CREDIT RISK MANAGEMENT IN VIETNAM TECHNOLOGY AND COMMERCIAL JOINT STOCK BANK

NATIONAL ECONOMIC UNIVERSITY NEU BUSINESS SCHOOL VU HUYEN HAI CREDIT RISK MANAGEMENT IN VIETNAM TECHNOLOGY AND COMMERCIAL JOINT STOCK BANK MASTER OF BUSINESS ADMINISTRATION THESIS Ha Noi – 2021 NATIONAL ECONOMICS UNIVERSITY NEU BUSINESS SCHOOL VU HUYEN HAI CREDIT RISK MANAGEMENT IN VIETNAM TECHNOLOGY AND COMMERCIAL JOINT STOCK BANK MASTER OF BUSINESS ADMINISTRATION THESIS SUPERVISOR: DR TRAN THI MINH HUONG Vũ Huyền Hải – EMBA18005 HANOI –2021 Vũ Huyền Hải – EMBA18005 TABLE OF CONTENTS Vũ Huyền Hải – EMBA18005 ACKNOWLEDGEMENTS This work would not have been possible without the support of the National Economic University I am especially indebted to Dr Tran Thi Minh Huong, who has been supportive of my thesis and who worked actively to provide me with the protected academic time to pursue those goals She always gives me invaluable advice, continuous support, and patience during my study Her immense knowledge and plentiful experience have encouraged me in all the time of my academic research I would like to express sincere thanks to family, friends, my colleagues at Techcombank for their assistance, insightful comments, and suggestions at every stage of the thesis I am looking forward to receiving your comments to improve this thesis Yours sincerely, Hanoi, date…month… year 2021 Student Vu Huyen Hai Vũ Huyền Hải – EMBA18005 ABBREVIATION ARCO: Audit and Risk Management Committee BCDE: Business Credit Decision Engine BB customers/SME customers: Small and medium-sized enterprises BB division: Business Banking division/in charge of SME customer management BBC/Branch: Business Banking Center or Branches CA - HO: Credit appraisal department – Head office CA manager: Credit appraisal manager - Risk management division CA: Credit appraisal officer - Risk management division CASA: Current Account and Savings Account CCA: Center of Credit Admin CLV: Customer Lifetime Value CSM: Credit Solution Management CPM: Credit portfolio management CRM: Credit risk management EAD: Exposure at Default (EAD) EL: Expected Loss EWS: Early warning system FMCG: Fast-moving consumer goods HO: Head office of TCB IFRS 9: International Financial Reporting Standard LGD: Loss Given Default NPL: Non-performing loan Vũ Huyền Hải – EMBA18005 PD: Probability of Default PFS: Personal Finance Service RM: Relationship Manager/Credit officer SBV: State Bank of Vietnam TCB/Techcombank: Vietnam Technological and Commercial Joint Stock Bank YoY: Year-over-year WB customers: Wholesales customers Vũ Huyền Hải – EMBA18005 LIST OF TABLES Table Page Table 3.1 – The asset growth rate 36 Table 3.2 - Lending growth rate in recent years 37 Table 3.3 – Profitability indicators 37 Table 3.4 – Target total outstanding of customer segmentation for 2021 40 Table 3.5 – Target estimated loss for 2021 40 Table 3.6 - Credit rating score at TCB 44 Table 3.7 – Credit limit of segmentation and industry 46 Table 3.8 - Loans structure by customer segmentation in recent years 50 Table 3.9 –Loan structure by term loan 51 Table 3.10 - Loan structure by industry sectors 51 Table 3.11 – Loan classification in recent years 52 Table 3.12 – Overdue and NPL in recent years 53 Table 3.13 – Provisions in recent years 53 Vũ Huyền Hải – EMBA18005 EXECUTIVE SUMMARY Banking is the business of accepting risk The primary objectives of any commercial bank are to manage all the risks to make and maintain the profit for its shareholders The ongoing development of innovative risk management methods has helped the banks easier to identify, measure, implement and treat potential credit risks This research proposal is intended to assist the reader to understand the credit risk management process as well as capture the actual credit risk management process in Techcombank and then assess its effectiveness The opening is the introductory part It gives an idea about the research objective, the scope, and the research methodology The thesis has been segregated into three separate chapters Chapter mentions the theoretical framework of credit risk and credit risk management in commercial banks Chapter contains the discussion of the actual implementation of credit risk management procedures in Techcombank Chapter includes the findings and recommendations of the study Appendices are enclosed at the end to help the reader to gain a detailed idea Vũ Huyền Hải – EMBA18005 1.1 1.2 CHAPTER - INTRODUCTION Rationale Commercial banks have a critical role in keeping economies vibrant and growing by lending to creditworthy borrowers Lending helps the economy growth by allowing businesses to buy new equipment, add workers, or sign contracts for increased