INTRODUCTION
The rationale of the study
Vietnam has become an official member of various international associations, including ASEAN, APEC, ASEM, and WTO, and in 2016, it deepened its international economic integration by implementing the Vietnam-Korea FTA and preparing to ratify additional agreements like the Vietnam-EU FTA and TPP As the business sector faces increased challenges, the banking system, a crucial pillar of national finance, must navigate new opportunities and heightened competition from foreign banks with advantages in capital and technology Domestic banks need to adopt vital strategies to address these challenges, while also managing inherent risks in commercial banking to maximize profitability.
Despite implementing various risk management strategies, the My Dinh branch of MBBank continues to struggle with high non-performing loans, making it one of the branches with the most significant credit risks in the MBBank system To enhance the safety and compliance of its banking operations with international standards like Basel II, it is crucial to address existing issues in credit risk management By focusing on this particular branch, the research aims to provide insights into the current credit risk management system and identify effective solutions to mitigate credit risks Therefore, the topic of this study is "Solutions to Reduce Credit Risks at Military Commercial Joint Stock Bank, My Dinh Branch."
Objective & research questions
This research evaluates the current state of credit risk management at Military Bank's My Dinh branch and proposes effective solutions to enhance its quality and reduce associated risks It aims to provide a comprehensive overview of credit, including its classification, indicators, and impacts, while also analyzing the underlying causes of credit risks Furthermore, the study assesses the existing credit risk management practices at the Military Commercial Joint Stock Bank, My Dinh branch Finally, it offers data-driven recommendations to mitigate credit risks and improve overall credit activities at the branch.
The thesis should be able to answer the following questions:
- How is the current situation of credit risk at Mbbank, My Dinh branch? What are results, causes, and limitations?
- Which solutions suggested to reduce credit risks at MBBank, My Dinh branch?
Methods of the study
For this study, I chose to collect, analyze, and summarize information to establish a solid background My approach is informed by the knowledge acquired during my university studies and the practical experience gained through my internship.
Scope & Limitations of the study
The scope of the study is the real situation of credit activities at Military commercial joint stock bank, My Dinh branch over the 2012-2015 period and solutions to minimize them.
Structure of the study
The study is divided into three parts:
The 1 st part is the introduction which includes the rationale, aims, methods, scope and structure of the thesis
The 2 nd part is the main part of the study with three chapters:
- Chapter 1: Literature review, this chapter gives a general overview of the credit risk and credit risk management at commercial banks
- Chapter 2: This chapter refers to current situations of credit activities at Military commercial joint stock bank, My Dinh branch
- Chapter 3: This chapter focuses on solutions and recommendations to minimize the damage of credit risks
The last part is the summaries of the content of the paper.
THE THEORY OF CREDIT RISK AND CREDIT RISK
Credit risk
Credit plays an essential role not only for banks but also for the whole economy
Effective cash flow is essential for the continuous operation of businesses and individuals However, credit risk remains a significant challenge for banks, stemming from lax credit standards and inadequate credit risk management Numerous economic experts have conducted research on credit risk, revealing a variety of insights and solutions to address this ongoing issue.
Credit risk is defined by the Basel Committee on Banking Supervision as the potential for a bank's borrower or counterparty to fail to meet their obligations under agreed terms Additionally, Darrell Duffie and Kenneth J Singleton describe credit risk as the risk of default or decreases in market value due to changes in the credit quality of issuers or counterparties.
Credit risk is defined as the potential for significant losses faced by banks when borrowers fail to make timely payments or do not repay the principal and interest adequately Each author presents unique perspectives on this concept, but the core idea remains that inadequate repayment can lead to severe financial repercussions for financial institutions.
Credit risk varies widely across different counterparties, ranging from individuals to large enterprises, and can manifest in various forms It can be categorized based on its causes into two main types: transaction risks and category risks.
A form of credit risk caused by limitations in the loan approval process and customer‟s evaluation Transaction risks has three parts:
- Selecting risk : The risk related to the banking process of assessment and choosing a feasible loan plan for borrowers
Security risks stem from various factors, including contractual terms and collateral issues These risks can arise from discrepancies in asset revaluation, the types of assets involved, the subject matter of the agreement, the manner of collateralization, and the loan rates relative to the collateral's value.
- Operational risk: The risk in the management of loans and lending operations, including processing techniques of specially mentioned loans b Category risk
A form of credit risk that arises from limitations in managing the loan portfolio of banks, which are divided into two categories: intrinsic risk and concentration risk
- Intrinsic risk: the risk coming from differences in the characteristics of each subject or the private economic sector
- Concentration risk: the risk of loss to a financial institution as a result of having too many outstanding loans concentrated in a particular type of borrower or in a particular country
As technology advances, credit risk manifests in various forms, making it essential for financial institutions to thoroughly understand these risks to manage them effectively.
