MINISTRY OF EDUCATION AND TRANING THE STATE BANK OF VIETNAM HO CHI MINH UNIVERSITY OF BANKING ĐỖ NGUYỄN HIỀN HOA FACTORS AFFECTING CREDIT RISK OF JOINT STOCK COMMERCIAL BANKS IN VIETNAM GRADUATION THE[.]
INTRODUCTION
RESEARCH OBJECTIVES
The general objective of this study is to study the factors affecting credit risk of joint stock commercial banks in Vietnam.
1.2.3Determining factors affecting credit risk of joint stock commercial banks in Vietnam
^ Evaluate of influence of these factors on credit risk of joint stock companies of commercial banks in Vietnam Provide recommendations to limit credit risk for bank managers and policy makers.
RESEARCH QUESTIONS
To achieve the research objectives, the thesis focuses on answering the research questions:
• What factors affect the credit risk of joint stock commercial banks in Vietnam?
• How influential are the factors affecting equity credit risk affect commercial banks in Vietnam?
• What solution to limit credit risk in the operation of joint stock companies commercial banks in Vietnam?
OBJECTS AND RESEARCH SCOPE
The object of this research is credit risk of commercial banks and factors affecting credit risk of Vietnamese commercial banks.
Research space: The study was carried out on the data of 25 Vietnamese joint stock commercial banks Research period: Research data for the period 2010-2020.
SCIENTIFIC AND PRACTICAL SIGNIFICANCE
Systematizes the theoretical basis related to credit risk of commercial banks and is a reference for researchers and banks interested in credit risk.
Research results provide empirical evidence on the positive and negative effects of these factors on credit risk of joint stock commercial banks Thereby, giving some recommendations to bank managers to limit the future credit risk at joint stock commercial banks in Vietnam.
RESEARCH GAP
At present, most the researchers are mainly conducted in foreign countries, there are relatively few domestic studies on this topic In addition, the research papers in Vietnam almost use the data series of commercial banks from 2000-2016 Therefore, there is still a lack of empirical evidence from the results of multivariate regression analysis to provide firmer evidence for the relationship between factors that can affect credit risk bank capital. Based on those reasons, the author conducts
The study builds a theoretical basis system and provides empirical evidence related to the factors affecting the credit risk from 2010 to 2020.
RESEARCH METHODS
Qualitative research method: Analyze and compare documents and studies related to credit risk, factors affecting credit risk.
Quantitative research methods: The study used Stata 14 software to analyze data In which, the study used regression analysis of panel data by least squares method (POOLED OLS), random effects method (REM) and fixed effect method (FEM).
In addition, the author also conducts tests for multicollinearity, autocorrelation,variance and homogeneity Then present the results and model conclusions As a result,compare and contrast research results with reality, thereby proposing solutions to research problems.
CHAPTER 1 INTRODUCTION TO THE RESEARCH TOPIC
1.4 Object and scope of research
CONTENT OF THESIS
CHAPTER 2 THEORETICAL BASIS AND OVERVIEW OF PRIOR STUDIES
2.1 Overview of credit risk of joint stock commercial banks
2.1.2 The indicators reflect the credit risk of commercial banks
2.3 Overview of the studies to the thesis
3.3 Description variable and research hypothesis
CHAPTER 4: RESEARCH RESULTS AND DISCUSSION
4.4 Estimated the Pooled OLS, FEM, REM models
4.5 Selection test of 3 models of Pooled OLS, FEM AND FEM
4.7 Estimated the regression model by GMM
5.3 Limitations of the topic and research directions
Chapter 1 gave an overview of the research topic After analyzing the necessity of the research, the author has outlined the research objectives, clearly defined the subject and scope of research, research methods and finally the layout of thesis including 5 chapter.
LITERATURE
OVERVIEW OF CREDIT RISK OF JOINT STOCK COMMERCIAL BANKS
2.1.2 The indicators reflect the credit risk of commercial banks
2.3 Overview of the studies to the thesis
3.3 Description variable and research hypothesis
CHAPTER 4: RESEARCH RESULTS AND DISCUSSION
4.4 Estimated the Pooled OLS, FEM, REM models
4.5 Selection test of 3 models of Pooled OLS, FEM AND FEM
4.7 Estimated the regression model by GMM
5.3 Limitations of the topic and research directions
Chapter 1 gave an overview of the research topic After analyzing the necessity of the research, the author has outlined the research objectives, clearly defined the subject and scope of research, research methods and finally the layout of thesis including 5 chapter.
2.1 OVERVIEW OF CREDIT RISK OF JOINT STOCK COMMERCIAL BANKS
Credit risk can be defined as ‘the potential that a contractual party will fail to meet its obligations in accordance with the agreed terms’ Credit risk is also variously referred to as default risk, performance risk.
According to the State Bank of Vietnam, credit risk in banking operations is the possibility of loss to the bank due to customers' failure to perform or inability to perform their obligations as committed (2005).
