Rationale of the Research
Vietnam is undergoing significant industrialization and modernization while actively integrating into the global economy, achieving an impressive average economic growth rate of 7.3% per year over the past decade To meet the ambitious economic goals in the coming years, there is a pressing need for substantial capital However, the State Bank's proposed credit expansion rate of approximately 30% per year may fall short of fulfilling the capital requirements of Vietnamese businesses and individuals Despite this high credit expansion, it is crucial to maintain a strong focus on debt quality and loan management, as Vietnamese Credit Institutions face increasing credit risks.
The global financial depression of 2008-2009 has had a profound impact on the world economy, the most severe since World War II The financial sector is undergoing significant changes and challenges, particularly due to the merger and acquisition of institutions worldwide The real estate crisis has led to the bankruptcy of major banks, including Lehman Brothers and Washington Mutual, while the failure of the US financial bailout has affected markets not only in America and Europe but also across Asia and the globe Financial institutions have struggled due to various factors, with lax credit standards for borrowers and poor portfolio risk management being the primary causes of ongoing banking issues.
Vietnam's economy and financial market are facing significant pressure due to the global financial depression and the trend of mergers and acquisitions To navigate these challenges, it is essential to implement changes such as modernizing banking infrastructure, enhancing credit risk management, and investing in human resource training.
Vietcombank, the oldest commercial bank for external affairs in Vietnam, is renowned for its prestigious services in trade finance, international payments, foreign exchange, and guarantees Offering a range of banking and financial products, including Visa and MasterCard credit cards, the bank operates under the motto "ALWAYS FOR CUSTOMERS' SUCCESS," prioritizing its commitment to supporting customer success.
Vietcombank aims to become a leading commercial bank in Vietnam and an international player in the region within the next decade Lending is central to the banking industry, with loans being the primary asset that generates the majority of operating income and poses the greatest risk To enhance loan quality and strengthen management activities, all departments involved in the credit process at Vietcombank are dedicated to improving these critical functions.
In my consultancy project within the Loan Management Department, I focused on analyzing the current state of Vietcombank's loan management operations My objective was to identify weaknesses and propose effective solutions to enhance these processes By choosing the task of "Strengthening Loan Management in Vietcombank," I aimed to gain a comprehensive understanding of the bank's loan quality and management activities, ultimately leading to essential recommendations for improving loan management quality at Vietcombank.
Problem statement
Over the past two decades, the quality of loans made by financial institutions has garnered significant attention The 1980s saw major issues with bank loans to developing countries and mortgage loans for residential and agricultural purposes In the early 1990s, the focus shifted to the challenges posed by commercial real estate loans and junk bonds, which affected banks, thrifts, and insurance companies alike Recently, the rapid increase in low-quality auto loans has raised concerns, contributing to a global financial crisis.
Credit risk remains a significant challenge for banks globally, particularly during times of economic crisis As the repayment capacity of borrowers diminishes and the bad debt ratio increases, effective loan management becomes crucial for financial stability.
At Vietcombank, my role in the Loan Management Department has provided me with valuable insights into the loan management system, which, despite receiving considerable attention, still requires innovative enhancements Key areas for improvement include the development of a more advanced IT system, an effective credit rating system, a robust credit risk rating model, tailored strategies, improved loan portfolio management, and more efficient collection of relevant external and 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
Chuyên đề thực tập Tốt nghiệp 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:
1 To gain a full view on credit or loan quality and loan management activities: the features, importance, operation…
2 To analyze the specific situation and shortcomings of loan quality and loan management activities in Vietcombank.
3 To draw out some recommendations to get a better loan quality and loan management system in Vietcombank.
Methodology and the Research design
This research focuses on the facts, concepts, techniques, and strategies related to loan management and control activities Utilizing a combination of general, analytical, comparative, and statistical methods, the study incorporates charts, tables, and factual data for comprehensive support Through the analysis of the gathered information, the author evaluates the current situation and identifies viable solutions to enhance loan management practices at Vietcombank.
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
Vietcombank's credit outstanding balance encompasses various financial services, including loans, trade finance, commercial note discounts, guarantees, and overdrafts Notably, loans represent the largest portion of this balance and are primarily overseen by the Loan Management Department This article specifically examines the scope of loan management at Vietcombank, with a particular emphasis on loans provided to large corporations at the Head Office.
This research examines the theoretical frameworks of loan management and its associated challenges within commercial banks, specifically focusing on the loan management practices at Vietcombank Through analysis, the study identifies key issues affecting loan management activities and offers recommendations to enhance the quality of loan management at Vietcombank.
Chuyên đề thực tập Tốt nghiệp
THEORITICAL BACKGROUND
Definition
A loan is a financial agreement where a lender, typically a bank, provides money or property to a borrower, who commits to repay the amount, often with interest, at a specified future date This arrangement includes a predetermined repayment timeline, and while lenders face the risk of borrower default, modern capital markets offer various strategies to mitigate this risk.
Bank loans have become a popular way to achieve financial goals that may be unattainable without external funding They enable individuals to purchase a wide range of assets, including homes and vehicles, as well as finance home repairs.
Lending is the core business of most commercial banks, with the loan portfolio serving as both the largest asset and a primary revenue source, making it a significant risk factor for the bank's stability Historically, issues within loan portfolios, often stemming from lax credit standards or economic weaknesses, have led to major bank losses and failures Therefore, effective loan portfolio management (LPM) is crucial for maintaining a bank's safety and soundness LPM involves managing and controlling the inherent risks in the credit process, making its review a key supervisory activity The assessment of LPM focuses on how bank management identifies and mitigates risks throughout the credit process, aiming to address potential issues before they escalate into serious problems.
Effective loan management aims to enhance loan quality by identifying and mitigating problem loans while minimizing lender liability Key activities in loan management encompass cash withdrawal, monitoring loan performance, collecting principal and interest, securely storing credit documents, and updating credit information in the network system.
The internship project focuses on key aspects of credit management, including facility management, collateral assets evaluation, and monitoring outstanding balances It involves executing internal credit ratings and supervising the inspection of loan usage objectives Additionally, the project addresses loan risk mitigation, classification, and provisioning, as well as non-performing loan management It also encompasses the preparation of periodic and ad-hoc credit reports to ensure comprehensive oversight and analysis.
Types of Bank Loans
Financial institutions offer a variety of loans, each differing in type and characteristics This section examines the primary loan categories provided by Commercial Banks, which include commercial and industrial loans, real estate loans, individual (consumer) loans, and other loan types.
