INTRODUCTION
Background of study
Commercial banks are specialized financial institutions that are highly sensitive to economic fluctuations, facing both internal and external risks that complicate their operations These risks not only threaten the local economy but can also impact the national economy as a whole While credit activities can significantly boost a bank's revenue, they come with considerable hazards, as the ability of debtors to repay loans is influenced by various factors such as economic growth, legal frameworks, and social stability Consequently, credit risk plays a crucial role in the survival and expansion of commercial banks.
In recent years, Vietnamese banks have enhanced their credit products, leading to increased competitiveness and steady growth in loan activities However, credit risk at commercial banks has become more volatile, particularly due to the prolonged COVID-19 pandemic, which adversely affects profitability and capital, hindering investment prospects and competitive ability Severe credit risk can jeopardize banks, as seen with Ocean Bank's alarming bad debt ratio of 57%-72% in 2015-2016, ultimately resulting in its acquisition for 0 VND To mitigate lending risks, banks have adopted proactive client assessments, created provisions, and implemented regulatory measures, although challenges persist in the current economic landscape.
Personal loans represent a vital segment of credit for Vietnamese commercial banks, attracting significant interest due to their substantial growth potential However, the credit risk linked to personal loans, especially consumer loans, tends to be higher compared to other lending types Consequently, banks face the risk of increased bad debts and financial losses if they do not manage their lending activities effectively.
In Vietnam, personal loans constitute 56% of VPBank's lending portfolio, highlighting the bank's growing presence in the retail banking sector However, economic fluctuations and the Covid-19 pandemic have resulted in decreased incomes and job losses, increasing credit risk for VPBank To address this challenge, it is essential to assess the factors influencing credit risk in personal lending, enabling the identification of causes and the implementation of effective control measures in the coming years This analysis forms the basis of the study titled “Analysis of Factors Influencing Credit Risk in Personal Lending at Vietnam Prosperity Joint Stock Commercial Bank.”
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.
Subject and scope of research
Determining and evaluating the factors affecting the credit risk of the personal lendings
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
Methodology of research: applying the combination of quantitative research
applying the combination of quantitative research and qualitative research
Structure of research
Chapter 1 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
LITERATURE REVIEW
The personal lending of commercial bank
Lending, a key aspect of credit activities, involves the transfer of funds from a lender to a borrower, who agrees to repay the amount borrowed over a specified period, typically with interest.
Lending involves a crucial relationship between two parties: the lender and the borrower This relationship is governed by a lending mechanism, which includes the loan term agreement and the applicable interest rate.
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
Individual and household customers represent a significant segment of the market, distinct from institutional clients This diverse group has varying borrowing needs that are heavily shaped by economic, cultural, and social factors.
In various regions, individual customers have distinct borrowing needs influenced by the local economic conditions, education levels, income, and consumption habits Typically, customers approach banks for loans to meet immediate requirements, such as purchasing a car, buying or renovating a home, or securing financing for a small business.
Personal lending primarily serves consumption and small business needs, resulting in generally small loan amounts However, the high volume of loans contributes to elevated operational costs for banks, leading to increased costs for personal lending.
Personal lending carries a higher risk compared to lending to corporate clients due to the lack of transparency and systematic information about individual borrowers This makes it challenging for banks to accurately assess the financial capacity of these customers, complicating the credit appraisal process Additionally, individual borrowers often possess limited financial knowledge, leading to obstacles in loan management that can increase risks for banks.
Because, consumer loans have high costs and risks, therefore, the interest rates that customers have to pay to banks are usually relatively high
Short-term personal loans are financial products with a maximum duration of 12 months, designed to assist individuals in meeting urgent financial needs Customers typically apply for these loans to bolster business capital or for personal consumption These loans provide a quick solution for those facing immediate financial challenges, allowing for swift access to funds with the expectation of repayment within a short timeframe.
A medium-term loan is a type of personal financing that typically spans from 12 to 60 months, making it ideal for installment payments on investment projects for companies or enterprises This loan option is also popular among individuals and small business owners, serving as a preferred alternative to short-term loans.
Long loan periods can result in economic fluctuations, particularly during large-scale projects, making unexpected events likely Consequently, banks and finance companies typically require borrowers to secure loans with higher interest rates compared to short-term loans by mortgaging assets.
A long-term loan, defined as a loan with a term exceeding five years, is primarily intended for capital construction, technical improvements, and the expansion of production and business activities This type of financing supports the procurement of fixed assets and long-term investments for both individuals and businesses Due to the extended repayment period, banks typically impose higher interest rates on long-term loans to mitigate potential risks associated with lending.
B According to purpose of loans
A consumer loan is designed to offer financial assistance for various personal needs, including shopping, purchasing household items, cars, funding education abroad, weddings, travel, furniture acquisition, and home construction or repairs Unlike consumer loans, personal loans cater specifically to individual spending without requiring collateral; lenders assess the borrower's creditworthiness and repayment capacity to determine eligibility.
