MÉMOIRE DE RECHERCHE RESEARCH DISSERTATION “STRENGTHENING LOAN MANAGEMENT IN VIETCOMBANK” Author Hoang Thi Bich Ngoc Program MBA 16th Intake 2007 2009 Tutor Dr Pham Hong Chuong Hanoi, October 2009 ACK[.]
RESEARCH DISSERTATION “STRENGTHENING LOAN MANAGEMENT IN VIETCOMBANK” Chuong Author : Hoang Thi Bich Ngoc Program : MBA 16th Intake : 2007 - 2009 Tutor : Dr Pham Hong Hanoi, October 2009 ACKNOWLEDMENT The author would like to express her sincerest gratitude to Dr Pham Hong Chuong, the Research Advisor for his valuable guidance, constructive comments and encouragement throughout the Research study I would like to highly appreciate my supervisor, Mrs Tran Thi Thu Ha, Head of Loan Management Department, who has had valuable remarks on my Research Dissertation Outstanding acknowledgments are due to CFVG and CFVG management, faculty, staff and colleagues for their great support that enabled the author to achieve the degree of MBA at the CFVG The author would like to take this opportunity to express her deep appreciation to FTU group members (Vu Thi Dieu Linh, Nguyen Thang Vuong, Tran Huu Phuc), who have greatly supported her in study process and shared with her valuable ideas Last but not least, the author remains grateful to her family members for their continued moral support during her study of the MBA course at CFVG TABLE OF CONTENT ACKNOWLEDMENT LIST OF ABBREVIATIONS .7 INTRODUCTION .8 Rationale of the Research .8 Problem statement Objectives of the research 10 Methodology and the Research design 10 Scope and limitation 10 CHAPTER I: THEORITICAL BACKGROUND 11 1.1 Definition 11 1.2 Types of Bank Loans 12 1.3 Loan (debt) Classification and Provision 14 1.4 Risks Associated with Lending .16 1.5 International Experience on Loan Management .22 1.5.1 Major Causes of Problem Loans 22 1.5.2 Detecting Problem Loans 25 1.5.3 Resolving Problem Loans 27 CHAPTER II: LOAN MANAGEMENT ACTIVITIES IN VIETCOMBANK 30 2.1 Introduction of Vietcombank 30 2.1.1 Historical development of Vietcombank 30 2.1.2 Organizational Structure 31 2.2 Lending Performance in Vietcombank during the period 2005-2008 .33 2.3 Loan Management in Vietcombank 39 2.3.1 Organization .39 2.3.2 Function of Loan Management Department 40 2.3.3 Lending Approval Procedure 41 2.3.4 Loan Management Procedure 44 2.4 Applying Internal Credit Rating System 44 2.5 Problem Loans Handling 48 2.6 Loan Management Achievements 49 2.6.1 Achievements 49 2.6.2 SWOT analysis 50 2.6.2.1 Strengths .50 2.6.2.2 Weaknesses .50 2.6.2.3 Opportunities .51 2.6.2.4 Threats .51 CHAPTER III: RECOMMENDATIONS TO STRENGTHEN LOAN MANAGEMENT ACTIVITIES .53 3.1 The Objectives and Tasks for Lending Activities in the Period 2009-2010 53 3.2 Solutions to Improve Loan Management Quality of Vietcombank in the Coming Years 54 3.2.1 Loan Repayment 54 3.2.2 Calculating the Return on a Loan .54 3.2.3 Evaluating and Managing Concentrations of Risk 57 3.2.4 Loan Portfolio Diversification 60 3.2.5 Better Debt Classification and Provision 62 3.2.6 Strengthen the Capacity of Loan Management Department 64 3.2.7 Improve NPL Management 65 CONCLUSION 66 REFERENCES 67 LIST OF TABLES AND CHARTS Chart 2.1 Vietcombank’s Organizational Structure Page 30 Table 2.1 Some Major Financial Highlights of Vietcombank in the period 2005 – 2008 Page 31 Chart 2.2 Outstanding Loans and Income from Lending from 20052008 Page 32 Table 2.2 Outstanding Loans by Type of Customers Page 34 Chart 2.3 Outstanding Loans by Industry Page 35 Table 2.3 Bank’s Loan Classification and Loan Loss Provision under Decision 493 Page 36 Table 2.4 Bad Debt Written off Page 37 Table 2.5 Credit Approval Body in Vietcombank Page 40 Table 2.6 Credit Approval Level for Branch Page 41 Chart 2.4 ICRS Process Page 43 Chart 2.5 Financial Marking Criteria Page 43 Chart 2.6 Non Financial Marking Criteria Page 44 Table 2.7 Loan Classification and Provision according to ICRS Page 44 Chart 2.7 Report Making Procedure under ICRS Page 46 Table 2.8 Solutions to Handle NPL in months 2009 Page 47 LIST OF ABBREVIATIONS FI Vietcombank Or VCB C&I Loans Decision 493 Financial Institution Bank for Foreign Trade of Vietnam Commercial and Industrial Loans Decision 493-2005-QD-NHNN of the State Bank dated 22 April 2005 on debt classification LPM Loan portfolio management MIS Management information system NPL Nonperforming loan ICRS Internal Credit Rating System ALCO Asset/liability management committee INTRODUCTION Rationale of the Research Vietnam is in the process of industrialization, modernization and aggressively integration into the world economy Over the past 10 years, the Country witnessed a relatively higher level of economic growth rate to almost the rest of the world, 7.3%/year on average To be able to achieve the goals