Commercial and industrial (C&I) loans can range from short-term options lasting a few weeks to long-term financing extending over ten years Short-term loans, typically with a maturity of one year or less, are primarily used to meet working capital and immediate funding needs, while long-term loans finance significant investments such as machinery purchases and business expansions These loans can vary significantly in size, from $10,000 for small businesses to over $10 million for larger corporations, often involving syndication where multiple financial institutions collaborate to provide the funding C&I loans can be secured, backed by specific borrower assets, or unsecured, with the latter having a general claim on assets in case of default This creates a trade-off between the collateral backing a loan and the interest rates or risk premiums charged by lenders.
C&I loans offer flexibility with either fixed or floating interest rates A fixed-rate loan locks in the interest rate at the start, ensuring stability throughout the contract, while the lender assumes all interest rate risks Conversely, floating-rate loans allow periodic adjustments based on a specific formula, transferring much of the interest rate risk away from the lender.
The topic of graduation internships highlights the significance of financial instruments (FI) for borrowers, indicating that longer-term loans are generally offered under floating-rate contracts more frequently than shorter-term loans.
Loans can be categorized as either spot loans or loan commitments A spot loan involves the borrower receiving the full loan amount immediately from the financial institution (FI) In contrast, a loan commitment, or line of credit, allows the lender to offer a specified amount of credit, such as $10 million, which the borrower can access in varying amounts throughout the commitment period With fixed-rate loan commitments, the interest rate is predetermined at the contract's inception, while floating-rate commitments charge the borrower the prevailing interest rate at the time of withdrawal.
Real estate loans, primarily consisting of mortgage loans and some revolving home equity loans, exhibit diverse characteristics such as loan size, loan-to-value ratio, and mortgage maturity Key factors include the mortgage interest rate, associated fees, and whether the mortgage is fixed or adjustable Adjustable-rate mortgages (ARMs) have their rates periodically adjusted based on an underlying index, like the one-year T-bond rate The balance between fixed-rate and adjustable-rate mortgages in financial institution portfolios shifts with interest rate cycles, with borrowers favoring fixed-rate mortgages during low-interest periods, leading to significant fluctuations in the proportion of ARMs to fixed-rate loans.
Residential mortgage are very long-term loans with an average maturity of about 10-
Over the past 15 years, the risk of default in residential mortgages has increased as house prices can dip below the outstanding loan amounts, raising the loan-to-value ratio A notable example of this occurred during the 2008 real estate market collapse in America, when many home values fell below their original purchase prices.
2007 This led to a dramatic surge in the proportion of mortgages defaulted on and eventually foreclosed many banks and FIs.
Individual loans, commonly known as consumer loans, include personal and auto loans offered by various financial institutions such as commercial banks, finance companies, retailers, savings institutions, and credit unions At commercial banks, consumer loans are primarily categorized into two major classes.
The largest category of consumer loans is non-revolving loans, which encompass new and used automobile loans, mobile home loans, and fixed-term consumer loans In contrast, revolving loans, primarily represented by credit card debt, allow borrowers to access a credit line that can be drawn upon and repaid up to a specified limit throughout the duration of the credit agreement.
The "Other Loans" category encompasses a diverse range of borrowers and loan types, including agricultural loans for farmers, financing from other banks, and nonbanking financial institutions like call loans to investment banks It also includes broker margin loans that fund a portion of individual investment portfolios, as well as loans to state and local governments and foreign banks.
Loan (debt) Classification and Provision
Under Decision 493, all credit institutions in Vietnam, except the Bank for Social Policies, must adhere to debt classification and loss provisioning requirements However, foreign bank branches operating in Vietnam can apply their parent banks' loss provisioning policies with approval from the State Bank of Vietnam Bank debt is categorized into five classifications using both quantitative and qualitative methods.
The Quantitative Method primarily is based on the period that payment of principle and interest being overdue.
Category 1 (pass): debts that are not due and the borrower is able to pay the principle and interest of debts in full and in a timely manner.
Category 2 (special-mention): debts that are overdue less than 90 days and rescheduled debt that are not due.
Category 3 (sub-standard): debts that are overdue from 90 to 180 days and rescheduled debt that are overdue less than 90 days.
Category 4 (doubtful): debts those are overdue from 181 to 360 days and rescheduled debts that are overdue from 90 to 180 days And
Category 5 (loss): debts that are overdue more than 360 days, rescheduled debts that are overdue more than 180 days and debts that are subject to rescheduling arrangements as directed by the Government.
However, loans may be subject to a worse rating if there are reasons to doubt the borrower’s ability to continue to service such loans.
Chuyên đề thực tập Tốt nghiệp
The qualitative method relies on the internal credit ranking system and provisioning policy of credit institutions, as sanctioned by the State Bank of Vietnam Debts are categorized into five classifications: pass, special-mention, sub-standard, doubtful, and loss.
Category 1 (pass): debts that the borrower is able to pay the\
Principle and the interest in full and timely manner.
Category 2 (special-mention): debts that the borrower is able to pay the principle and the interest in full but there exists a sign of decreasing payment ability.
Category 3 (sub-standard): debts that the borrower is not able to pay the principle and the interest in a timely manner and some loss of principle and interest is possible.
Category 4 (doubtful): debts in relation to which the loss of principle and interest is highly probable And
Category 5 (loss): debts that are uncollectible.
Decision 493 outlines two types of loss provisioning for credit institutions: specific provisions and general provisions Specific provisions are set aside for identified losses on particular loans, while general provisions, introduced for the first time in this decision, are designed to cover unidentified losses within the loan portfolio General provisions are calculated at 0.075% of the total debt classified from categories 1 to 4, complementing the existing specific provisions already in use by credit institutions.
Under both qualitative and quantitative methods, the specific provision ratios for debt categories 1 to 5 are set at 0%, 5%, 20%, 50%, and 100%, respectively The calculation of specific provisions is guided by the formula outlined in Decision 493.
In which, R: a specific amount for loss reserve
A: the value of the asset (i.e., the loan)
C: the value of the collateral (after being discounted by such percentage as set forth in Decision 493 for each type of collateral) r: ratio for loss provisioning
Chuyên đề thực tập Tốt nghiệp
The value of collateral specified in the security agreement serves as the foundation for determining the loan loss reserve for various types of collateral, excluding gold and securities Typically, credit institutions assign a nominal value to the collateral at the time the security agreements are established.
Loss reserves are essential for managing financial risks associated with bankrupt or dissolved customers, whether they are organizations or individuals who are deceased or missing These reserves are particularly relevant when loans fall into the highest risk category, classified as debts in category 5 In these situations, specific provisions and proceeds from collateral are utilized first to offset losses, while general provisions serve as a last resort for compensation.