What is credit risk? Well, the easiest way to consider credit risk is to think of your own situation Take the case where an acquaintance, someone you may have known at school or in a social situation, turns to you and asks you to lend them some money Not a trivial amount to pay for their bus fare home but a sufficient amount so that, if they do not repay you as promised, you are left significantly out of pocket Credit risk occurs when the borrower in a debt contract defaults or delays in repaying the debt either in whole or part. Anderson (2013, 292) defines credit risk as “the probability that a legally enforceable contract may become worthless (or at least substantially reduced in value) because the counterparty defaults and goes out of business.” In the words of Saunders and Cornett (2011,
186), it is the “risk that the promised cash flows from loans and securities held by financial institutions may not be paid in full.” Thus, credit risk emerges due to default by debt issuers and counterparties in derivatives transactions (Hull 2012).
Bank credit risk can assessed through the bad debt ratio, is the ratio of total bad debt divided by total outstanding loans (Fadzlan Sufian & Royfaizal R Chong, 2008; Nguyen ThiThai Hung, 2012; Rasidah M Said & Mohd H Tumin, 2011; Somanadevi Thiagarajan & ctg,2011; Tobias Olweny & Themba M Shipo, 2011) Some other studies measure credit risk through the ratio of credit risk divided by total assets of the bank (Luc Laeven & GiovanniMajnoni (2002), Nabila Zribi & Younes Boujelbène (2011)) This point of view that outstanding loans account for mainly in total assets should be directly usable total assets to calculate risk Daniel Foos & ctg (2010), Hess & ctg (2009), and Ong & Heng (2012) combines two ways of calculating above to calculate credit risk They measure risk credit risk by risk reserve ratio credit in year t compared to loan balance year t-1 This measurement criterion considers provision for losses may occur for each specific debt should more accurately reflect credit risk If the general comparison between prices bad debt of different debt groups (groups 3, 4 and 5) with total outstanding loans from group 1 to 5 will not reflect the correct version credit risk quality Bank The State of Vietnam (2013) considers bad debt is debt in groups 3, 4 and 5, but Debts from group 2 onwards must be set aside risk room We measure credit risk using the method of Daniel Foos & ctg (2010), and Hess & ctg (2009), and is defined as follows:
Amount deducted make provision for bank credit risk i year t
To tal b ank 10 an b al ance i y ear ( t - 1 )
Value of provision for credit risk used is the amount set up and accounted for into operating expenses to reserve for possible losses on debt of credit institutions, bank branches foreign Hedging includes specific and general provision Attend specific room is the amount set aside for provision for possible losses out for each debt at a specific rate like group 1: 0%; group 2: 5%; group 3: 20%; group 4: 50%; and group 5: 100% Attend shared room is the amount set aside for provision for possible losses out but not determined when extracting preventive The general reserve amount must deduction is determined as 0.75% of the total outstanding debts from group 1 to group 4, minus deposits (except payment deposits accounting) at a domestic credit institution, branches of foreign banks in Vietnam in accordance with the law and deposit at a foreign credit institution; and clause lending, buying with term valuable papers for with credit institutions, bank branches other foreigners in Vietnam.
2.1.2 The indicators reflect the credit risk of commercial banks:
The criterias for assessing credit risk at commercial banks have a particularly important role because it directly reflects the credit risk of the bank, specifically:
• Outstanding debt: is the basic indicator reflecting credit risk Outstanding debt willCredit risk (i, t) arise when the borrower is unable to repay part or all of the loan to the lender. Depending on how long it is past due, this debt will be identified as qualified debt, attention debt, subprime debt, doubtful debt, or potential default Outstanding debt is reflected through the following two criteria:
I J 4 í M í m n _Rutio of Outstanding customers to totul outstữnding custOTtisrs
Ratio of outstanding customers Total number of customers with outstanding balance
If a bank has a target of outstanding debt and a large number of customers with Outstanding debt, that bank is at high risk and vice versa.
• Non – performing debts: are loans to customers, which are difficult or impossible to recover due to loss of business or bankruptcy, increased liabilities, insolvency of enterprises Non – performing debts will reflect clearly the credit quality of the bank through the assessment of both the loan's overdue term and the loan's risk assessment criteria.
Non – performing debts is most clearly reflected in the following indicators:
∗ Non – performing debts ratioTotal outstanding balance
∗ Non – performing debts to equity ratio ■ r Non– Performing debts
∗ Ratio of Non – performing debts to loss provision fundLoss provision fund
■ Provision for credit risk: Provision for risk assesses the solvency of the bank when risks occur The purpose of using a bank's risk provision is to cover losses for the bank's debts that occur in the event that the customer is unable to pay due to dissolution, bankruptcy, death, missing, or when the debt is classified in category 5.
Credit provision is calculated on the principal balance of the customer including: (i)Specific provision - to cover specific risks for each loan; (ii) General provision - insurance for unspecified general risks in the credit portfolio and all provisions are included in the operating expenses of the business.