A business loan is a financial package offered by banks to provide customers with the necessary capital for production, service provision, and expansion to enhance competitiveness The purpose of the loan plays a crucial role in the bank's decision-making process; feasible loan purposes increase the likelihood of approval Common acceptable purposes for business loans include purchasing goods and raw materials, investing in machinery and equipment, upgrading factories, and agricultural investments Additionally, customers can secure loans for household businesses As a type of mortgage loan, obtaining a business loan requires customers to provide collateral, which must match or exceed the loan's value.
C According to forms of mitigation risk
A secured loan is a type of borrowing that requires the borrower to provide collateral, which helps banks mitigate credit risks In the event that the borrower defaults on the loan, the bank can recover its losses by seizing the collateral.
An unsecured loan is a type of financing that does not require the borrower to provide collateral These loans are typically available only to individuals with strong creditworthiness, a solid credit history, and a reliable ability to repay.
2.1.4 Role of personal lending in the economy
Personal lending presents a significant opportunity for banks to enhance their income by broadening their lending activities This approach not only diversifies the loan portfolio, thereby mitigating risks, but also encourages borrowers to engage with additional bank services Consequently, banks can increase profits while fostering stable and sustainable growth.
Credit risk of personal lending
Risk encompasses various definitions, with Frank Knight describing it as the unpredictability of uncertain outcomes Allan Willett emphasizes that risk pertains to the specific uncertainties linked to unforeseen events Additionally, Irving Perfer views risk as the cumulative randomness that can be quantified through probability Lastly, Marilic Hurt Mr Carty provides further insights into the concept of risk.
“Risk is situation in which events occur in the future can be determined”
Koch (1995) emphasizes that banks possess profitable assets, but they face risk when customers default on their principal and interest payments Credit risk refers to the potential impact on net income and the market value of capital due to customer defaults or delays in payment.
Credit risk, as defined by the Basel treaty, refers to the uncertainty regarding a partner's ability to fulfill contractual obligations and regulations This risk can lead to significant financial losses, including reduced net income and diminished market capital value, and in extreme situations, it may result in bankruptcy.
Credit risk refers to the potential loss that arises when a customer is unable to fulfill their debt obligations As outlined in Circular 39/2013/TT-NHNN by the Governor of the State Bank of Vietnam, this type of risk within credit institutions occurs when customers fail to meet their promised commitments.
Credit risk, as defined by Khan and Ahmed (2003), refers to the likelihood that a borrower will fail to fulfill their loan obligations Arunkumar emphasizes in his research on credit risk management at commercial banks that borrower defaults remain a critical risk that must be effectively managed This type of risk significantly influences the capital structure of the economy, necessitating banks to implement robust controls to mitigate it and protect against other financial risks.
Credit risk arises when a borrower fails to meet their contractual repayment obligations, which include both the principal amount and any interest accrued.
Personal credit risk arises when banks extend credit to individual customers, necessitating a thorough analysis of the borrower's factors to ensure safety in lending Despite these efforts, predicting potential issues remains challenging, as a borrower's ability to repay can fluctuate due to various reasons Additionally, many bankers may lack the expertise for effective credit analysis, making credit risk an unavoidable reality While it can be mitigated, it cannot be completely eliminated Consequently, banks must strategically accept certain risks, balancing caution with calculated decision-making, as anticipated risks are integral to their overall strategy.
2.2.2 Reasons of credit risk in personal lending
Credit risk in personal lending arises from various factors, which experts typically categorize into three main areas: bank-related reasons, customer-related reasons, and business environment-related reasons.
Loan pricing should not solely reflect the customer's risk level; instead, interest rates must be set to cover capital costs, management expenses, desired profits, and risk premiums If banks impose excessively high interest rates, customers may struggle to meet their repayment obligations, potentially leading to financial difficulties and increased credit risk.
The second, in lending activities, lending strategy and policy are very important
An ineffective lending strategy and poorly chosen target market can hinder a bank's market access and risk management capabilities, ultimately resulting in heightened credit risk.
Unfair competition policies in the banking sector often lead some banks to lower lending standards to meet sales targets, resulting in the approval of high-risk loans This practice increases overall credit risks and exposes the financial system to significant dangers.
The weaknesses in the lending process, procedures, and supervision at banks can significantly increase credit risks Inconsistent and lax customer screening may result in the approval of ineligible clients while overlooking potential borrowers Furthermore, without proper oversight from management, credit officers may make incorrect decisions regarding loan disbursement, leading to heightened risk Continuous monitoring of customers post-disbursement is essential to identify early signs of bad debt; however, many credit officers treat this monitoring as a mere formality A lack of close supervision can render credit officers ineffective and may even lead to ethical breaches in lending practices and debt collection Additionally, if management neglects the bank's credit status, they miss crucial opportunities to address and mitigate potential risks promptly.
The bank's lending portfolio lacks effective diversification, which is crucial for mitigating credit risks Despite recognizing the importance of diversifying their investments, many banks restrict their lending to just one or two industries or a limited number of large clients This over-reliance on a single industry or individual poses significant risks, highlighting the need for a more balanced and varied approach to lending.
