INTRODUCTION
Rationale of the study
Small and medium enterprises (SMEs) in Vietnam represent 97.5% of all businesses, totaling over 420,000 companies (VNASME, 2014) Their significant presence offers substantial business opportunities for banks With their simple structures and agility in responding to economic changes, SMEs play a crucial role in enhancing the state budget and creating jobs Consequently, they are regarded as the backbone of economic development, making the promotion of this sector a key objective in the national economic strategy.
Because SMEs’ demand of capital depends on economy’s development, they are often in need of huge capital funds to expand their productions and cover other business expenses
In the near future, competition among banks in the SME sector is expected to intensify, driven by interest rates, solution packages, and enhanced incentive policies to attract SME credit However, globalization and economic integration, coupled with declining consumer demand, may push many SMEs into challenging circumstances or potential bankruptcy Consequently, mitigating and managing credit risks associated with SMEs has become a critical focus for banks today.
Competition adversely affects both SMEs and banks, compelling the banking system to relax credit requirements and lower interest rates to attract SME loans Consequently, enterprises may misallocate bank loans towards inefficient investments, leading to difficulties in repaying loans and increasing credit risks As banks seek to expand lending operations and boost profits within the SME sector, the inevitability of credit risks becomes apparent.
During my internship at the Agribank Tam Trinh branch, I identified critical credit risks and ongoing solutions This thesis aims to survey these existing credit risks and propose effective strategies to enhance the bank's credit operations.
Aims of the study
This study aims to systematize fundamental theories regarding bank credit for SMEs, examine the credit risks commonly faced by commercial banks, and analyze the methods employed to mitigate these risks It focuses on the current credit operations at Agribank Tam Trinh branch, identifying existing credit risks and assessing the effectiveness of the bank's risk prevention strategies The research highlights the bank's achievements and limitations, along with the underlying causes of these challenges Finally, the study proposes solutions and recommendations to enhance the bank's ability to manage credit risks associated with SMEs more effectively.
Research questions
This research investigates the current state of credit risks and assesses the suitability and effectiveness of the methods implemented at Agribank Tam Trinh branch To fulfill its goals, the researcher will address two key questions.
1 What are the existing credit risks in Agribank Tam Trinh branch?
2 How effective are the solutions that Agribank Tam Trinh is applying to cope with credit risks?
Scope of the study
This research focuses on the statistical data and information from Agribank branch Tam Trinh between 2013 and 2015, allowing for a practical evaluation of credit operations and the effectiveness of preventive solutions during this specific period.
Methodology of the study
The research employs both qualitative and quantitative analysis, utilizing real financial reports to assess the credit risk levels at Agribank Tam Trinh Additionally, interviews are conducted to document the measures taken to prevent and mitigate credit risks for SMEs from 2013 to 2015.
Structure of the study
The study includes five main chapters as follows:
Chapter I: Introduction – This chapter presents the overall view on the topic with the reason to implement the study, its scope and the methods of the study
Chapter II: Theoretical background – This chapter provides brief theoretical knowledge focusing on bank credit, credit risks and content of credit risks restrict solutions in SMEs segment
Chapter III: Methodology and Data analysis – The third chapter introduces the data collection instruments and analyzes these data
Chapter IV: Findings – This chapter describes in detail achievements and limitations of Agribank Tam Trinh in applying its solutions to prevent and minimize the existing credit risks from 2013 to 2015, and then sorts out the main causes of limitations
Chapter V: Recommendations and conclusions – The last chapter aims to propose some recommendations and solutions to research problem.
THEORETICAL BACKGROUND
Theoretic background of commercial banks’ credit risks in lending to SMEs
Risk refers to the potential for unforeseen threats or negative outcomes, such as damage or loss, arising from internal or external vulnerabilities It is an inherent aspect of business operations, necessitating effective management to ensure growth and sustainability By understanding the relationship between risk and business, organizations can take proactive measures to mitigate potential issues and thrive in a competitive environment.