2.1.3 Causes leading to credit risks
Banks primarily view loans as their most significant source of credit risk, but they are increasingly encountering credit risks from diverse factors due to advancements in science and technology, as well as complex fraudulent schemes This study identifies two key categories of these risks: objective causes and subjective causes.
Objective causes are external factors that can indirectly contribute to credit risks for banks Key elements include economic conditions, fluctuations in the market, changes in the legal environment, and the impact of natural disasters.
The economic situation plays a crucial role in influencing the performance of banks and enterprises A stable economy enables businesses to operate efficiently and generate profits, allowing them to fulfill their financial obligations to banks Conversely, during a recession, companies face financial challenges that hinder their ability to meet loan requirements, leading to increased risk for financial institutions.
Market fluctuations are driven by various factors, including shifts in interest rates and material costs, which continuously impact both global and domestic markets For instance, when material costs rise, many companies struggle to adapt quickly, resulting in significant financial losses This can lead to bankruptcy, leaving banks unable to recover their loans.
The legal environment significantly influences the management of credit risks, yet Vietnam's legal system remains imperfect and inconsistent The rise in monetary fraud cases within banks can largely be attributed to various loopholes in the regulations Additionally, the oversight and supervision of bank officials and state authorities are insufficiently stringent, exacerbating the issue.
Natural disasters, including floods, earthquakes, and tsunamis, represent a significant unforeseen factor that can severely impact production and business operations, particularly in the agricultural sector These events can lead to project delays and disrupt primary income sources, affecting the ability to repay banking loans.
Subjective causes are factors that derive from the bank itself or from borrowers Unlike objective causes, they directly lead to credit risks and affect the operation of a bank a Borrower
Borrowers play a crucial role in the operations of banks, as they are essential for maintaining continuous business flow However, they also introduce significant risks, which can stem from factors such as personal ethics, fraudulent activities, and inadequate management practices.
Firstly, customer shows poor personal morality performed through using the loan for wrong purposes or deliberately defraud to appropriate assets from banks
Fraudulent activities arise when borrowers fabricate documents to illegally obtain funds from banks When seeking a capital loan for business operations, borrowers are required to present a detailed and viable business plan, which bank officers meticulously analyze to determine loan eligibility However, in instances of fraud, both the business plan and mortgage documents are forged, concealing losses and unfavorable figures to present misleadingly positive statistics in financial reports.
Poor management of borrowers significantly impacts business performance While companies prioritize expanding production scale through new equipment and assets, they often neglect essential aspects of management, including finance, accounting, and workforce supervision This combination of increased production capabilities with outdated management practices leads to poor business outcomes, ultimately resulting in an inability to repay bank debts.
CREDIT RISKS AT MILITARY COMMERCIAL JOINT STOCK BANK, MY DINH BRANCH
An overview of Military Commercial joint stock bank
MB, founded on November 4, 1994, in Hanoi at 28 Dien Bien Phu, started with a charter capital of VND 20 billion and a modest team of 25 employees, positioning itself to support the businesses of military enterprises amidst a competitive banking landscape.
After three years of establishment, MB achieved stable growth, becoming the only profitable bank during the 1997 Asian financial crisis Despite starting as a small bank, MB maintained impressive annual growth rates of 20% to 30% in the following years Between 1995 and 2002, the bank expanded its operations significantly, joining the interbank forex market in 1997, acquiring the 10,000m² ASEAN Hotel in 1999, and establishing its Treasury and Forex Department the same year MB evolved beyond a traditional commercial bank, gradually transforming into a financial group by launching two member entities: MB Securities Joint Stock Company (MBS) in 2000 and MB Assets Management Company (MBAMC).
In 2002, MB evolved into a modern financial institution, expanding its range of services to meet the diverse needs of Vietnamese customers By the end of the period from 1995 to 2002, MB had significantly developed beyond its initial goals, positioning itself as a comprehensive provider for nearly all types of clients in Vietnam.
From 2003 to 2008, MB implemented a comprehensive restructuring plan aimed at expanding market share and achieving rapid, robust, and stable growth Notably, during this period, MB became the first bank to achieve significant milestones in the financial sector.
In 2004, MB initiated a trilateral cooperation agreement with Vietcombank and Viettel, followed by a partnership with Citibank in 2005 to enhance its financial products and services with high-tech solutions The establishment of the Hanoi Fund Management Company in 2006, now known as MB Capital, marked a significant expansion of its financial service offerings By 2008, MB successfully increased its charter capital to VND3,400 billion, and further to VND5,300 billion in 2009 In 2010, MB launched its strategic development plan for 2011-2015 and began operations in the foreign market with the opening of its branch in Laos on December 30, 2010.