Risks Associated with Lending
Risk encompasses the potential for both anticipated and unforeseen events to negatively affect a bank's earnings or capital Key types of risk include credit, interest rate, liquidity, price, foreign exchange, transaction, compliance, strategic, and reputation risks Additionally, banks engaged in international operations face country risk and transfer risk It's important to note that these risks are interconnected, meaning that any given product or service may expose the bank to several risks simultaneously.
Managing risk effectively requires an understanding of the interrelationships among nine key risk factors, as they can be positively or negatively correlated Actions affecting correlated risks can lead to similar outcomes; for instance, decreasing problem assets can lower credit risk, liquidity risk, and reputation risk simultaneously Conversely, reducing one risk type may inadvertently increase another; for example, a bank might lower credit risk by shifting to family residential mortgages but face heightened interest rate risk due to the sensitivity of these loans Thus, lending practices can expose a bank’s earnings and capital to various risks, making it crucial for examiners to grasp the risks within the loan portfolio and their potential implications for the institution The following sections will elaborate on how these risk categories relate to a bank's lending operations.
For most banks, loans are the largest and most obvious source of credit risk. However, there are other pockets of credit risk both on and off the balance sheet,
Effective credit risk management is crucial for banks, especially in handling products like investment portfolios, overdrafts, and letters of credit, which expose them to potential repayment risks The risk arises when borrowers fail to meet their obligations, influenced by their financial capacity and character Poor financial performance or reliance on unproven projections can lead to borrower impairment, especially under economic stress Therefore, credit risk management should extend beyond the initial loan decision, as improper structuring or inadequate monitoring can compromise sound choices While traditional oversight has focused on individual loans, a comprehensive approach considering portfolio segments and the overall portfolio is essential for effective risk management.
Effective management of credit risk in a loan portfolio necessitates that both the board and management possess a deep understanding of the bank's risk profile and credit culture This includes a comprehensive awareness of the portfolio's composition, inherent risks, product mix, industry and geographic concentrations, and average risk ratings Additionally, it is crucial to ensure that the policies, processes, and practices designed to manage risks associated with individual loans and portfolio segments are robust and that lending personnel consistently follow these guidelines.
Banks involved in international lending encounter unique country risks that domestic lenders typically do not face Country risk refers to uncertainties linked to a nation's economic, social, and political landscape that can impact the repayment of foreign debt and equity investments This risk encompasses potential political instability, nationalization of assets, government refusal to honor external debts, exchange controls, and fluctuations in currency value While such events might not render a loan uncollectible, any delays in repayment can still adversely affect the financial stability of the lending bank.
Transfer risk, a specific subset of country risk, refers to the potential inability of an obligor to fulfill payment obligations due to the unavailability of the required currency This situation may arise from government policies that restrict currency access For instance, even if an individual borrower is financially successful and possesses adequate local currency cash, they may still face challenges in making payments if the currency is not accessible.
When a borrower country faces challenges in repaying its foreign debt, particularly in U.S dollars, it may lack the necessary currency to fulfill its obligations The Interagency assesses the transfer risk linked to banks' exposures in these foreign markets.
The interest rate risk associated with a bank's lending activities is influenced by its loan portfolio composition and the terms of its loans, including maturity, rate structure, and embedded options To effectively manage this risk, banks should consider funding costs and maturities when making pricing and portfolio decisions It is crucial to periodically stress-test individual credits or portfolio segments that are particularly sensitive to interest rate fluctuations The asset/liability management committee (ALCO) must receive comprehensive reports on the loan portfolio and pipeline trends, such as maturing loans, pipeline status, and rate repricing, to effectively oversee and manage the bank’s interest rate risk.
Banks often transfer interest rate risk to borrowers by offering loans with variable interest rates, which can lead to financial challenges for those with limited repayment ability if rates rise To effectively manage this risk, banks must pinpoint borrowers whose loans are particularly sensitive to interest rate fluctuations and create strategies to alleviate this risk One effective approach is to mandate that at-risk borrowers obtain interest rate protection or implement other hedging strategies.
Effective liquidity risk management necessitates strong connections and information flow from the lending function due to the substantial size of the loan portfolio Loans represent a primary use of funds, and while managing loan growth has traditionally been a crucial aspect of liquidity management, the loan portfolio is increasingly recognized as a significant source of funds Banks are adapting their practices by leveraging the loan portfolio as a funding source through strategies such as loan sales, securitization, and portfolio run-off.
Chuyên đề thực tập Tốt nghiệp
Banks are increasingly managing their loan portfolios to enhance liquidity while mitigating credit risk They are originating consumer loans, such as mortgages and credit cards, primarily for immediate securitization Larger banks are expanding their underwriting in the syndicated loan market and actively packaging and selling distressed loans A comprehensive liquidity strategy should identify loans that can be quickly converted to cash, taking into account factors like loan quality, pricing, and market conformity Additionally, loans serve as collateral for borrowings, and their liquidity is influenced by market conditions and loan quality Effective liquidity analysis requires assessing these variables across different scenarios, while also tracking the bank's lending commitments and borrower usage.
Understanding the types of commitments and the levels of usage is crucial for evaluating whether a bank's liquidity can meet normal, seasonal, or emergency demands Management information systems should differentiate between legally binding commitments and advisory lines Analyzing a bank's capacity to reduce commitments requires consideration of reputation risks and potential lender-liability issues, not just legal obligations Reducing commitments can significantly impact a bank's reputation and its ability to attract and retain customers, especially in tight credit markets Therefore, bank management must thoroughly evaluate the consequences of limiting lending lines to avoid damaging community trust and support.
Chuyên đề thực tập Tốt nghiệp
Recent advancements aimed at enhancing the liquidity of loan portfolios are influencing price risk Historically, banks' lending activities remained insulated from price risk due to the practice of holding loans to maturity, which necessitated book value accounting However, with the evolution of active portfolio management strategies and the expansion of the loan market, these portfolios are becoming more susceptible to fluctuations in price risk.
Loans intended for securitization or direct sale in the secondary market are subject to price risk while in the pipeline, necessitating their placement in a "held-for-sale" account where they are repriced at the lower of cost or market value This accounting treatment is also applicable to syndicated loans and distressed credits If a bank underwrites more of a syndicated loan than its designated "hold" position, the excess must be categorized as held-for-sale Additionally, once a strategy for selling distressed or undesirable credits is established, these should also be recorded in a held-for-sale account.
International lending banks can experience significant impacts from fluctuations in the secondary market for loans Monthly, these banks that trade foreign debt are required to adjust the value of their loans in trading accounts to reflect current market prices.
International Experience on Loan Management
1.5.1 Major Causes of Problem Loans
Problem loans can arise from various factors, including ineffective plant management and rising raw material costs for manufacturers, as well as inadequate accounts receivable collection policies and increasing product prices for wholesale companies Typically, the emergence of a problem loan is due to a combination of these elements rather than a single cause.