In today's economy, experts recognize seven key types of risks: credit risk, liquidity risk, market risk, operational risk, capital or solvency risk, legal risk, and reputational risk Among these, credit risk is the most significant for banks, arising from nonpayment or delayed payments on loans and securities, leading to potential losses.
In Vietnam, the State Bank Governor defines credit risks in banking activities as potential losses that credit institutions may face due to customers' inability to fulfill their obligations as per their commitments, as outlined in Clause 1 of Article 2 of Decision 493/2005/QD-NHNN.
In conclusion, credit risks appear in business relation in which banks are the lenders, and the borrowers violate commitments to repay in the credit contracts
2.2.2 Signals to realize credit risks
Banks must recognize the early indicators of atypical loans to ensure prompt intervention The signals outlined can be identified throughout the duration of the credit process, rather than at a single moment in time.
Banks assess an enterprise's financial health through various indicators, notably liquidity and profitability ratios Low liquidity ratios suggest that a company struggles to meet its short-term obligations, raising concerns about its ability to convert short-term assets into cash for loan repayments Additionally, a decline in profitability ratios indicates management's challenges in transforming sales into profits and cash flow, highlighting operational weaknesses within the business.
Solvency ratios are crucial indicators of a company's financial stability, as they measure the relationship between debt, assets, and equity Inefficient solvency ratios signal potential issues when a company carries excessive debt, limiting its ability to manage cash flow amidst rising interest rates or adverse business conditions Additionally, efficiency ratios, such as inventory turnover and receivables turnover, highlight instability and illiquidity, indicating that the company struggles to convert inventory into sales and collect outstanding credit balances effectively.
2.2.2.2 Group of non-financial signals
In the credit analysis phase, credit officers utilize a range of non-financial signals to identify problematic credits, enabling them to make informed credit decisions and reduce potential credit risks for banks These signals are crucial for effective risk management.
Negative signals in bank transaction monitoring can indicate potential risks in customer accounts, such as a significant and ongoing decrease in deposit balances, check rejections, rising average withdrawal levels, and an inability to manage costs effectively Credit officers may observe that risky clients frequently increase their loan amounts, delay repayments, and often request loan extensions or rescheduling Additionally, enterprises at risk may misuse short-term loans for long-term investments, rely on high-cost capital sources, regularly discount receivables to meet credit demands, or reduce their legal capital.
The management of customer relationships is negatively impacted by frequent changes in the human resource structure within the management team, leading to disputes in the management process and incurring unreasonable expenses Additionally, a lack of experience among management board members and the regular transfer of employees further complicates effective customer management.
Credit officers can identify customers struggling with new product development, particularly seasonal items, by analyzing technical and commercial signals They can also recognize clients reducing repair and replacement expenditures, which may result in lower product and service quality Additionally, shifts in government policy can significantly impact these customers, highlighting the need for proactive assessment in credit management.
Credit officers should be vigilant in evaluating financial information to identify potential credit risks, as customers may submit incomplete or delayed financial statements and documents An analysis may reveal concerning trends, such as rising debt ratios and increasing sales accompanied by a sharp decline in profits, indicating that inventory growth is outpacing sales Additionally, warning signs may include a substantial rise in receivables, inventory levels, or deterioration of business infrastructure.
Classifying credit risks into distinct groups is crucial for banks to develop effective prevention strategies and respond promptly when risks arise Depending on specific research objectives, credit risks can be categorized using various criteria In this study, the author focuses on classification based on the causes of risks, identifying two main types: portfolio risks and transaction risks.
Transaction risks represent a form of credit risk stemming from limitations in transactions, customer evaluations, and the loan approval process These risks can be categorized into three main sectors: selection risks, security risks, and operational risks Selection risks occur during the credit analysis and assessment phases, particularly when banks are tasked with identifying viable projects for lending Security risks emerge when the conditions of secured loans—such as credit contract terms, types of collateral, and methods of valuation—are not adhered to Lastly, operational risks pertain to the management of loans and lending operations, which includes the implementation of credit rating systems and strategies for addressing bad debts.
