The problems of non performing loans in vietnams commercial banking system from 2010 to 2015 and solutions,graduation thesis

STATE BANK OF VIETNAM BANKING ACADEMY Foreign Language Faculty -*** - GRADUATION THESIS THE PROBLEMS OF NON-PERFORMING LOANS IN VIETNAM’S COMMERCIAL BANKING SYSTEM FROM 2010 TO 2015 AND SOLUTIONS Student : Nguyen Hong Nhung Lecturer : Nguyen Phuong Lan (M.A) 20th May 2016 Nguyen Hong Nhung – K15ATCA ACKNOWLEDGEMENT I would like to express my profound gratitude to Mrs Nguyen Phuong Lan (M.A), my thesis supervisor for her guidance, suggestions, pieces of advice and sharing of knowledge I am also deeply indebted to all of my devoted lecturers in Faculty of Foreign Languages My sincere thanks go to all members of my family for their love and support during my entire study period and also my entire life I sure cannot fail to acknowledge the encouragement of my fellow friends in the Banking Academy I am also thankful to all those who in one way or the other supported me in the completion of this thesis Nguyen Hong Nhung – K15ATCA ABSTRACT During the last decade, non-performing loans had a huge impact on the economy in a widespread area As soon as the collapse of stock market and real estate market, this phenomenon has been concerned seriously Since those markets accounted for a huge volume of capital, the crisis rapidly spread to the lending market of commercial banking system In the case of Vietnam’s commercial banking system, non-performing loans started to be concerned since 2010 The problems were not only about non-performing loans themselves, but also about the interference and adjustments of the government and the whole commercial banking system in order to control the situation The analysis of nonperforming loans can be used to measure the health of the commercial banking system in particular and the stability of the economy in general Non-performing loans problem is a broad subject and yet to be conveyed entirely in the study; still, the research’s expectation is to provide a general look into non-performing loans problems of Vietnam’s commercial banking system during the 2010 – 2015 period By using qualitative and quantitative research method, the thesis includes detail information and analyzed figures related to the topic, actual explanations for causes, and possible recommendations for the government and the commercial banks in the hope of preventing the outburst of non-performing loans There are four chapters in the research: Chapter 1: Introduction Chapter 2: Literature review Chapter 3: Research methodology and data analysis Chapter 4: Recommendations and conclusions Nguyen Hong Nhung – K15ATCA TABLE OF CONTENTS ACKNOWLEDGEMENT i ABSTRACT ii TABLE OF CONTENTS iii LIST OF TABLES AND FIGURES iv LIST OF ABBREVIATIONS v CHAPTER I: INTRODUCTION 1 Rationale Objective Research questions Scope and limitations Research methodology CHAPTER II: LITERATURE REVIEW Commercial bank 1.1 Definition of commercial bank 1.2 Roles of commercial bank 1.3 Basic operations of commercial bank Non-performing loan 12 2.1 Definition of bank’s NPL 13 2.2 Loan classification and criteria for accessing NPLs 13 2.3 Causes of NPLs 15 2.4 Consequences of NPLs 17 CHAPTER III: RESEARCH METHODOLOGY AND DATA ANALYSIS 20 Vietnam’s commercial banking system 20 1.1 Overview 20 Nguyen Hong Nhung – K15ATCA 1.2 Credit operation situation of Vietnam’s commercial banking system from 2010 to 2015 20 1.3 Loan classification according to Vietnam’s regulations 22 The problems of NPLs in Vietnam’s commercial banking system from 2010 to 2015 24 2.1 The NPLs situation and the effort in controlling NPLs of Vietnam’s commercial banking system from 2010 to 2015 24 2.2 Vietnam’s NPLs situation evaluated by the international rating agencies 45 2.3 Limitations that cause NPLs problems in Vietnam’s commercial banking system 46 CHAPTER IV: RECOMMENDATIONS AND CONCLUSION 51 The necessity of controlling NPLs 51 Recommendations to control NPLs 52 2.1 Recommendations for the government 52 2.2 Recommendations for commercial banks 56 Conclusion 60 REFERENCES vi Nguyen Hong Nhung – K15ATCA LIST OF TABLES AND FIGURES List of Tables Page Table 2.1 Loan classification according to the IMF and the WB 14 Table 3.1 Group loans in some commercial banks in September 2011 26 Table 3.2 Total amount of NPLs and NPL ratio of some commercial banks in 2014 and 2015 40 Table 3.3 The amount of NPLs in each group of some commercial banks in 2014 and 2015 41 List of Figures Page Figure 3.1 NPL ratio of some commercial banks in September 2010 and September 2011 26 Figure 3.2 Loans structure of some commercial banks in September 2011 27 Figure 3.3 Term of deposits of some commercial banks in September 2011 28 Figure 3.4 Term of loans of some commercial banks in September 2011 29 Figure 3.5 NPL ratio of some commercial banks in 2011 and 2012 30 Figure 3.6 The ratio of Group loans and outstanding loans in September 2012 31 Figure 3.7 NPL ratio of some commercial banks in 2012 and 2013 33 Figure 3.8 NPLs structure in 2013 and 2014 36 Figure 3.9 NPL ratio of some commercial banks in 2013 and 2014 36 Figure 3.10 The