The limitations in technical infrastructure hinder the effectiveness of lending activities and credit risk management in commercial banks Many institutions struggle to implement information technology applications that enhance risk management and administrative control As a result, these banks often fail to standardize their practices according to international standards, which ultimately leads to increased credit risk.
The weakness of bank staff, particularly credit officers, stems from inadequate qualifications and moral integrity When credit officers lack knowledge and experience, their ability to accurately assess customers and determine appropriate loan terms diminishes, resulting in poor credit quality and increased risk Additionally, failure to adhere to proper credit processes, such as disbursing funds before completing necessary documentation or neglecting to monitor the use of borrowed capital, can lead to a rise in bad debt Furthermore, credit officers who exhibit low responsibility and are susceptible to bribery can inflict significant harm on the bank by approving loans based solely on personal relationships rather than following essential procedures.
Factors affecting credit risk in bank’s personal lending
To determine the factors affect credit risk on personal lending, there are many research, include quantitative and qualitative research The impressive researches are following:
According to Konovalova N., Kristovska I., Kudinska M (2016) in dissertation:
A study on credit risk in commercial banks analyzed data from 100 borrowers, focusing on key indicators such as loan term, loan amount, borrower’s sex, age, number of children, and average earnings The findings revealed that the most significant factors influencing a bank's credit risk when lending to retail clients are the borrower's average income, the loan amount, and the loan term.
A study by Kolapo, T Funso; Ayeni, R Kolade; and Oke, M Ojo (2010) evaluated the impact of credit risk on personal loans in Nigerian banks over an 11-year period from 2000 to 2010 The findings revealed that factors such as business variables, loan collateral, and customer capital use significantly influence credit risk in personal lending Conversely, the borrower's financial capability, experience, and the credit officer's expertise, along with debt monitoring and inspection practices, negatively affect credit risk The study suggests that while credit growth is accelerating, it may lead to a decline in credit quality and an increase in credit risk within the next four years.
A study by Ahmed, Takeda, and Shawn (2017) revealed that loan loss provisions significantly positively impact non-performing loans This suggests that an increase in loan loss provisions signals heightened credit risk and a decline in loan quality, ultimately negatively affecting bank performance.
Ali and Ghauri (2013) analyzed the effects of the 2008 global financial crisis on credit risk management in personal lending by banks in Pakistan from 2007 to 2009 Their research revealed that Islamic banks were largely unaffected by the crisis and demonstrated greater resilience compared to traditional banks.
Laxmi Koju, Ram Koju, and Shouyang Wang highlight that the size of a commercial bank significantly influences its credit risk, with larger banks more likely to lend to high-risk customers due to government protections during failures This tendency makes large banks more susceptible to heightened credit risk However, contrary to this perspective, Khemraj and Pasha (2016) argue that bank size is not a statistically significant factor in determining credit risk, suggesting a need for further investigation into the relationship between bank size and problem loans.
In her article "Determinants of Credit Risk in Commercial Banks of Kosovo," Donjeta Morina highlights that business environment factors, particularly the inflation rate, significantly influence credit risk in commercial banks Inflation, defined as the overall increase in prices for goods and services, has an ambiguous relationship with credit risk While high inflation can decrease the real value of loans, making debt more manageable for borrowers, it may also impair their ability to repay if their income fluctuates Ultimately, rising inflation is associated with a negative and significant impact on credit risk, as it lessens borrowers' debt burdens while diminishing the actual value of loans.
In journal: ‘’ The commercialization of the microfinance industry: Is there a
A study by Leif Atle Beisland, Bert D’Espallier, and Roy Mersland (2019) highlights the issue of 'personal mission drift' among credit officers, emphasizing that their competence significantly influences credit risk The research reveals a negative correlation between credit officer competence and the provision of small loans, particularly to young clients and those with disabilities Notably, after accounting for factors such as gender, education, marital status, and branch affiliation, it was found that more experienced credit officers tend to serve fewer clients from poorer backgrounds.
In the journal article "The Case of COVID-19 Impact on the Level of Non-Performing Loans of Conventional Commercial Banks in Indonesia," authors Siti Epa Hardiyanti and Lukmanul Hakim Aziz (2021) highlight that the COVID-19 pandemic significantly influences the rise of non-performing loans in Indonesian commercial banks They propose that the COVID-19 variable serves as an external indicator of increased bad debt, suggesting that future research could utilize it to assess emergencies that exceed human control This study offers valuable insights for banking institutions to inform their credit risk management policies amid the ongoing pandemic.
In the journal article "The Impact of Credit Risk on Profitability Performance of Commercial Banks in Ethiopia" by Million Gizaw and Matewos Kebede (2015), the authors highlight that credit risk significantly influences the profitability of commercial banks Their analysis reveals that key credit risk measures, including bad debt, loan loss provisions, and capital adequacy, play a crucial role in determining the financial performance of these banks in Ethiopia.
Dr Michael Nyagol, in the journal article "Relationship between Credit Risk Management and Financial Performance: Empirical Evidence from Microfinance Banks in Kenya," emphasizes the importance of implementing a credit grading system in banks to mitigate credit risk This system should evaluate factors such as the borrower’s financial condition, repayment capacity, collateral value, and additional characteristics that may affect the likelihood of collecting principal and interest Furthermore, assessing credit risk can be enhanced through the analysis of historical default data for specific borrowers and industries, facilitated by information sharing.