trade or services that help a stronger national economy In a current competitive environment, commercial banks provide a wide range of products and services for their customers but their primary activities are still taking term deposits and lending Besides customer quality, credit risk management is undoubtedly one of the most important issues in financial risk management Credit risk in banks is always with the lending function The ability to separate good customers from bad customers is a very key factor to becoming a successful player in the banking Banks cannot avoid bad customers or bad debts but can minimize their impacts with proper evaluation and controls So, it is important for Vietnam Technological and Commercial Joint Stock Bank to analyze, identify the causes for major credit problems, and implement an effective risk management system By analyzing, comparing, and synthesizing statistics, the author has chosen the issue: "Credit risk management in Vietnam Technology and Commercial Joint Stock Bank” to contribute the practical solutions to maximize credit returns while minimizing the risks Research Objective Vũ Huyền Hải – EMBA18005 growing relationships with customers is the Bank's goal not only to grow the business but also to manage risk more effectively 4.2.2 Improving credit risk measurement 4.2.2.1 Maintain the quality of credit measurement activities TCB should enhance the quality of appraisal and analysis criteria The analysis should focus on quantitative analysis, quantifying the risk level of the customer through the evaluation of data from the financial statements (receivables, inventory…) combined with quantitative analysis (analyze the macro and microenvironment, the industry environment, the history of credit relationship with the bank, etc.) While accessing risks, credit officers and appraisers have to be requested to take the following actions to understand the customer needs so that they can advise customers to use appropriate products and services as well as recognize potential risks and the ability to control and limit risk: ● Verify the customer’s legal status and the group of legally related customers; authorized representatives to decide on credit and sign credit documents right during the appraisal process ● Take physical visits to check production, business locations and collaterals This must be a mandatory step in the process ● Require customers to provide audited financial statements or certified financial statements by tax authorities to increase reliability ● When TCB decides to lend corporate customers money will not only be based on the appraisal of the initial business plan, using the loan for the Vũ Huyền Hải – EMBA18005 right purpose, but equally important is to control the customer's cash flow When the cash flow comes in, it must first give priority to repaying loans to TCB, then TCB will consider continuing to lend customers The appraisal and assessment of customers need to be evaluated and reviewed periodically and irregularly so will soon take measures to deal with the occurrence of risks arising from the customer's side 4.2.2.2 Complete the standard credit rating system according to Basel II standards It is necessary to supplement the content of the internal credit rating system according to Basel II standards, especially the calculation of Probability of Default (PD), Loss Given Default (LGD), Exposure at Default (EAD), and Expected Loss (EL) of the Customer Thus, the new credit rating is a useful risk-limiting tool in credit activities and a basis for risk-based pricing of commercial banks 4.2.3 Improving credit risk monitoring 4.2.3.1 Improve the quality of the collateral appraisal To mitigate the credit risks, the author suggests TCB take the following actions: Update the new policy of collateral receiving management: It is necessary to seriously develop a new policy, ensuring suitability with the current socioeconomic situation and competitors In collateral valuation, TCB should (i) Coordinate with valuation companies and request to increase the valuation rate through an independent Vũ Huyền Hải – EMBA18005 appraisal company (ii) Develop the reference market price frame of land; goods, means of transport When re-checking the valuation results, the competent authority will apply the price frame for each property after comparing it with the ownership papers on location and area Avoidance of risk: TCB should have plans to handle the event of sudden fluctuations in the business environment, organizational change, technological change 4.2.3.2 Improve the quality of the lending process, post-lending, and reporting a Simplify and standardize the appraisal, approval, operation