Portfolio risks represent a specific category of credit risks associated with investment portfolios, which can be divided into intrinsic risks and concentration risks Intrinsic risks arise from the unique characteristics of individual borrowers or specific industries, affecting their operations and capital utilization In contrast, concentration risks occur when banks face potential losses due to allocating a significant portion of their capital to a group of enterprises that operate within the same sector, geographic area, or share similar high-risk loan profiles.
2.2.4 Reasons leading to SMEs credit risks
Credit risk refers to the potential dangers that banks face in their operations, stemming from various factors To implement effective preventative measures and solutions, banks must accurately identify the sources of these risks The causes of credit risk can be classified into three main categories.
Theoretic background of preventing and minimizing SME credit risks in
2.3.1 Definition of preventing and minimizing credit risks
To effectively prevent and minimize credit risks, it is essential to research and propose solutions aimed at maximizing the avoidance of risks in credit operations Key risks include the potential for nonpayment, which reflects a loss of ability to pay, and delayed payments on loans and securities, indicating the risk of failing to meet payment deadlines.
2.3.2 Solutions to prevent and restrict credit risks
Credit risks pose significant challenges to banks' operations, making it crucial for them to understand effective solutions for prevention and mitigation By implementing strategies to address these risks, banks can significantly reduce potential losses This article will explore several popular solutions aimed at enhancing risk management in the banking sector.
To effectively mitigate credit risks, banks should adopt a proactive approach that expands their operational scope across diverse customer types and geographical regions Implementing this strategy requires the development of tailored business strategies that align with these key orientations.
To mitigate credit risks, banks should diversify their investments across various economic sectors and products, while maintaining a broad customer base to prevent over-reliance on specific clients It's crucial for banks to adhere to specific lending ratios relative to their customers' total working capital, reducing the likelihood of customer dependence on loans and mitigating the impact of unforeseen events Additionally, offering a balanced mix of short-term, medium-term, and long-term loans can safeguard against market interest rate fluctuations Lastly, maintaining an appropriate balance between lending in VND and foreign currencies is essential to protect against credit risks stemming from currency exchange rate changes.
While this method is regarded as the most effective way for banks to diversify risks, it also presents several drawbacks, including management complexities, lengthy assessment processes, increased monitoring costs, and diminished opportunities for high profit gains.
In certain instances, banks may be unable to meet the credit demands of enterprises for large-scale projects due to high credit values and challenges in accurately assessing project risks To address this issue, banks often collaborate to evaluate the project, distributing both the lending and associated risks while adhering to principles that protect the rights and obligations of all parties involved.
Vietnamese commercial banks generally do not favor this type of credit due to its complexity and the conflicts that can arise during the cooperation process, which are significant drawbacks of this solution.
Collateral regulation serves as a safeguard for creditors against defaults and unforeseen events By requiring collateral, lenders can significantly reduce credit risks, as it reinforces borrowers' commitment to repayment and helps deter fraudulent activities Additionally, collateral acts as a secondary repayment source for banks when borrowers face cash flow challenges, ensuring financial security for lending institutions.
Credit insurance serves as an effective tool for banks to mitigate risks associated with credit operations It can take several forms, including lending insurance, property insurance, and mortgage insurance, providing comprehensive coverage for various financial transactions.
This solution effectively addresses credit risk damages, but the high upfront insurance fees deter many customers from securing loans with insurance Furthermore, the underdeveloped insurance industry in Vietnam fails to instill sufficient trust and interest among banks and customers alike.
Loan loss provisions are essential for banks as they allocate funds to cover potential losses from customers who breach credit agreements The level of these provisions varies based on the risk associated with different loan groups, ranging from 0% to 100% Consequently, banks with riskier loan portfolios must maintain a higher percentage of provisions to safeguard against potential defaults.
