INTRODUCTION
Problem statement
In recent years, the Vietnamese economy has experienced significant growth, particularly following the 2008-2012 economic crisis, leading to the evolution of commercial banks as crucial channels for capital supply Credit provision is a fundamental function of commercial banks, with interest income from loans serving as a primary revenue source According to KPMG's Vietnam Banking Survey 2013, loans and advances to customers represent over 50% of banking assets, with revenues from credit activities accounting for approximately half to two-thirds of total bank revenues.
Commercial banks often diversify their products and target markets to expand operations, but this growth comes with inherent risks, including credit, market, and operational risks (Golin & Delhaize, 2013) Among these, credit risk is the most significant, as it not only constitutes a substantial portion of the risks faced but also interacts complexly with other risk types When credit risk materializes, it can lead to substantial financial losses and damage the bank's reputation, eroding public trust in the banking system Consequently, the pervasive nature of credit risk has the potential to trigger broader financial or social crises.
A primary indicator of credit risk is the level of bad debt, with a high rate signaling a bank's inability to manage this risk effectively During a conference summarizing Vietcombank's financial results for the first half of 2015, Chairman Mr Thanh Nghiem expressed concern over credit quality and rising bad debt Notably, while credit growth reached 6.52%, it exceeded the average, highlighting potential underlying issues.
In 2014, bad debt at Vietcombank rose by 1.012 billion VND, a topic frequently discussed during the author's internship This recurring issue sparked the author's curiosity to explore the underlying causes and develop an effective credit risk management model.
Research objectives and questions
This research analyzes Vietcombank's current credit activities and assesses its credit risk management practices The primary objective is to provide answers to two key research questions regarding the bank's performance and strategies in managing credit risk effectively.
What do credit growth and bad debt of Vietcombank reflect?
Is it possible to build up an effective model of credit risk management for Vietcombank?
Research methodology
This research employs qualitative analysis to explore credit risk issues at Vietcombank, ultimately proposing a model to enhance loan granting decision-making Primary data was sourced from the bank's official website and annual reports, supplemented by credible articles from reputable financial institutions to reinforce the findings Additionally, an interview with a credit expert from Vietcombank's Bad Debt Handling Department provided valuable insights into the bank's credit operations.
Research structure
The research is structured into four key chapters, beginning with an introduction that provides a comprehensive overview of the topic, outlining its origins and the author's objectives for the study.
This article outlines a comprehensive research study on credit risk management in the banking sector, focusing on the Vietnamese banking industry The first chapter details the research tools utilized, while the second chapter establishes a theoretical framework for understanding credit risks and their management by commercial banks Following this, the analysis of Vietcombank's credit activities from 2012 to mid-2015 highlights challenges such as credit growth and a high bad debt rate The third chapter proposes effective strategies for improving credit risk management Finally, the conclusion summarizes the key findings of the research, reinforcing the importance of robust credit risk practices in banking.
THEORETICAL FRAMEWORK
Commercial banks in Vietnam
Commercial banks play a crucial role in the economy by providing essential financial services Defined as institutions that handle money and credit for profit, they accept public deposits for safekeeping and lend these funds to individuals and organizations in need (Leaf, 1927; Gobat, 2012) In the United States, commercial banks are characterized by their ability to offer federally insured deposits, pay interest to depositors, and provide residential and commercial loans while underwriting securities such as U.S Treasuries and bonds (Getter, 2016) In contrast, commercial banks in Asian countries often expand their offerings to include traditional banking services, investment banking, insurance, and asset management (Laeven, 2005).
Commercial banks, though defined variably across countries, are primarily categorized into two main functions: primary and secondary functions (Nguyen, 2016) Each function encompasses specific activities that characterize the roles and services provided by these financial institutions.
• Accepting deposits from fund savers
(current account deposits, fixed deposits, and saving account deposits)
• Making loans and advances in form of cash credit, demand loans, overdraft, and short-term loans
• Investment: in securities such as
Government securities, other approved securities, and other securities
• Discounting bills of exchange or bundles
• Agency functions: transferring funds, collecting funds, making payments of tax, insurance and bills as per the direction of customers, purchasing and selling securities, collecting dividends, etc
• Performing general utility services such as locker facility and underwriting securities
Table 1: Commercial banks’ primary and secondary functions (Academic Collective, 2016)
Commercial banks play a crucial role in both the national banking system and the overall economy due to their unique characteristics and functions As highlighted by Olokoyo (2011), they are key players in capital savings, mobilization, and financial allocation, which significantly contribute to economic growth and development The importance of commercial banks can be summarized in three main aspects.
11 dimensions, including information processing, risk sharing, and money creation (Mehta & Fung,
In 2008, it was noted that banks gather information from both depositors and borrowers to assess the financial health and capital flow of transactions When lending to borrowers, banks share the risk with depositors in case of default (Martin et al., 2018) Additionally, commercial banks facilitate money supply through credit creation, influenced by primary deposits from savers and secondary deposits related to reserve requirements (Academic Collective, 2016) By fulfilling this role, commercial banks significantly assist the government in managing and generating money supply for its social, economic, and political expenditures (Mehta & Fung, 2008).
2.1.2 Operation of commercial banks in Vietnam
In Vietnam, commercial banks can be categorized into wholesale and retail banks, although many offer both services Wholesale banks primarily focus on corporate lending, while retail banks cater to individuals and small businesses For example, ANZ Banking Group, recently acquired by Shinhan Bank, stands out as the only foreign bank in Vietnam primarily targeting retail banking In contrast, most foreign banks concentrate on commercial corporate and wholesale banking, often funding foreign direct investment (FDI) projects rather than supporting domestic private sector enterprises.