To prevent problematic loans, it's essential to conduct a comprehensive evaluation of the loan application and maintain diligent follow-up efforts Any major failures in the commercial lending process, such as ineffective loan interviews or insufficient monitoring, can lead to bad loans.
A poor interview often arises when a business banker interacts with a friend or when the business owner holds significant leverage Instead of probing deeply into the company’s financial health, the banker may resort to casual conversation Additionally, a relationship manager might feel intimidated or misled, leading to a reluctance to ask critical questions for fear of appearing uninformed Consequently, this can result in approving a loan request that should have been declined during the initial assessment.
Chuyên đề thực tập Tốt nghiệp proceed to financial analysis and beyond With each subsequent step, it becomes increasingly more difficult to reject the request.
Inadequate financial analysis often leads to loan issues when commercial loan officers prioritize subjective measures, such as personal interactions, over thorough evaluations of financial data While certain traits, like resilience, may not be reflected in financial statements, a comprehensive review of income statements, balance sheets, financial ratios, and cash flow is essential These objective metrics provide a reliable assessment of a company's performance and facilitate meaningful comparisons with similar businesses.
A significant factor contributing to problem loans is the inadequate structuring of loans by business bankers Issues frequently emerge when bankers lack a deep understanding of their clients' businesses and cash flow cycles This gap in knowledge makes it challenging to predict future financing needs and select the right loan type, amount, and repayment terms Consequently, borrowers, irrespective of their financial stability, often struggle to meet repayment obligations that do not align with their cash flow cycles.
Improper collateralization is a significant factor contributing to loan losses, as accepting inadequately evaluated collateral can leave banks vulnerable during defaults Proper collateral, such as mortgages on immovable property or fixed assets, instills a sense of obligation in borrowers to repay their debts However, when borrowers feel secure and free from the risk of losing their collateral, they may become more inclined to consider defaulting on their loans While collateral requirements can seem harsh, they ultimately serve a crucial purpose by ensuring that borrowers have a vested interest in fulfilling their financial commitments to banks and financial institutions.
Unrealistic Terms and Schedule of Repayment
Chuyên đề thực tập Tốt nghiệp
Financers often present an overly optimistic view of projects during appraisal, influenced by personal interests, which can lead to unrealistic breakeven points and inflated profitability projections This may result in an inaccurately calculated Debt Service Coverage Ratio (DSCR), leading to excessive installment amounts and a conservative repayment schedule Consequently, borrowers may feel pressured to accept unfavorable terms, ultimately finding themselves unable to meet repayment obligations This situation arises not from a desire to defraud but from the financial strain of sustaining their business, causing them to neglect repayment calls.
Fluctuations in Statutory Regulations and Norms
Unpredictable fluctuations in statutory regulations, such as changes in excise rates, commercial taxes, and electricity tariffs, can significantly disrupt industrial planning These variations are often so severe and unexpected that they challenge even the most cautious entrepreneurs To manage these unforeseen challenges, many entrepreneurs consider delaying loan repayments as a practical solution to alleviate the financial strain.
Lack of Follow up Measures
Regular and systematic follow-up measures ensure that borrowing units remain under the vigilant oversight of financial institutions These measures not only help identify and address potential issues promptly but also encourage borrowing units to stay alert and correct mistakes early on By providing guidance and support during challenging times, financial institutions can foster a more resilient relationship with their clients, making such close follow-up programs essential for effective financial management.
The absence of a structured internship program for graduates leads to significant issues, as borrowing units frequently neglect their payment obligations to financial institutions This disregard not only jeopardizes their own financial stability but also negatively impacts the health of the financial institutions involved.
Regular inspections and systematic monitoring of borrowing units, including scrutiny of returns and annual balance sheets, can greatly enhance their performance These inspections help ensure that borrowers adhere to the loan terms and prevent the misallocation of funds, thereby maintaining the financial health of the units.
Loans typically do not become problematic overnight; instead, they often exhibit warning signs that indicate a decline in credit quality If these signs are identified early, business bankers can take action to prevent the loan from becoming a problem or mitigate potential losses in case of default For instance, a musical instrument manufacturer that neglects product research may face obsolescence, leading to bankruptcy and significant creditor losses The bank's financial exposure largely hinges on the relationship manager's ability to detect early warning signs, such as reduced investment in research and development, declining sales, and slower inventory turnover Additionally, unreturned calls to the company president or a sharp decrease in bank account balances may signal the emergence of a problem loan.
To effectively minimize problem loans, it is crucial to identify symptoms early rather than waiting for significant repayment issues to arise By recognizing potential problems promptly, relationship managers can collaborate with borrowers to implement remedial actions, preventing the need for loan workouts or losses Early detection of problem loans allows for proactive measures, ensuring better outcomes for both lenders and borrowers.
Analyze financial statements regularly and thoroughly
Chuyên đề thực tập Tốt nghiệp
Keep lines of communication open with the borrower with frequent telephone calls, correspondence, and site visits.
Stay alert to direct or indirect signs supplied by third parties
Look at the borrower’s total account relationship with the bank
Analyzing a borrower's financial statements is crucial for identifying potential credit issues Key tools for this analysis include the income statement, balance sheet, financial ratios, and cash flow statement By comparing these documents year over year or against industry benchmarks, lenders can effectively detect any financial weaknesses that may increase the risk of borrower default.
Business transactions and interactions between borrowers and third parties can signal potential problem loans to relationship managers Bank tellers and clerks, who are familiar with a company's operations, may first notice signs of trouble, such as a reliance on float and large last-minute deposits to meet payroll Additionally, competitors, suppliers, customers, and regulators can provide valuable insights or alerts about impending issues Some warning signs from third-party sources may include unusual transaction patterns or changes in payment behavior.
Calls from existing suppliers for additional credit information to evaluate requests for special terms
Calls from new suppliers requesting credit information to open new credit lines
Appearance of other FIs in the lending picture, especially collateralized lenders
An Insurance Company that send a cancellation for non-payment of a premium
Chuyên đề thực tập Tốt nghiệp
Legal notice served against the borrower for tax liens, judgments or garnishments
LOAN MANAGEMENT ACTIVITIES IN VIETCOMBANK
Introduction of Vietcombank
Vietcombank, officially known as The Commercial Joint Stock Bank for Foreign Trade of Vietnam, is headquartered at Vietcombank Tower, 198 Tran Quang Khai Street, Hoan Kiem District, Hanoi Established on October 30, 1962, under Decision 115/CP, it originated from the Foreign Exchange Management Department of the Central Bank, which is now the State Bank of Vietnam Initially, Vietcombank served as the sole institution managing external economic affairs and facilitating export-import lending across the nation.