In the article "Reducing Credit Risk at the Bank of Social Policy" by Chu Ngoc Thanh, the author highlights several key factors influencing credit risk in policy banks These include the qualifications and professional ethics of bank staff, the structure of the credit risk management framework, the effectiveness of credit policies and processes, as well as the efficiency of the supervisory system and internal controls within the bank.
There are several methods to identify the factors influencing credit risk in personal lending, which can be categorized into three main groups: environmental factors, borrower-related factors, and bank-specific factors.
2.3.2 Factors affecting credit risk in personal lending
In developing a risk model to identify factors influencing credit risk in personal lending, this dissertation draws on the research frameworks established by Kolapo, T Funso; Ayeni, R Kolade; and Oke, M Ojo (2010), as well as the models proposed by Truong Dong Loc and Nguyen Thi Tuyet (2010) Key factors impacting lending risk for individual bank customers are thoroughly examined, providing a comprehensive analysis of credit risk in personal lending scenarios.
Diagram: The research model of the factors affecting credit risk in personal lending
(Sources: Kolapo, T.Funso; Ayeni, R.Kolade; Oke, M.Ojo (2010), Truong Dong Loc,
Nguyen Thi Tuyet (2017) and other authors)
Risk = β0 + β1BE + β2BFA + β3BAMF + β4BCUI + β5BCOC + β6CP
Content of variables and assumption:
Macro factors, such as the economic, legal, and political environments, as well as inflation, significantly influence all industries within the economy Instability in these factors can disrupt company operations, resulting in job losses and decreased employee earnings Consequently, personal loans may become less risky in such volatile circumstances.
Credit risk in personal lending
Borrower’s ability to personal financial managements
Business environment will have inverse impact on credit risk in personal lending at Vietnam prosperity joint stocks commercial bank
According to Truong Dong Loc and Nguyen Thi Tuyet (2010), a borrower's financial capacity is assessed by the ratio of their own capital to the total investment of the loan project A higher equity contribution from the borrower correlates with increased project success and reduced credit risk This study posits that when borrowers invest more of their own capital, alongside benefiting from lower loan costs, they are likely to dedicate additional time and resources, thereby minimizing risks Consequently, the research suggests a positive relationship between a borrower's financial capability and their repayment ability, indicating that financial strength inversely affects credit risk.
Borrower's financial ability has a same impact on credit risk in personal lending at Vietnam prosperity joint stocks commercial bank
*Borrower’s ability in personal financial managements: (X3)
RESEARCH AND DESIGN
Process of research
Step 1: Determining clearly the research purpose
Step 2: Clarifying the theoretical basis for determining the factors affecting credit risk on personal lending of commercial banks
- Systematizing the theoretical issues of credit risk
-Overviewing the public previous research that have quantitative research about the factors affect credit risk on personal lending
Step 3: Basing on result of research from step 2, dissertation determine research model and propose the assumption about factors affect credit risk on personal lending at Vietnam prosperity joint stocks commercial bank to come up with a preliminary research model The research must be conducted through two phases:
Quantitative research was conducted using a formal survey with a sample size of 184 participants Data collection involved interviews, followed by data cleaning and screening to eliminate unsatisfactory questionnaires The data was then encrypted, entered, and analyzed using SPSS 22.0 to extract meaningful insights.
Step 4: Designing the questionnaire following determined research model:
- Develop preliminary questionnaires, test surveys and consult instructors and experts (credit officer, other staff at bank and managers)
- Under the guidance of the instructor, adjusting and completing the questionnaire
Step 5: Conducting the survey, collecting the answer and processing data, analyzing the survey results
Methodology of research
This article aims to systematically establish the theoretical framework related to research by reviewing secondary data, including textbooks, reference materials, published studies, and official reports from VPBank It seeks to elucidate the theoretical aspects and identify the factors influencing credit risk in commercial banks, with a specific focus on VPBank Additionally, the analysis will clarify the determinants of credit risk at VPBank, providing a foundation for proposing effective solutions to enhance and mitigate credit risks within the bank.