amount of NPLs in each group in 2013 and 2014 37 Figure 3.11 The amount of NPLs bought by VAMC from December 2013 to December 2014 38 Figure 3.12 banks with the largest amount of NPLs in September 2015 43 Figure 3.13 Total amount of NPLs of the banking system from 2010 to 2015 44 Figure 3.14 NPL ratio of the banking system from 2010 to 2015 45 Figure 3.15 NPL ratio according to SBV and the international rating agencies 45 from 2011 to 2014 Nguyen Hong Nhung – K15ATCA LIST OF ABBREVIATIONS NPLs Non-performing Loans SBV The State Bank of Vietnam WB World Bank WTO World Trade Organization IMF International Monetary Fund VND Vietnamese Dong SOCBs State-owned Commercial Banks SOEs State-owned Enterprises JSCBs Joint Stock Commercial Banks VAMC Vietnam Asset Management Company CICs Credit Information Centers CD Certificate of Deposit Nguyen Hong Nhung – K15ATCA CHAPTER I: INTRODUCTION Rationale Joining the WTO is the largest watershed of the Vietnam economy with tremendous opportunities as well as vast challenges International integration increases the prestige and position of Vietnam's banking system especially on the local financial market Nonetheless, the competitive pressure also grows as regulations for foreign financial institution are loosened To ensure sustainable development, Vietnam’s commercial banking system needs to be addressed the weaknesses that still exist, such as technology, professional qualification, management mechanism and supervision On the road of integration, bad debts or NPLs problems of Vietnam’s commercial banks started to be noticeable in 2010 and need to be particularly concerned since 2011 Risk management activities of banks have not kept pace with the overheating development of the economy and credit growth; thus, result in bad debts outburst, poor credit quality and low efficiency of the banking business NPLs problem today is puzzling not only Vietnam economists but also the world's financial experts Its impacts are massive loss in profit and even bankruptcy Therefore, it is crucial that urgent actions are taken effectively to prevent and control bad debts for a healthy banking system in particular and a strong financial system as a whole Be aware of the importance to prevent NPLs hazard in credit operations, as well as the need to accelerate strengthening the banking system, I chose the topic: "The problems of nonperforming loans in Vietnam’s commercial banking system from 2010 to 2015 and solutions” Objective The main objective of the research is provide different aspects of NPLs problem in credit activities of Vietnam’s commercial banks from 2010 to 2015 The research aim to assess the situation of bad debts, causes of bad debts incurred, measures to control bad debts that were used by the government and the banking system, and consequences of bad debts Based on that, some possible solutions will be proposed in order to settle and prevent NPLs; Nguyen Hong Nhung – K15ATCA hence, strengthening credit operations and banking businesses of Vietnam’s commercial banking system in the near future Research questions The study should be able to answer a number of questions with a certain level of insight - What are the causes of NPLs? How did NPLs progress during the period of 2010 to 2015 in Vietnam’s commercial banking system? - What did the government and banks to deal with this problem? To what extent was it effective? What were the remaining drawbacks? What are the possible solutions to handle NPLs? - Scope and limitations Considering NPLs is a complex object, the paper will narrow the topic to a reasonable limit This research will take an overview look at credit activities of the whole commercial banking system of Vietnam Banks which are chosen to investigate varied in different types of JSCBs, SOCBs and different level of charter capital as they can well represent Vietnam’s commercial banking systems The paper mainly targeted at these banks: VietinBank (CTG), BIDV, Vietcombank (VCB), Sacombank (STB), Eximbank (EIB), Military Bank (MB), Asia Commercial Bank (ACB), VPBank (VPB), Techcombank, SHBank (SHB), LienVietPostBank (LPB), National Citizen Bank (NVB), Habubank (HBB), KienLongBank and Agribank The researched period is from 2010 to 2015 as it is the time when the risks of NPLs broke out Research methodology In addition to the common methods used in academic research which are dialectical materialism historical materialism, the study also uses synthesis, analysis, comparison and statistical methods Other sources include the Internet, printed books, newspaper and magazines, specialized journals, economic experts’ talks, specialists’ points of view and previous researches Nguyen Hong Nhung – K15ATCA CHAPTER II: LITERATURE REVIEW Commercial bank 1.1 Definition of commercial bank Commercial bank are financial intermediaries which have an important position in the economy There are many different concepts of commercial banks: 1.1.1 Definitions by the economists According to Frederic S Mishkin, “These financial intermediaries raise funds primarily by issuing checkable deposits (deposits on which checks can be written), savings deposits (deposits that are payable on demand but not allow their owner to write checks), and time deposits (deposits with fixed terms to maturity) They then use these funds to make commercial, consumer, and mortgage loans and to buy government securities and municipal bonds.” According to Peter S Rose, “Commercial bank is type of bank which sells deposits and makes loans to businesses and individuals.” 