In Vietnam, commercial banks are primarily classified into three categories: State-owned commercial banks (SOCBs), Joint-Stock Commercial banks (JSCBs), and wholly foreign-owned banks (WFOBs) (Tran et al., 2015) As of July 2018, this classification highlights the diverse ownership structures within the country's banking sector.
12 banking sector has 4 SOCBs, 31 JSCBs, and 8 WFOBs 1 which are supervised and regulated by the State Bank of Vietnam (SBV) as the Central Bank (International Trade Administration,
2018) The characteristics of each type of commercial banks are summarized in the table below:
100% or majority-owned by the Government (or SBV)
Traditional customers are state-owned enterprises (SOEs) and non-SOEs
More diversified shareholding structure than SOCBs since they are listed on the stock market
Focusing on making loans to Small & medium enterprises (SMEs) and retail banking
MB Bank, SCB, EIB, VIB, SHB
Present in Vietnam since early 1990s after the country opened the doors for foreign business
Strictly complying with Vietnamese laws
HSBC, Shinhan, Standard Chartered, Woori
Table 2: Types of commercial banks by ownership (Tran et al., 2015)
1 List of commercial banks by ownership (See more in Appendix 1)
State-Owned Commercial Banks (SOCBs) dominate the Vietnamese banking sector, controlling over 44% of total assets Joint-Stock Commercial Banks (JSCBs) follow closely with a 42% share, while foreign banks account for the remaining 11% (Tran et al., 2015).
Figure 1: Vietnamese banking sector by assets (Tran et al., 2015)
Despite their smaller number, State-Owned Commercial Banks (SOCBs) dominate the Vietnamese banking sector, holding the largest market share The four major SOCBs in Vietnam are Agribank, Vietinbank, BIDV, and Vietcombank, as reported by the State Bank of Vietnam in 2016.
Vietnamese banking sector by assets
SOCBsJCSBsForeign banksOthers
Credit risk in Vietnamese banking system
Credit risk is a critical aspect of commercial banking, arising from the core functions of accepting deposits and issuing loans Banks face more risks than other financial institutions, with credit risk being the most significant According to Van Greuning & Bratanovic (2009), about two-thirds of a commercial bank’s balance sheet is tied to risk management This risk primarily stems from lending activities, including loans to individuals and organizations, financial guarantees, letters of credit, investment portfolios, and credit acceptance (Bandyopadhyay, 2016) Notably, loans to individuals and corporations represent the major sources of credit risk, constituting between 50% to 75% of a bank's total assets (Papin, 2014).
Credit risk is defined in various ways by economists, policymakers, and researchers Rose (2002) describes it as the likelihood that a bank's assets, such as loans, may lose value or become worthless The Basel Committee on Banking Supervision defines credit risk as the potential for a borrower to fail to fulfill their obligations as agreed with the bank Sironi & Resti (2005) characterize credit risk as the possibility that an unexpected change in a counterparty's creditworthiness could lead to an unforeseen change in the market value of associated credit exposure Additionally, Koch & MacDonald (2009) associate credit risk with the quality of individual assets and the likelihood of default, indicating that it involves potential variations in net income and the market value of equity due to nonpayment or delayed payment of principal and interest.
Cash flow problems and liquidity issues at banks can be attributed to 15 key factors, as highlighted by Sironi & Resti (2005) According to the State Bank of Vietnam (SBV) in the Act of 493/2005/QDDNHNN, credit risk is defined as the potential for banks to incur losses when borrowers either refuse to repay or fail to fulfill their payment commitments.
Credit risk arises when individual or corporate borrowers fail to repay their loans, leading to financial losses on a bank's balance sheet Such losses can severely impact a bank's profitability and liquidity, particularly during periods of significant depositor withdrawals However, engaging in lending activities remains appealing for banks, as the interest rates on loans are considerably higher than those on deposits, making it challenging for commercial banks to eliminate lending from their service offerings.
Credit risk, a crucial aspect of financial risk, encompasses two primary sub-risks: transaction risk and portfolio concentration risk These risks can arise from issuers or counterparties, highlighting the importance of understanding their sources in financial management.
Figure 2: Types of credit risk at commercial banks
Transaction risk in lending activities, as defined by the Comptroller of the Currency (1998), arises during loan disbursement and credit administration when banks violate their credit policies This risk is closely linked to the effectiveness of information systems and controls, the quality of operational procedures, and the integrity and capability of employees It can occur when bank staff are reluctant or fail to properly assess borrowers' creditworthiness and select suitable clients Additionally, a lack of hedging strategies against credit defaults and an inability to manage and resolve bad debt issues can further exacerbate transaction risk for banks.
In 2018, it was highlighted that banks face increased transaction and credit risks when their information systems fail to adequately identify borrower entities, facilities, or financial statements This lack of information can lead to significant financial losses, particularly if banks extend loans to corporations on the verge of bankruptcy.
Portfolio concentration risk occurs when a bank's lending portfolio is heavily exposed to a small group of clients, making it difficult to achieve diversification (Grippa & Gornicka, 2016) This lack of diversification increases the likelihood of instability not only for the banks but also for the entire banking system Historical examples include the financial troubles faced by U.S banks in the early 2000s due to significant exposures to large borrowers like Enron and WorldCom Additionally, the global financial crisis was exacerbated by concentrated mortgage portfolios during the housing crisis, leading to numerous bank failures (Grippa & Gornicka, 2016).
Commercial banks cannot eliminate credit risk, as lending activities are a primary source of their income Consequently, effective credit risk management is essential for minimizing credit risk and safeguarding banks against significant financial losses.
