Finance dissertation onanalysis of factors influencing credit risk in personal lending at vietnam prosperity joint stocks commercial bank

Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE DISSERTATION ON ANALYSIS OF FACTORS INFLUENCING CREDIT RISK IN PERSONAL LENDING AT VIETNAM PROSPERITY JOINT STOCKS COMMERCIAL BANK HOANG VAN ANH ID No: 21071794 Intake Supervisor: Dr Nguyen Xuan Quang September 2022 Tai ngay!!! Ban co the xoa dong chu nay!!! 17014126243421000000 ACKNOWLEDGEMENT First, I would like to express my sincere thanks to UWE and Banking Academy of Vietnam for creating the best conditions for me during my studying and researching time at school I also would like to express my deep gratitude to Prof.Dr Nguyen Xuan Quang for being wholeheartedly caring for, wholeheartedly helping, guiding, and supporting me to complete this Dissertation Although there are many efforts to implement this dissertation completely, due to the limitations of knowledge and experience, there are inevitable shortcomings that I have not seen myself Therefore, I look forward to receiving the suggestions of teachers and interested people to help this thesis be more complete Once again, I would like to thank Banking Academy of Vietnam for facilitating and supporting me during the internship period I wish all the teachers and all employees to be healthy and successful ABSTRACT Clarifying the basic issues of meaningful content about credit risk in personal loans Secondly, the topic uses quantitative research to determine the factors affecting credit risk in lending to individual customers Based on the survey results, the topic has pointed out factors affecting credit risk in personal loans: business environment, borrower's financial ability, credit policy, credit officer's competence, borrower's ability to personal financial managements finance, borrower's capital use Based on the survey results, the study proposed solutions and recommendations to improve the quality of credit risk management at VPBank TABLE OF CONTENTS CHAPTER 1: INTRODUCTION 1.1 Background of study 1.2 Objectives of research 1.3 Subject and scope of research 1.3.1 Subject of research 1.3.2 Scope of research: 1.4 Methodology of research: applying the combination of quantitative research and qualitative research 1.5 Structure of research CHAPTER 2: LITERATURE REVIEW 2.1 The personal lending of commercial bank 2.1.1 Definition of personal lending: 2.1.2 Characteristic of personal lending: 2.1.3 Types of personal lending 2.1.4 Role of personal lending in the economy 2.2 Credit risk of personal lending 2.2.1 Definition of credit risk 2.2.2 Reasons of credit risk in personal lending 2.2.3 Negative influence of credit risk 12 2.3 Factors affecting credit risk in bank’s personal lending 13 2.3.1 The previous published researches 13 2.3.2 Factors affect credit risk in personal lending 16 CHAPTER 3: RESEARCH AND DESIGN 21 3.1 Process of research 21 3.2 Methodology of research: 21 3.2.1 Qualitative research: 21 3.2.2 Quantitative research 22 3.3 Data analysis 25 CHAPTER 4: RESULTS AND DISCUSSIONS 27 4.1 Introduction of VPBank 27 4.2 Analyzing factors affecting credit risk at VPB’s personal lending 28 4.2.1 Descriptive statistics: 28 4.2.2 Actual research results 29 CHAPTER 5: SOLUTIONS, RECOMMENDATION AND CONCLUSION 39 5.1 Solutions 39 5.2 Recommendations 41 5.3 Conclusion 42 5.3.1 The limitation of research 43 REFERENCES 44 APPENDIX 46 LIST OF TABLES Table 3.1 The variables measure business environment 23 Table 3.2 The variables measure the borrower’s financial ability 23 Table 3.3 The variables measure the Borrower’s ability to personal financial managements 23 Table 3.4 The variables measure the borrower’s capital use 24 Table 3.5 The variables measure credit officer’s competence 24 Table 3.6 The variables measure credit policy 24 Table 3.7 Number of survey 25 Table 4.1 The age of interviewee .28 Table 4.2 Position of interviewee at VPBank 28 Table 4.3 Working seniority at VPBank 29 Table 4.4 Checking the reliability of each scale .30 Table 4.5 Testing the confidence of scale of credit risk on personal lending .31 Table 4.6 Summary of factor results .32 Table 4.7 Static model 36 Table 4.8 Regression result of each variables 37 CHAPTER 1: INTRODUCTION 1.1 Background of study Commercial banks are a particular kind of financial organization whose operations are closely linked to and highly sensitive to changes in the economy As a result, banks constantly deal with both internal and external threats, making banking operations riskier and more complicated than in other industries Risks not only negatively impact the local economy, but also the entire country's economy They significantly increase a commercial bank's revenue in terms of credit activity However, there are a lot of hazards involved in this operation Because the debtor's repayment is influenced by the business environment, including economic growth, the legal system, and social stability, in addition to the bank and borrowers Credit risk so directly affects and considerably contributes to the existence and growth of commercial banks Vietnamese banks have been supplying the market with more and better-quality credit products in recent years As a result, Vietnamese commercial banks are becoming more competitive, expanding the scope of their loan activities, and growing steadily Credit risk at commercial banks, on the other hand, tends to rise and fluctuate complicatedly with macroeconomic variations, particularly the broad and protracted COVID-19 outbreak The incidence of credit risk has an impact on the bank's profitability in addition to other areas, but it has the greatest impact on the bank's capital, investment prospects, operational scale, and ability to compete in the financial market Commercial banks may weaken or fail in more severe circumstances, which would have a negative impact on the economy For instance, Ocean Bank had a bad debt ratio of 57%–72% in 