1.1.2 Definition according to Vietnam law Commercial banks are financial intermediaries that have an important position in the economy, which are a type of business enterprises in the financial sector According to Credit Institutions Act No.20/2004/QH11, "Commercial banks are the type of credit institutions that perform all banking activities and other related business activities." While "banking is monetary business and banking service with regular activity is receiving deposits, then use this money to provide credit and payment services." The business model of banks is mainly monetary business and providing banking services Commercial bank is the largest indirect capital channel, a bridge between people in need of capital and people with surplus capital Activities of commercial banks serve for trading a particular commodity that is capital, paying deposit rates lower than capital loan interest Nguyen Hong Nhung – K15ATCA Since the late 2008, the economy has been negatively affected by financial crisis, global economic depression and high inflation This makes economic growth rate and aggregate demand slowed in the first months of 2012, estimated economic growth was only 4.38% compared with the same period in 2011 Consumer price index improved slowly compared with the same period of the previous years Meanwhile, businesses inventories index rose sharply and at a high level over the same period in previous year, on 01/06/2012, the inventory index of the processing industry increased by 26% compare to the same period in 2011 Large amount of inventories leads to outstanding capital in production business and a rise in bad debts of banks Besides, a lot of businesses now have weak financial capacity, operating primarily on bank loans, small equity and limited ability to respond to the business environment changes Therefore, when the business environment worsens, macroeconomic policy is tightened and interest rate rises while distribution of consumer goods has difficulties will greatly affect the financial condition, business performance and ability to pay bank loans of enterprises As reported by the Ministry of Planning and Investment, the number of companies dissolved, suspended operations increased rapidly: in 2011 there were 23,358 enterprises and in 2012 there are about 25,250 businesses, an upturn of 8.1% 2.3.3.2 Legislation to restrict and tackle bad debts is not yet transparent and rational  Unclear bad loan classification regulations, making it difficult to settle bad debts In principle, to resolve bad debts, it is required to find the real figures and the causes of them in order to reach a solution However, one of the biggest barriers to find of the exact number of bad loans in banks is the ambiguity in the regulations on loan classification criteria As stipulated in Decision 493/2005/QD-NHNN, amended by Decision 18/2007/QD-NHNN and Decision 02/2013/TT-NHNN of SBV, banks’ debts can be classified based on two methods of qualitative and quantitative SBV allowed banks to choose one of the two methods, depending on the possibilities and conditions of each bank Therefore, some banks have their NPL ratio determined by qualitative methods, others by quantitative methods The qualitative method is more efficient, allowing banks to have a complete basis to assess the potential and ability to repay debts of customers accurately and 49 Nguyen Hong Nhung – K15ATCA completely However, at the present, there is no common standards of qualitative criteria in Vietnam SBV does not have any specific guidance on the application of qualitative methods On the other hand, this loan classification method require implementing banks to build a credit rating for customers in a coherent way However, it is not easy to implement and takes a lot of time as well as effort Another important factor is that qualitative classification would create a NPL ratio to times higher than the quantitative method, which means businesses are required to establish a bigger risk provisions Therefore, there are very few banks classify debts using qualitative method Meanwhile quantitative classification does not concern production results of businesses, which leads to a wrong reflection of the nature of their debts Thus, unclear classification regulations made bad debt of banks not reflected fully and accurately, thereby making it more difficult to settle and control bad debts  Legal framework for the sale of debts is ineffective VAMC have the tasks of acquiring bad loans from commercial banks, creditors, businesses and then restructure these debts to sell on the market However, the legal framework is still incomplete; making the sale and settlement of outstanding debts becomes more difficult For example, the