TABLE OF CONTENT Academy of finance Graduation Thesis TABLE OF CONTENTS ACKNOWLEDGEMENT ABSTRACT LIST OF ABBREVIATIONS LIST OF FIGURES AND TABLES INTRODUCTION 1 Rationale 2 Aims of the study 3 Scope o[.]
Academy of finance Graduation Thesis TABLE OF CONTENTS ACKNOWLEDGEMENT ………… ABSTRACT LIST OF ABBREVIATIONS LIST OF FIGURES AND TABLES INTRODUCTION Rationale Aims of the study Scope of the study Methodology Structure of the study DEVELOPMENT CHAPTER : LITERATURE REVIEW THEORETICAL BACKGROUND OF CREDIT RISKS IN CERDIT INSTITUTIONS’ACTIVITIES 1.1 THE CREDIT ACTIVITIES OF CREDIT INSTITUTIONS 1.1.1 The concept of credit 1.1.1 The role of credit 1.1.1 Types of credit 1.2 CREDIT RISKS IN CREDIT INSTITUTIONS’ ACTIVITIES 1.2.1 What is risk? 1.2.2 Viewpoints on credit risk 1.2.3 Types of credit risk 1.2.4 Causes of credit risks 1.2.5 Criteria for evaluating credit risks 1.2.6 The impact of credit risks on credit institutions’ activities 1.3 SOME EXAMPLES OF GOVERNMENT REGULATIONS IN CONTROLLING RISKS OF CREDIT INSTITUTIONS CHAPTER 2: RESEARCH METHODOLOGY Error! Bookmark not defined 2.1 RESEARCH QUESTIONS 2.2 THE SUBJECTS: CCF – HA TAY BRANCH 2.2.1 History and development of CCF Hatay branch 2.2.2 Services offered 2.2.3 Organization structure 2.2.4 Overview of activities at CCF Hatay branch 2.3 DATA COLLECTION INSTRUMENTS 2.4 DATA COLLECTION PROCEDURES Nguyen Thi Thu Trang Luan van k45/51.02 Academy of finance Graduation Thesis 2.5 THE STUDY: MANAGEMENT OF CREDIT RISKS AT CENTRAL PEOPLE’S CREDIT FUND – HA TAY BRANCH 2.5.1 Current situation of credit risks at central people’s credit fund Hatay branch 2.5.1.1 Overdue debts 2.5.1.2 Bad debts 2.5.1.3 Risk provisions ratio 2.5.2 Evaluating the management of credit risks at central people’s credit fund Hatay Branch 2.5.2.1 Achievements 2.5.2.2 Weaknesses 2.5.2.3 Reasons for the CCF Hatay branch’s weaknesses 2.6 DATA ANALYSIS AND FINDINGS CHAPTER 3: IMPLICATION/RECOMMENDATIONS 3.1 ORIENTATIONS FOR CREDIT ACTIVITIES AT CENTRAL PEOPLE’S CREDIT FUND – HA TAY BRANCH IN THE NEAR FUTURE 3.1.1 Orientation for developing credit products and services 3.1.2 Targets for the year 2011 3.2 SOLUTIONS TO MINIMIZE CREDIT RISK AT CENTRAL PEOPLE’S CREDIT FUND – HA TAY BRANCH 3.2.1 Improving the quality of researches and analyzes of customers 3.2.2 Collecting adequate information on customers 3.2.3 Tightening supervision over credits 3.2.4 Enhancing the quality of human resource 3.2.5 Diversifying credit portfolio 3.2.6 Using appropriately credit assessment models 3.2.7 Obeying Basel Committee’s principles 3.3 IMPLICATIONS 3.2.1 Implications to the government and related sectors 3.2.2 Implications to the State Bank of Vietnam 2.2.3 Implications to CCF Hatay branch CONCLUSION Summary of the study Suggestions for further study REFERENCES APPENDIX Nguyen Thi Thu Trang Luan van k45/51.02 Academy of finance Graduation Thesis INTRODUCTION Rationale of the study Concerns about unsafe credit activities and vulnerable credit risk management system have been climbing these years, from the United States‟ troubled mortgage lending (2008) to the European debt crisis (2010) It urges the significance of a sound credit risk management in lending organizations Credit risk is a popular type of risk that credit institutions must deal with In banking business, credit risk happens when “payments can either be delayed or not made at all, which can cause cash flow problems and affect a bank’s liquidity Hence, credit risk management in a bank basically involves its practices to “manage”, or in other words, to minimize the risk exposure and occurrence For a bank, lending activities form a critical part of its products and services In fact, more than 70% of a bank’s balance sheet generally relates to this aspect of risk management Therefore, credit risk management is crucial to any bank’s success In a small country like Vietnam, the financial sector is still in the development phase and many credit institutions have not been able to establish a firm risk management framework, particularly credit risk management, in order to prevent unfavorable events This is dangerous when Vietnamese banks’ customer services are still in their infancy and banks’ revenue depends heavily on lending activities and credit growth is central to any bank’s profit In addition, the control work from the central bank, though playing a growing role, has not