Purpose of questionnaire: collecting information from VPBank’s staff by answering questionnaire in order to determine the level influence of factors to credit risk on personal lending at VPBank
+Part 1: Surveying the personal information (Position at bank, working seniority)
+Part 2: Content of survey include: Business environment, borrower’s financial ability, borrower’s ability to manage finance, borrower’s capital use, credit officer’s competence, credit policy, credit risk on personal lending
+Part 3: Assessment information has 24 questions divided into 7 groups according to the stated theoretical basis
Designing in the form of a 5-point Likert scale with a scale from 1 to 5:
Table 0.1 The variables measure business environment
BE2 Spread of pandemic covid 19
BE3 The war between Russia and Ucraina
Assumption 1: Business environment will have inverse impact on credit risk in personal lending at Vietnam prosperity joint stocks commercial bank
Table 0.2 The variables measure the borrower’s financial ability (Truong Dong Loc and Nguyen Thi Tuyet (2010))
BFA1 Customer’s level of earning per month
BFA2 Type of customer’s job
BFA3 Financial ability of customer’s family members
Assumption 2: Borrower's financial ability has a same impact on credit risk in personal lending at Vietnam prosperity joint stocks commercial bank
Table 0.3 The variables measure the Borrower’s ability to personal financial managements
BAMF1 Understanding of customer about personal finance
BAMF2 Experience of using capital
BAMF4 Spending habits of customers
Assumption 3: The good borrower’s ability to personal financial managements has an inverse impact on credit risk of personal lending at Vietnam prosperity joint stocks commercial bank
Table 0.4 The variables measure the borrower’s capital use (Truong Dong Loc and
BCUI1 Purpose of using capital
BCUI2 Compliance of purpose using capital
Assumption 4: Using the capital for correct purpose will have inverse impact with credit risk in personal lending at Vietnam prosperity joint stocks commercial bank
Table 0.5 The variables measure credit officer’s competence (Truong Dong Loc and
COC1 Qualification of credit officers
COC2 Training and re-training credit officers
COC3 Experience, work seniority of credit officers
COC4 Mortality, responsibility of credit officers in their work
Assumption 5: Credit officer’s competence has inverse impact on credit risk in personal lending at Vietnam prosperity joint stocks commercial bank
Table 0.6 The variables measure credit policy
CP1 The credit risk is affected by the diversity of credit products
CP2 Process and procedure for lending affect credit risk
CP3 Bank has strict credit appraisal
Assumption 6: Stricter credit policy have an inverse impact on credit risk in personal lending at Vietnam prosperity joint stocks commercial bank
Interviewees are bank manager, credit officer and other staff at bank These interviewees are member of bank and they have knowledge about credit, therefore it will guarantee the representative
Questionnaires are sent to respondents by Messenger of facebook
Table 0.7 Number of survey Number of surveys Percentage (%)
Number of answers are valid 180 97.8
Number of answers are not valid
Data analysis
Data collected through a survey questionnaire will be analyzed using SPSS software This approach aims to test the theoretical model presented in the dissertation, focusing on the factors influencing credit risk in personal lending at banks.
To ensure the reliability of the scale, the Cronbach's Alpha reliability test method should be employed to assess and refine the variables Variables with a corrected-total correlation coefficient below 0.3 should be eliminated, while a Cronbach's Alpha coefficient exceeding 0.6 indicates an acceptable level of reliability for the scale.
- EFA exploratory factor analysis to test the convergent and discriminant validity of the component boundaries in the model
+ The scale is accepted when the total variance extracted (Total Variance Explained) > 50%
+ Factor coefficient extracted Eigenvalue value > 1
-Research conduct to test the assumptions in the model, the multivariate regression model was tested at the 5% significance level.
RESULTS AND DISCUSSIONS
Introduction of VPBank
Established on August 12, 1993, Vietnam Prosperity Joint Stock Commercial Bank (VPBank) has evolved into a reputable financial institution in Vietnam, boasting a network of 233 branches and nearly 25,000 employees Recognized for its strong financial stability, VPBank was ranked by Brand Finance as one of the "Top 250 most valuable global banks," with a brand value of $502 million in 2020, reflecting a 41% increase from the previous year In 2021, VPBank received The Asian Banker’s "Banking Risk Management" award, marking its second win for excellence in risk management The bank has also been acknowledged for its innovative digital transformation, winning the "Typical Digital Transformation Bank" award for three consecutive years from 2018 to 2020, and was honored with the "Best Customer Experience" award in 2020 for its commitment to digitizing its services and processes.
In recent years, VPBank has emerged as a leader in social responsibility, actively engaging in community support initiatives alongside its business efficiency goals Since the onset of the Covid-19 pandemic in 2020, the bank has undertaken significant social security campaigns, including substantial donations to the Vietnam Fatherland Front Committee for epidemic control, a contribution of 60 billion VND to the Government's vaccine fund, and the provision of essential medical equipment such as five mobile medical examination trucks and 1,715 ventilators for the southern region VPBank's commitment to corporate social responsibility was recognized in 2020 when it was honored as the "Best Bank for Corporate Social Responsibility."
- CSR" by Asia money Magazine
In 2021, VPBank demonstrated resilience amidst the COVID-19 pandemic, raising approximately VND 369 trillion and achieving a credit balance of VND 384 trillion, reflecting an 18.9% increase from 2020 Additionally, the bank maintained a robust workforce of around 23,000 employees.
However, VBP is one of the leading banks with high bad debt ratio (more than 15,800 billion VND, an increase of 60% compared to 2020).