Following 15 successful years, MB initiated its development strategy for 2011-2015, aiming to enhance operations and secure a position among the top three joint stock commercial banks in Vietnam by 2020, all while maintaining independence from state-owned controlling shares.
In 2011, the Ministry of Defense took control, leading to the transfer of military administration functions from the MB to the Central Military Commission of the Communist Party This year also saw the Bank successfully go public on the Ho Chi Minh Stock Exchange (HSX) and expand its operations internationally by establishing a branch in Cambodia.
From 2012 to 2015, MB achieved a remarkable milestone by ranking first in operating profits and performance among joint stock commercial banks without state-owned controlling shares, solidifying its position as the fifth largest bank in Vietnam In recognition of its outstanding contributions, MB was honored with the title of Hero of Labor by the Government in 2015.
Figure 3.1: Organizational structure at Mbbank, My Dinh Branch
Military Commercial Joint Stock Bank, one of the largest commercial banks in Hanoi, features a clear organizational structure across its branches Each department operates independently under the guidance of a branch manager, ensuring effective management of transactions With a team of qualified and professional staff, the bank is at the forefront of investment and development initiatives.
Business activities at Military Commercial Joint Stock Bank, My
Capital mobilization is essential for banks to enhance their credit activities Mbbank – My Dinh Branch has demonstrated a dedicated approach, successfully overcoming challenges to achieve significant capital mobilization results between 2012 and 2015.
(Source: annual operation report of Mbbank, My Dinh Branch)
Table 3.1: Capital mobilization in terms of economic components over 2012-2015 period
The table presents data on capital mobilization from two economic sectors, categorized by customer type and currency, during the period from 2012 to 2015 Overall, capital sourced from individuals constitutes the majority of the total capital at the My Dinh branch, with a notable increase in total capital over the specified timeframe.
In December 2012, the capital was recorded at 3,730 billion VND, but it experienced significant growth, increasing to 5,121 billion VND within a year This upward trend continued, with a remarkable rise of 3,224 billion VND, culminating in a peak of 8,345 billion VND by 2015.
In 2012, individual capital mobilization reached 2,190 billion VND, nearly double the amount raised from economic entities Between 2013 and 2014, the capital mobilized from both residents and economic entities showed significant growth, increasing from over 2,000 billion to nearly 4,000 billion VND Notably, personal savings amounted to 5,041 billion VND during this period.
2015 which accounted for 60,41% of total capital in comparison with just 39.59 %
The trend shows that savings in foreign currencies are generally lower than those in domestic currency For example, capital mobilized in Vietnamese Dong (VND) increased significantly, reaching 4.929 billion VND in 2014 and 5.684 billion VND in 2015, which is double the amount saved in foreign currencies during the same period.
Between 2012 and 2015, the capital mobilization at Military Bank, My Dinh Branch, demonstrated a positive trend despite facing economic recession and intense competition from other commercial banks The branch achieved significant results during this period.
Credit activity is vital for banks, contributing approximately 80% of their profits by broadening the borrower base and diversifying loan methods, including lump sum lending and refinancing Additionally, competition among banks for lending turnover in the same region is intensifying.
Over the period of 2012 – 2015, there is a gradual increase in both total capital mobilization and outstanding loan at MBBank, My Dinh Branch
Table 3.2: Outstanding loan over 2012-2015 period
Unit: billion VND (Source: annual operation report of Mbbank, My Dinh Branch)
As we can see from the table, the amount of undischarged debt in 2012 was just 1,145 billion VND However, after one year, it surged to 2,583 billion VND which
From 2013 to 2015, My Dinh Branch experienced a decline in outstanding loans due to a high bad debt ratio However, efficiency improved significantly, reaching 74.98%, which was double that of the previous year.
In 2012, the efficiency of capital utilization and total capital mobilization, amounting to 3,730 billion VND, was 30.7% However, this efficiency saw a significant increase over the next four years, rising to 74.98% in the relationship between capital mobilization and outstanding loans.
The capital efficiency at Mbbank's My Dinh Branch is notably high; however, if outstanding loans continue to rise excessively, it could lead to potential credit risks.
Total income Total expense Net income
Figure 3.2: Business operation over 2012-2015 period
(Source: annual operation report of Mbbank, My Dinh Branch)
The line chart presents the operational performance of My Dinh Branch over four years, from 2012 to 2015, highlighting that total income consistently exceeded total expenses during this period.