2.2.3 Credit risk and bad debt
Credit risk is closely linked to bad debt, which is a primary cause of credit risk for banks Bad debt refers to amounts owed by debtors that cannot be collected, rendering them worthless to creditors An increase in bad debt poses significant challenges for banks, impacting their profitability and their capacity to repay depositors Another contributor to credit risk is non-performing loans (NPLs), defined as loans that are overdue for more than one year without any repayments Both bad debt and NPLs are critical indicators of credit risk, and their ratios can be calculated to assess the credit risk faced by banks.
Bad debt ratio = Bad debts/ Gross customer loans
Non- performing loans (NPL) ratio = Non- performing loans/ Gross customer loans
Credit risk in commercial banks can be assessed through the bad debt ratio and non-performing loans (NPLs) ratio, which are influenced by both internal and external factors According to Akter & Roy (2017), banks that impose higher lending interest rates and engage in excessive lending practices tend to experience elevated levels of NPLs Consequently, policymakers must consider these internal and external influences when managing credit risk to effectively address the issues of high NPLs and bad debt.
2.2.4 Importance of credit risk management at banks
Credit risk significantly influences banks' profitability and their capacity to repay depositors Effective credit risk management is essential for maximizing a bank's risk-adjusted return by ensuring that credit exposure remains within acceptable limits.
Effective credit risk management is essential for commercial banks to balance profitability while ensuring the stability of the banking system The level of credit risk is influenced by various factors, including the nature of borrowers—whether individuals or organizations—the purpose of the loans, and their maturity periods To accurately assess credit risk, banks must evaluate these elements, as they are crucial for managing and minimizing potential risks Employing risk assessment techniques to identify the credit risk associated with each loan and borrower allows banks to implement strategies for effective loan portfolio management.
2.2.5 Current situation of credit at Vietnamese commercial banks
A study by Muhamet & Arbana (2016) reveals that 98% of bank failures stem from poor asset quality, primarily due to inadequate loan policies, non-compliance with regulations, and insufficient supervision, which contribute to a detrimental credit culture Colquitt (2007) defines a bank's credit culture as the overall attitude and approach towards credit management.
Credit culture in banking refers to the relationship between banks and their customers, significantly influenced by management's attitude toward credit risk It aligns credit risk objectives, policies, and strategies, fostering a cohesive understanding of lending practices across all levels of the organization According to Barr & McWhorter (1992), effective credit culture is established through clear communication from top management to all staff, ensuring comprehensive awareness of lending policies A robust credit culture enhances credit risk management not only for individual banks but also strengthens the entire banking system through mutual support in the interbank market (Guseva & Rona-Tas).
The process of developing a strong credit culture is presented in Figure 5:
Figure 3: Credit culture establishment process (McKinley & Barrickman, 1994)
Credit risk and credit risk management in Vietnamese banking sector
2.3.1 Key players in credit market
As of July 2018, the Vietnamese banking sector comprises four State-Owned Commercial Banks (SOCBs), 31 Joint Stock Commercial Banks (JSCBs), and eight Wholly Foreign-Owned Banks (WFOBs), all regulated by the State Bank of Vietnam (SBV), the country's central bank Notably, three SOCBs, including Vietinbank, play a significant role in the commercial banking landscape.
Development of Vietnam (BIDV), and Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), dominates Vietnamese credit market (Figure 7)
Figure 4: Total assets and credit portfolio of three Vietnamese biggest commercial banks at 30 June 2017
In 2017, Vietnam's three largest banks experienced substantial credit portfolio growth, averaging 15% (Vietnambiz, 2017) Despite this increase in credit, the bad debt ratios for these banks also rose; however, they showed a marked improvement compared to 2014/2015 Specifically, BIDV's bad debt ratio decreased from 2.3% to 1.93%, Vietcombank's fell from 2.97% to 1.51%, and Vietinbank's declined from 1.5% to 1.17%.
Total assets and credit portfolio of three Vietnamese biggest commercial banks at 30 June 2017 (billion VND)
Figure 5: Bad debt ratio of Vietnamese commercial banks (Vietnambiz, 2017)
Vietnam's largest banks are increasingly focused on maintaining a healthy credit environment and managing bad debt ratios This heightened attention to credit risk management is crucial for ensuring the overall stability and soundness of their operations, as evidenced by positive trends in bad debt ratios and credit growth.
The effectiveness of credit risk assessment and management is heavily reliant on the identification of credit risk sources Akter & Roy (2017) highlight that the level of credit risk in banks stems from both internal and external environments Internal factors encompass bank-specific determinants such as management inefficiencies, poor credit management practices like insider lending, unbalanced sectarian lending, and speculative lending (Naceur & Omran, 2011) In contrast, external factors are categorized into three groups, including general macroeconomic factors such as inflation and unemployment rates.
Bad debt ratio of Vietnamese commercial banks
Credit risk management is essential for commercial banks as it allows them to identify, measure, mitigate, and prevent the potential negative impacts of credit risk This process involves analyzing 26 directional factors, such as GDP and GDP per capita, along with market conditions like interest rates and stock market indices (Figlewski et al., 2012).
The credit risk management systems in Vietnamese commercial banks can be classified as either centralized or decentralized A centralized system involves a single organizational unit, typically led by a Chief Risk Officer, overseeing the entire risk management process, which ensures a high degree of hierarchical authority (Aksel, 2017) In contrast, a decentralized system allows individuals closest to the risk to have a greater influence in decision-making, characterized by increased participation and lower hierarchical authority (Lindè & Wallgren, 2012; Andrews et al., 2009) While decentralized systems can be more efficient for small banks by saving time and costs, there is a growing preference for centralized structures among banks due to the need for better coordination and compliance with regulatory requirements (Alonso et al., 2008) Centralization also helps to mitigate potential internal conflicts, thereby enhancing productivity and overall performance (Andrews et al.).