Analyzing factors affecting credit risk at VPB’s personal lending
Table 0.1 The age of interviewee
Source: Author’s calculation from survey data
In total of 183 persons, who answer my questionnaire:
-No one is above age 70
People in age 26-40 occupy the biggest percentage in total people answer the questionnaire
Position of interviewee at VPBank:
Table 0.2 Position of interviewee at VPBank
Age of interviewees 18-25 age 26-40 age 41-69 age Above 70 age
-People is other staff account 19%
-People is credit officers account 63%
-People is Deputy Head of Department account 10.9%
The majority of interviewees are credit officers, who are frequently surveyed due to their high qualifications and direct interaction with individual borrowers This focus ensures the accuracy and relevance of the information collected.
Table 0.3 Working seniority at VPBank
Working seniority Below 1 year 1-5 years Above 5 years
-People with working seniority below 1 year is 32.2%
- People with working seniority 1-5 years is 42.1%
- People with working seniority above 5 years is 25.7%
Most interviewee has 1-5 years working seniority This human resource is relatively young
A Testing the scale with Cronbach's Alpha
Cronbach's Alpha is an essential tool for refining observed variables, effectively eliminating those with a total correlation coefficient below 0.3 For optimal scale selection, a Cronbach's Alpha value of 0.5 or higher is recommended.
Table 0.4 Checking the reliability of each scale
Scale Mean if Item Deleted
Scale Variance if Item Deleted
Cronbach's Alpha if Item Deleted
The dissertation analyzes data using SPSS software, focusing on 24 observed variables, which include 6 independent variables and 1 dependent variable Initially, the study assesses reliability through Cronbach's Alpha, categorizing 20 specific observed variables into 6 groups The findings indicate that all observations exhibit a Cronbach's Alpha coefficient exceeding 0.6, with total variable correlation coefficients greater than 0.3, demonstrating satisfactory reliability.
The evaluation of scale reliability using Cronbach's Alpha revealed that all factor groups achieved coefficients exceeding 0.6, indicating their suitability for subsequent Exploratory Factor Analysis (EFA).
Table 0.5 Testing the confidence of scale of credit risk on personal lending
Cronbach's Alpha if Item Deleted
C Analyzing EFA exploratory factor for independent variables affecting credit risk on personal lending
With 20 observed variables of the scale included in the analysis of Principal Component extraction with "Varimax" rotation after testing the reliability of each factor, the dissertation analysis factor and achieved the results
-KMO = 0.755 > 0.5, so analyzing EFA exploratory factor is suitable
-Testing Bartlett’s has Sig = 0.000 < 0.05 so at 95% confidence the observed variables are correlated with each other Therefore, the results of EFA factor analysis are appropriate
Table 0.6 Summary of factor results
Factors Observed Factor loading Cronbach’s
With the results of Varimax rotation, it shows that all observed variables have transmission coefficients > 50%, resulting in no variables being excluded The variables are extracted into 6 factors as follows:
Group 1: “Business environment” include variables: BE2, BE1, BE3
Group 2: “Borrower’s financial ability” include variables: BFA1, BFA2, BFA3
Group 3: “Borrower’s ability to personal financial managements” include variables: BAMF2, BAMF3, BAMF4, BAMF1
Group 4: “Borrower’s capital use” include variables: BCUI1, BCUI2
Group 5: “Credit officer competence” include variables: COC4, COC2, COC1, COC3
Group 6: “Credit policy” include variables: CP2, CP4, CP3, CP1
The study reveals that six key factors—business environment, borrower’s financial ability, borrower’s financial management skills, capital utilization issues, credit officer competence, and credit policy—account for 60.375% of the data's variability, exceeding the required threshold of 50% However, 39.625% of the variability remains unexplained, indicating the influence of additional factors not addressed in this research, such as interest rates.
D Analyzing EFA for dependent variable “credit risk on personal lending”
The thesis analyzes four observed variables related to the credit risk scale in personal lending using exploratory factor analysis (EFA) The factor loading coefficients exceed 0.4, indicating strong relationships among the variables The extracted variance is 60.375%, surpassing the 50% threshold, and the Bartlett test yields a significance level of 0.000, confirming the validity of the factor model.
0.5, so the EFA factor analysis results are appropriate
The exploratory factor analysis (EFA) identified key factors influencing credit decisions, including the business environment, the borrower's financial ability, their financial management skills, capital utilization issues, the competence of credit officers, and the relevance of credit policies.
- BE (-) Business environment will have inverse impact on credit risk in personal lending at Vietnam prosperity joint stocks commercial bank
- BFA (+) Borrower's financial ability has a same impact on credit risk in personal lending at Vietnam prosperity joint stocks commercial bank
- BAMF (-) The good borrower’s ability to personal financial managements has an inverse impact on credit risk of personal lending at Vietnam prosperity joint stocks commercial bank
- BCUI (-) Using the capital for correct purpose will have inverse impact with credit risk in personal lending at Vietnam prosperity joint stocks commercial bank
- COC (-) Credit officer’s competence has inverse impact on credit risk in personal lending at Vietnam prosperity joint stocks commercial bank
- CP (-) Suitability of credit policy have an inverse impact on credit risk in personal lending at Vietnam prosperity joint stocks commercial bank
The relevant observed variables significantly influence the dependent variable, credit risk in personal lending, and should be included in subsequent analyses Correlation analysis will evaluate the suitability of these variables for the regression model Additionally, exploratory factor analysis (EFA) will be employed to validate the underlying assumptions.