core issue in the operation of VAMC after purchasing the debts is to support the weak businesses so they can pay the debts The key factor to the recovery of these businesses is capital which enables businesses to restore production, continue to operate in order to finish the repayment Nonetheless, current regulations not allow companies to purchase or sell guaranteed loans; therefore, it is tricky and time consuming in reviving companies in debts Furthermore, debts trading companies face obstacles in approaching clients There are currently no regulations that force commercial banks to sell their debt if their bad debt ratio is too high or their inability in dealing with bad loans; thus, most commercial banks are reluctant to sell debt Moreover, bad debts are usually offered with very high and unrealistic price, which is 70% or even 100% of the value of the debts This creates obstacles in negotiation, affecting VAMC in their attempts to purchase and solve bad debts 50 Nguyen Hong Nhung – K15ATCA CHAPTER IV: RECOMMENDATIONS AND CONCLUSION The necessity of controlling NPLs Since the global financial crisis started from the United States spreading around the world, the economy started to face a lot of difficulties stemming from the banking system, the most momentous of which is bad debt They greatly affect the quality of a bank and, of course, their influence is not limited within the banks The reason people have to pay much attention to banks’ bad debts is their far-reaching influence to the business and the economy A bank with a high ratio of bad debt will face the risk of capital loss and default Weak banks with bad loans can reduce the efficiency of market mechanisms and adversely affect the implementation of macroeconomic policies A weak banking system, unhealthy with high levels of bad debt will not only damage the micro channels which are necessary for economic growth but also become a heavy burden on the budget, negatively impacting the operation of the exchange rate system NPLs have a sizable effect on the entire economic sectors; hence, solving bad debts is necessary in order to recover the post-crisis economy Moreover, joining WTO means Vietnam’s banking system have to face with the presence of 100% foreign capital investment commercial banks Thus, domestic banks, which have weak financial capacity (total assets of the largest banks are not yet 15 billion VND, capital is below 550 million USD), low level of management and outdated technology, will be competing with giants such as Citibank, HSBC, ANZ who have total assets of trillions USD with modern banking management and technology Foreign banks often accomplish remarkable achievements with low NPLs (below 1%) and have nationwide network Therefore, domestic banks need to immediately strengthen their business activities, along with that is the prevention and restriction of bad debts It is required to find a solution that is effective and synchronized to restrict banks’ bad debts The elimination of bad debts is the task of not only the banking system but also of the economy, it depends on not only the measures of SBV, commercial banks or the borrowers, but also on an uniform and complete legal system and a favorable economic environment 51 Nguyen Hong Nhung – K15ATCA Recommendations to control NPLs 2.1 Recommendations for the government 2.1.1 Renovating and modernizing the credit information system Banks need to constantly innovate and modernize the system for collecting and processing customer information and administrative information, ensuring bank managers as well as credit officers can access quickly, systematically and up-to-date on reliable sources In the future, it is necessary to consolidate and develop credit information system of the banks includes credit information center, the information department at bank branches, customer information department at other credit institutions Furthermore, to provide sufficient information for the decision-making processes of commercial banks, government should also have specific mechanisms and regulations on the establishment of private credit center or professional credit rating agencies In some other countries, public CICs are often established by the central bank with the main purpose of monitoring commercial banks, while private CICs are established by credit institutions or credit market participants in order to share credit information for business safety purposes Public CICs tend to only collect information on large value loans that may have impact on the overall economy The information they gather is from financial institutions under the supervision of SBV, so developing non-bank financial institutions such as leasing companies, finance companies are often not included Moreover, public CICs only provide current information without providing payment history of borrowers Meanwhile, private CICs collect information on a much broader range, including loans of SOEs and individuals In particular, the information is not just limited to large loans, the center also offers payment history of borrowers and many other services such as processing credit