It is clear from the chart that total income in 2012 was 105 billion VND It then experienced a slight increase of 7 billion VND to the high of 112 billion VND in
2013 The following years witnessed a double growth from 122 to 223 billion VND
On the other hand, total expense shared nearly the same pattern as total income
In 2012, the total expenses amounted to 88 billion VND, and over the next three years, this figure rose gradually to 105 billion VND By 2015, expenses experienced a significant surge, reaching 188 billion VND.
After two years of stagnation at 17 billion VND, net income at My Dinh Branch experienced a stable increase, reaching between 31 and 35 billion VND in 2014 and 2015 While the growth was modest, it demonstrated the resilience of the management and staff in overcoming challenges to maintain steady development.
Credit activities
The credit model categorizes loans into three types: short-term, medium-term, and long-term A comparison of the proportion of short-term outstanding loans against medium and long-term loans is presented in the table below, covering a four-year period from 2012 to 2015.
Table 3.3: Outstanding loan on term over 2012-2015 period
Total outstanding loan 1,145 2,583 4,081 6,257 Short term outstanding loan 345 601 867 1,648 Long and medium term outstanding loan 800 1,982 3,214 4,609
Outstanding loan on term over 2012-
Short term outstanding loan Long and medium term outstading loan
Figure 3.3: Outstanding loan on term over 2012-2015 period
(Source: annual operation report of Mbbank, My Dinh Branch)
The graph illustrates the unequal distribution of short-term, long-term, and medium-term outstanding loans over four years In this period, short-term outstanding loans reached 345 billion VND, representing 30.1% of the total outstanding loans, while the values for long-term and medium-term loans varied significantly.
In recent years, the gap between long and medium-term loans and short-term loans has significantly widened Currently, long and medium-term outstanding loans have surged to 3.214 trillion VND, tripling the amount of short-term outstanding loans In contrast, in 2015, these two categories only experienced modest increases of 1.648 billion VND and 4.609 billion VND, respectively.
In summary, Mbbank's My Dinh Branch primarily offers long and medium-term loans, tailored to meet the needs of local residents and the specific features of their financial products.
3.3.2 Credit model in terms of types of borrower
Figure 3.4: Credit model in terms of borrower over 2012-2015 period
(Source: annual operation report of Mbbank, My Dinh Branch)
The pie chart illustrates the distribution of outstanding loans at MBBank's My Dinh Branch from 2012 to 2014, highlighting three key customer segments: individuals, private entities, and SMEs alongside CIB Notably, SMEs and CIB emerged as the primary borrowers during this period, indicating their significant role in the branch's lending portfolio.
In 2012, the proportion of both individuals and private was the same as that in
In 2013, outstanding loans for individuals and private sectors were at 3% and 10%, respectively However, the following year saw a significant increase, with outstanding loans rising to 460 billion VND for individuals and 861 billion VND for the private sector, representing 7% and 14% Following successful results in the SMEs and CIB sectors, primarily from enterprises within the Ministry of Defense, the branch shifted its strategy to focus on developing potential personal customers, leading to a substantial rise in personal loans.
Between 2012 and 2015, the rates of Small and Medium Enterprises (SMEs) and Corporate and Investment Banking (CIB) showed fluctuations, yet they remained significant customer segments, collectively representing 30% to 50% of the market.
The credit model has shifted, reflecting an increase in outstanding loans for individuals and private customers, while loans for SMEs and corporate clients have decreased.
From 2012 to 2015, Mbbank's My Dinh branch focused on adhering to its strategic plan, prioritizing reasonable growth, safety, and effectiveness while emphasizing the importance of maintaining high credit quality.
The My Dinh branch has implemented proactive programs and policies to meet customer demands, resulting in a credit growth rate that aligns with the regulations and direction of the State Bank of Vietnam The branch's outstanding loans exceeded the previous year's figures, demonstrating effective planning Notably, these loans primarily supported enterprises in integrating technology into agriculture and related industries, reflecting a strategic approach suitable for the current economic landscape.
The My Dinh branch has implemented a sustainable credit growth policy to enhance credit quality through effective credit risk management This involves restructuring loan portfolios and strictly controlling credit quality via established processes and regulations There has been a notable increase in outstanding loans to individuals and private customers, with a diverse range of products tailored to meet different customer needs Notably, lending for car and apartment purchases has been prioritized, leveraging favorable locations while adhering to risk diversification principles, ultimately reducing credit risk levels.
Between 2012 and 2015, the My Dinh branch made notable strides in credit management, despite facing challenges such as a high bad debt ratio While some sectors experienced negative outcomes, the overall performance during an economic recession reflects a positive trend.