The use of provision is used on the principle that the specific provision is used for each debt first, the sale of security assets to recover the debt, and finally, if the sale of assets is not enough to recover the debt, the just used general backup Each bank needs to have a suitable provisioning method that is just enough to cover risks and avoid high costs affecting net income Indicators showing the provision for credit risk:
Provision ratio for credit risk
■ Provision ratio for credit risk= ——;- - -— -7 : -;— - -:—7
Total outstanding loans for the reporting period Provisions for creditlosses are Setup
Although indirect indicators do not specifically reflect the bank's credit risk, there is a big change in this period compared to the previous period or compared to the average of the banking system is a sign reflecting the credit risk of the bank On that basis, the bank can consider adding other criteria to comprehensively assess the bank's credit risk.
• Credit size: Not a direct indicator of credit risk, but if the credit scale is too hot and does not correspond to the control ability of the bank, then the credit size will reflect credit risk Credit scale is clearly shown through the following indicators:
∗ Debt balance to total assets= -——; - -
∗ Average loan balance over number of credit officers
Average total number of credit officers
∗ Number of customers over number of credit officers
Total number of customers Average total number of credit officers
∗ Growth rate of outstanding loans compared to economic growth
Credit growth rate Economic growth rate
If the bank expands the credit scale in the direction of loosening credit for customers, it will lead to the risk that customers use capital for wrong purposes, cannot control the purpose of loan use This will cause risks risk to the bank.
Overview of the studies to the thesis
RESEARCH METHODS
DESCRIPTION VARIABLE AND RESEARCH HYPOTHESIS
RESEARCH RESULTS AND DISCUSSION
CORRELATION ANALYSIS
ESTIMATED THE POOLED OLS, FEM, REM MODELS
4.5 Selection test of 3 models of Pooled OLS, FEM AND FEM
4.7 Estimated the regression model by GMM
5.3 Limitations of the topic and research directions
Chapter 1 gave an overview of the research topic After analyzing the necessity of the research, the author has outlined the research objectives, clearly defined the subject and scope of research, research methods and finally the layout of thesis including 5 chapter.
2.1 OVERVIEW OF CREDIT RISK OF JOINT STOCK COMMERCIAL BANKS
Credit risk can be defined as ‘the potential that a contractual party will fail to meet its obligations in accordance with the agreed terms’ Credit risk is also variously referred to as default risk, performance risk.
According to the State Bank of Vietnam, credit risk in banking operations is the possibility of loss to the bank due to customers' failure to perform or inability to perform their obligations as committed (2005).
What is credit risk? Well, the easiest way to consider credit risk is to think of your own situation Take the case where an acquaintance, someone you may have known at school or in a social situation, turns to you and asks you to lend them some money Not a trivial amount to pay for their bus fare home but a sufficient amount so that, if they do not repay you as promised, you are left significantly out of pocket Credit risk occurs when the borrower in a debt contract defaults or delays in repaying the debt either in whole or part. Anderson (2013, 292) defines credit risk as “the probability that a legally enforceable contract may become worthless (or at least substantially reduced in value) because the counterparty defaults and goes out of business.” In the words of Saunders and Cornett (2011,
186), it is the “risk that the promised cash flows from loans and securities held by financial institutions may not be paid in full.” Thus, credit risk emerges due to default by debt issuers and counterparties in derivatives transactions (Hull 2012).
Bank credit risk can assessed through the bad debt ratio, is the ratio of total bad debt divided by total outstanding loans (Fadzlan Sufian & Royfaizal R Chong, 2008; Nguyen ThiThai Hung, 2012; Rasidah M Said & Mohd H Tumin, 2011; Somanadevi Thiagarajan & ctg,2011; Tobias Olweny & Themba M Shipo, 2011) Some other studies measure credit risk through the ratio of credit risk divided by total assets of the bank (Luc Laeven & GiovanniMajnoni (2002), Nabila Zribi & Younes Boujelbène (2011)) This point of view that outstanding loans account for mainly in total assets should be directly usable total assets to calculate risk Daniel Foos & ctg (2010), Hess & ctg (2009), and Ong & Heng (2012) combines two ways of calculating above to calculate credit risk They measure risk credit risk by risk reserve ratio credit in year t compared to loan balance year t-1 This measurement criterion considers provision for losses may occur for each specific debt should more accurately reflect credit risk If the general comparison between prices bad debt of different debt groups (groups 3, 4 and 5) with total outstanding loans from group 1 to 5 will not reflect the correct version credit risk quality Bank The State of Vietnam (2013) considers bad debt is debt in groups 3, 4 and 5, but Debts from group 2 onwards must be set aside risk room We measure credit risk using the method of Daniel Foos & ctg (2010), and Hess & ctg (2009), and is defined as follows:
Amount deducted make provision for bank credit risk i year t
To tal b ank 10 an b al ance i y ear ( t - 1 )
Value of provision for credit risk used is the amount set up and accounted for into operating expenses to reserve for possible losses on debt of credit institutions, bank branches foreign Hedging includes specific and general provision Attend specific room is the amount set aside for provision for possible losses out for each debt at a specific rate like group 1: 0%; group 2: 5%; group 3: 20%; group 4: 50%; and group 5: 100% Attend shared room is the amount set aside for provision for possible losses out but not determined when extracting preventive The general reserve amount must deduction is determined as 0.75% of the total outstanding debts from group 1 to group 4, minus deposits (except payment deposits accounting) at a domestic credit institution, branches of foreign banks in Vietnam in accordance with the law and deposit at a foreign credit institution; and clause lending, buying with term valuable papers for with credit institutions, bank branches other foreigners in Vietnam.