BE, BFA, BAMF, BCUI, COC, CP The following are the factors used in the regression model to be calculated as:
Compute BE=MEAN (BE2, BE1, BE3)
Compute BFA=MEAN (BFA1, BFA2, BFA3)
Compute BAMF=MEAN (BAMF2, BAMF3, BAMF4, BAMF1)
Compute BCUI=MEAN (BCUI1, BCUI2)
Compute COC=MEAN (COC4, COC2, COC1, COC3)
Compute CP=MEAN (CP2, CP4, CP3, CP1)
F Assumption test about linear correlation coefficient
Before conducting linear regression analysis, it is essential to evaluate the correlation coefficient to determine the relationship between the independent and dependent variables, as well as to assess the correlations among the independent variables.
A high correlation coefficient between independent and dependent variables indicates a strong relationship between them.
+ If the correlation coefficient between the variables of the independent variable is large, it indicates that there is multicollinearity between them
Model R R 2 Adjust R 2 Standard error of estimate
Source from actual research a Independent variables: BE, BFA, BAMF, BCUI, COC, CP b Dependent variables: Credit risk on personal lending (CR)
The research model demonstrates a valid analysis with an R² value of 0.734 and an adjusted R² of 0.721, indicating that 73.4% of the variation in credit risk for personal lending is attributable to the independent variables included in the model This leaves 27.9% of the variation unexplained, highlighting the model's effectiveness in assessing the factors influencing credit risk.
% being influenced by variables outside the model
The testing results indicate an F-value of 71.129 and a statistical significance level of Sig = 0.00, which is significantly lower than the threshold of 0.005 This leads to the rejection of the hypothesis that the regression coefficients are zero, confirming that the linear regression model is reliable and well-fitted.
Table 0.8 Regression result of each variables
Standardized coefficient t Sig Collinearity statistics
B Std.Error Beta Tolerance VIF
The analysis of the coefficient results indicates that the independent variables—business environment, borrower’s financial ability, borrower’s personal financial management, borrower’s capital use issues, credit officer competence, and credit policy—are all significant at the 95% confidence level, with p-values less than 0.05 The coefficients (Beta) for these variables are -0.257, -0.173, 0.137, -0.165, -0.139, and -0.345, respectively, demonstrating that while borrower financial ability (BFA) has a similar impact on credit risk in personal lending, the other variables (business environment, borrower ability in financial management, borrower capital use issues, credit officer competence, and credit policy) exhibit an inverse relationship with credit risk Consequently, the independent variables significantly influence the dependent variable, establishing a regression model that illustrates the factors affecting credit risk in personal lending.
CR= -0.257*BE + 0.137*BAMF - 0.173*BFA – 0.165*BCUI – 0.139*COC – 0.345*CP
The most significant factor influencing credit risk in personal lending is credit policy, which has a Beta value of -0.345, indicating an inverse relationship with credit risk Specifically, a 1-unit increase in credit policy risk leads to a decrease in personal lending credit risk by 0.345 times, assuming other factors such as BE, BFA, BAMF, BCUI, and COC remain constant.
SOLUTIONS, RECOMMENDATION AND CONCLUSION
Solutions
5.1.1 If a Bank has a good personal credit policy, It will effectively control credit risks, create conditions for banks to selectively lend to customers with high repayment ability According to the survey, credit policy has the strongest impact on credit risk on personal lending at VPBank Therefore, VPBank should improve the credit policy on personal lending as follows:
To effectively develop its product policy, banks must conduct thorough market research to accurately gauge the demand for personal loans at different times Understanding that customer groups have diverse needs, banks should identify their target demographics to create tailored financial products Currently, VPBank should focus on laborers in the public and corporate sectors, as well as individuals with stable incomes in Vietnam, which enhances their ability to repay loans VPBank can offer personal loans at an attractive interest rate of 5.9% for one year or set rates slightly above the annual savings interest rate Additionally, implementing flexible interest payment options will cater to the varying financial circumstances of customers.
- Paying more attention to customer’s financial literacy
The ability of borrowers to manage their personal finances effectively is crucial for meeting their needs, achieving personal goals, and planning for the future Research indicates that strong personal financial management directly influences credit risk Consequently, banks must carefully evaluate borrowers' financial management skills when considering loan applications to mitigate potential credit risks.
When evaluating loan applications, it's crucial to consider the applicant's understanding of personal finance Customers with backgrounds in finance or banking, who have received formal education or training in personal finance, should be prioritized in the loan approval process.
Bank officers should prioritize consulting with customers on personal financial management to mitigate credit risk effectively When processing loan applications, credit officers must assist customers in preparing necessary documents and selecting loan products that align with their needs and financial management experience Additionally, banks should maintain close oversight during the capital usage phase, providing timely advice to customers when financial management issues occur, thereby enhancing their financial literacy and understanding.