application, credit scoring systems Thus, public and private CICs support each other, work together to promote credit activities, creating equality and easier access to loans for micro lenders Another positive effect of the sharing credit information for banks is reducing the proportion of bad loans, reducing the cost of lending, which in turn brings higher profits for banks The credit rating institutions may provide rankings of companies, setting a foundation for banks to consider and decide whom to provide credit 52 Nguyen Hong Nhung – K15ATCA 2.1.2 Tightening the financial discipline for SOCBs and SOEs As SOCBs still prioritize SOEs and the government is still trying to save these banks, statedirected lending with the guarantee of the government will always have latent credit risks in it Once there exists moral hazard in the relationship among the government, the SOCBs and SOEs, bad debts will not be solved The government tightens fiscal discipline to SBV and SOEs is essential to preventing the cycle of regeneration and accumulation of bad debts In addition, the Government should improve banking supervision system to raise the quality of early warning systems and advanced technical requirements for loan loss provisions At the same time, it is crucial to speed up the process of restructuring the banking system and equitizing associate with listing on the stock market 2.1.3 Enhancing the role of the VAMC in handling bad debts It is necessary to develop VAMC to become a special tool for SBV to contribute to limit bad debts faster, reduce risks and boost credit growth for the economy VAMC must be the financial institution that is qualified and has sufficient financial resources, human resources, management and technology Continuing to study and perfect the legal framework for the organization and operation of VAMC is critical so they can have enough initiative and competence in seizing property, fore closuring, processing and selling security assets to collect debt, participation in governance and restructuring loans Meanwhile SBV should continue to increase the charter capital of VAMC in order for them to have the ability to buy bad loans as market mechanisms It is also pivotal to coordinate closely with other agencies and authorized organizations, VAMC and borrowers to complete procedures, legal documents related to bad loans, asset-guaranteed of bad loans sold to VAMC 2.1.4 Accelerating the process of finalizing legal documents Currently, the provision of legal documents on ownership of the property has attracted more attention However, to get these documents, the owner will encounter countless complication due to the procedures and the delay from authorities Hand-over or foreclosed collateral is very difficult to sell, or will not recover the debts as it does not have enough legal documents Collateral settlement is also an obstacle to banks when they are not 53 Nguyen Hong Nhung – K15ATCA allowed to sell the assets by themselves, especially if the customer does not cooperate, and the authorities sometimes not support effectively Therefore, it is advisable to facilitate and accelerate the process of finalizing legal documents This change would create favorable conditions for commercial banks in selling collateral to settle bad debts 2.1.5 Establishing more specific regulations on loan classification and provision Most of the credit institutions that implement quantitative methods have NPL ratio below 3% However, banks still not have internal credit ranking system to support the classification of debt management and credit quality This suggests that the debt classification results not yet reflect the exact debt situation of organizations It is necessary to unify a credit quality assessment method on the basis of combining evaluating customers’ repayment capacity by internal credit ranking system and the actual assessment at the time of evaluation A specific guideline for the evaluation process and customer ratings for uniform implementation is required The criteria and ratings are determined based on statistical results, survey data from some banks and assessed through mathematical model Based on the internal credit ranking system, banks are to be required to build internal regulations on credit quality management and credit policy to manage throughout the process from the appraisal, approval, granting of credit to checking and administrating the process of disbursement, monitoring loans as well as the management of collateral Banks also need risk prevention policies to manage provisioning and use of provisions to deal with risks and the sale of collateral Decentralization, authorization and define the powers and responsibilities of each department and individuals involved throughout the process should be highly concerned, too It should also be ensured that similar customers receive the same management level, from the evaluation, approval, granting of credit, credit records to the process of reviewing, ratings, loan classification, provisioning, use of provisions for dealing with risks 2.1.6 Completing the surveillance activities of SBV to commercial banks The