2.1.2 The indicators reflect the credit risk of commercial banks:
The criterias for assessing credit risk at commercial banks have a particularly important role because it directly reflects the credit risk of the bank, specifically:
• Outstanding debt: is the basic indicator reflecting credit risk Outstanding debt willCredit risk (i, t) arise when the borrower is unable to repay part or all of the loan to the lender. Depending on how long it is past due, this debt will be identified as qualified debt, attention debt, subprime debt, doubtful debt, or potential default Outstanding debt is reflected through the following two criteria:
I J 4 í M í m n _Rutio of Outstanding customers to totul outstữnding custOTtisrs
Ratio of outstanding customers Total number of customers with outstanding balance
If a bank has a target of outstanding debt and a large number of customers with Outstanding debt, that bank is at high risk and vice versa.
• Non – performing debts: are loans to customers, which are difficult or impossible to recover due to loss of business or bankruptcy, increased liabilities, insolvency of enterprises Non – performing debts will reflect clearly the credit quality of the bank through the assessment of both the loan's overdue term and the loan's risk assessment criteria.
Non – performing debts is most clearly reflected in the following indicators:
∗ Non – performing debts ratioTotal outstanding balance
∗ Non – performing debts to equity ratio ■ r Non– Performing debts
∗ Ratio of Non – performing debts to loss provision fundLoss provision fund
■ Provision for credit risk: Provision for risk assesses the solvency of the bank when risks occur The purpose of using a bank's risk provision is to cover losses for the bank's debts that occur in the event that the customer is unable to pay due to dissolution, bankruptcy, death, missing, or when the debt is classified in category 5.
Credit provision is calculated on the principal balance of the customer including: (i)Specific provision - to cover specific risks for each loan; (ii) General provision - insurance for unspecified general risks in the credit portfolio and all provisions are included in the operating expenses of the business.
The use of provision is used on the principle that the specific provision is used for each debt first, the sale of security assets to recover the debt, and finally, if the sale of assets is not enough to recover the debt, the just used general backup Each bank needs to have a suitable provisioning method that is just enough to cover risks and avoid high costs affecting net income Indicators showing the provision for credit risk:
Provision ratio for credit risk
■ Provision ratio for credit risk= ——;- - -— -7 : -;— - -:—7
Total outstanding loans for the reporting period Provisions for creditlosses are Setup
Although indirect indicators do not specifically reflect the bank's credit risk, there is a big change in this period compared to the previous period or compared to the average of the banking system is a sign reflecting the credit risk of the bank On that basis, the bank can consider adding other criteria to comprehensively assess the bank's credit risk.
• Credit size: Not a direct indicator of credit risk, but if the credit scale is too hot and does not correspond to the control ability of the bank, then the credit size will reflect credit risk Credit scale is clearly shown through the following indicators:
∗ Debt balance to total assets= -——; - -
∗ Average loan balance over number of credit officers
Average total number of credit officers
∗ Number of customers over number of credit officers
Total number of customers Average total number of credit officers
∗ Growth rate of outstanding loans compared to economic growth
Credit growth rate Economic growth rate
If the bank expands the credit scale in the direction of loosening credit for customers, it will lead to the risk that customers use capital for wrong purposes, cannot control the purpose of loan use This will cause risks risk to the bank.
ESTIMATED THE FGLS
4.7 Estimated the regression model by GMM
5.3 Limitations of the topic and research directions
Chapter 1 gave an overview of the research topic After analyzing the necessity of the research, the author has outlined the research objectives, clearly defined the subject and scope of research, research methods and finally the layout of thesis including 5 chapter.
2.1 OVERVIEW OF CREDIT RISK OF JOINT STOCK COMMERCIAL BANKS
Credit risk can be defined as ‘the potential that a contractual party will fail to meet its obligations in accordance with the agreed terms’ Credit risk is also variously referred to as default risk, performance risk.
According to the State Bank of Vietnam, credit risk in banking operations is the possibility of loss to the bank due to customers' failure to perform or inability to perform their obligations as committed (2005).
What is credit risk? Well, the easiest way to consider credit risk is to think of your own situation Take the case where an acquaintance, someone you may have known at school or in a social situation, turns to you and asks you to lend them some money Not a trivial amount to pay for their bus fare home but a sufficient amount so that, if they do not repay you as promised, you are left significantly out of pocket Credit risk occurs when the borrower in a debt contract defaults or delays in repaying the debt either in whole or part. Anderson (2013, 292) defines credit risk as “the probability that a legally enforceable contract may become worthless (or at least substantially reduced in value) because the counterparty defaults and goes out of business.” In the words of Saunders and Cornett (2011,
186), it is the “risk that the promised cash flows from loans and securities held by financial institutions may not be paid in full.” Thus, credit risk emerges due to default by debt issuers and counterparties in derivatives transactions (Hull 2012).