been protective enough Access to credit information and history is very limited Thus, small banks and credit funds are facing the big question of establishing a strong credit risk management framework in order to maximize their profits and to gain competitive advantage over their rivalries Central people credit fund (CCF) - a joint stock credit institution which is supervised by SBV is not an exception Nguyen Thi Thu Trang Luan van k45/51.02 Academy of finance Graduation Thesis CFF provides financial services to LCFs and the general public, including SMEs, farmers and CCF staff Thus, its operation has all specific characteristics of an commercial bank, especially in potential credit risk This is where the research problem for this thesis arises Instead of analyzing other credit institutions that have quite more comprehensive risk management framework, the researcher is far more worried about the practices in central people’s credit fund Hatay branch which are still weak and less competitive in banking market What could they have done in order to prevent or at least lessen the bad impact of credit risks happening? In brief, all of the facts mentioned above have encouraged me to direct my study on: “Credit risks at Central people’s credit fund Hatay branch and some solutions to minimize that” Aims of the study The biggest objective of this research is studying the current situation of credit activities, analyzing credit risks at CCF Hatay branch during the 2008-2010 period and then giving some suggestions to minimize these risks This thesis also explains to the readers the significance of credit risk management in banking in general and CCF Hatay branch in particular Methods of the study Research methodology is a philosophical framework for any research It contains the data used and the research data collection techniques For this thesis, both primary and secondary data are used Secondary data are collected from the literature (books, journals, previous research papers, electronic sites, etc.), the SBV regulation database, the CCF, PCFs annual reports and published internal policies Primary data are gathered by the researcher through both qualitative and quantitative methods An in-depth interview was conducted with three credit staffs in the branch to gain insight into the office’s daily credit operations A questionnaire was also designed and handed to 30 peoples to find out more about the staffs’ characteristics and practices Nguyen Thi Thu Trang Luan van k45/51.02 Academy of finance Graduation Thesis Scope of the study Because of the limitation of the writer’s knowledge, experience and time, this study only focuses on the management of credit risks in short, medium and long term loans at CCF Hatay branch from 2008 to 2010 Organization of the study Besides an Introduction giving a brief description of the research including the reason for choosing topic, scope, aims and methods of the study and a Conclusion which summarizes the main points of the study and gives suggestion for further study, this thesis was divided into three main chapters: Chapter : Literature review providing a theoretical background of credit risks in financial institutions’ activities Chapter : Method methodology showing the method used to evaluate the practice of managing credit risk at CCF Hatay branch Chapter : Implication/ Recommendations suggesting some solutions to minimize credit risks at the CCF Hatay branch Nguyen Thi Thu Trang Luan van k45/51.02 Academy of finance Graduation Thesis CHAPTER : LITERATURE REVIEW THEORETICAL BACKGROUND OF CREDIT RISKS IN CERDIT INSTITUTIONS’ ACTIVITIES 1.1 THE CREDIT ACTIVITIES OF CREDIT INSTITUTIONS 1.1.1 The concept of credit We are living in a world of credit Everyday, in every way, we become more and more involved in various aspects of this credit world As consumers, business people, and bankers, we are experiencing continued growth in using credit Therefore, all of us need to understand what credit is, and how it is used Some concepts such as a credit transaction, credit activity and credit line are often mentioned in everyday life, however, many people may not understand the exact meaning of these IN fact, it is hardly to give a clear definition of credit because of its large scale Traditionally, credit may be defined as “ a transaction between two parties in which one ( the creditor or lender) supplies