In case of Vietnam, commercial banks are encouraged to conduct centralized credit risk management based on market conditions and the unique characteristics of Vietnamese banking system:
Head office: a department of credit management headed by Chief Risk Officer
Bank branches: Specific team of sales, credit analysis and operation which work together in credit approval process.
RISK MANAGEMENT OF JOINT STOCK COMMERCIAL BANK FOR
Overview of Vietcombank
Established in 1963, Vietcombank (Joint Stock Commercial Bank for Foreign Trade of Vietnam) is one of Vietnam's pioneering commercial banks and has been publicly listed since 2009 Over more than five decades, it has become one of the country's four largest banks, alongside Vietinbank, BIDV, and Agribank Vietcombank has received numerous accolades, including recognition as a “Top 1,000 Leading Asian Brand” by Nielsen and Campaign Asia Magazine, and being named the “Best Commercial Bank in Vietnam” at the Asian Banker Summit Additionally, it ranks 62nd among the “Top 500 Strongest Banks in Asia Pacific” according to the Asian Banker The bank's achievements extend beyond its product offerings and customer service, reflecting its commitment to employment relations and sustainable development, exemplified by its honor as the “Enterprise of the Year” in 2016.
28 for Employees”, showing bank’s outstanding efforts to improve benefits and working environment for employees
Since its inception, Vietcombank has played a crucial role in stabilizing and growing Vietnam's economy, serving as a key foreign trade bank with a significant influence on both national and international financial landscapes By the end of 2015, the bank boasted over 400 branches, including those overseas, along with a vast network of more than 2,100 ATMs and 49,000 points of sale across the country Collaborating with approximately 1,800 banks from 155 countries, Vietcombank leverages advanced technology to enhance its diverse product offerings, including Digital Lab, Internet Banking, VCB Money, SMS Banking, and Phone Banking, thereby simplifying and enriching the banking experience for its customers.
Table 4: Vietcombank’s financial figures from 2012 to 2017 (Vietcombank, 2018)
Vietcombank has demonstrated impressive performance growth primarily through its deposit-taking and lending activities From 2012 to 2017, customer deposits surged by nearly 20%, totaling VND 708.5 billion Additionally, the bank's lending activities saw a positive increase of 17.9%, reflecting its robust financial health and commitment to serving customers effectively.
2016, reaching approximately VND 543.4 billion The ratio of loans to deposits has been reduced yearly, associated with continually decrease in non-performing loan ratio from 2.4% in
2012 to 1.14% in 2017, showing banks’ effort to control credit risk and avoid bad debt
Vietcombank's profit margin illustrates the evolving income trends within Vietnamese commercial banks, as evidenced by a decline in net interest income from 2.99% in 2012 to 2.66% in 2017 In contrast, non-interest income, primarily from fees and commissions, has surged with an average growth rate of 25% (Vietcombank, 2018) This shift indicates Vietcombank's growing focus on non-traditional activities such as securities trading and foreign exchange, mirroring a broader global banking trend that emphasizes fee-for-service models and a diversification of products, including derivatives and foreign exchange (Baek et al., 2015).
Since the late 20th century, Vietnam's openness to international business has significantly expanded opportunities for local banks like Vietcombank However, this influx of international banks has intensified competition in the banking sector, creating substantial challenges for local institutions As a result, local banks are under increasing pressure to enhance their services and products to meet the evolving expectations of customers.
Vietcombank aims to establish itself as the leading commercial bank in Vietnam by 2020, aspiring to rank among the top 100 financial institutions in Asia and the top 300 financial corporations globally The bank's strategic objectives for this period focus on achieving significant growth and enhancing its market position.
Rank 1 st in retail banking and 2 nd in wholesale banking by maintaining and developing local market while still select and develop international market.
Best bank in term of profit
Best bank in term of customer satisfaction
Best bank in term of human resource quality
Best bank in risk management
The specific strategic target of Vietcombank in 2018 is presented in Figure:
Capital mobilization from economy Increased by 15%
Credit outstanding balance Increase by 15%
Profit before tax VND 13.3 trillion
Table 5: Vietcombank’s strategic target for 2018
Current credit performance
Lending activities of Vietcombank can be broken down based on different customers, including individuals, small & medium enterprise (SMEs), and corporations According to Vietcombank
(2018), more than half of Vietcombank’s loans are made to corporations, followed by individuals with 32.7% and SMEs with 9% (Figure 11)
Figure 6: Vietcombank’s loan breakdown by customers
VCB has observed a shift in loan distribution, with a growing emphasis on individual lending alongside corporate clients The bank's focus on retail banking is driven by Vietnam's large population and economic growth, which present significant opportunities for development Notably, Weldon et al (2015) highlight that only 20% of Vietnam's population holds a bank account, and a mere 3% possess a credit card, underscoring the promising potential of the retail banking sector for VCB.
In fact, retail banking has been concerned by VCB since 2016, by 2017, the bank’s credit section grew by 17% against 2016, making it the leading role in the credit market.
Credit risk
3.3.1 Bad debt and non-performing loans
Credit risk is closely linked to bad debt, which is a primary factor contributing to banks' credit risk Recent statistics reveal that Vietcombank (VCB) has successfully reduced its non-performing loan ratio from 2.4% in 2012 to just 1.14% in 2017, a figure notably lower than that of other banks like BIDV, which had a ratio of 1.93% in the same year Looking ahead to 2018, VCB aims to maintain its low bad debt ratio, projecting that it will not exceed 1.5% (Vietcombank, 2018).