monitoring activities still has many issues to be further researched to complete: 54 Nguyen Hong Nhung – K15ATCA - - - Restructuring the functions and duties of the Banking Supervision Agency to ensure full implementation of a cycle consisting of four stages: licensing, promulgating regulations, monitoring, and fining, revoking licenses It is aim to ensure consistency and improve the effectiveness of surveillance activities Innovation monitoring method according to CAMELS method Using this method, inspectors will put banks into groups following these criteria: capital adequacy, asset quality, management and operations quality, earnings, liquidity and sensitivity to risk This help SBV change its surveillance methods towards monitoring based on risk Completing the monitoring process with a combination of two main parts: remote monitoring and on-site inspection of the Banking Supervision Agency Training supervisors and staff 2.1.7 Strictly controlling the issuance of license to establish business enterprises One of the major constraints impeding lending activities of banks is the mismatch between the capabilities, qualifications, functions, scope of business of the enterprises with information on their registration Many state and non-state owned enterprises receive establishment license and business registration with the functions and duties exceed their financial capacity, technical qualifications and level of production State enterprises have very little equity and assets are usually factories and obsolete machinery, which are not qualified for a mortgage Meanwhile, the mandates in their business license are so great, loan requests of many customers are often 20 to 50 times higher than the actual equity capital Thus, if the loans are in accordance with the regime, most SOEs are not eligible for loans or the loans will not be significant If banks continue to lend, the possibility of risks of the loans is very high If the risks occur, they may face the offense of intentionally break the rules or lack of responsibility, causing serious consequences Therefore, the issue faced by the government, ministries and agencies whose function is to adjust the mechanisms and policies Specifically: - Authorize a single state agency to issue licenses for the establishment, registration of business Licensing agency must be responsible for the legal entity, actual equity capital and the capacity of the business 55 Nguyen Hong Nhung – K15ATCA - Business license and operation scale must comply with the equity, capacity and actual management ability of the business 2.2 Recommendations for commercial banks 2.2.1 Improving the quality of credit information In credit business, information is crucial to help banks to decide to invest or not The information provided by the customers is often incomplete and inaccurate, so loan officers cannot just rely on customer’s information, they need to gather, process information on all matters related to the project from different sources Besides the use of CICs, commercial banks need to be active in gathering accurate information of customers through measures such as:  Interviewing loan applicants Through interviewing people applying for loans, bank staff will know the reasons of borrowing and whether their loan requests meet the requirements of the bank Therefore, Bank staff may have some ideas about the borrowers’ truthfulness, business development, managerial structure, competitive advantages, and plans for the future In addition, credit officer may request additional financial information needed for credit analysis  Investigating borrowers’ business location Businesses applying for loans must allow loan officers to visit their business location A loan officer can gain substantial information about the development of business management through accessing their property and interviewing management staff The loan officer can review the organizational and operational structure, production lines, business methods and customer inventories For manufacturing companies, equipment and manufacturing diagrams are mainly focused For retailing businesses, the bustling activities suggests their power Credit officers are able to check credit information collected through interviews and from other sources  Collecting information from other banks 56 Nguyen Hong Nhung – K15ATCA A business often borrows from different banks With each bank, it must provide certain information depending on the requirements of the bank Therefore, to get an overview or more information of the business, a bank can collect information from other banks  Collecting information from financial statements Most customers are required to provide financial statements for the bank, especially if it is a rather large loan application In addition, depending on the requirements of each bank, businesses must provide additional reports on their debt situation and their budget The fidelity of these reports should be checked Banks usually requires the financial reports to be certified by the auditing agency Nevertheless, in many cases, businesses can provide unaudited figures which can be untruthful  