processes Management is not only to minimize risks for the Bank but also must be focused on risk management solutions for customers Building strong and growing relationships with customers is the bank's goal to grow the business and to manage risk more effectively When defining the focus segment and sub-segment of customers, there are two basic criteria when understanding customers: TCB understands the business segmentation and business environment of the customer as well as the characteristics of customers' business activities This can be done through individual customers or via business projects/business programs or whole selected segmentation The Business team and Risk Management Team should coordinate to develop standard product packages with pre-approval limits and conditions that are suitable for targeted customers Vũ Huyền Hải – EMBA18005 • • Standardize the criteria in the appraisal process and centralize credit approval process for each sub-segment Standardize and simplify the credit conditions so that easier to check compliance b Improve the post-lending quality At the branch level: Branch Managers/Directors are responsible for organizing, monitoring, and supervising the implementation of post-lending actions in branches At the higher level, Area Directors will be responsible for monitoring the implementation of post-lending actions in the region Strengthen the role of Internal Audit: Internal Audit is an assistant department for the Board of Directors and Supervisory Board of the Bank Internal audit will help TCB promptly detect signs of risks to take timely measures, helping the Board of Management to recognize potential risks that may appear in the future so that TCB can have solutions to limit and better manage risks This department ensures TCB operates in compliance with laws and regulations, internal management and operation procedures, and ethical standards set by the bank It also helps to protect, manage and use assets and resources economically and efficiently In conclusion, Internal Audit can support the implementation of risk management more effectively TCB should clearly define post-disbursement monitoring and inspection criteria with components: Purpose of using capital and credit conditions compliance, collateral status, financial status and non-financial status Post-lending monitoring frequency by risk level needs to be regulated: Customers borrowing Vũ Huyền Hải – EMBA18005 working capital is monitored at least every months or by EL rate; customers only borrow medium and long-term loans will be checked at least 1-time minimum during the loan term c Has disciplinary for reporting The regulation has to clarify the responsibility of credit officers to check the debt classification of customers at other credit institutions monthly If the customer has group or greater than group debt classification, credit officers have to check and take physical visit customers to collect further verification; The Branch must notify the Credit Identification, Warning and Reviewing Department – Risk Management Division, and submit the report to the Early Warning Board on: ● Situation and direction of handling overdue debts at other credit institutions: (i) Causes of overdue debt (ii) Overdue debt handling plan (iii) Assess ability to repay: Wait for cash flow from business activities or customers can arrange to pay themselves or decide to sell collaterals? Estimated processing time? ● Assessing the liquidity of collaterals: Reviewing disbursement documents, collateral mortgage/pledge documents to ensure the rights/legality when TCB handles debt ● Deciding transaction orientation, handling plan: (i) maintain and continue the relationship with TCB (ii) Stop disbursement and focus on debt collection (iii) Gradually reduce the outstanding balance and stop the relationship (iv) Other treatment options: maintain / supplement / adjust Vũ Huyền Hải – EMBA18005 4.2.4 Improving human resource quality Human is one of the key success factors of the bank Customers need to be served by the best human resources, professionally trained in the key sub-segments and have a deep understanding of the business sector, industry, business model of customers So it is necessary to promote the bank culture of self-study and selfimprovement to enhance the sales forces to become the best financial advisors to help customers choose the solutions that best suit their financial needs; regulations and processes are developed Implement highly supportive training programs: Training from basic to indepth on each specific sector, each customer has specific characteristics of specific production and segmentation Update professional knowledge