Credit risks analysis
Table 3.4: Overdue debt proportion over 2012-2015 period
(Source: annual operation report of Mbbank, My Dinh branch)
The table presents data on the percentage of overdue debt from 2012 to 2015, indicating that overdue debt represented a minor fraction of the total outstanding loans during this period.
In 2012, overdue debt in Vietnam was 28 billion VND, representing only 2.4% of the total outstanding debt However, this figure surged to 94 billion VND (3.6%) in 2013, primarily due to the economic recession that led to high inflation and interest rates As a result, many companies faced financial difficulties and struggled to meet their debt obligations, causing a significant rise in overdue bank debts The trend of increasing overdue debt continued in subsequent years, with a sharp increase to 196 billion VND.
In 2015, the VND represented 4.8% of the total outstanding loans, marking the highest rate in four years Additionally, there was a notable decrease in overdue debt, which fell from 196 billion VND to 185 billion VND, constituting only 2.9% of the total.
Overdue debt represents a significant portion of total outstanding loans To mitigate credit risks and ensure sustainable development, management and staff are implementing various future strategies.
Non-performing debt plays a crucial role in how banks assess credit risks To determine the rate of non-performing debt, banks categorize their outstanding loans into five distinct groups Groups 1 and 2 consist of loans that meet standard requirements, while Groups 3, 4, and 5 indicate increasing levels of risk.
5 included loans which were under standard requirements, were doubted to lose principals or had probability to lose principals The addition of the amount in group
3, group 4 and group 5 were the total non-performing debts In this part, I will focus on group 3, group 4 and group 5
Table 3.5: Non-performing debt rate over 2012-2015 period
Total non-performing debt 53.8 136 193.9 192 Non-performing debt rate (%) 4.7 5.3 4.7 3.1
(Source: annual operation report of Mbbank, My Dinh branch)
The table presents data on outstanding loans across five categories, reflecting the total non-performing debt at My Dinh Branch from 2012 to 2015 Overall, there was a noticeable increase in bad debt throughout this period.
As can be seen form the table, in 2012, the amount of outstanding loans in group
In recent years, the total non-performing debts reached 53.8 billion VND, representing 4.7% of outstanding loans, with group 4 and group 5 accounting for 26.6 billion VND and 8.2 billion VND, respectively However, this figure surged to 193.9 billion VND over the next two years, maintaining the same percentage of total loans Notably, all three groups experienced significant increases, particularly group 5, which rose to 51.3 billion VND In contrast, in 2015, the proportion of bad debts decreased to 3.1%, marking a 1.6% decline compared to the previous year.
In summary, the significant rise in non-performing debt ratios in 2013 and 2014 can be attributed to the challenging economic climate and inadequate credit risk management at the My Dinh branch A higher non-performing debt rate indicates an increased likelihood of credit risks Although there was a positive trend with a decrease in the rate by the end of 2015, it still suggested that credit risk management practices were not fully effective.
According to the decision 493/2005 of state bank of Vietnam, provision for credit risks is calculated based on groups of outstanding loans Specifically: group 1: 0%, group 2: 5%, group 3: 20%, group 4: 50% and group 5: 100%
Table 3.6: Provision plan over 2012-2015 period
(Source: annual operation report of Mbbank, My Dinh branch)
The table illustrates the provision expenditures at Mbbank's My Dinh branch from 2012 to 2015 Notably, the total provision amount consistently rose throughout the years, with the exception of a decline observed in 2015.
In 2012, the total provision reached 26.7 billion VND, with allocations of 1.4 billion for group 2, 3.8 billion for group 3, 13.3 billion for group 4, and 8.2 billion for group 5, indicating a medium level of credit risk However, subsequent years saw a dramatic increase in total provisions, rising to 109.57 billion VND, with group 5 provisions significantly climbing to 51.3 billion VND, representing half of the total provision amount.
In 2015, the total amount of provisions began to decline, with provisions for groups 3, 4, and 5 decreasing significantly to 14.96 billion VND, 33.1 billion VND, and 51 billion VND respectively, indicating effective credit risk management practices.
The high proportion of provisions in groups 3, 4, and 5 indicates a significant implicit threat of credit risks facing the My Dinh branch An increase in the amount of provisions could negatively impact the branch's business operation results.
Understanding borrower information is crucial for banks to assess credit risks early on MBbank, particularly the My Dinh branch, recognizes this significance, prompting management to direct staff to prioritize this aspect Despite these efforts, several shortcomings remain in the process.
The limited knowledge and skills of officers hinder their ability to effectively utilize information, resulting in inaccurate data collection and analysis Relationship Managers (RMs) have the authority to assess customers borrowing less than 1 billion, leading some to overlook thorough evaluations of borrowers' legal and financial capacities Additionally, the My Dinh branch faces technological constraints, relying on various software systems to manage the customer disbursement process.