Collecting information from other sources of information To attain information on supply and demand of products on the market, on product development policies and on the development of the government sector, banks need to collect information from other sources, such as: - The ministry: provides banks information about supply and demand volume, industry development trends, information about those products Magazines, books After gathering enough information, bank officers conducted a review of selected information to prepare for the analysis and processing of information On the other hand, they should collect information about the market, the technology; build information scoring systems and customer credit rating by using computer software This will be the basis for a more accurate assessment of borrowers and enhance the speed of processing loans 2.2.2 Reforming the credit system Currently most of the commercial banks in Vietnam are having problems in their structure The operating system is cumbersome and ineffective Therefore, it is necessary to reform the credit system to operate under international rules on credit risk management Separating the functions of marketing, customer relations, independent risk assessment, credit decision and debt management, along with clarifying definition of responsibilities and jurisdictions, 57 Nguyen Hong Nhung – K15ATCA ensuring the independence and objectivity It is important to perform strict, frequent supervision related to disbursement and loans monitoring Only then can the credit system run smoothly, efficiently, thereby reducing bad debts 2.2.3 Improving the quality of loan officers Human factor is always the most important in determining the success or failure of any activity in all fields For credit activities, human resources play an even more important role They decide provisions to credit quality, service quality of banks and thereby determining the credit effectiveness of bank It is required to establish courses for training, retraining knowledge of professional, focusing on marketing, sales skills, negotiating contracts and business culture At the same time, credit officers must be standardized, while those who lack profession, ethics and are dishonest must be rejected or transferred 2.2.4 Encouraging borrowers to open accounts at banks Through changes in the customers’ account, banks can easily monitor their business activities Therefore, banks should encourage customers to open accounts From that, banks could discover signs of negative effects of customers’ business activities so that specific measures can be taken to prevent and limit credit risks At the same time, through customers’ use of means of payments, banks can be more aware of the customers’ demand to constantly improve 2.2.5 Strictly inspecting the process before, during and after lending to take immediate measures if customers use the funds for improper purposes Banks need to strictly implement credit processes, enhance operational inspection and check before, during and after lending, ensuring the use of customer funds Check before lending includes checking the conditions of customer such as legal documents, financial conditions, loans demand, and loans purpose Check while lending helps credit officers lend money to proper customers and comply with their purposes Check after lending means that after disbursement, credit officers should check whether the customers use the loan for the correct purposes and monitor for early detection of problematic loans 2.2.6 Finishing internal credit ratings system following international standards 58 Nguyen Hong Nhung – K15ATCA Internal credit ratings system is the most crucial platform to deploy administration tools following international standards Periodically (every quarter), clients will be evaluated and placed in one particular class, such as AA, BB + or CCC Based on the results of the credit rating, banks will classify customers outstanding loans into debt groups, for example, the AA is assigned to Group 1, the CC is classified into Group The internal credit ratings system is a quantitative, comprehensive and consistent evaluation of the financial status and repayment capacity of the customer This system based on ratings of customers’ financial and non-financial indicators, assessment of the financial parameters, business prospects, internal management quality The criteria and scales are developed on actual statistics of many customers and opinions of expert This ensures the scientific, realistic and specially high predictability of the assessment Applying the credit rating system following international standards will help banks manage their credit portfolio 2.2.7 Finding the cause to have the appropriate solutions when customers show signs of bad debts Banks should analyze the situation of overdue loans through guaranteed and nonguaranteed debts analysis and status of mortgage assets In addition, banks should cooperate with committees, local authorities, and related departments in lending, collecting loans, dealing with bad loans, and processing collateral In reality, there are cases where customers