2.3.3 Criteria to evaluate effect of preventing and minimizing credit risks
Some basic indicators to evaluate effectiveness of preventing and minimizing credit risks of banks are mentioned bellows:
Outstanding loans growth (%) (Outstanding loans this year – Outstanding loans last year) Outstanding last year
Growth of loan turnover (%) = (Loan turnover this year – Loan turnover last year)
The index serves as a benchmark for assessing the growth of outstanding loans over time It evaluates the bank's credit provision capabilities and its effectiveness in attracting customers In a stable economic environment, a higher index indicates stronger and more effective banking operations Conversely, a lower index suggests challenges in establishing new customer relationships and potential shortcomings in the bank's business strategy.
Credit quality is indicated by the ratios of overdue loans and bad debts In a stable economic environment, a gradual decrease in these ratios compared to the previous year signifies an improvement in the bank's credit quality.
Overdue loans ratios (%)= Overdue loans x 100%
Bad debts ratios (%) = Bad debts x 100%
The ratio of provisions to total outstanding loans is crucial for assessing a credit institution's financial health According to Decision No 493/2005/QD-NHNN, there are two types of loss provisions: general provisions, which are set aside to cover unidentified losses within the loan portfolio, and specific provisions, which are allocated for losses linked to particular loans.
This indicator reflects the ratio of provisions to total outstanding loans in a bank A high ratio indicates increased costs, while a low ratio suggests insufficient funds to cover potential losses when needed.
Ratio of provision and total outstanding loans = Provision
METHODOLOGY AND DATA ANALYSIS
Research methodology
The analysis is based on real financial reports from Agribank Tam Trinh branch covering the period from 2013 to 2015 This study includes ten tables that detail the bank's credit operations and current credit risk situation.
The article presents a comprehensive analysis of the credit structure for SMEs at Agribank Tam Trinh branch from 2013 to 2015, detailing clients’ demographics, outstanding loans, and their classifications by term, industrial sector, collateral, and provisions against losses It also examines overdue loan ratios, bad debt ratios, and the turnover of loans All data, including figures, tables, and charts, are sourced from the branch's annual reports and income statements.
In an interview with Mrs Nguyen Thi Thuong Hieu, the Head of the Business and Plan Department at Agribank Tam Trinh branch, we aimed to explore the existing credit risks and the strategies currently implemented to prevent and mitigate these risks within the branch.
On May 8, 2016, a brief 20-minute interview was conducted, featuring two key questions The first question aimed to uncover the credit risks encountered by the branch during the research period The second question focused on identifying the strategies employed by the branch to mitigate these credit risks, along with their associated limitations.
Data analysis
3.2.1.1 Credit operation for SMEs at Agribank Tam Trinh branch from 2013 to
3.2.1.1.1 Structure of credit clients of Agribank Tam Trinh branch
Table 3 1 Structure of credit clients of Agribank Tam Trinh branch from 2013 to 2015
Source: Credit office, Agribank Tam Trinh branch
The table lists the number and the percentage of SMEs clients compared with other groups of clients in Agribank Tam Trinh branch in the duration from 2013 to 2015
In 2015, individual and household customers represented the largest segment with 251 clients, followed by SMEs with 51 and large enterprises with 10 The steady increase in SMEs customers highlights the branch's focus on this sector Following economic recovery signals in 2013, the number of SMEs customers surged in 2014, rising from 47 to 66, a remarkable 67.9% increase This upward trend continued into 2015, with a total of 51 SMEs customers, indicating positive growth prospects for the future.
The structure of customers in the branch was affected by a decline in global aggregate demand, leading to challenges for SMEs Consequently, the percentage of SMEs in the customer base slightly decreased from 16.38% in 2014 to 16.34% in 2015, although their overall proportions have shown steady growth in subsequent years.