Bank credit risk can assessed through the bad debt ratio, is the ratio of total bad debt divided by total outstanding loans (Fadzlan Sufian & Royfaizal R Chong, 2008; Nguyen ThiThai Hung, 2012; Rasidah M Said & Mohd H Tumin, 2011; Somanadevi Thiagarajan & ctg,2011; Tobias Olweny & Themba M Shipo, 2011) Some other studies measure credit risk through the ratio of credit risk divided by total assets of the bank (Luc Laeven & GiovanniMajnoni (2002), Nabila Zribi & Younes Boujelbène (2011)) This point of view that outstanding loans account for mainly in total assets should be directly usable total assets to calculate risk Daniel Foos & ctg (2010), Hess & ctg (2009), and Ong & Heng (2012) combines two ways of calculating above to calculate credit risk They measure risk credit risk by risk reserve ratio credit in year t compared to loan balance year t-1 This measurement criterion considers provision for losses may occur for each specific debt should more accurately reflect credit risk If the general comparison between prices bad debt of different debt groups (groups 3, 4 and 5) with total outstanding loans from group 1 to 5 will not reflect the correct version credit risk quality Bank The State of Vietnam (2013) considers bad debt is debt in groups 3, 4 and 5, but Debts from group 2 onwards must be set aside risk room We measure credit risk using the method of Daniel Foos & ctg (2010), and Hess & ctg (2009), and is defined as follows:
Amount deducted make provision for bank credit risk i year t
To tal b ank 10 an b al ance i y ear ( t - 1 )
Value of provision for credit risk used is the amount set up and accounted for into operating expenses to reserve for possible losses on debt of credit institutions, bank branches foreign Hedging includes specific and general provision Attend specific room is the amount set aside for provision for possible losses out for each debt at a specific rate like group 1: 0%; group 2: 5%; group 3: 20%; group 4: 50%; and group 5: 100% Attend shared room is the amount set aside for provision for possible losses out but not determined when extracting preventive The general reserve amount must deduction is determined as 0.75% of the total outstanding debts from group 1 to group 4, minus deposits (except payment deposits accounting) at a domestic credit institution, branches of foreign banks in Vietnam in accordance with the law and deposit at a foreign credit institution; and clause lending, buying with term valuable papers for with credit institutions, bank branches other foreigners in Vietnam.
2.1.2 The indicators reflect the credit risk of commercial banks:
The criterias for assessing credit risk at commercial banks have a particularly important role because it directly reflects the credit risk of the bank, specifically:
• Outstanding debt: is the basic indicator reflecting credit risk Outstanding debt willCredit risk (i, t) arise when the borrower is unable to repay part or all of the loan to the lender. Depending on how long it is past due, this debt will be identified as qualified debt, attention debt, subprime debt, doubtful debt, or potential default Outstanding debt is reflected through the following two criteria:
I J 4 í M í m n _Rutio of Outstanding customers to totul outstữnding custOTtisrs
Ratio of outstanding customers Total number of customers with outstanding balance
If a bank has a target of outstanding debt and a large number of customers with Outstanding debt, that bank is at high risk and vice versa.
• Non – performing debts: are loans to customers, which are difficult or impossible to recover due to loss of business or bankruptcy, increased liabilities, insolvency of enterprises Non – performing debts will reflect clearly the credit quality of the bank through the assessment of both the loan's overdue term and the loan's risk assessment criteria.
Non – performing debts is most clearly reflected in the following indicators:
∗ Non – performing debts ratioTotal outstanding balance
∗ Non – performing debts to equity ratio ■ r Non– Performing debts
∗ Ratio of Non – performing debts to loss provision fundLoss provision fund
■ Provision for credit risk: Provision for risk assesses the solvency of the bank when risks occur The purpose of using a bank's risk provision is to cover losses for the bank's debts that occur in the event that the customer is unable to pay due to dissolution, bankruptcy, death, missing, or when the debt is classified in category 5.
Credit provision is calculated on the principal balance of the customer including: (i)Specific provision - to cover specific risks for each loan; (ii) General provision - insurance for unspecified general risks in the credit portfolio and all provisions are included in the operating expenses of the business.
The use of provision is used on the principle that the specific provision is used for each debt first, the sale of security assets to recover the debt, and finally, if the sale of assets is not enough to recover the debt, the just used general backup Each bank needs to have a suitable provisioning method that is just enough to cover risks and avoid high costs affecting net income Indicators showing the provision for credit risk:
Provision ratio for credit risk
■ Provision ratio for credit risk= ——;- - -— -7 : -;— - -:—7
Total outstanding loans for the reporting period Provisions for creditlosses are Setup
Although indirect indicators do not specifically reflect the bank's credit risk, there is a big change in this period compared to the previous period or compared to the average of the banking system is a sign reflecting the credit risk of the bank On that basis, the bank can consider adding other criteria to comprehensively assess the bank's credit risk.