After over 45 years of operation, Vietcombank has transformed into a comprehensive financial institution, excelling in wholesale banking for major corporations The bank has established a diverse and extensive distribution network, enhancing its retail banking capabilities and providing superior products and services to small and medium-sized enterprises Additionally, Vietcombank has made strategic investments in various business segments, including securities.
Chuyên đề thực tập Tốt nghiệp fund management, life insurance, real estate, infrastructure development, etc via its network of subsidiaries and joint ventures.
Despite challenges in the business environment, Vietcombank has achieved consistent and robust growth over the years, thanks to the flexible measures implemented by the Government and the State Bank of Vietnam The bank's credit activities maintain high quality compared to other commercial banks in Vietnam, while its banking services are continually enhanced to effectively meet customer needs In addition to standard lending, Vietcombank is actively strengthening its presence in domestic and international interbank markets to improve capital efficiency and boost profits.
In 2007, Viecombank embarked on a transformative journey with its equalization milestone, implementing significant changes in corporate governance aligned with international standards The bank focused on expanding its business operations, developing innovative banking products and services, and investing in advanced technologies These strategic initiatives aim to position Viecombank as a leading regional universal financial holdings by the target year of 2015-2020.
By September 2009, Vietcombank was recognized for its well-established group, consisting of:
Vietcombank has emerged as one of Vietnam's leading modern banking institutions, leveraging an advanced technology system that seamlessly connects its products and services This integration enables Vietcombank to offer customers high-quality, innovative banking solutions.
Chuyên đề thực tập Tốt nghiệp
Chart 1: Vietcombank’s Organizational Structure Chart 1: Vietcombank’s organizational structure
Chuyên đề thực tập Tốt nghiệp
Lending Performance in Vietcombank during the period 2005-2008
Table 2.1: Some major financial highlights of Vietcombank in the period 2005 - 2008
Source: Vietcombank’s financial statements of 2005 to 2008 and other internal sources
Between 2005 and 2007, Vietcombank demonstrated impressive business growth, with all financial indices showing year-on-year increases Total assets surged to VND 197,408,036 million in 2007, marking a 64.5% rise since 2004, while net earnings skyrocketed by 259% over three years The bank maintained high levels of return on equity (ROE) and return on assets (ROA), solidifying its status as a leading institution with a strong profit rate However, in 2008, Vietcombank experienced a significant decline in net earnings, largely due to the adverse effects of the global financial crisis and a rise in bad debts.
The graduation internship program necessitated significant capital for provisions, leading to a notable decrease in net earnings Despite this substantial reduction, Vietcombank maintained its status as the most profitable bank in Vietnam in 2008.
In early 2005, Vietcombank launched a policy focused on "Credit expansion based on improving quality and adhering to international standards." This initiative involved enhancing credit risk management, tightening control over credit risks, and establishing credit limits for specific branches, while significantly reducing limits for customers with poor financial performance The bank also prioritized the development of lending categories by customer and industry, diligently executing a regional credit growth strategy and addressing the issue of bad loans.
In August 2006, Vietcombank enhanced its credit procedures in line with the policy of "Intensifying customer relationships and improving credit quality toward international standards," following guidance from the Technical Assistance Project funded by the Royal Dutch Government and the World Bank This initiative led to improved credit risk management through the separation of customer relationships, credit risk, and debt management, while also focusing on specialized customer relationship and sales development within the Corporate Banking Department.
Vietcombank has enhanced its credit procedures by aligning them with international best practices, implementing a comprehensive front-middle-back office approach throughout its banking system In August of the same year, the establishment of the Loan Management Department marked a significant organizational change, splitting the Credit Management Department into three specialized areas: Credit Policy, Credit Risk Management, and Loan Management.
The introduction of advanced credit solutions has enabled Vietcombank to achieve stable growth in the credit market Over the past four years, the bank has experienced a significant increase in both loans and loan turnover, demonstrating resilience even during the financial crisis of 2008, as illustrated in the accompanying chart.
Chuyên đề thực tập Tốt nghiệp
Chart 2.2: Outstanding Loans and Income from Lending from 2004-2008
In recent years, the Bank has focused on selective credit expansion and enhancing credit risk management to improve its portfolio quality, aiming for a diversified and healthier loans portfolio Historically, Vietcombank targeted large corporations, often neglecting individual customers and smaller economic entities However, since late 2006 and early 2007, the Bank has introduced new credit packages and services to attract small and medium-sized enterprises (SMEs) and individual clients This strategy has begun to yield positive results, with a year-on-year increase in loans granted to individuals and SMEs, contributing to a healthier credit portfolio.
Chuyên đề thực tập Tốt nghiệp
Table 2.2: Outstanding Loans by Type of Customers.
According to Table 2, loan values credited to different customer types exhibit fluctuating trends without a fixed pattern Notably, the years 2005 and 2006 witnessed a downtrend in most customer categories, except for limited liability enterprises However, in 2007, all customer categories experienced a significant surge in credit value, largely attributed to the high economic growth rate that year.
Over the past four years, there have been significant shifts in outstanding loans across various industries The Manufacturing and Processing, Construction, Hospitality, and Transportation sectors received a larger share of credit, while the Trade and Service sectors experienced a decline in credit allocation Additionally, the Mining, Agriculture, Forestry, and Aquaculture industries faced notable fluctuations in their borrowing patterns.
Chuyên đề thực tập Tốt nghiệp
Chart 2.3: Outstanding Loans by Industry
In recent years, the Bank's loan portfolio, categorized by both customer and industry, has seen minimal growth; however, there has been a significant focus on enhancing loan and debt management operations This includes meticulous loan reviews and classifications aimed at mitigating credit risk, improving the quality of debts, and effectively managing problem debts.
Since the implementation of Decision 493/2005/QD-NHNN on April 21, 2005, by the State Bank of Vietnam regarding loan classification and credit loss provisions, Vietcombank categorizes its loans into five classifications: current, special mention, substandard, doubtful, and loss For a detailed overview of the Bank's loan situation, please refer to Table 3.
Chuyên đề thực tập Tốt nghiệp
Table 2.3: Bank’s Loan Classification and Loan Loss Provision under Decision 493
Loans Total provision Loans Total provision Loans Total provision Loans Total provision
Net loan exposure for each customer is determined by deducting the assessed collateral value from the loan balance, applying accepted discount rates as per Decision 493 This decision mandates that Vietcombank must fully provision for credit losses related to loan classifications within five years of its enactment Notably, Vietcombank was among the first banks to fulfill these provisioning requirements, both general and specific, shortly after Decision 493 was implemented Additionally, the bank has also fully accounted for provisions concerning defaulted letters of credit and service settlements.