The branch consistently aligns its interest rates with market trends to fairly serve its SME customers Additionally, it has created and integrated diverse credit product packages to attract new clients while maintaining the loyalty of existing ones.
Table 3 2 Outstanding loans to SMEs of Agribank Tam Trinh branch from 2013 to
Source: Credit office, Agribank Tam Trinh branch
The table describes the size and the growth of outstanding loans for SMEs in Agribank Tam Trinh branch from 2013 to 2015
The outstanding loans to SMEs saw a significant increase over the years, rising from 1,708 billion VND in 2013 to 1,943 billion VND in 2014, marking a growth of 235 billion VND or 13.8% However, in 2015, there was a slight decrease of 119 billion VND, equivalent to 6.12% This decline in outstanding loans reflects a broader trend affecting the entire economy.
The increase in outstanding loans to SMEs demonstrates the branch's proactive engagement with small and medium-sized enterprises By strategically investing in high-performing businesses, the branch successfully attracted more creditors during the research period.
Table 3 3 Ratios of outstanding loans to SMEs in Agribank Tam Trinh branch from 2013 to 2015
Source: Credit office, Agribank Tam Trinh branch
The table compares the ratios of outstanding loans to SMEs and to other customers in the outstanding loans’ structure of Agribank Tam Trinh branch in the research period
In recent years, small and medium-sized enterprises (SMEs) have represented approximately 80% of the total outstanding loans at the branch, with their share reaching 81.3% in 2014, marking an increase of over 2% from 2013 Despite facing challenging conditions in 2015 that led to a slight decrease in the overall size of outstanding loans, the proportion of loans allocated to SMEs still saw a modest rise of 1.23%.
The increasing percentage of outstanding loans for SMEs is attributed to actively implemented projects, products, and services designed to enhance their economic situation Recognizing the importance of SMEs in its long-term growth strategy, the Tam Trinh branch has introduced various preferential policies to help these businesses access capital at reduced costs.
3.2.1.1.4 Outstanding loans classified by terms
Table 3 4 Outstanding loans classified by terms from 2013 to 2015
Growth (%) Total outstanding loans to SMEs 1,708 100 1,943 100 13.8 1,824 100 (6.1) Short-term outstanding loans 1,189 69.6 1,385 71.3 16.5 1,293 70.9 (6.6) Medium-term outstanding loans 132 7.7 89 4.6 (32.6) 78 4.3 (12.4) Long-term outstanding loans 387 22.7 469 24.1 21.2 453 24.8 (3.4)
Source: Credit office, Agribank Tam Trinh branch
Between 2013 and 2015, the Tam Trinh branch experienced a consistent increase in outstanding loans, with both short-term and long-term loans rising from 1,189 billion VND.
From 2013 to 2014, outstanding loans surged from 387 billion VND to 1,385 billion VND, with a subsequent decline in 2015 to 1,293 billion VND The medium-term outstanding loans also gradually decreased during this period This growth in credit activities was crucial in addressing the working capital needs of enterprises for their business operations.
In the analysis of loan structures, short-term loans dominated, comprising approximately 70% of total outstanding loans However, from 2014 to 2015, short-term loans showed a decline, while long-term loans increased due to the branch's focus on funding mid-term and long-term projects Despite this, mid-term and long-term loans to SMEs remained minimal, accounting for less than 26% of total outstanding loans, primarily due to SMEs' limited financial resources that hindered their ability to secure such loans Consequently, SMEs primarily sought short-term loans to address immediate needs, such as meeting payment obligations and covering working capital requirements, indicating a lack of demand and capacity for long-term projects.