of Vietnam economy’s entities in the coming years, there exists the demand for a huge capital In this context, a credit expansion rate of about 30% (suggested by State Bank) per year can hardly meet the need for capital of Vietnam’s businesses and individuals But high credit expansion rate does not mean less attention to debt quality as well as loan management For Vietnamese Credit Institutions, the matter of loan quality and loan management has become more important than ever before because they are undergoing such a high credit risks Moreover, the global financial depression 2008-2009 is hurting the world economy most seriously since the World War II The Financial sector is now facing much changes and challenges, especially the merger and acquisition of financial institutions in the world The crisis in real estate leads to the bankrupt of many giant banks in the world, such as: Lehman Brothers, Washington Mutual’s, and Fannie Mae, Freddie Mac, Chiffon Bank, Colonial Bank… The failure of the US financial bailout has had effect not only on American, European financial market but also in Asia and the whole world While Financial Institutions have faced difficulties over the recent period for a dozen of reasons, the major cause of serious banking problems continues to be directly related to lax credit standard for borrowers and counterparties, poor portfolio risk management… The global financial depression and the merger and acquisition trend have put Vietnam’s economy and financial market under pressure, which require new changes to overcome such difficulties, for example: the modernization of bank system’s infrastructure, credit risk management, and human resource training… As the oldest commercial bank for external affairs in Vietnam, Vietcombank has always been known as the most prestigious bank in trade finance, international payments, foreign exchange, guarantee and other banking and financial services, including credit cards: Visa, Master Card With the motto “ALWAYS FOR CUSTOMERS' SUCCESS", the Bank's dominant objective is to maintain the role of a leading commercial bank in Vietnam and to be an international bank in the region in the next decade For Vietcombank, lending represent the heart of the banking industry, loans are the dominant asset which generate the largest share of operating income and represent the Bank’s greatest risk exposure Departments joining in the credit/lending procedure as well as the whole bank have paid such a properly giant attention and effort to improve the loan quality and strengthening the loan management activities of Vietcombank Carrying out my consultancy project in the Loan Management Department and been assigned to study the current situation of Vietcombank’s Loan management operations; to find out the solutions to improve or overcome such weaknesses to be found, I chose the task “Strengthening loan management in Vietcombank” with the aim of having an overview of Vietcombank’s loan quality, loan management activities, hence be able to propose essential solutions to raise loan management quality in Vietcombank Problem statement Over the past two decades, the loan quality of many Financial Institutions’ lending and investment decision has attracted a great deal of attention In the 1980s, there were tremendous problems with bank loans to less developed countries as well as with thrift and bank residential and farm mortgage loans In the early 1990s, attention switched to the problems of commercial real estate loans (to which banks, thrifts and insurance companies were all exposed) as well as junk bonds More recently, concerns have been raised about the rapid growth in low-quality auto loans which lead to the financial crisis all over the world The exposure to credit risk continues to be the leading source of problems in banks worldwide, especially when global crisis is booming Loan repayment capacity of enterprises – borrowers is weakening, bad debt ratio rising Thus, the matter of Loan management is more important than ever before Working for Vietcombank, in Loan Management Department, I have a chance to get access and deeply understand the Loan management system, which has been paid much attention but still be in need of innovation That innovation may include: better IT system, helpful credit rating system, credit risk rating model, suitable strategy, better loan portfolio management, and better collection of related external or corporate information… After studying the importance of loan management and the situation of Vietcombank, I realize the fact that VCB need lots of reform or innovation to improve the loan quality and loan management activity to meet the international standards and keep her safe from the global