money, goods, services or securities in return for a promise of future payment by the other ( the debtor or borrower)” Such transactions normally include the payment of interest to the lender In the case of a credit institution, credit means lending or advances made by it The bank itself is the lender, and the borrower from an credit institution is the interest or commission charge that they have to pay through the life of the lending In terms of language, a credit has the similar meaning as a loan to some extent For example, a short-term and long-term credit is often understood as a short-term and long-term loan respectively Nguyen Thi Thu Trang Luan van k45/51.02 Academy of finance Graduation Thesis 1.1.2 Types of credit In order to manage and control a large scale of credit, credit is often classified into different groups according to various criteria 1.1.2.1 Time of credit a Short-term credit: is a type of credit which is advanced for a year or less with an agreement that they will be repaired in one payment at the end of the period b Medium and long-term credits: are those with maturities longer than one year Evidence of the transaction is the promissory note, either secured or unsecured Usually, such credits are repaid at specified intervals mutually agreed on by the lender and borrower 1.1.2.2 Subjects involving in credit activities a Private credit: is credit used by individuals and businesses in order to carry on exchanges in the private sector of the economy Private credit includes: - Consumer credit: is the use of credit as a medium of exchange for the purchase of finished goods and services by the ultimate user - Business credit: describes the credit relationship involved in purchasing goods, raw materials, and inventory for resale, or obtaining funds to start, maintain, and operate business activities, using credit as a medium of exchange b Public credit: is credit extended or used directly by a government agency to finance the goods, services, and welfare programs it offers to citizens Governments borrow money primarily through the sale of bonds and other securities if tax revenues are not sufficient to cover current spending needs 1.1.3.3 Security a Unsecured credit: is a credit that bases solely on the creditworthiness of the borrower, and on which no collateral is pledged The evidence of this type of credit is usually the borrower’s signed promissory note Nguyen Thi Thu Trang Luan van k45/51.02 Academy of finance Graduation Thesis b Secured credit: is a credit that relies not only on the borrower’s promise to pay but also on a pledge of some specified property The bank can exercise its lien on the collateral in the event the borrower defaults 1.1.3.4 Borrowing purposes a Real estate credit: which is secured by real property- land, buildings, and other structures It includes short-term loans for construction and land development and longer-term loans to finance the purchase of houses, apartments, or foreign properties b Financial institution credit: contains credit to banks, insurance companies and other financial institutions c Agriculture credit: which is extended to farm and ranch operations to assist in planning and harvesting crops and to support the feeding and care of livestock d Commercial and industrial credits: which are granted to business to cover such expenses as purchasing inventories, paying taxes, and meeting payrolls e Credits to individuals: include credit to finance the purchase of automobiles, appliances, and other retail goods to repair or modernize homes, cover the cost of medical care and other personal expenses, either extended directly to individuals or indirectly through retailed dealers 1.2 CREDIT RISKS IN CREDIT INSTITUTIONS’ ACTIVITIES 1.2.1 What is risk? 1.2.1.1 Definition The economists define risk in many different ways, but all agreed that risk is uncertainty or unreliability about the result in the future IN the financial world, credit institutions have to face a various range of risks Indeed, it is believed that the main business of each banking institution is to manage these risks Some of the major risks that bankers are concerned with are credit risk, operational risk, liquidity risk and legal risk, which are discussed below 1.2.1.2 Types of risks of credit institutions Nguyen Thi Thu Trang Luan van k45/51.02 Academy of finance Graduation Thesis a Credit risk “Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with specified terms in a credit agreement” (Wikipedia) b Operational risk Operational risk is the risk of loss resulting from non-financial problems, such as technology ( e.g., technological failure and deteriorating systems), employees ( e.g., human error), customer relationships (e.g., contractual disputes), capital assets ( e.g., destruction by fire and other catastrophes) and external events(e.g., external fraud) In other words, operational risk is associated with a bank’s overall organization and can arise whenever existing technology malfunctions or back-office support systems break down c Liquidity risk “Liquidity risk is the risk that a sudden in liability withdrawals may leave a financial institution in a position of having to liquidate assets in a very short period of time and at low prices.” (Wikipedia) Faced with liquidity risk, a bank may be forced to borrow emergency funds at excessive cost to cover its immediate cash needs, thus reducing its earnings d Legal risk “Legal risk is the risk from uncertainty due to legal actions or uncertainty in applicability or interpretation of contracts, laws or regulations” (Wikipedia) Legal risk may also occur when there are contradictions in the legal system Sometimes, commercial banks are confused by various regulations and they face difficulties in following one rule which may go against another Despite innovation in the financial service sector, credit risk is still the major single cause of bank failures due to the fact that nearly 90% of a bank’s revenue generally brought by credit activities Thus, the effective management of this risk Nguyen Thi Thu Trang Luan van k45/51.02 Academy of finance Graduation Thesis is central to a commercial bank’s performance That is the reason why the thesis will mainly focus on credit risk and its management approach 1.2.2 Viewpoints on credit risk Financial institutions’ credit capital often involves in all economic periods, therefore, danger that are exposed to the economy as a whole are believed to be the dangers to credit institutions as well Although each bank has different considerations for credit risk management, it is hardly denied that credit risk is an inherent part of banking activities In addition to the above mentioned definition, credit risk also refers to the risk of financial losses due to unexpected changes in the credit standard of debtors and counterparty in a financial agreement It occurs as an obstacle that prevents businesses from increasing profits Heffernan ( 2005) has shown that “ credit risk comprises the possibility which as asset or a loan is irrecoverable in the case of default, or the risk of delay in repayment of the loan: It is often the case in the business of lending that a borrower knows more about its solvency than the lender, therefore, the financial institution is being at an informational disadvantage The lender may seek out its solution by setting a credit line, rather than permitting the borrowers to access their own loan size without any restriction However, the quantitative exposure limits company’s competitiveness in the market For example, reducing a credit line might make the volume of clients decrease and thereby gains lower profit Contrary to it, extended credit may lead to higher risk Some bankers argued that credit risk is mainly associated with the risk in assessment process For example, if a customer is unwilling to provide the bank with adequate and accurate information on his/her business activities, it will run the risk of making wrong decision on offering a credit Thus, the most important step for bank is to focus on evaluating the borrower’s business condition 1.2.3 Types of credit risk Nguyen Thi Thu Trang 10 Luan van k45/51.02 ... Graduation Thesis 2.5 THE STUDY: MANAGEMENT OF CREDIT RISKS AT CENTRAL PEOPLE’S CREDIT FUND – HA TAY BRANCH 2.5.1 Current situation of credit risks at central people’s credit fund Hatay branch. .. credit risks happening? In brief, all of the facts mentioned above have encouraged me to direct my study on: ? ?Credit risks at Central people’s credit fund Hatay branch and some solutions to minimize. .. evaluate the practice of managing credit risk at CCF Hatay branch Chapter : Implication/ Recommendations suggesting some solutions to minimize credit risks at the CCF Hatay branch Nguyen Thi Thu Trang