3.2.1.1.5 Outstanding loan classified by industrial sectors
Table 3 5 Outstanding loans classified by terms from 2013 to 2015
Source: Credit office, Agribank Tam Trinh branch
Table 3.5 illustrates the distribution of outstanding loans by industrial sectors at Agribank Tam Trinh branch from 2013 to 2015 Throughout these years, the industrial sector consistently held the largest share of total outstanding loans, comprising 72.1% in 2013, 74.7% in 2014, and 75.3% in 2015 The commerce and trade sector ranked second, with proportions of 19.6% in 2013, 16.4% in 2014, and 15.5% in 2015 In contrast, the agriculture sector represented the smallest share in the structure of outstanding loans during this period.
In the branch's structure, outstanding loans in the industry and agriculture sectors exhibited a consistent increase, while the commerce and trade sector demonstrated a contrasting reserve trend This indicates a stable financial structure that aligns with Agribank's strategic orientation for the coming years.
3.2.1.1.6 Outstanding loan classified by collaterals
Table 3 6 Outstanding loans classified by collaterals from 2013 to 2015
(%) Total outstanding loans to SMEs 1,708 100 1,943 100 1,824 100
Loans secured by collaterals 1,544.2 90.41 1,724.4 88.75 1,587.4 87.03 Loans without secured by collaterals
Source: Credit office, Agribank Tam Trinh branch
The statistics in the table illustrate the branch’s outstanding loans classified by collaterals from 2013 to 2015
The trend of secured loans has declined over the analyzed period In 2014, outstanding secured loans reached 1,724.4 billion VND, reflecting an increase of 180.2 billion VND or 11.7% However, by 2015, this figure decreased to 1,587.4 billion VND, representing a drop to 7.9%.
Over 80% of outstanding loans are secured, highlighting a strong safety level and effective risk management for the bank This high percentage of secured loans enables the bank to confidently recover funds, even in cases of customer default or bankruptcy, thanks to the collateral backing these loans.
In summary, the high rate of secured loans presented that the branch was implementing its preventing and minimizing solutions effectively
3.2.1.2 Credit risks in lending to SMEs at Agribank Tam Trinh
Table 3 7 Ratios of overdue loans of SMEs in Agribank Tam Trinh branch from 2013 to 2015
Total outstanding loans to SMEs 1,708 1,943 1,824
Overdue loans in lending to SMEs 51.58 124.35 102.69
Source: Credit office, Agribank Tam Trinh branch
The table presents the value and the percentage of overdue loans in the total outstanding loans in Agribank Tam Trinh branch from 2013 to 2015
Over the years, the value of overdue loans has shown a decreasing trend In 2013, the frozen real estate market and rising production costs led to many enterprises failing to repay their loans, resulting in a significant increase in overdue loans both in value and percentage By 2014, the total outstanding loans and overdue loans followed a similar upward trajectory, with overdue loans reaching 124.35 billion VND, accounting for 6.4% of total outstanding loans, and increasing 2.4 times compared to 2013.
FINDINGS
Limitations
Despite its accomplishments, the Agribank Tam Trinh branch faces ongoing challenges in effectively managing and mitigating credit risks associated with lending to small and medium-sized enterprises (SMEs) These limitations will be detailed further.
In 2015, the loans turnover reached 53.6 billion VND; however, this increase was not proportional to the growth rate, indicating a discrepancy in performance Compared to 2014, the growth rate failed to adequately represent the branch's size, capacity, and reputation.
The Agribank Tam Trinh branch's credit operations model lacked specialization, requiring each officer to manage all aspects of the credit process, from customer acquisition to loan collection This approach resulted in significant time and energy expenditure, diminishing productivity and effectiveness, particularly when serving SMEs with diverse business operations The necessity for credit officers to possess in-depth knowledge of each business's characteristics further complicated evaluations Consequently, the absence of specialized roles hindered the efficiency of credit operations and increased the potential for credit risks.
Despite the use of IPCAS for ranking customer creditworthiness and identifying credit risks, the criteria for differentiating enterprise sizes were inadequate As a result, the process of assessing and classifying credit risks relied heavily on the subjective experiences of credit and appraisal officers This reliance on personal judgment introduced emotional bias into the credit evaluation process, increasing the potential for moral hazard within the branch.