Staff faced challenges in managing the growing influx of customers, leading to ineffective coordination and poor credit risk management.
My Dinh branch‟s credit risk management evaluation
From 2012 to 2015, the My Dinh branch of MBBank experienced one of the highest ratios of non-performing loans, despite implementing various strategies to detect and mitigate credit risks The branch's operational processes yielded both significant achievements and notable challenges.
Despite the My Dinh branch's focus on supervision, its execution remained passive, primarily identifying issues through basic signals This lack of proactive measures could lead to significant losses in the event of sophisticated fraud Consequently, the branch struggled to manage overdue and non-performing loans effectively, with non-performing loans surging to 153.9 billion VND in 2013 and 2014.
Since 2015, the My Dinh branch has seen significant improvements in its credit model, particularly between 2012 and 2014 The branch has established a clear and logical process for Relationship Managers (RMs) that encompasses customer engagement, information gathering, disbursement, and post-lending evaluations Despite the involvement of multiple departments, the branch streamlines operations into key areas, such as the relationship management and assistance departments For loans under 1 billion, RMs have the authority to appraise customers independently, taking full responsibility for the entire process—from identifying potential clients and collecting necessary information to proposing suitable lending plans, managing borrower relationships, and overseeing debt recovery after the loan is issued.
The My Dinh branch has diligently adhered to the provision plan established by the State Bank of Vietnam Over the period from 2012 to 2015, the total provisions amounted to 26.7 billion VND in 2012, followed by 70.76 billion VND in 2013, 109.57 billion VND in 2014, and 108.31 billion VND in 2015, as detailed in Table 2.6.
Despite the significant figure, the My Dinh branch worked diligently to manage and offset damages from credit risks However, the substantial provision amount led to increased expenses, negatively impacting the bank's operations As illustrated in Table 2.6, provisions surged to 119.09 billion VND in 2015, contributing to the rise in overall expenses.
88 billion VND to 188 billion VND Moreover, My Dinh branch strictly make provision plan but the way it used provision to compensate was not effective
Between 2012 and 2015, the My Dinh branch effectively identified suspicious loans and prevented some instances of financial fraud by analyzing borrower information However, the overall approach to information collection was superficial, with many staff members performing their duties in a lackluster manner This focus on quantity over quality resulted in inadequate verification of borrower details, creating opportunities for fraudulent activities A critical example is the identity card verification process; if relationship managers fail to compare the copy with the original and overlook customers with non-performing debts who may manipulate their identity card information, it can lead to significant losses for the bank.
In Chapter 1, the "5 C's" framework is introduced for evaluating credit risks, which has been effectively implemented by the My Dinh branch, enhancing their credit risk management However, the branch's loan supervision post-lending has proven ineffective, often regarded merely as a formality Despite bank staff assessing borrowers' financial capabilities initially, they fail to monitor and analyze the borrowers' business performance and income sources after the loan is disbursed This oversight results in insufficient information regarding borrowers' future loan repayment abilities.
Overdue debt and non-performing debt recovery
Between 2012 and 2014, there was a notable rise in overdue and non-performing debts, highlighting ineffective credit risk management and debt recovery strategies Despite these challenges, the My Dinh branch intensified its focus on addressing the issue by establishing a dedicated debt collection team and regularly conducting debt classification and examinations As a result, the branch successfully reduced both overdue and non-performing debts in 2015, marking a significant achievement for the bank's efforts.
3.5.2 Causes of high ratio of credit risks at My Dinh branch
From the current situation of credit risks at My Dinh branch, we can see that there are many imperfections in credit risk management of this branch One of the
The My Dinh branch is focused on identifying the causes behind the high credit risk ratio to enhance credit quality Surveys and feedback from relationship managers, supervisors, and executives in the business analysis department categorize these causes into two main types: objective and subjective factors.
In terms of objective causes, there are three main causes which are economy situation, borrower‟s issues and State bank‟s policies
In 2012 and 2013, the unpredictable fluctuations of the global economy significantly affected Vietnam's economy, directly impacting business operations and individual income The rising inflation rate and intense competition in the domestic market pushed many companies to the brink of bankruptcy Consequently, the My Dinh branch experienced a substantial increase in non-performing loans during this challenging period.
Between 2012 and 2014, SMEs and CIB were the main customers of the branch, but many lacked business management experience and were severely impacted by the economic crisis, leading to financial difficulties Additionally, a segment of borrowers engaged in monetary fraud, falsifying financial reports to illegally obtain funds from the bank.