Substandard, Doubtful, and Loss loans are categorized as non-performing loans, also known as bad debts The bad debt ratio serves as a key indicator of credit quality Vietcombank aims to maintain its annual bad debt ratio at under 3%.
From 2005 to 2007, Vietcombank successfully maintained its bad debt ratio at consistently low levels of 2.8%, 2.8%, 2.66%, and 2.6%, all below the targeted 3% per year This effective control resulted in minimal annual bad debt write-offs However, the financial year 2008 posed significant challenges for the banking sector, as the bank's bad debt amount doubled compared to previous years.
2007 Bad debt ratio also reached a peak level of 4.6% of the last 4 years, leaving behind the target number of 3%.
Table 2.4: Bad Debts Written off
Bad debt in amount (million VND) 2,092,667 1,870,700 3,211,629 6,873,353 Bad debt written off (million VND) 831,801 258,708 288,022 592,802 Bad debt written off over Total Bad debt (%) 39.75 13.83 8.97 8.62
Since 2004, the annual bad debt written off has consistently represented a small fraction of the total bad debt, remaining significantly lower than the provisions set aside for loan losses This proactive approach allows the bank to effectively manage unexpected loan losses and reduce the negative impact of uncollectible debts.
Loan Management in Vietcombank
Vietcombank's credit and lending process involves several key departments, including Corporate Customer, Project Finance, Credit Policy, Trade Finance, Credit Risk Management, and Loan Management The Corporate Customer and Project Finance Departments focus on understanding customer needs and advising on appropriate credit products Meanwhile, the Credit Policy Department develops tailored policies for different customers and industries over specific timeframes Additionally, Credit Risk Management assesses potential risks associated with providing credit to customers.
The internship project in the finance industry focuses on enhancing the health of loan portfolios Once a customer's credit is approved, the Loan Management Department takes responsibility for overseeing the issued loan This includes managing loan disbursement, collecting principal and interest, monitoring loan performance, storing documents, classifying loans, making provisions, and generating both ad-hoc and periodic reports.
Loan Management Department has only been established for 3 years with more than
Vietcombank, with a rich history spanning over 48 years, boasts a youthful team of 10 staff members This department has demonstrated its vital role in the modern credit processes of the bank, especially in addressing the ongoing debt crisis that poses significant challenges and risks.
2.3.2 Function of Loan Management Department
- Manage and directly perform the job concerning cash imbursement: Opening loan account; executing the cash withdrawal proceedings, guarantying the conformity of data on system with actual data.
- Store and manage the credit document adequately and safely
- Manage the risks in co-operation among different departments taking part in credit procedure; make sure that the credit activities are in accordance with the issued credit process.
- Make reports on the loans, including periodical and ad-hoc reports concerning: credit limit, outstanding principal, due and expiry date… and other report upon the leaders’ request.
- Supervise loan purpose check after cash withdrawal
- Execute loan classification, provisions setting and usage of provision to written- off bad debts.
To ensure effective management of loan repayments, it is essential to periodically generate and distribute the Interest and Principal Billing statements Additionally, sending timely notices regarding due payments to both the Accounting and Customer Departments will facilitate debt collection and maintain vigilant oversight of borrower repayment activities.
Chuyên đề thực tập Tốt nghiệp
Participate in internal credit creation by updating both financial and non-financial information in the IT system, which was recently reviewed by Ernst & Young Vietnam Limited in mid-2009.
- Customer/Project Investment Officer collects information and documents from customer and other sources which are helpful for approving credit line or approving project investment.
- Execute internal credit rating in case of approving customer’s credit line.
- Make Report on credit line proposal/Report on project investment with Customer /Project Investment officer and Head of Department and present the Report to Credit Approval Body (table 2.5).
- Make notice on credit line/ project investment approval after the ratification of Credit Approval Body.
- Sign credit facility, collateral asset facility and other related facility.
Chuyên đề thực tập Tốt nghiệp
Table 2.5: Credit Approval Body in Vietcombank
Credit issued for Organization customer Credit Line Approval
Total amount of Credit Approval Credit Approval for an Investment Project
Without Credit Line I/ In Head Quarter
Committee > 300 billion VND No execution > 300 billion VND > 200 billion VND
Customer Manager ≤ 300 billion VND No execution ≤ 300 billion VND ≤ 200 billion VND
3 Credit Risk Manager ≤ 200 billion VND No execution ≤ 200 billion VND ≤ 100 billion VND 4
Credit Line ≤ 200 billion VND ≤ 100 billion VND
II/ Credit Risk Department ≤ 150 billion VND Within approved
Credit Line ≤ 150 billion VND ≤ 50 billion VND
1 Branch’s Credit Committee According to Table
2.6, column 3 No execution According to Table
2 Manager/ Vice Manager According to Table
Credit Line According to Table
Chuyên đề thực tập Tốt nghiệp
Table 2.6: Credit Approval Level for Branch
Level of Credit Approval for Organization Customer
Credit Line/Total Credit Approval for Working
Capital Credit approval for an Investment
Branch’s Credit Committee Branch Manager Branch’s Credit
Chuyên đề thực tập Tốt nghiệp
Upon the approval of the credit line or investment project, the Loan Management Department receives all pertinent documents from the Customer or Project Investment Officer This includes reports and checks to ensure that the credit approval process aligns with the established credit procedures.
- Updating the credit line/ investment project information on the banking network.
- Execute the loan withdrawal proceedings.
- Monitor loan performance: full repayment of principal and/or interest on time
- Supervise the inspection of loan’s usage objective periodically, remind the Customer/Project Investment Officer if any lateness or delay exists.
Collaborate with other departments to address problematic loans by considering various solutions tailored to the specific circumstances Possible options include loan restructuring or extension, selling loans, or writing off bad debts.
- Liquidate the credit facility and collateral asset facility when all the interest and principal are paid.
- Draft about 30 kinds of period reports on: loan classification by industries and by customers; asset/liability classification report, collateral assets report,…and other ad-hoc reports
- Monthly classify loan and provision setting.
Applying Internal Credit Rating System
The Internal Credit Rating System (ICRS) consulted by Earn and Young Ltd in early 2008 and will formally be applied in whole Vietcombank’s network by mid
Established in 2010, the Internal Credit Rating System (ICRS) aims to classify loans and allocate provisions in line with Decision 493 and international standards It evaluates credit risk, borrower solvency, and potential risks the bank may face in its commitments or guarantees to third parties The ICRS is structured according to Article 7 of Decision 493/2005/QD-NHNN, dated April 22, 2005, and aligns with the international frameworks of Basel II and ISAS 39.