• Credit size: Not a direct indicator of credit risk, but if the credit scale is too hot and does not correspond to the control ability of the bank, then the credit size will reflect credit risk Credit scale is clearly shown through the following indicators:
∗ Debt balance to total assets= -——; - -
∗ Average loan balance over number of credit officers
Average total number of credit officers
∗ Number of customers over number of credit officers
Total number of customers Average total number of credit officers
∗ Growth rate of outstanding loans compared to economic growth
Credit growth rate Economic growth rate
If the bank expands the credit scale in the direction of loosening credit for customers, it will lead to the risk that customers use capital for wrong purposes, cannot control the purpose of loan use This will cause risks risk to the bank.
DISCUSSION
CONCLUSION
5.3 Limitations of the topic and research directions
Chapter 1 gave an overview of the research topic After analyzing the necessity of the research, the author has outlined the research objectives, clearly defined the subject and scope of research, research methods and finally the layout of thesis including 5 chapter.
2.1 OVERVIEW OF CREDIT RISK OF JOINT STOCK COMMERCIAL BANKS
Credit risk can be defined as ‘the potential that a contractual party will fail to meet its obligations in accordance with the agreed terms’ Credit risk is also variously referred to as default risk, performance risk.
According to the State Bank of Vietnam, credit risk in banking operations is the possibility of loss to the bank due to customers' failure to perform or inability to perform their obligations as committed (2005).
What is credit risk? Well, the easiest way to consider credit risk is to think of your own situation Take the case where an acquaintance, someone you may have known at school or in a social situation, turns to you and asks you to lend them some money Not a trivial amount to pay for their bus fare home but a sufficient amount so that, if they do not repay you as promised, you are left significantly out of pocket Credit risk occurs when the borrower in a debt contract defaults or delays in repaying the debt either in whole or part. Anderson (2013, 292) defines credit risk as “the probability that a legally enforceable contract may become worthless (or at least substantially reduced in value) because the counterparty defaults and goes out of business.” In the words of Saunders and Cornett (2011,
186), it is the “risk that the promised cash flows from loans and securities held by financial institutions may not be paid in full.” Thus, credit risk emerges due to default by debt issuers and counterparties in derivatives transactions (Hull 2012).
Bank credit risk can assessed through the bad debt ratio, is the ratio of total bad debt divided by total outstanding loans (Fadzlan Sufian & Royfaizal R Chong, 2008; Nguyen ThiThai Hung, 2012; Rasidah M Said & Mohd H Tumin, 2011; Somanadevi Thiagarajan & ctg,2011; Tobias Olweny & Themba M Shipo, 2011) Some other studies measure credit risk through the ratio of credit risk divided by total assets of the bank (Luc Laeven & GiovanniMajnoni (2002), Nabila Zribi & Younes Boujelbène (2011)) This point of view that outstanding loans account for mainly in total assets should be directly usable total assets to calculate risk Daniel Foos & ctg (2010), Hess & ctg (2009), and Ong & Heng (2012) combines two ways of calculating above to calculate credit risk They measure risk credit risk by risk reserve ratio credit in year t compared to loan balance year t-1 This measurement criterion considers provision for losses may occur for each specific debt should more accurately reflect credit risk If the general comparison between prices bad debt of different debt groups (groups 3, 4 and 5) with total outstanding loans from group 1 to 5 will not reflect the correct version credit risk quality Bank The State of Vietnam (2013) considers bad debt is debt in groups 3, 4 and 5, but Debts from group 2 onwards must be set aside risk room We measure credit risk using the method of Daniel Foos & ctg (2010), and Hess & ctg (2009), and is defined as follows:
Amount deducted make provision for bank credit risk i year t
To tal b ank 10 an b al ance i y ear ( t - 1 )
Value of provision for credit risk used is the amount set up and accounted for into operating expenses to reserve for possible losses on debt of credit institutions, bank branches foreign Hedging includes specific and general provision Attend specific room is the amount set aside for provision for possible losses out for each debt at a specific rate like group 1: 0%; group 2: 5%; group 3: 20%; group 4: 50%; and group 5: 100% Attend shared room is the amount set aside for provision for possible losses out but not determined when extracting preventive The general reserve amount must deduction is determined as 0.75% of the total outstanding debts from group 1 to group 4, minus deposits (except payment deposits accounting) at a domestic credit institution, branches of foreign banks in Vietnam in accordance with the law and deposit at a foreign credit institution; and clause lending, buying with term valuable papers for with credit institutions, bank branches other foreigners in Vietnam.