and train new legal regulations The in-depth training on products, processes, as well as foreign language skills, should be improved to serve foreign-invested customers For large, complex loans or investment project financing, it should be given to the need for enhanced assistance from finance professionals to properly identify the capital needs, identify and analyze all potential risks Focus on recruitment, job assignment, attracting and retaining personnel: TCB should pay attention to ethical assessment criteria before recruiting to avoid human-caused risks; assign jobs by your strength and education level; develop and improve HR policies to retain and attract a high-quality workforce At last, TCB should create a reward mechanism for departments and individuals to identify and report risks or have initiatives to improve and enhance their affection for risk management Vũ Huyền Hải – EMBA18005 Enhance the risk management culture: It is necessary to build a compliance culture with the law and respect for business ethics rules throughout the bank's executive and management levels This should be mentioned in the bank's charter on handling conflicts between the interests of shareholders and business ethics principles Increase the coordination of departments: With the bank's risk management activities, to ensure the highest efficiency of risk management activities as required by Basel II, departments, units, and human resources must have synchronous coordination For risk management, to work effectively, there must be coordination by everyone in the organization from senior management, internal auditors, and senior management levels These parts must have close coordination with each other The images below not only clearly show the relationship between rain factors and risk management activities but also show the tasks of each Department in the steps of risk management: ● Senior management gives the right direction for risk management activities including setting up risk management strategies and policies ● The internal audit uses and leverages tools to measure and quantify credit risk, and to manage the quality of risk assessment activities ● The Head of Risk Management ensures that all credit risks are analyzed, appraised, and controlled before credit is granted ● The Head of Information Technology Department must ensure the information flow is consistent and accurate Vũ Huyền Hải – EMBA18005 ● Managers of business units are responsible for identifying, assessing, and controlling credit risk before lending and ensuring that risk control in their units is consistent with risk management policies organizations ● Finance/Human Resources and workforce managers assist with budgeting and staffing to manage credit risk ● Identifying, assessing, and preventing risks is not only a routine job but also a daily work of every employee in the organization Only in this way can Vietnamese commercial banks succeed 4.2.5 Improving IT infrastructure Build sales tool Customer Lifetime Value – CLV to help TCB to predict the value brought from customers Data statistical methods and tools should be built to analyze and understand the characteristics of customer needs; Business Credit Decision Engine (BCDE) needs to be enhanced to make customer data is well managed and are all used for analytic purposes and support for decision making This system needs to be integrated with the credit rating system, watch-list, fraud detection system to help salesforce, branches, HO departments conveniently inquiry data for credit analyzing purposes so that they have correct decision making TCB should enhance it to integrate with credit information from other credit institutions (CI) and give a warning if loan class from other CIs are higher than the bank’s loan class Vũ Huyền Hải – EMBA18005 Early warning systems should be modernized to control thresholds, control ratios and give threshold violation warnings automatically Modernize the Credit rating and financial spreading system: TCB should build a modern scoring system to utilize and use sources of information/results of other systems in ranking and risk assessment Integration of main lending systems Credit approval system - Credit operation system (post-approval) - Problematic debt management should be implemented Vũ Huyền Hải – EMBA18005 CONCLUSION Credit risk is the basic risk for most commercial banks in general and Vietnam Technological and Commercial Joint Stock Bank in particular Credit activities always have potential risks, researching and applying measures to limit risks in credit activities to minimize defaults is one of the most prioritized activities in Techcombank The study "CREDIT RISK