Chuyên đề thực tập Tốt nghiệp
The ICRS process is portrayed in the chart below:
The financial marking and non-financial marking processes are handled by distinct departments Initially, the Loan Management Department executes the financial marking, followed by the non-financial marking, which is carried out in either the Corporate Customer Department, Project Investment Department, or Credit Risk Management Department, depending on various criteria outlined in the accompanying charts.
Chuyên đề thực tập Tốt nghiệp
Chart 2.6: Non Financial Marking Criteria
Once the marking procedures are complete, each corporate customer's total mark is accessible on the ICRS, corresponding to one of the sixteen rankings outlined in the table below The key distinction between the current and new loan classification policies lies in the provision rates, which vary within a single category in the ICRS The sixteen-ranking system represents the latest advancement in Vietnam's banking credit rating framework, enhancing the precision of credit rating activities compared to the previous ten-ranking system used by other commercial banks.
Table 2.7: Loan Classification and Provision according to ICRS
Total mark Ranking Loan category Loan classification
Chuyên đề thực tập Tốt nghiệp
The ICRS application revolutionizes the credit report system by providing daily, monthly, quarterly, and yearly reports on loan classification and provisions, significantly enhancing the report creation process This automated system replaces the cumbersome and time-consuming manual reporting, allowing Loan Management Officers to efficiently review and forward reports to higher management without the previous inaccuracies.
Chuyên đề thực tập Tốt nghiệp
Problem Loans Handling
Vietcombank experienced a significant increase in non-performing loans (NPL), rising from 3.28% in early 2008 to a peak of 6.25% by September 2008, equating to an increase from 3,241 billion VND to 6,171 billion VND In response, the bank intensified its focus on NPL management, which effectively helped control the growth rate of NPLs By August 2009, the NPL rate had decreased to 3.97%, significantly lower than the previous year; however, achieving the Board of Director's target of 3% by the end of 2009 remained a challenging goal.
The Loss loan category constitutes a significant portion of the Bank's non-performing loans (NPL) due to challenges in collecting bad debts, with only 30% of total NPL successfully collected Furthermore, the approach of using credit risk provisions to write off bad debts and subsequently remove them from the balance sheet is inadequate In the first nine months of 2009, only 53 billion VND was written off against a provision of 3,305 billion VND by September 2009.
Chuyên đề thực tập Tốt nghiệp
Table 2.8: Solutions to Handle NPL in 9 months 2009
Giving credit with tougher conditions 636 7%
Limiting or reducing outstanding balance 403 4%
Exempting/ reducing interest to improve principle collection possibility 56 1%
Require the guarantor to pay 535 6%
Selling the collateral by order of court 579 6%
Take the collateral to deduct the loan 25 0%
Bring the borrower to the court 551 6%
Loan Management Achievements
Three years after the establishment of the Loan Management Department within the Vietcombank system, the department has successfully navigated initial challenges and fulfilled its responsibilities, significantly enhancing the bank's loan management operations.
The Loan Management Department ensures the accurate execution of daily tasks related to credit applications, cash withdrawals, and the collection of interest and principal Their diligent oversight has eliminated errors in the credit procedure, resulting in improved credit approval processes, enhanced credit quality, and more effective loan management activities.
Chuyên đề thực tập Tốt nghiệp
Regular assessments of the loan portfolio by industry and customer are conducted to ensure that the actual loan percentages closely align with scheduled figures Significant discrepancies trigger alerts for senior management, enabling prompt adjustments to maintain financial stability.
- Loan classification and loan loss provision under Decision 493 has been perfectly done in compliance with the regulation.
- Successfully apply the internal credit rating system in Vietcombank, making the categorization of bank debt much easier and more exactly.
- With 48 years of experience, Vietcombank is famous as the “Top level Bank”, many time rewarded the “Best bank in Vietnam” and many other repetitious prizes.
- Famous for being the leading bank guiding the national financial market, each activity and innovation of Vietcombank will be closely watched and follow by other banks.
- Vietcombank’s operations including credit activities have been supported by the largest correspondent network among Vietnamese banks with more than 1,300 financial institutions in over 90 countries and territories.
- Broad branch network nationwide which allow Vietcombank to get access to all targeted and potential customers.
- Credit activities including loan management activities have been improved and developed stably with low overdue loan ratio during operation years.
- Perfect loan loss provision and low level of bad debt written off.
- Vietcombank’s Credit staffs and employees are highly qualified and skillful.
- Credit risk level of a loan hardly balances with the loan price (interest) as the interest rate is calculated mainly based on relationship.
Chuyên đề thực tập Tốt nghiệp
- Loan portfolio movement does not deserve the effort spent New targeted customer segment like SMEs and individuals only take a small proportion in the Bank’s loan portfolio.
- Credit proceedings inflexible, annoying customers in some cases.
- Lack of experienced Loan management officer Loan management technology goes far behind the world without automatic debt classification function and provision calculation Several reports are still hand-made.
The credit and lending procedures, along with the "credit machine," have been enhanced to meet international standards; however, they remain cumbersome in certain areas This complexity hampers their ability to adapt effectively to fluctuations in the financial market and evolving government regulations.
Many employees at Vietcombank, particularly in the credit department, heavily depend on the bank's strong brand reputation as a leading state-owned institution This mindset fosters a belief that customers require the bank more than vice versa, which can negatively impact their work ethic and contribute to customer dissatisfaction.
- Vietnam’s economy is enjoying rapid growth rate than most of the rest of the world and credit demand also increasing everywhere: from individuals, businesses to general corporation and Government.
- Vietcombank’s successful equitization in 2007 has brought VCB with new chances, new experience, modern and professional working style, especially the
“one door working system” has proved to be in favor of the credit activities
- Separate credit procedure for different kind of customers has just been issued and applied in VCB’s whole system, in which customer range has been diversified significantly.
- Increasingly tough competition from other financial institutions, domestic and foreign as well as from customers Vietcombank has loss the Prize “Best Bank in Vietnam” since 2005.
Chuyên đề thực tập Tốt nghiệp
- High staff turnover – Vietcombank’s credit employees are qualified, experienced and skillful that any banks in Vietnam want to attract with better remuneration package.
- Vietnamese banking laws and regulations is unstable, lack of instruction decrees…
- Global financial-credit crisis with negative effects on the Vietnam’s economy and the banking system.
Chuyên đề thực tập Tốt nghiệp
RECOMMENDATIONS TO STRENGTHEN LOAN MANAGEMENT ACTIVITIES
The Objectives and Tasks for Lending Activities in the Period 2009-2010
The Bank aims for a total loan growth of approximately 30% while maintaining a non-performing loan ratio below 3% Recognizing the critical need for enhanced credit and loan management quality, the Bank has prioritized these improvements in its "credit expansion campaign." Future objectives will include targeted tasks focused on both credit and loan management activities.