In accordance with Decision No 493/2005/QD-NHNN issued by the State Bank of Vietnam (SBV) in 2005, Vietcombank classifies its loans into five categories: current (1), special mentioned (2), sub-standard (3), doubtful (4), and loss (5) The SBV mandates that all commercial banks establish specific provisions for these loans As outlined in Decision No 02/2013/TT-NHNN, the specific allowance for credit risk is determined by loan grading and the corresponding allowance rate applied to the principal outstanding as of November 30, with collateral values deducted The allowance rates for the loan categories are set at 0% for group 1, 5% for group 2, 20% for group 3, 50% for group 4, and 100% for group 5 Loans classified as group 3 and 4 are at risk of becoming bad debts, while group 5 loans represent debts that are uncollectible and thus deemed worthless to Vietcombank.
Vietcombank’s loan group has significantly changed over years The latest statistics show that in
2017, 98% of VCB loan fell in group 1, meaning that most of loans are highly collectable with little sign of bad debt (Vietcombank, 2018) The quality of credit has been improved strongly
By the end of 2017, Group 2's debt decreased by 35% compared to 2016, yet Vietcombank (VCB) continued to allocate significant resources for provisions and allowances for credit loss to mitigate borrower default risks In that year, VCB's provision allowances for credit loss reached VND 8.1 trillion, maintaining a high PACL/bad debt ratio of 130.7%, significantly up from 98% in 2014 This indicates VCB's robust capability to manage default events among debtors Notably, Vietcombank stands out among national commercial banks as the only institution fully prepared for credit risk, having been recognized as the "best bank for credit management" by the Asian Banker Summit in 2016.
Effective management of bad debt is crucial for the financial health of banks, particularly in Groups 3, 4, and 5 Vietcombank (VCB) recognizes this significance, as efficient bad debt management allows the bank to unlock billions of VND for reinvestment, fostering a robust credit environment and enhancing its competitive edge in the global market VCB addresses bad debt through its own credit policies and support from the State Bank of Vietnam (SBV), implementing various strategies through its debt handling department at both headquarters and branches to maximize recovery efforts before seeking government assistance as a last resort.
3.3.2 Potential factors causing credit risk
Vietcombank stands out as the bank with the fastest credit growth and the lowest bad debt ratio in the industry Recent statistics reveal a consistent decline in its non-performing loan ratio, dropping from 2.4% in 2012 to just 1.14% in 2017, a figure notably lower than competitors like BIDV, which reported a 1.93% ratio in the same year Looking ahead to 2018, Vietcombank aims to maintain this impressive performance, projecting that its bad debt ratio will remain below 1.5%.
Despite Vietcombank's positive performance, the bank continues to face credit risk challenges due to persistent bad debts and non-performing loans Both internal and external factors contribute to the complexities of credit risk management Internally, issues such as management inefficiencies, poor credit practices, and unbalanced lending contribute to risk, while external factors include macroeconomic conditions, directional indicators like GDP, and market factors such as interest rates For instance, during the global economic downturn from 2008 to 2010, the State Bank of Vietnam implemented monetary policies that spurred GDP growth from 6% to 7.5% and significantly boosted banking sector credit expansion However, by 2013, credit growth sharply declined to around 12%, and high levels of bad debt emerged due to deflationary pressures that hampered consumption and investment Although the problem loan rates improved by 2014, thanks to the effective operations of the Vietnam Asset Management Company, internal factors at Vietcombank remain critical in understanding its credit risk landscape.
The incompetence of the staff’s knowledge: The staffs working daily on credit activities lack the understanding of the credit culture of Vietcombank The incompetence of
35 knowledge and experience results in the staff’s ability to evaluate and process the information of loan application, incorrect assessment of customers, unsuitable loan amount, interest rate and loan maturity
The bank's credit policy mandates that each credit employee must secure a specific loan amount from current or prospective customers monthly Employees earn commissions for every loan they successfully facilitate, which raises concerns about the morality of staff practices.
In the banking sector, an unspoken "silent rule" suggests that failing to meet loan quotas may lead to job loss, creating pressure on staff Many employees struggle to identify potential borrowers while ensuring the credit quality of approved loans This pressure often leads to the neglect of compliance in the loan granting process, as they rush to expedite applications Consequently, this issue poses a significant challenge for banks in managing these compliance risks effectively.
The loosening control of top management in the loan granting process can lead to significant credit risks, as staff require managerial approval for final decisions When top managers neglect to verify and review these decisions, the potential for financial loss increases Additionally, after loans are granted, staff are expected to monitor customer situations to identify any potential losses; however, this critical step is often overlooked Effective supervision by managers is essential to ensure that credit activities are conducted efficiently and to prevent moral hazards in the granting and collection of debts.
The need of a more working credit risk management model: Mr Thanh in the quarter meeting raised the assumption for the bad debt rate with the high credit growth: whether
Vietcombank's current credit risk model may no longer be suitable for the rapidly evolving banking industry, prompting a need for reevaluation by top management This necessitates a comprehensive restructuring of credit risk management in the coming years, as outlined in the bank's 2014 annual report The goal is to enhance the bank's capabilities in actively monitoring and controlling customer-related information and associated loans.
Credit risk management
Vietcombank has implemented a centralized CRM system, as recommended by SBV, to integrate risk management, sales, and operations, thereby reducing credit risk and enhancing staff expertise The bank's credit risk management structure consists of three levels: the Risk Control Committee, the Credit Committee, and the Functional Departments located at both the head office and branches.
