points
Therati oofnetin comefr ominter estsand fees(H3
(Badcreditbalance+Credit sold toVAMCbalance) ending
Changi ng inbad debtan ddebts oldto
∑Structualdebtremaininggroup1,group2( owe notes-watch)debtending
Group1 debtover dueless than10 daysRa tio(R7)
Group3 60 points Group4 40 points Group5 20 points
5 biggest creditb alance custome rs(T2)
4) i.I f Q1 ≥ 10years,Q4 ismaximum 10 points ii.I f Q1 < 10years,Q4 iscalculatedas below:
-Master degreemajorineconomic(full–time) 10 points
-Bachelordegreemajor ineconomic (full–time) 8 points
-Otherkinds:(i)Collegedegree;(ii)Bachelordegree/ masterdegreemajorinothersectors;(iii)Bachelordegree/ masterdegreem a j o r i n e c o n o m i c bydistance- learning,part-timelearning…