start to experience difficulties but have been detected in time and taken measures to prevent right from the start, such as controlling warehouse, frozen assets, conducting lawsuits early so the possibility of debts recovery is very high 2.2.8 Diversifying measures to handle bad debt In addition to usual bad debts treatment measures such as setting provision funds to offset or liquidate collateral, banks can use other measures These includes: - Selling bad debts to VAMC and foreign investors: Banks selling off bad loans to debt-trading companies is an effective solution in settling bad loans, cleaning up the balance sheets of banks Meanwhile, banks can focus on the business activities with the sole goal of increase profit and corporate value 59 Nguyen Hong Nhung – K15ATCA - Transferring debts into equity: For outstanding debts with pledged assets, banks can convert them into capital of enterprises which is eligible to be transfered Raising the debt: This means that banks can provide more capital and continue financing to help customers to overcome the financial difficulties temporarily Co-financing debt: There are bad debts exceeding the ability of a bank to deal with, so that there should be coordination between banks in the form of co-financing for debts settlement Co-financing, or co-capital, to deal with bad debts has an advantage: each bank has its system of familiar customers and field, or its own strength Therefore, co-financing will help banks complement each other by focusing on the strengths and creating a synchronized control of customers 2.2.9 Separate commercial lending and directive lending in credit activities of SOCBs SOEs are always the biggest customers of the banking system, although the proportion of bank credit for this region is abating The problem here is that while many SOEs are continuously operating in losses and unable to pay debt, they still borrow money from SBV without collateral This led to SOEs’ debt become more exacerbated, putting the banking system into danger without the financial intervention of the state The management of SOCBs are regarded as the biggest weakness of SBV They should be run by a professional board of directors rather than a division of the government or SBV If we keep the current situation which is maintaining a conflict of interest as banks leaders represent both owners and financial regulatory agencies Briefly, control and treatment of NPLs in Vietnam's commercial banks are always a primary concern of the government and the banks These are some recommendations to improve the effectiveness of dealing with bad debts in Vietnam Nonetheless, to effectively implement these measures, it is necessary, not just for banks but for the whole socio-economic sectors to cooperate Conclusion Banking business is one of the most risky activities in the financial market Thereby, the study of risks in the banking operations, especially risks in credit operations, is an extremely substantial yet complex task 60 Nguyen Hong Nhung – K15ATCA Through the research process, the following conclusions can be drawn out from the paper: First, commercial banks are financial institutions making business by borrowing and lending It is the lending activities of banks that trigger the problem of NPLs, as it is an inevitable risk of credit operations Bad debts cause negative impacts to customers, banks and the economy Therefore, the prevention and restriction bad debts is an urgent mission Second, during the time of 2010 to 2015, NPLs problem in Vietnam’s commercial banking system was indeed a serious problem Be aware of that, through a variety of micro and macro policies, Vietnam’s commercial banks, alongside with SBV, made great effort to solve this problem Measures to be applied, though limited for several causes, the NPLs settlement was still improved to some extent Third, to have a sound financial system, the restriction of NPLs is momentous The thesis, thus, mentions a number of strategies to strengthen the ability to restrict and control bad debts in credit activities Since there are still barriers in time, in the process of approaching sources and collecting information, as well as limitation in professional understanding, it is unavoidable that the study could have some certain deficiencies NPLs problem is also quite a wide subject, only a number of aspects can be shown within the scope of this study It is much necessary to investigate further in order to thoroughly understand the subject matter./ 61 Nguyen Hong Nhung – K15ATCA REFERENCES Adriaan M Bloem; Russel Freeman (2004) The Treatment of Non-performing Loans IMF Committee on Balance of Payments Statistics Ahlem Messai; Fathi Jouini (2013) Micro and Macro Determinants of Nonperforming Loans Alain Laurin; Giovanni Majnoni (2003) Bank Loan Classification and Provisioning Practices in Selected Developed and Emerging Countries World Bank Publications Arnaud de Servigny; Olivier Renault (2004) The Standard & Poor's Guide to Measuring and Managing Credit Risk (1st Edition) McGraw-Hill Education Do Quynh Anh; Nguyen Duc Hung 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