2.1.2 The indicators reflect the credit risk of commercial banks:
The criterias for assessing credit risk at commercial banks have a particularly important role because it directly reflects the credit risk of the bank, specifically:
• Outstanding debt: is the basic indicator reflecting credit risk Outstanding debt willCredit risk (i, t) arise when the borrower is unable to repay part or all of the loan to the lender. Depending on how long it is past due, this debt will be identified as qualified debt, attention debt, subprime debt, doubtful debt, or potential default Outstanding debt is reflected through the following two criteria:
I J 4 í M í m n _Rutio of Outstanding customers to totul outstữnding custOTtisrs
Ratio of outstanding customers Total number of customers with outstanding balance
If a bank has a target of outstanding debt and a large number of customers with Outstanding debt, that bank is at high risk and vice versa.
• Non – performing debts: are loans to customers, which are difficult or impossible to recover due to loss of business or bankruptcy, increased liabilities, insolvency of enterprises Non – performing debts will reflect clearly the credit quality of the bank through the assessment of both the loan's overdue term and the loan's risk assessment criteria.
Non – performing debts is most clearly reflected in the following indicators:
∗ Non – performing debts ratioTotal outstanding balance
∗ Non – performing debts to equity ratio ■ r Non– Performing debts
∗ Ratio of Non – performing debts to loss provision fundLoss provision fund
■ Provision for credit risk: Provision for risk assesses the solvency of the bank when risks occur The purpose of using a bank's risk provision is to cover losses for the bank's debts that occur in the event that the customer is unable to pay due to dissolution, bankruptcy, death, missing, or when the debt is classified in category 5.
Credit provision is calculated on the principal balance of the customer including: (i)Specific provision - to cover specific risks for each loan; (ii) General provision - insurance for unspecified general risks in the credit portfolio and all provisions are included in the operating expenses of the business.
The use of provision is used on the principle that the specific provision is used for each debt first, the sale of security assets to recover the debt, and finally, if the sale of assets is not enough to recover the debt, the just used general backup Each bank needs to have a suitable provisioning method that is just enough to cover risks and avoid high costs affecting net income Indicators showing the provision for credit risk:
Provision ratio for credit risk
■ Provision ratio for credit risk= ——;- - -— -7 : -;— - -:—7
Total outstanding loans for the reporting period Provisions for creditlosses are Setup
Although indirect indicators do not specifically reflect the bank's credit risk, there is a big change in this period compared to the previous period or compared to the average of the banking system is a sign reflecting the credit risk of the bank On that basis, the bank can consider adding other criteria to comprehensively assess the bank's credit risk.
• Credit size: Not a direct indicator of credit risk, but if the credit scale is too hot and does not correspond to the control ability of the bank, then the credit size will reflect credit risk Credit scale is clearly shown through the following indicators:
∗ Debt balance to total assets= -——; - -
∗ Average loan balance over number of credit officers
Average total number of credit officers
∗ Number of customers over number of credit officers
Total number of customers Average total number of credit officers
∗ Growth rate of outstanding loans compared to economic growth
Credit growth rate Economic growth rate
If the bank expands the credit scale in the direction of loosening credit for customers, it will lead to the risk that customers use capital for wrong purposes, cannot control the purpose of loan use This will cause risks risk to the bank.
LIMITATIONS OF THE TOPIC AND RESEARCH DIRECTIONS
Chapter 1 gave an overview of the research topic After analyzing the necessity of the research, the author has outlined the research objectives, clearly defined the subject and scope of research, research methods and finally the layout of thesis including 5 chapter.
2.1 OVERVIEW OF CREDIT RISK OF JOINT STOCK COMMERCIAL BANKS
Credit risk can be defined as ‘the potential that a contractual party will fail to meet its obligations in accordance with the agreed terms’ Credit risk is also variously referred to as default risk, performance risk.
According to the State Bank of Vietnam, credit risk in banking operations is the possibility of loss to the bank due to customers' failure to perform or inability to perform their obligations as committed (2005).
What is credit risk? Well, the easiest way to consider credit risk is to think of your own situation Take the case where an acquaintance, someone you may have known at school or in a social situation, turns to you and asks you to lend them some money Not a trivial amount to pay for their bus fare home but a sufficient amount so that, if they do not repay you as promised, you are left significantly out of pocket Credit risk occurs when the borrower in a debt contract defaults or delays in repaying the debt either in whole or part. Anderson (2013, 292) defines credit risk as “the probability that a legally enforceable contract may become worthless (or at least substantially reduced in value) because the counterparty defaults and goes out of business.” In the words of Saunders and Cornett (2011,
186), it is the “risk that the promised cash flows from loans and securities held by financial institutions may not be paid in full.” Thus, credit risk emerges due to default by debt issuers and counterparties in derivatives transactions (Hull 2012).