- To speed up project financing, to implement decisive and effective measures, to improve credit quality at the whole system and specially the braches with low credit quality.
To enhance risk management and reinforce internal supervision and auditing, it is essential to institutionalize detailed procedures for the services offered and the daily operations of the Bank.
To enhance diversity in our customer base, we are focusing on small and medium-sized enterprises as well as retail customers This initiative involves restructuring our business models, expanding our retail network, and creating customized policies for each customer segment Additionally, we will design and market innovative products and services tailored to meet the specific needs of our customers.
- Widely apply the internal credit rating in all Branches.
- Strengthening loan management activity, making it a useful tool for credit and credit risk management, helping improve credit/loan quality of Vietcombank.
Chuyên đề thực tập Tốt nghiệp
Solutions to Improve Loan Management Quality of Vietcombank in the Coming
To ensure a robust loan structure, it is essential to incorporate at least two distinct and unrelated sources for loan repayment The primary source should derive from the customer's cash flow, while the secondary source can be tangible collateral or another form of guarantee.
A short-term loan acts as an advance that is repaid through sales when current assets are converted to cash, while medium and long-term loans are repaid over multiple operating periods using incremental earnings and depreciation from the financed investment If the new investment fails to generate sufficient returns for repayment, funding must come from other sources, such as collateral assets or guarantees Collateral assets, which the bank can claim in case of financial distress, typically include accounts receivable, inventory, crops (with insurance), livestock, land, buildings, machinery, equipment, stocks, and certificates of deposit Guarantees can be provided by corporations, individuals, or banks, and may be joint, making all guarantors liable for the total amount, or separate, where each guarantor is responsible only for their specified portion.
Collateral-backed loans mitigate bank risk by allowing the liquidation of assets if borrowers default on repayments Additionally, the loan loss provision for these secured loans is lower compared to unsecured loans, as the collateral's value is factored in when calculating necessary provisions.
3.2.2 Calculating the Return on a Loan
Loans represent the primary source of credit risk for most banks, but credit risk can also arise from various activities within a bank This includes exposure in both the banking book and trading book, as well as through on-balance and off-balance sheet items.
Graduating internship topics on balance sheets highlight that banks are increasingly confronted with credit risk, also known as counterparty risk, across a range of financial instruments beyond traditional loans This includes exposure in areas such as acceptances, interbank transactions, trade financing, foreign exchange dealings, financial futures, swaps, bonds, equities, options, as well as in the extension of commitments and guarantees, and the settlement of various transactions.
Vietcombank effectively forecasts and monitors potential credit risk exposures at both the counterparty and portfolio levels; however, it struggles to connect these risks to its pricing system To optimize its operations, the bank must consistently balance risks and rewards, particularly in relation to earnings from fees, interest, and charges, while considering exceptions for loyal customers Setting loan prices too high may drive away clients, while excessively low rates could erode profit margins or lead to losses Additionally, maintaining an excessive capital reserve may result in missed investment opportunities, whereas insufficient reserves could jeopardize regulatory compliance and financial stability.
Effective credit management hinges on the pricing of loans after the decision to lend has been made This pricing must account for the borrower's perceived credit risks and default likelihood, alongside any associated fees and collateral that support the loan.
The contractually promised return on a loan: there exists a number of factors impact the promised return that an FI achieves on any given loan amount These factors include the following:
1 The interest rate on the loan
2 Any fees relating to the loan
3 The credit risk premium on the loan
4 The collateral backing of the loan
5 Other non-price terms (especially compensating balance and reserve requirements)
Credit risk is a crucial element influencing loan returns, but financial institutions (FIs) must also consider various other factors when assessing loan profitability and risk FIs have the ability to mitigate high credit risk through alternative strategies beyond traditional measures.
In the context of graduation internship topics, financial institutions often charge higher explicit interest rates or risk premiums on loans, which can restrict the available credit Additionally, they may impose higher fees, require substantial compensating balances, and seek increased collateral to indirectly compensate for the lending risk involved.
The contractually promised gross return on the loan, k, per dollar lent equals:
BR: base lending rate m: margin b: compensating balance requirement, held as noninterest-bearing deposit.
R: Reserve requirement by State bank
The expected return on a loan, denoted as E(r), is influenced by the promised return (1 + k) agreed upon by the borrower and lender, which encompasses both the interest rate and any associated fees However, this promised return may differ from the expected and actual returns due to default risk, the possibility that the borrower may fail to meet the loan terms Default risk is inherent in all loans, making it a critical factor in determining the expected return at the time the loan is issued.
In which p is the probability of repayment of the loan To the extent that p is less than 1, default risk is present This means FI must:
- Set the risk premium (m) sufficiently high to compensate for the risk
- Recognize that setting high risk premium as well as high fees and base rates may actually reduce the probability of repayment (r)
Chuyên đề thực tập Tốt nghiệp
K and p are interrelated, as rising fees and loan rates can lead to a decreased likelihood of borrowers fulfilling their promised returns, indicating a negative correlation between them Consequently, financial institutions must manage credit risk by considering both the price or promised return (1 + k) and the quantity or availability of credit.
3.2.3 Evaluating and Managing Concentrations of Risk
The composition of a bank's overall portfolio and its associated risk levels should align with the objectives set by the bank's directors Nonetheless, it is common for certain loan pools to generate concerns due to the risks linked to the loans or the high volume of loans sharing similar characteristics.
Each pool of risk should be assessed individually and in relation to the overall portfolio to ensure alignment with loan portfolio objectives A significant exposure to a specific borrower type or industry may present less risk compared to a minor exposure to another The aim is to maintain an optimal balance of risk and return across the portfolio Management must establish performance standards, risk tolerance levels, and business goals for each concentration, ensuring these align with the broader loan portfolio management strategy.
A pool of loans can create a concentration of risk that is challenging for banks to manage, particularly for smaller institutions with limited geographic markets and local economic dependencies Larger banks may face similar risks due to mergers or efforts to enhance industry expertise It is essential for banks to evaluate whether specific loan pools present undesirable concentrations of risk that need to be mitigated Borrowers within these concentrated portfolios often share similar financial traits, such as sources of capital and repayment capabilities By identifying these common characteristics, management can streamline monitoring processes, thereby enhancing risk supervision Implementing stress testing based on shared financial indicators can help pinpoint which loan pools are most susceptible to credit risk and require closer scrutiny.
Chuyên đề thực tập Tốt nghiệp
In the last ten years, large banks have increasingly embraced active portfolio management strategies, enhancing their Management Information Systems (MIS) capabilities and fortifying their credit risk management practices To effectively manage portfolios and mitigate concentration risk, banks employ a diverse range of techniques.