The branch faced significant challenges in assessing and supervising credit risks due to a limited availability of reliable information sources This lack of dependable data hindered effective analysis and evaluation processes.
Causes leading to limitations
The branch's customer policies, particularly for SMEs, are inadequately tailored to meet the unique needs of specific customer groups The absence of a classification system for categorizing customers has led to significant shortcomings in policy implementation, resulting in inconsistencies, incompleteness, and a lack of alignment with real-world conditions.
Tam Trinh branch's credit officers lack experience in lending to SMEs, as the branch previously focused on different customer segments This lack of familiarity with the unique characteristics of SMEs has led to a lack of confidence among credit staff, resulting in missed opportunities due to perceived risks associated with lending to these businesses.
Tam Trinh's lending practices primarily focused on lump-sum lending, a traditional method that, while enabling strict loan control, posed significant challenges for SMEs This approach necessitated that enterprises undergo repetitive procedures and sign new credit contracts for each loan, leading to increased time, costs, and effort Consequently, many businesses hesitated to secure loans from the bank.
The branch's promotion of its products to SMEs was ineffective due to a lack of widespread and professional outreach As a result, there was insufficient connection with SMEs, leading to the branch not providing the most suitable products for its customers.
Small and medium-sized enterprises (SMEs) often struggle with effectively managing and utilizing loans due to a lack of knowledge and experience This deficiency leads to challenges in project planning, calculating expected returns and losses, and assessing potential risks As a result, many SMEs face failures and find themselves unable to repay their bank loans.
A primary challenge faced by SMEs is the lack of access to crucial information regarding domestic business and finance This information gap hinders their ability to adapt to market changes effectively As a result, SMEs frequently invest in saturated sectors or develop products that fail to align with the needs of their partners, ultimately affecting their competitiveness and growth.
The asymmetry of information between banks and customers significantly contributes to credit risks, primarily due to adverse selection and moral hazard issues Inadequate quantitative and qualitative information hinders banks from accurately assessing borrowers' creditworthiness, leading to situations where customers may engage in excessively risky activities after obtaining loans This lack of oversight, particularly with small and medium-sized enterprises (SMEs) that often operate without regular supervision from credit officers, poses substantial risks to banks Furthermore, SMEs with poor market reputations frequently attempt to delay repayments, further escalating credit risks for financial institutions.
Established laws governing the business activities of banks and SMEs are often complicated and incomplete, creating challenges for both parties Typically, banks accept assets, primarily real estate, from SMEs as collateral for loans However, the intricate and time-consuming legal procedures surrounding collateral negatively impact credit provision and the management of these assets.
Government regulations on SME lending, particularly regarding collateral and financial capacity, are stringent, creating significant barriers for enterprises Despite SMEs being a promising sector, they require more favorable conditions to access loans, which unfortunately can lead to increased credit risks for banks.
RECOMMENDATIONS AND CONCLUSIONS
5.1.1 Solutions to prevent and minimize SMEs credit risks in Agribank Tam Trinh 5.1.1.1 Group of preventing SMEs credit risks solutions
5.1.1.1.1 Building a reasonable credit policy for SMEs
To enhance specialization in credit operations, the branch should implement a structured working model that designates specific credit procedures to designated groups of credit officers, including relationship managers, appraisal officers, and credit support officers.
At the same time, it is necessary that each specific group of credit officers ensure its support to other groups so that credit operations reach the highest effect
To effectively serve their target customers, the branch should develop tailored credit products that cater to the unique needs of SMEs Instead of offering a single credit product, the branch should create a comprehensive financial services package that includes financial consulting, credit provision, and payment services to improve credit quality Additionally, the product design process provides valuable insights that help the branch proactively identify and mitigate potential credit risks.