MANAGEMENT IN VIETNAM TECHNOLOGY & COMMERCIAL JOINT STOCK BANK” was built based on a combination of the theoretical basis of credit risk management, analysis of the current situation of credit risk management at TCB along with the knowledge collected in the learning process and the author's practical experience The thesis has answered the research question and proposed solutions for credit risk management at Techcombank With the research results of the thesis, the author expects the proposed solutions will contribute to perfecting the credit risk management activities at Techcombank Due to the author's ability and limited time, the thesis cannot avoid shortcomings The author would like to sincerely accept your comments and suggestions to complete the thesis Sincerely thank! Vũ Huyền Hải – EMBA18005 LIST OF REFERENCES Abhiman Das and Saibal Gosh (2007), Determinants of Credit Risk in Indian Stateowned Banks: An Empirical Investigation Allen N Berger & Robert DeYoung (1997) Problem Loans and Cost Efficiency in Commercial Bank, Forthcoming, Journal of Banking and Finance, Vol 21 Anthony Saunders & Linda Allen (2002), Credit Risk measurement New Approaches to Value at Risk and Other Paradigms, Basel Committee on Banking Supervision (1999), Principles for the Management of Credit Risk Brian Coyle (2000), Framework for Credit Risk Management, Christopher L Culp (2001), The Risk Management Process: Business Strategy and Tactics David H Pyle (1999), Bank Risk Management Hennie van Greuning and Sonja Brajovic Bratanovic 4th edition, (2020), Analyzing Banking Risk José Arias, Carlos Maquieira &Mauricio Jara (2019), Do legal and institutional environments matter for banking system performance 10 Paul Hopkin (2018), Fundamentals of Risk Management: Understanding, Evaluating and Implementing Effective Risk Management 5th Edition 11 Rawan Abuzarqa (2019), Banking risk management according to the requirement of Basel agreement 12 Saunder & H Lange (1996), Financial Institutions Management – A Modern, Perspective 13 Shawtari et al., (2015), The Effect of Financial Risk Management and Income Diversification towards Bank Performance (Evidence form the Commercial Banking Sector) 14 SBV (2013), Circular 02/2013/TT-NHNN, the banks have to make a provision to Vũ Huyền Hải – EMBA18005 minimize the losses when a credit risk occurs 15 TCB’s internal reports and documents 16 Techcombank (2019 and 2020) Annual report 17 The free dictionary by Farlex, < Financial Dictionary (thefreedictionary.com)> 18 Tony Van Gestel and Bart Baesens (2018) Credit Risk Management 19 Waemustafa, W., & Sukri, S (2015) Bank specific and macroeconomics dynamic determinants of credit risk in Islamic banks and conventional banks International Journal of Economics and Financial Issues, 5(2) 20 Wang, Y., Wang, W C., & Wang, J J (2017) Credit Risk Management Framework for Rural Commercial Banks in China Journal of Financial Risk Management, 6, 48-65 Vũ Huyền Hải – EMBA18005 APPENDICES Appendix 1: IN-DEPTH INTERVIEW QUESTION About the credit risk management in Techcombank Question 1: Can you share with us the current contents of the CRM process in TCB? Question 2: How you access the effectiveness of CRM in TCB? Question 3: What are the limitations of CRM activities at TCB? Question 4: Which indicators is TCB using to analyze the credit risk? Question 5: Can you suggest some recommendations for CRM in TCB? Vũ Huyền Hải – EMBA18005 Appendix 2: LENDING PROCESS IN TECHCOMBANK Steps PIC Collect information and check customer documents Create loan proposal RM in branch First appraisal CSM in branch Verify appraisal report Branch Manager 2nd appraisal Appraisal in HO Approve Approvers Mortgage/pledge collaterals; Credit limit granting activation CSM in branch Prepare disbursement/bank guarantee/other proposal BSO in branches Approve Approvers in branch Check disbursement/bank guarantee/other proposal; 10 Risk control in credit supervision and Handling problem debt Vũ Huyền Hải – EMBA18005 CCA in HO Branch Source: Credit granting process in TCB - Internal document of TCB Vũ Huyền Hải – EMBA18005 ... BACKGROUND ON CREDIT RISK AND CREDIT RISK MANAGEMENT IN COMMERCIAL BANK Credit risk in commercial bank Risk definition and classification in commercial bank 2.1.1.1 Risk definition In the market... Analyzing Banking Risk, key risks in banking include credit risk, currency risk, market risk, liquidity risk, and operational risk Bank risks Credit risk Currency risk Market risk Liquidity risk. .. BACKGROUND ON CREDIT RISK AND CREDIT RISK MANAGEMENT IN COMMERCIAL BANK CHAPTER 2: THE SITUATION CREDIT RISK MANAGEMENT IN TCB CHAPTER 3: RECOMMENDATION TO IMPROVE CREDIT RISK MANAGEMENT IN TCB Vũ