2015 and 2016; this was one of the contributing causes that led to Ocean Bank being a weak bank and being acquired for VND Banks have recently implemented a number of initiatives to reduce the credit risk associated with lending to individuals, including proactive client reviews and evaluations, the creation of provisions, and other regulating actions In the current challenging economic environment, it is still a problem More specifically, personal loans continue to be a significant credit area for Vietnamese commercial banks Personal credit has attracted the participation of most banks in the past, present, and future since it is a market with a lot of expansion potential The credit risk associated with personal loans, particularly consumer loans, is frequently higher than it is with other types of lending As a result, if banks not effectively manage lending activities, they run the danger of higher risks and bad debts when lending to individuals In Vietnam, personal loans that were still outstanding made up 56% of VPBank's lending portfolio VPBank is steadily solidifying its position in Vietnam's retail banking market However, fluctuations of the economy, Covid-19 pandemic led to reduce people's incomes and lost many jobs, VPBank is facing the increase of credit risk The assessment of factors affecting credit risk on personal lending in order to find out the causes and take measures to control credit risk on personal lending in the coming years is an objective requirement Therefore, the author chooses the topic: “Analysis of factors influencing credit risk in personal lending at Vietnam prosperity joint stocks commercial bank’’ 1.2 Objectives of research Firstly, systematizing theoretical issues about credit risk in lending activities for individual customers at commercial banks Secondly, pointing out, analyze and evaluate the factors affecting credit risk in personal loans and correlation between factors and personal credit risk at Prosperity Vietnam Commercial Joint Stock Bank Thirdly, proposing solutions and recommendations to control credit risk in lending to individual customers at VPBank in the coming years 1.3 Subject and scope of research 1.3.1 Subject of research: Determining and evaluating the factors affecting the credit risk of the personal lendings 1.3.2 Scope of research: Researching the factors affecting the credit risk of the personal lendings at Prosperity Vietnam Commercial Joint Stock Bank (VPBank) The secondary data was collected in the period of 2016- 2021 The primary data was collected in the period of 2016-2021, and the interviewees are managers, credit officer, other staff 1.4 Methodology of research: applying the combination of quantitative research and qualitative research 1.5 Structure of research Chapter 1: Introduction Chapter of the dissertation clarifies the basic topics such as the urgency of the research topic, the objectives, and the scope of the research In addition, give an overview of how to collect data for research Chapter 2: Literature review Chapter of the dissertation will clarify the concepts, characteristics, classification, and role of credit risk on personal lending Next, I will review the previous research and then highlight the factors that will affect credit risk on personal lending at VPBank Chapter 3: Research methodology Chapter of dissertation describes the research methodology Process, outline, how to get data After designing the questionnaire and obtaining the data, SPSS software will be applied to analyze the results and how the factors affect each other Chapter 4: Result and discussion Chapter of dissertation gives a general introduction to Vietnam prosperity joint stocks commercial bank (VPBank) Next, I will evaluate and describe the research results obtained from the use of SPSS software And finally the conclusion, discuss the influence of the factors Chapter 5: Conclusions Chapter of dissertation will propose solutions and recommendations for VPBank to develop VPB’s personal lending in the coming years CHAPTER 2: OVERVIEW OF PERSONAL LENDING OF COMMERCIAL BANKS 2.1 The personal lending of commercial bank 2.1.1 Definition of personal lending: Lending, also known as a type of credit activities, is the provision of finance by one party (lender) to another (borrower) in which the borrower will repay the lender within a certain period of negotiable time and usually with interest Lending reflects the relationship between two parties - One is the lender, and the other is the borrower The relationship between the two parties is bound by the lending mechanism, loan term agreement, interest rate payable… Personal lending is a form of lending in which the bank allows customers who are individuals or households to use sum of money for consumption or business 2.1.2 Characteristics of personal lending: The customer is individuals and households Unlike institutional customer, the number of individual customers is often large, their borrowing needs are diverse and are greatly influenced by the economic, cultural and social environment Therefore, in each different region, the borrowing needs of individual customers are also different depending on the economic situation, education level, income, habits and consumption tastes of the population Individual customers come to the bank to apply for a loan often to satisfy their current needs, these loans can be loans to buy a car, buy a house or repair a house or a small business loan The purpose of personal lending is often consumption or small business needs, so most scale of loans are relatively small Meanwhile, the number of loans is relatively numerous, so the bank's cost is relatively high Therefore, personal lending cost is high Risk of personal lending is often higher than lending to corporate customers Because the information about individual customers is often lack of transparency, lack of system, making it difficult for banks to assess the financial capacity of