To mitigate risks associated with economic fluctuations, the branch should diversify its customer base beyond the traditional SMEs involved in importing, exporting, transporting, and food processing By actively seeking and extending credit to businesses in varied sectors, particularly those with high growth potential, the branch can effectively spread its risks and enhance financial stability.
To foster stronger credit relationships with newly established SMEs lacking financial documentation or profits, the branch must implement a clearer credit regime Given the inherent risks of lending decisions based solely on project feasibility and collateral, the evaluation process will largely rely on non-financial information about these enterprises.
5.1.1.1.2 Improving the quality of credit analysis and assessment
Credit risks arise from negligence and inaccuracies during analysis and assessment Effective credit evaluation is essential for improving credit quality and ensuring optimal efficiency in credit operations while minimizing risks.
To enhance assessment quality, relationship managers must improve their effectiveness in gathering information directly from customers Organizing them into specialized groups focused on lending to specific business sectors will allow staff to deepen their expertise in their respective areas Additionally, it is crucial to collect both financial and non-financial information from a variety of sources to ensure comprehensive data analysis.
Appraisers responsible for evaluating customers should be carefully chosen and trained by experienced seniors They must conduct thorough assessments of customers, considering various factors including legal and financial capacity, repayment plans, credit history, current limitations, and future prospects within their business sector Additionally, appraisers need to collaborate closely with relationship managers to address any challenges that may arise during the lending process.
5.1.1.1.3 Developing a system of early warning signals
Developing a system of signals to early identify credit risks will help the branch detect risks timely and have reasonable measures to prevent, minimize credit losses
To effectively assess and mitigate credit risks, credit officers must be attuned to customer needs, possess a deep understanding of various business sectors, and closely monitor customer operations Additionally, branches should anticipate economic shifts and changes within specific industries and clients to implement appropriate risk prevention strategies.
In order to strengthen credit risks management, the branch is required to regularly monitor loans, re-evaluate lending terms, assess customers’ business, financial capacity, and credit limit of customers
The branch must ensure that loan disbursements align with the decisions made by credit approval officers, maintaining consistency among the loan's purpose, disbursement requests, and the cost structure related to customer lending demands This synchronization is crucial for ensuring the legal and valid use of loans.
5.1.1.2 Group of minimizing SMEs credit risks solutions
Credit risks arise from unpredictable factors, making it essential for banks to mitigate potential losses To safeguard against these risks, banks should utilize insurance and mandate collateral for loans.
By transferring a portion of its risks to an insurance company, the bank enhances customer trust and minimizes its own risk exposure This strategic partnership allows the bank to concentrate its resources on delivering exceptional customer service and operate with greater flexibility.
Insurance companies possess specialized expertise in risk assessment and prevention strategies, which significantly benefits banks By collaborating with these insurance providers, banks can improve their sustainability, reliability, and overall reputation in the financial sector.
All in all, the bank can offer diverse insurance products to customers to reduce losses from credit risks and share benefits with insurance companies
5.1.1.3.1 Improving skills and quality of credit officers
To enhance the quality of credit officers, banks must prioritize equipping their staff with essential knowledge and skills while also ensuring that these officers possess strong moral qualities.
To effectively train credit officers, the bank must implement a transparent and objective recruitment process to select qualified candidates Additionally, it should establish advanced training programs to equip staff with essential knowledge of credit, legal regulations, and the market environment, thereby improving credit operations Periodic retraining is also crucial to keep staff updated on industry developments and enhance their ability to identify and prevent customer fraud Lastly, the bank should introduce incentive programs to reward and promote outstanding performance among its employees.
Credit staff should consistently develop their moral qualities, including responsibility, honesty, enthusiasm, and proactivity To excel in their roles, they must receive training from experienced banking professionals, enabling them to effectively apply essential skills such as communication, investigation, analysis, and negotiation when interacting with borrowers.
5.1.1.3.2 Enhancing the information system to avoid credit risks