-Advising customers in self-study and improving personal financial understanding through the introduction of useful programs and courses that bank staff know
- Requirements of customer’s own capital basing on the risk of personal loans
Surveys indicate that a customer's core capital significantly influences credit risk, as loans backed by core capital tend to be less risky Customers with core capital are generally more responsible in managing their loans and have suitable plans for utilizing the funds Consequently, banks should implement regulations that require customers to possess core capital to promote effective loan usage However, to prevent imposing excessive core capital requirements that could burden customers, banks must assess each customer's individual capital in relation to the specific risk characteristics of the loan.
-With a small loan, short term and customers have good credit history, there is no need to have requirement for core capital
Long-term loans are available for customers with strong credit histories and substantial collateral, allowing banks to offer competitive interest rates while requiring a solid core capital.
When dealing with long-term loans for large amounts, banks must exercise caution, particularly with untrustworthy customers It is essential for banks to maintain a substantial core capital to mitigate risks and incentivize borrowers to make timely repayments.
- Improving capacity of staff functioning personal lending
The competence of credit officers is crucial in managing credit risk associated with personal lending To enhance this competence, banks must implement policies focused on four key areas of improvement for credit officers.
Effective staff arrangement involves assessing and evaluating personnel to ensure optimal placement in roles, particularly in personal loans It is essential that staff members responsible for loan transactions, assessments, and management possess the necessary qualifications and skills Employees who do not meet these job requirements should be reassigned to more suitable positions within the organization.
Training and retraining are essential for credit officers, especially when new products or process changes are introduced Newly recruited staff must receive comprehensive training to understand their roles effectively Additionally, it is crucial to educate credit officers on professionalism and ethics, as the nature of their work can present various temptations.
- Recruitment: There are few positions that need to be recruited Recruitment should be based on job requirements to recruit the right people
To foster employee motivation and contribution, banks must implement a robust remuneration system and cultivate a positive work environment This involves not only competitive salaries and bonuses but also ensuring a transparent and supportive atmosphere that accurately evaluates staff capabilities.
Recommendations
To conduct the solutions above, banks may be had troubles by mechanisms and policies Therefore, the recommendations aim to increase the feasibility of the solution
To ensure a thriving economy, the government must stabilize the macroeconomic environment and maintain consistent policies A stable macro economy fosters opportunities for various sectors, enhancing business development and securing income sources for the populace This stability ultimately reduces credit risks associated with personal lending at banks, facilitating lending processes and delivering substantial benefits to financial institutions.
-Government should build a policy for financial education for citizens to improve understanding of personal finance Due to the fact that through a survey in
2016, it was found that Vietnamese people have weak personal financial management skills in the Asia-Pacific region and it will increase credit risk
The government must promptly upgrade citizen data to maintain consistency in population statistics This will enable the development of a mechanism that allows commercial banks to utilize this data for customer assessments However, it is crucial to uphold the principle of protecting individuals' privacy rights throughout this process.
For State Bank of Vietnam
The State Bank must enhance the legal framework governing lending activities, particularly focusing on personal loans It is crucial to establish comprehensive regulations that safeguard the legitimate interests of individuals utilizing the bank's lending services.
To enhance the integrity of the banking sector, the State Bank must bolster its inspection and supervision of commercial banks, ensuring compliance with legal standards and fostering fair competition Prompt and strict action against errors and fraud in banking operations is essential to safeguard stakeholder interests and promote a healthy environment for personal lending activities.
To enhance personal lending infrastructure, the State Bank should bolster support for commercial banks by improving the quality of their human resources This can be achieved through organized training and retraining programs at all levels, acting as a vital link that enables commercial banks to access high-quality training courses for their personnel.
Conclusion
With the desire to research and clarify the factors affecting credit risk in personal loans at VPbank, the study has completed with the following main contents:
Understanding credit risk in personal loans is essential for effective lending This article employs quantitative research to identify key factors influencing credit risk for individual borrowers The findings highlight six critical elements: the business environment, the borrower's financial capacity, credit policy, the competence of credit officers, the borrower's personal financial management skills, and the utilization of borrowed capital.
Based on the survey results, the study proposed solutions and recommendations to improve the quality of credit risk management at VPBank
Testing the assumptions reveals that various factors significantly influence credit risk in personal lending at Vietnam Prosperity Joint Stock Commercial Bank Specifically, the business environment negatively impacts credit risk, while a borrower's financial ability also plays a crucial role in mitigating it Additionally, a borrower's proficiency in financial management inversely affects credit risk, as does the appropriate use of capital Furthermore, the competence of credit officers and the suitability of credit policies are both essential in reducing credit risk in personal lending at the bank.
From the above research results, the thesis has proposed solutions and recommendations to improve the effectiveness of credit risk control at VPBank in the coming years
The primary limitation of this study is that the data is sourced exclusively from bankers, rather than directly from customer loan records, which means the findings only partially represent the credit risk associated with personal lending at banks.
The number of survey questionnaires is limited, so the opinions obtained from the survey are not objective and comprehensive
1 Ahmed, A., Takeda, C and Thomas, S., 2022 Bank loan loss provisions: a reexamination of capital management, earnings management and signaling effects
3 Chu Ngoc Thanh, 2019 Limiting credit risk at social policy bank Available at