The State Bank's policies are crucial for enhancing risk management in commercial banks, yet there is a lack of specific guidance from the State Bank in this area While some large banks have developed internal credit rating systems primarily for loan classification and risk provision, they have not fully utilized these systems for other essential functions, such as credit decision support and loan evaluation This issue is partly due to the underdeveloped state of Vietnam's banking system compared to global standards, making immediate implementation of advanced standards challenging Nevertheless, the State Bank should provide guidance to help commercial banks progressively align with international risk management standards.
There are some main subjective causes including knowledge and experience of staff, non-performing loan management , credit process and information and management system
The relationship managers (RMs) at the My Dinh branch exhibit limited specialist knowledge and experience, which poses challenges in credit activities that span various economic sectors To effectively navigate these complexities, RMs must not only possess a strong grasp of their profession but also have a solid understanding of legal and market dynamics Additionally, they need to develop soft skills to accurately assess the legal and financial capacities of customers In instances where customers provide misleading or fraudulent information, a lack of experience in appraisal can lead to misjudgments, resulting in significant losses for the branch Unfortunately, some RMs at the My Dinh branch do not fulfill these essential requirements.
One significant issue is the inadequate information and management system regarding borrowers The current approach relies heavily on the data provided by borrowers, leading to a passive collection of information Although credit officers do assess the borrowers' business results and the feasibility of their plans, this analysis often lacks depth and diligence Consequently, the My Dinh branch struggles to accurately forecast potential credit risks.
Ineffective management of non-performing loans at the My Dinh branch is a significant issue, as the unofficial risk management department fails to address these loans promptly This lack of action contributes to increased losses for the bank, while inefficient collateral liquidation hampers the recovery of principal and interest Consequently, the proportion of bad debt remains alarmingly high.
SOLUTIONS AND RECOMMENDATIONS TO REDUCING
Solutions to reduce credit risks at My Dinh branch
The My Dinh branch of Military Bank experienced one of the highest non-performing loan (NPL) ratios from 2012 to 2014 Although the current credit risk situation has improved, neglecting credit risk management could lead to significant losses in the future To effectively minimize credit risks, the branch should implement four key strategies: utilizing a robust credit model, establishing adequate provisions, enhancing the quality of human resources, and ensuring diligent loan supervision.
To establish a strong credit model, it is essential to diversify both products and borrower groups The My Dinh branch has successfully increased the proportion of outstanding loans to private customers, effectively spreading credit risks Mbbank has notably targeted employees of Viettel Group and the Ministry of Defence with attractive interest rates However, the branch must enhance its borrower classification awareness, as effective diversification requires proper management This approach enables the bank to assess borrower risks and set appropriate credit limits, thereby reducing potential losses from credit risks Additionally, while the My Dinh branch is focusing on the car loan market with appealing interest rates and flexible approval processes, it should also prioritize market analysis to better attract customers.
Manpower is a critical factor for organizational success, yet the My Dinh branch faces challenges due to staff deficiencies Some employees lack experience and knowledge, leading to poor credit risk assessments that harm the branch Additionally, the negligence of relationship managers in collecting and inspecting borrower information complicates credit risk detection, allowing borrowers to exploit these weaknesses for monetary fraud To address these issues, the branch must enforce strict regulations for underperforming staff and implement training courses to enhance professional skills and detect increasingly sophisticated fraud tactics Recruiting qualified personnel is essential to improve overall quality, while prioritizing the morality and responsibility of bank officers is crucial, as a negative working attitude poses a significant risk to the bank's integrity.
Borrower information primarily derives from legal documents and financial reports; however, these reports often lack thorough auditing, leading to inadequacies in accuracy Consequently, the My Dinh branch must gather information not only from financial reports but also from borrowers' partners and affiliated banks This comprehensive approach ensures the bank has the necessary data to assess borrower solvency effectively while enhancing collaboration and information sharing among banks.
The My Dinh branch must prioritize gathering market-related information, as bank officers are responsible for collecting data on products and pricing to effectively manage credit risks Essential economic factors such as exchange rates, interest rates, tax rates, and inflation also need to be monitored, as they are external elements that can significantly impact a company's business performance Having accurate and comprehensive information is crucial for making informed decisions regarding loan contracts, ultimately helping to minimize credit risks.