Bank credit risk can assessed through the bad debt ratio, is the ratio of total bad debt divided by total outstanding loans (Fadzlan Sufian & Royfaizal R Chong, 2008; Nguyen ThiThai Hung, 2012; Rasidah M Said & Mohd H Tumin, 2011; Somanadevi Thiagarajan & ctg,2011; Tobias Olweny & Themba M Shipo, 2011) Some other studies measure credit risk through the ratio of credit risk divided by total assets of the bank (Luc Laeven & GiovanniMajnoni (2002), Nabila Zribi & Younes Boujelbène (2011)) This point of view that outstanding loans account for mainly in total assets should be directly usable total assets to calculate risk Daniel Foos & ctg (2010), Hess & ctg (2009), and Ong & Heng (2012) combines two ways of calculating above to calculate credit risk They measure risk credit risk by risk reserve ratio credit in year t compared to loan balance year t-1 This measurement criterion considers provision for losses may occur for each specific debt should more accurately reflect credit risk If the general comparison between prices bad debt of different debt groups (groups 3, 4 and 5) with total outstanding loans from group 1 to 5 will not reflect the correct version credit risk quality Bank The State of Vietnam (2013) considers bad debt is debt in groups 3, 4 and 5, but Debts from group 2 onwards must be set aside risk room We measure credit risk using the method of Daniel Foos & ctg (2010), and Hess & ctg (2009), and is defined as follows:
Amount deducted make provision for bank credit risk i year t
To tal b ank 10 an b al ance i y ear ( t - 1 )
Value of provision for credit risk used is the amount set up and accounted for into operating expenses to reserve for possible losses on debt of credit institutions, bank branches foreign Hedging includes specific and general provision Attend specific room is the amount set aside for provision for possible losses out for each debt at a specific rate like group 1: 0%; group 2: 5%; group 3: 20%; group 4: 50%; and group 5: 100% Attend shared room is the amount set aside for provision for possible losses out but not determined when extracting preventive The general reserve amount must deduction is determined as 0.75% of the total outstanding debts from group 1 to group 4, minus deposits (except payment deposits accounting) at a domestic credit institution, branches of foreign banks in Vietnam in accordance with the law and deposit at a foreign credit institution; and clause lending, buying with term valuable papers for with credit institutions, bank branches other foreigners in Vietnam.
2.1.2 The indicators reflect the credit risk of commercial banks:
The criterias for assessing credit risk at commercial banks have a particularly important role because it directly reflects the credit risk of the bank, specifically:
• Outstanding debt: is the basic indicator reflecting credit risk Outstanding debt willCredit risk (i, t) arise when the borrower is unable to repay part or all of the loan to the lender. Depending on how long it is past due, this debt will be identified as qualified debt, attention debt, subprime debt, doubtful debt, or potential default Outstanding debt is reflected through the following two criteria:
I J 4 í M í m n _Rutio of Outstanding customers to totul outstữnding custOTtisrs
Ratio of outstanding customers Total number of customers with outstanding balance
If a bank has a target of outstanding debt and a large number of customers with Outstanding debt, that bank is at high risk and vice versa.
• Non – performing debts: are loans to customers, which are difficult or impossible to recover due to loss of business or bankruptcy, increased liabilities, insolvency of enterprises Non – performing debts will reflect clearly the credit quality of the bank through the assessment of both the loan's overdue term and the loan's risk assessment criteria.
Non – performing debts is most clearly reflected in the following indicators:
∗ Non – performing debts ratioTotal outstanding balance
∗ Non – performing debts to equity ratio ■ r Non– Performing debts
∗ Ratio of Non – performing debts to loss provision fundLoss provision fund
■ Provision for credit risk: Provision for risk assesses the solvency of the bank when risks occur The purpose of using a bank's risk provision is to cover losses for the bank's debts that occur in the event that the customer is unable to pay due to dissolution, bankruptcy, death, missing, or when the debt is classified in category 5.
Credit provision is calculated on the principal balance of the customer including: (i)Specific provision - to cover specific risks for each loan; (ii) General provision - insurance for unspecified general risks in the credit portfolio and all provisions are included in the operating expenses of the business.
The use of provision is used on the principle that the specific provision is used for each debt first, the sale of security assets to recover the debt, and finally, if the sale of assets is not enough to recover the debt, the just used general backup Each bank needs to have a suitable provisioning method that is just enough to cover risks and avoid high costs affecting net income Indicators showing the provision for credit risk:
Provision ratio for credit risk
■ Provision ratio for credit risk= ——;- - -— -7 : -;— - -:—7
Total outstanding loans for the reporting period Provisions for creditlosses are Setup
Although indirect indicators do not specifically reflect the bank's credit risk, there is a big change in this period compared to the previous period or compared to the average of the banking system is a sign reflecting the credit risk of the bank On that basis, the bank can consider adding other criteria to comprehensively assess the bank's credit risk.
• Credit size: Not a direct indicator of credit risk, but if the credit scale is too hot and does not correspond to the control ability of the bank, then the credit size will reflect credit risk Credit scale is clearly shown through the following indicators:
∗ Debt balance to total assets= -——; - -
∗ Average loan balance over number of credit officers
Average total number of credit officers
∗ Number of customers over number of credit officers
Total number of customers Average total number of credit officers
∗ Growth rate of outstanding loans compared to economic growth
Credit growth rate Economic growth rate
If the bank expands the credit scale in the direction of loosening credit for customers, it will lead to the risk that customers use capital for wrong purposes, cannot control the purpose of loan use This will cause risks risk to the bank.