The Risk Control Committee is tasked with formulating credit and Credit Risk Management (CRM) policies, while the Credit Committee oversees the implementation of credit programs and ensures compliance with legal standards Functional departments adhere to the Risk Control Committee's guidelines, with the Sales department tailoring credit products to attract customers, and the Operations department managing loan documentation legally before passing it to Credit Risk Management This process ensures that the assessed credit risk aligns with the bank's risk appetite.
37 outstanding credit applications, decision will be made at the head office and by Credit Committee.
Since 2003, Vietcombank has implemented a credit rating model, developed in collaboration with the World Bank, and continuously refined it with a customer-centric approach The bank integrates its internal rating system with independent assessments from credit rating agencies to enhance loan decision-making However, the utility of these independent ratings is limited, as they primarily focus on publicly traded companies, leaving many of Vietcombank's key clients—state-owned enterprises—outside their scope As Vietcombank aims to increase individual credit growth in the coming years, the emphasis shifts towards its internal rating model, crafted by the Risk Control Committee to better assess creditworthiness in alignment with its strategic objectives.
Vietcombank's Vice Managing Director, Mr Nguyen Van Tuan, emphasized the importance of monitoring customer credibility and credit levels to enhance profitability The bank has dedicated its resources to developing an internal scoring system aimed at optimizing credit activities.
Support in credit decisions: It helps to enhance the accuracy and effectiveness of the loan granting decisions, to provide supportive means for saving time, costs and reducing human errors
Management of credit risk: It is undeniably a tool to assess credit risk level of borrower
Identifying "good" and "bad" customers is essential for assessing default risk, as it involves integrating credit policies, cultures, and programs to determine acceptable risk levels This approach aligns with the principles of prudence, supports overall business strategy, and adheres to national banking regulations.
Effective customer service and management rely on a robust model that establishes a comprehensive customer information database When a borrower faces a problematic loan, it is crucial to carefully assess and categorize their other loans within the portfolio In contrast, borrowers with high credit ratings should receive preferential treatment in future transactions.
Establishing bad debt provisions and allowances is crucial for banks, as it clarifies the necessary measures to prevent defaults Additionally, it minimizes the need for problem loan allowances by ensuring that high credit loans are secured with valuable collateral assets.
Vietcombank utilizes advanced IT solutions and a sophisticated credit rating model to effectively manage diverse data from customers' operational activities and credit portfolios This integration enhances the organization of information and facilitates the scientific generation of reports, streamlining the reporting process.
Vietcombank employs an internal credit rating model featuring two distinct scoring schemes tailored for individual/household customers and enterprises While both schemes assess credit scores based on financial and non-financial factors, they utilize different criteria for evaluation The credit scores, which are measured on a scale of 100, enable Vietcombank to assess customer creditworthiness and categorize loans accordingly.
The model to score creditworthiness of individual/ household borrowers includes criteria of customer’s personal information and the relationship with the bank The final credit score is computed as:
Individual credit score= 0.4* Final score of personal information + 0.6* Final score of relationship with bank
Table 7: VCB’s credit scoring for individual clients (Vo, 2015)
Bank credit policies mandate that individual credit ratings must be updated at least every three months This regular assessment is crucial for promptly identifying any changes in credit risk, allowing the bank to implement timely measures to mitigate potential adverse effects Additionally, corporate clients undergo a similar credit scoring process to maintain accurate risk evaluations.
Financial information is primarily sourced from the company's financial reports, which include the mandatory Profit and Loss statement and Balance Sheet While the Cash Flow report is optional, Vietcombank's information system can automatically generate it using data from the other two reports Additionally, the financial criteria in these reports must adhere to the standards established by the Ministry of Finance, specifically under Decision 200/2014/TT-BTC.
2014) It makes it more convenient for the bank to collect the necessary financial figures by the
IT system There are 16 norms of financial criteria classified into five groups
Table 8: VCB’s financial scoring group
The criteria outlined encompass all dimensions of the company's financial performance Vietcombank determines the appropriate weighted ratios based on the specific nature of each borrower's business, rather than applying a uniform weighted average for the norms.
Non-financial information used to compute the debtor’s credit scores is qualitative analysis of
Management quality refers to a company's performance under the guidance of top managers, the effectiveness of its internal control environment, and the viability of future plans as directed by the Board of Directors.
Credibility in transactional relationships can be assessed by analyzing a firm's historical loan repayment records, transaction frequency, and deposit amounts at Vietcombank This evaluation allows the bank to form a general understanding of the firm's trustworthiness.
Borrowers may achieve improved credit scores if they are part of a thriving industry or possess a strong regional reputation Additionally, their market position and competition are significant factors that influence their creditworthiness.
3.4.4 VCB’s credit risk management SWOT analysis
The leading bank in fully utilizing financial reports in scoring the credit risk
A well-functioning IT system to calculate the credit scores
Lacking a logically specific estimate of the bank’s capability to cope with problem loans
The non-financial criteria for Corporate Rating model are mainly based on
A fair model of quantitative and qualitative analysis
The convenience to compare the credit risk of customers expert’s judgement
Collateral assets are not considered in Individual Rating model
Difficulty in scoring company working in many sectors
The closer step to the international credit rating benchmark with the support from SBV
Frauds from financial reports of corporate customers leads to the incorrect credit scores
Solutions to current credit risk issues
3.5.1 Comprehensive individual credit risk management approach
To enhance the assessment of individual creditworthiness, it is recommended to integrate the collateral asset rating with the borrower's credit rating for a more informed credit decision This approach involves evaluating collateral assets based on a three-group scoring system, with a total score out of 300 The cumulative score will then be classified into credit categories A, B, or C Finally, a matrix combining the credit rating and collateral asset rating will guide the decision-making process for loan approvals.