The My Dinh branch has recognized the importance of supervising borrowers not only prior to loan approval but also post-disbursement However, the lack of focus on post-lending supervision, coupled with quantitative norms and a negligent work attitude, has led to superficial monitoring Consequently, the credit risk management department lacks adequate information on borrowers' business performance and income sources, hindering their ability to assess future debt repayment capacity and identify potential credit risks, resulting in significant losses for the bank To address these issues, the My Dinh branch must enhance its credit processes, from information gathering to loan supervision and evaluation Implementing the 5 C's method more effectively will empower bank officers to make informed lending decisions Additionally, increased training for credit supervisors is essential to improve oversight levels Ultimately, the focus should shift towards enhancing credit quality rather than merely prioritizing quantity, as an excessive emphasis on volume can pressure staff to overlook crucial credit processes to satisfy higher authority demands.
4.1.5 Overdue debts and non-performing debts management
Recent efforts by management and staff have led to a decrease in the overdue debt rate, thanks to an effective strategy However, a significant increase in overdue debt, reminiscent of the years 2012 to 2014, signals potential credit risks, highlighting the ineffective credit risk management at the My Dinh branch during that period Additionally, the high proportion of non-performing debts, particularly in group 5, poses a serious threat, as these debts are challenging to recover, putting banks at risk of losing both principal and interest.
As overdue and non-performing debts rise, bank officers must assess the concentration level of borrowers to identify which groups represent the largest share of total debts They need to investigate the reasons behind late payments; if poor management is the cause, banks can advise borrowers on restructuring their production systems or adopting new technologies to enhance productivity Additionally, banks may extend maturity dates or provide capital to help borrowers revive their business activities However, if no positive changes occur, banks will resort to liquidating assets to mitigate losses.
Many banks struggle to manage credit risks due to inadequate provisions, but the My Dinh branch faces a different challenge: a rapidly increasing provision amount While higher provisions can mitigate credit risk damage, they also elevate the bank's costs To address this issue, the My Dinh branch must enhance the quality of its credit risk assessment and supervision Inaccurate assessments can lead to inflated provision amounts, emphasizing the need for precise evaluation to ensure appropriate provisioning.
Technology serves as a crucial catalyst for banking advancements, yet the My Dinh branch currently faces limitations in its machinery and equipment To enhance service quality and credit risk management efficiency, it is essential to adopt new technologies and devices The branch must prioritize investments in information systems, infrastructure consolidation, and oversight of internet resources in the coming years.
Recommendations
Current and future credit activity is crucial for MBBank and other banks, offering significant benefits However, persistent credit risk issues pose challenges and potential losses To address these concerns, I have outlined several recommendations for MBBank.
MBbank must enhance its credit activities management by establishing an internal credit ranking system to effectively manage credit risks Conducting research to implement risk administration models that align with current regulations and MBbank's unique characteristics is essential Additionally, collaboration with relevant units to provide regular training courses will improve the professional skills and knowledge of bank officers Furthermore, accelerating credit inspection and supervision across the entire system will help identify loopholes and facilitate timely solutions.
To enhance the quality of products and services while ensuring safety, MBbank must modernize technology across all branches and transaction offices Advanced technology significantly improves asset management and credit risk management, making them more effective As monetary fraud techniques become increasingly sophisticated, outdated equipment hampers bank officers' ability to detect credit risks, potentially leading to substantial financial losses and damage to the bank's reputation.
MBbank should prioritize competing with other financial institutions by adopting concessionary policies to draw in more customers Enhancing service quality is essential to meet customer expectations, and investing in training for bank officers is crucial They must possess both high skills and a positive attitude, as staff members represent the bank's image If customers are unhappy with their interactions, they are likely to seek services elsewhere.
MBbank must enhance its examination and supervision activities, conducting them frequently to identify any misconduct by bank officers Implementing strict penalties will deter staff from violations Through effective supervision, managers can understand their team's expectations and requirements, allowing for appropriate commendations and rewards Additionally, a comprehensive examination of the entire system will help identify loopholes in the credit process, enabling the bank to propose suitable solutions This proactive approach will also facilitate the detection of suspicious loans and non-performing debts, allowing for timely intervention to minimize potential damage.
The proposed solutions and recommendations are grounded in the theoretical framework outlined in Chapter One and the credit risk analysis presented in Chapter Two for Mbbank, My Dinh branch Effective implementation of these strategies necessitates the attention of the My Dinh branch director, along with collaboration from relevant units and economic organizations.
Every daily activity carries inherent risks, particularly in credit operations where the potential for loss arises from borrowers failing to repay principal and interest on time The global financial crisis has adversely impacted Mbbank's My Dinh branch, exacerbated by sophisticated fraud tactics that undermine credit quality and lead to significant financial losses Consequently, enhancing credit quality and risk management has become the primary objective for the My Dinh branch This thesis aims to analyze the current state and underlying causes of credit risk at the branch, identifying weaknesses in risk management practices It will also propose actionable recommendations for both the State Bank and Mbbank to improve the effectiveness of these solutions.