economic and financial crisis Objectives of the research The objectives of the Research are formulated as followed: To gain a full view on credit or loan quality and loan management activities: the features, importance, operation… To analyze the specific situation and shortcomings of loan quality and loan management activities in Vietcombank To draw out some recommendations to get a better loan quality and loan management system in Vietcombank Methodology and the Research design The Research will cover fact, concepts, techniques and approaches explored from loan management and controlling activities The Research uses general, analytical, comparative and statistical methods with using charts, tables and factual data for support From the collected information and data, the writer assesses and analyses the situation to draw conclusion and find out feasible solutions to improve Loan management in Vietcombank Structure of the Research: The Research consists of Introduction, Conclusion and three main chapters as follows: Chapter I: Theoretical background Chapter II: Loan management activities in Vietcombank Chapter III: Recommendations to strengthen Loan management activities Scope and limitation Credit outstanding balance in Vietcombank includes loans, trade finance, discount and rediscount commercial notes, payment for guarantee, overdraft and so on Among those, loan always takes the largest part which is managed in Loan Management Department In this thesis, the scope of Loan management in Vietcombank focuses on loans for company, especially for big firms in Head office The Research refers to theoretical frameworks on Loan management and related issues at commercial bank and actual loan management activities in Vietcombank After analysis, the Research states out problems that Loan management activity facing and recommend on solutions to improve Loan management quality in Vietcombank CHAPTER I: THEORITICAL BACKGROUND 1.1 Definition Loan is An arrangement in which a lender (usually the Bank) gives money or property to a borrower, and the borrower agrees to return the property or repay the money, usually along with interest, at some future point(s) in time Usually, there is a predetermined time for repaying a loan, and generally the lender has to bear the risk that the borrower may not repay a loan (though modern capital markets have developed many ways of managing this risk) Getting a bank loan has become a very popular means of acquiring something, which otherwise would not have been possible without getting a loan from a bank An individual can obtain a bank loan to own anything under the sun Bank loans make it possible for an individual to own a house, own a vehicle, and repair one's house Lending is the principal business activity for most commercial banks The loan portfolio is typically the largest asset and the predominate source of revenue As such, it is one of the greatest sources of risk to a bank’s safety and soundness Whether due to lax credit standards, poor portfolio risk management, or weakness in the economy, loan portfolio problems have historically been the major cause of bank losses and failures Effective management of the loan portfolio and the credit function is fundamental to a bank’s safety and soundness Loan portfolio management (LPM) is the process by which risks that are inherent in the credit process are managed and controlled Because review of the LPM process is so important, it is a primary supervisory activity Assessing LPM involves evaluating the steps bank management takes to identify and control risk throughout the credit process The assessment focuses on what management does to identify issues before they become problems Loan Management: Loan management’s overall objectives are to improve loan quality, recognizing and minimizing problem loans, identifying appropriate solutions and minimizing exposure to lender liability Loan management activities include but not limit to: withdrawing cash, monitoring loan performance, collecting principal and interest, storing credit documents, updating the network system information on credit ... become problems Loan Management: Loan management? ??s overall objectives are to improve loan quality, recognizing and minimizing problem loans, identifying appropriate solutions and minimizing exposure... liability Loan management activities include but not limit to: withdrawing cash, monitoring loan performance, collecting principal and interest, storing credit documents, updating the network system information... outstanding balance and execute internal credit rating, supervising the inspection of loan usage’s objective, treating with loan risk appearance, loan classification and provision, non performing loan