Table 10: Comprehensive individual credit risk management approach
Scores Collateral rating letter Analysis of collateral asset
Table 11: Categorization of collateral scoring
The quality of credit is determined by the interplay between credit ratings and collateral ratings, which significantly influences a bank's lending decisions based on its risk appetite and the prevailing economic conditions During economic booms, banks may be more willing to extend loans with credit qualities ranging from "Excellent" to "Average" to capture market share Conversely, in times of recession, banks like Vietcombank may tighten their lending criteria, focusing on maintaining healthy profits by approving loans solely for individuals demonstrating "Excellent" or "Good" creditworthiness.
3.5.2 Corporate credit risk management approach
The primary concern regarding Vietcombank's Corporate Credit Risk Management Model is the inadequate link between the company's final credit rating and the bank's capital assessment for default provisions This disconnect poses a risk to Vietcombank's ability to meet its obligations to depositors, especially in the event of a single or widespread borrower default, raising questions about the bank's capacity to repay its stakeholders.
47 its depositors and performs other responsibilities in such financial distress with its available capital
In recent years, the State Bank of Vietnam (SBV) has aligned its credit risk management practices with international standards set by the Basel Committee since 2010 This effort was formalized with the issuance of Circular 24/TT-TTGSNH5 in 2014, which mandates commercial banks to adopt Capital Adequacy Standards under Basel II Vietcombank has taken the lead in this initiative, transforming its operations to meet international standards and serving as a model for other banks However, the bank continues to face challenges in integrating the capital adequacy requirements of the Basel II framework with its corporate credit risk management model.
VCB's internal rating model should align with international regulations like Basel to enhance credit risk management This alignment ensures that the bank is adequately protected in the event of a default, establishing a robust framework for assessing and managing credit risks effectively.
Vietcombank assesses the creditworthiness of corporate customers and the associated credit risk of loans using a rating model, which classifies loans into one of five categories Following this classification, the bank calculates the necessary allowances for problem loans based on the specific allowance rates for each group This process of loan classification and allowance computation adheres strictly to the regulatory framework established by the State Bank of Vietnam (SBV).
Vietcombank determines the risk weight of loans in accordance with Circular 13/TT-NHNN (2010), taking into account the collateral assets associated with each loan This process allows the bank to accurately calculate the Risk-Weighted Assets (RWA) With a minimum Capital Adequacy Ratio (CAR) of 9% mandated for all commercial banks, Vietcombank can efficiently assess its capital requirements.
48 minimum capital charge for the bank against the loan to sufficiently operate in the market
The internal auditing team at Vietcombank closely monitors the entire loan granting process and ensures compliance with a minimum Capital Adequacy Ratio (CAR) of 9% to mitigate unexpected risks The State Bank of Vietnam (SBV) acts as a supervisory authority, regularly assessing Vietcombank's adherence to credit policies, credit ratings, provisions for bad debts, and loan classifications as outlined in Decisions 457/2005/QĐ-NHNN and 493/2005/QĐ-NHNN This oversight is crucial for evaluating the effectiveness of the internal auditing team and for maintaining the bank's management practices to uphold the required CAR.
Vietcombank should prioritize market transparency to foster a competitive banking environment in Vietnam Public disclosure of vital information, such as capital adequacy, credit risk profiles, and assessments, is essential This accessible data serves as a crucial resource for the State Bank of Vietnam (SBV) to refine and enhance risk regulations, ultimately improving the quality of the banking sector on both regional and international levels.
To maintain the required 9% Capital Adequacy Ratio (CAR) for a 1 billion VND loan, Vietcombank must ensure its available capital exceeds 180 million VND to mitigate credit risk from Company A Following a thorough examination of Company A's credit aspects by the internal auditing team, the State Bank of Vietnam (SBV) can review the bank's compliance procedures throughout the year to confirm capital adequacy without the need for intervention Additionally, by year-end, Vietcombank is required to disclose information regarding its capital structure, detailing the sources of its capital and the frequency of its capital transactions.
The bank has increased its capital to achieve a 9% Capital Adequacy Ratio (CAR), while also evaluating the average credit risk across various industrial sectors where its corporate clients operate Additionally, the assessment of credit risk involves a detailed examination of the internal rating model, including any adjustments made in response to the State Bank of Vietnam’s updated regulatory framework This credit rating model is aligned with the three pillars of the Basel II framework, ensuring that each component interconnects to provide the most reliable information, as changes in one area can significantly impact the others.
To successfully implement the corporate credit risk management model, Vietcombank must navigate several key implications for its operations As the bank seeks to expand through credit growth, which enhances asset value and risk-weighted assets (RWA), it is crucial to maintain capital adequacy to support borrower credit risk With a minimum capital adequacy ratio (CAR) of 9%, Vietcombank needs to effectively balance capital raising and utilization While increasing capital can improve this ratio, the bank must have a solid business plan to generate earnings; otherwise, shareholder pressure for timely dividends may arise Furthermore, investing in staff training and effective business strategy communication is essential to enhance employee performance in credit management and ensure transparency within the internal auditing team Finally, Vietcombank acknowledges the necessity of a robust information system to manage customer data and facilitate information disclosure effectively.
CONCLUSION AND RECOMMENDATIONS
Commercial banks play a vital role in the economy by providing credit, which facilitates capital circulation, supports business operations, and enhances household living conditions Credit activities are essential for a bank's survival, as they constitute a significant portion of its assets and generate substantial income Consequently, credit risk is a primary concern for bank managers, as it can lead to severe financial losses and damage the bank's reputation in the event of customer defaults To improve credit quality, banks must implement effective risk management models to mitigate potential losses While the benefits of a robust credit risk management system are clear, many banks face challenges in finding a model that aligns with their specific structure and market conditions.
Since Vietnam's international opening, the banking industry has rapidly evolved, with numerous banks established to cater to diverse customer groups This expansion has led to a significant increase in credit, raising concerns about credit risk due to high levels of bad debt, which recently exceeded 3% The State Bank of Vietnam (SBV) has prioritized addressing this issue, implementing measures to reduce bad debt rates below 3% by the end of 2015 To facilitate this, the SBV established the Vietnam Asset Management Company (VAMC) to purchase bad debts from commercial banks, enabling them to clear problematic loans from their financial reports and access funding from the SBV This support has been instrumental in helping many banks navigate financial challenges.
Nevertheless, in the long run, the banks are in need of having better credit policies, building a functioning credit risk management model to minimize the impact of credit risks
Vietcombank is a significant player in Vietnam's banking sector, benefiting from the country's economic growth and maintaining a strong financial position However, it lags behind key competitors in managing credit risk within its loan portfolio, as evidenced by a higher bad debt rate, particularly the non-performing loan (NPL) ratio This research aims to address two critical questions: the relationship between Vietcombank's robust credit growth and its elevated bad debt levels, and the potential development of a model to effectively manage credit risk.
The analysis of credit activities and bad debt management at Vietcombank reveals that rapid credit growth and a high bad debt rate may stem from pressures on employees to meet loan quotas, potentially compromising credit quality Additionally, insufficient training for staff can lead to a lack of understanding of the bank's credit policies and culture Furthermore, top management shares responsibility for these issues due to weakened oversight, which has created vulnerabilities in credit risk management practices This situation raises the question of whether it is time for Vietcombank to reform its credit risk management system to reduce bad debt levels while ensuring sustainable credit growth.
The author explores the credit risk management model at Vietcombank, highlighting its internal credit rating system, which consists of two distinct sub-models for individual and corporate customers Both models employ quantitative and qualitative analyses to assess customer creditworthiness, reflected in their credit rating letters However, the author identifies critical weaknesses: the Individual model fails to account for collateral assets, while the Corporate model lacks a clear link between credit risk and the bank's capital adequacy in the event of a company's default These shortcomings underscore the need for a more comprehensive approach to credit risk management, as proposed by the author.
In individual credit risk management, collateral assets are assessed based on their value relative to the loan, combined with credit ratings to determine loan approval For corporate credit risk management, collateral security is highlighted, aligning with international standards as the State Bank of Vietnam (SBV) encourages Vietcombank to adopt the Basel II framework This involves a minimum Capital Adequacy Ratio (CAR) of 9%, which protects the bank from credit risk by ensuring it holds sufficient capital to cover potential defaults without impacting existing customers The proposed corporate credit risk management model integrates these principles effectively.
The Corporate internal credit rating model evaluates corporate customers while the Basel II regulatory framework, adapted for the Vietnamese banking sector, enhances Vietcombank's protection strategies through collateral asset assessments in case of customer defaults This approach also strengthens the State Bank of Vietnam's supervisory role, ensuring a fair competitive environment in the banking market Effective corporate credit risk management ensures that the bank's credit activities and policies remain transparent and compliant with SBV regulations.
In conclusion, Vietcombank must focus on several key areas to ensure success First, it is crucial to balance the capital adequacy ratio (CAR) by raising capital wisely to maintain the 9% ratio without imposing heavy dividend burdens on shareholders Second, effective communication of the credit risk management model and policies to employees is essential to reduce fraud stemming from misunderstandings Finally, significant investment in information systems is necessary to develop a comprehensive customer database, enhancing the credit rating model By excelling in these areas and implementing a robust credit risk management framework, Vietcombank can progressively realize its vision of becoming a leading bank both nationally and regionally.
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Appendix: List of commercial banks in Vietnam categorized by ownership
Number of branches State-owned Commercial banks (SOCBs)
Vietnam Bank for Agriculture and Rural
Vietnam Joint Stock Commercial Bank of
Joint Stock Commercial Bank for
Investment and Development of Vietnam
Joint Stock Commercial Bank for Foreign
Joint Stock Commercial Banks (JSCBs)
1 Asia Commercial Joint Stock Bank – ACB Listed 9,377 81
An Binh Commercial Joint Stock Bank –
3 Bao Viet Joint Stock commercial Bank Unlisted 3,150 12
Viet Capital Commercial Joint Stock Bank -
5 BAC A Commercial Joint Stock Bank - Bac Unlisted 5,000 22
LienViet Commercial Joint Stock Bank –
7 Public Vietnam Bank - PVcomBank Unlisted 9,000 33
DONG A Commercial Joint Stock Bank -
Southeast Asia Commercial Joint Stock
The Maritime Commercial Joint Stock Bank
Kien Long Commercial Joint Stock Bank -
Viet Nam Technological and Commercial
Nam A Commercial Joint Stock Bank -
Orient Commercial Joint Stock Bank –
Military Commercial Joint Stock Bank –
17 National Citizen bank - NCB Unlisted 3,010 20
Sai Gon Commercial Joint Stock Bank -
19 Saigon Bank for Industry & Trade – SGB Unlisted 3,080 33
Saigon-Hanoi Commercial Joint Stock Bank
Saigon Thuong Tin Commercial Joint Stock
TienPhong Commercial Joint Stock Bank -
Viet A Commercial Joint Stock Bank -
Vietnam Commercial Joint Stock Bank for
Viet Nam Thuong Tin Commercial Joint
Petrolimex Group Commercial Joint Stock
Viet nam Export Import Commercial Joint
Ho Chi Minh city Development Joint Stock
Vietnam Joint Stock Commercial Bank of