Solutions to credit risk mitigation in lending activity in evn finance joint stock,

Banking Academy Graduation thesis THE STATE BANK OF VIETNAM BANKING ACADEMY FOREIGN LANGUAGE FACULTY  GRADUATION THESIS Topic: SOLUTIONS TO CREDIT RISK MITIGATION IN LENDING ACTIVITY IN EVN FINANCE JOINT STOCK COMPANY Student : Mai Hong Van Student ID : 14A7510275 Class : ATCC-K14 Supervisor : Ms Can Thuy Lien (MA) Hanoi, May 20th, 2015 Mai Hong Van Class: ATCC - K14 Banking Academy Graduation thesis DEDICATION I dedicate this thesis to my family for their endless love and encouragement A special feeling of gratitude goes to my beloved parents who has never stopped giving me strength and financial support throughout my study I also dedicate this thesis to lecturers and students in Foreign Language Faculty for helping me develop and perfect my writing skills Finally, I dedicate this work to my university, Banking Academy of Vietnam for creating ideal learning environment Mai Hong Van Class: ATCC - K14 Banking Academy Graduation thesis ACKNOWLEDGEMENT I wish to thank my teachers who directly provide profound knowlegde for me The knowlegde is a valuable asset to bring along in my career path I would like to acknowlegde and give sincere thanks to Ms Can Thuy Lien for her countless hours of reading, commenting and guiding me thoughout the entire process I owe much of my success to her hard work Moreover, I am also very grateful to all working staff of EVN Finance Joint Stock Company Special thanks goes to the members of staff at Accounting Department and Credit Department Their willingness to provide useful and precious materials made the completion of this thesis an evocative experience Hanoi, May 20th 2015 Mai Hong Van Class: ATCC - K14 Banking Academy Graduation thesis TABLE OF CONTENTS INTRODUCTION .1 CHAPTER 1: LITERATURE REVIEW 1.1 Overview of credit risk 1.1.1 Definition of credit risk .3 1.1.2 Causes of credit risk 1.1.3 Impacts of credit risk 1.2 Credit risk in lending activity in finance companies 1.2.1 Overview of finance companies 1.2.2 Lending activity in finance companies 1.2.3 Credit risk in finance companies CONCLUSION OF CHAPTER .12 CHAPTER 2: THE REALITY OF CREDIT RISK IN LENDING ACTIVITY IN EVN FINANCE JOINT STOCK COMPANY 13 2.1 History and development of EVN Finance Joint Stock Company 13 2.1.1 Foundation and development 13 2.1.2 The organization structure .13 2.1.3 Status of raising capital and results of operational activities in 2012-2014 14 2.2 The reality of credit risk in lending activity in EVN Finance Joint Stock Company 17 2.2.1 Status of credit activities 17 2.2.2 Analysis of credit risk in lending activity 20 2.3 Evaluation of credit risk and credit risk management in EVN Finance Joint Stock Company .25 2.3.1 Achievements and reasons .25 2.3.2 Drawbacks and causes .26 CONCLUSION OF CHAPTER .28 CHAPTER 3: SOLUTIONS TO CREDIT RISK MITIGATION IN LENDING ACTIVITY IN EVN FINANCE JOINT STOCK COMPANY 29 3.1 Orientation toward the development of credit activities in EVNFC 29 Mai Hong Van Class: ATCC - K14 Banking Academy Graduation thesis 3.1.1 Strategies of credit activities 29 3.1.2 Orientation to lending activity 29 3.2 Solutions to credit risk mitigation in EVN Finance Joint Stock Company 30 3.2.1 Tackling problems of overdue loans thoroughly .30 3.2.2 Perfecting lending procedure and lending policy 31 3.2.3 Improving the quality of lending activity 31 3.2.4 Improving the quality of human resources 31 3.2.5 Building up a credit information system 33 3.2.6 Executing credit insurance .34 3.3 Petitions 34 3.3.1 To Vietnam Electricity Corporation 34 3.3.2 To the State Bank of Vietnam 34 3.3.3 To the Government 36 CONCLUSION OF CHAPTER .37 CONCLUSION .38 REFERENCES 39 Mai Hong Van Class: ATCC - K14 Banking Academy Graduation thesis TABLE OF ABBREVIATION ABBREVIATION MEANING BIDV Bank for Investment and Development of Vietnam CDM Clear Development Mechanism CIC Credit Information Center EVN Vietnam Electricity Corporation EVNFC EVN Finance Joint Stock Company IT Information Technology NPL Non-performing loan SBV The State bank of Vietnam VAMC Vietnam Asset Management Company VND Vietnam Dong Mai Hong Van Class: ATCC - K14 Banking Academy Graduation thesis LIST OF TABLES Table 1: Total mobilized capital from 2012-2014 15 Table 2: Total income and expenditure of EVNFC in 2013-2014 17 Table 3: Outstanding loans classified by loan terms .18 Table 4: Outstanding loans classified by groups of customer .19 Table 5: Customer rating system 21 Table 6: Loan collection ratio 22 Table 7: Delinquency ratio .22 Table 8: Non-performing loans 23 Table 9: Provision 24 LIST OF ILLUSTRATIONS Diagram 1: Classification of credit risk Diagram 2: Organization structure 14 Figure 1: Capital structure 16 Figure 2: Outstanding loans classified by loan terms .19 Figure 3: Outstanding loans classified by groups of customer .20 Figure 4: Delinquency ratio in the year 2012, 2013 and 2014 .23 Figure 5: NPL ratio from 2012 to 2014 24 Mai Hong Van Class: ATCC - K14 Banking Academy Graduation thesis INTRODUCTION 1.Rationale Lending activity is not only one part of credit activities but also one of main business activities of a finance company since it is a primary source of incomes However, lending activity in finance companies has currently encountered intense competition due to the effects of global financial crisis and several domestic difficulties There are contingent risks and losses related to lending activity, hence the strong consciousness of developing high quality of this activity among finance companies To avoid these unpredicted losses, finance companies always have to implement solutions to increase credit quality and reduce credit risk in their lending activity Being a new non-bank credit institution, EVNFC has achieved good outcomes Although its credit activities have met the capital demands to contribute to the development of Vietnam Electricity Corporation, there are some drawbacks such as an increase in bad debt ratio and low credit safety Under these conditions, it is imperative that credit risk mitigation should be the top priority in EVNFC For those reasons, the topic of “Solutions to credit risk mitigation in lending activity in EVN Finance Joint Stock Company” has been chosen for the thesis 2.Objectives The objectives of this thesis focus on three major issues Firstly, it aims at systematizing the fundamentally theoretical issues of credit risk in lending activity in finance company Secondly, it will concentrate on analyzing and evaluating the status of credit risk in lending activity; finding out the causes of drawbacks of lending quality in EVN Finance Joint Stock Company Thirdly, based on these analysis and evaluations, some practical solutions to credit risk mitigation in lending activity in the company will be proposed 3.Subject and scope Study subject of the thesis is about credit risk in lending activity and solutions to credit risk mitigation in lending activity in finance company Within the limited Mai Hong Van Class: ATCC- K14 Banking Academy Graduation thesis scope, the thesis focuses on analyzing and accessing the reality of credit risk in lending activity in EVN Finance Company over a period from 2012 to 2014 4.Methodology Various methods are used in the thesis including the method of collecting and statistics from Annual Report, Income Statement of the company Moreover, the method of analysis, synthesis and comparison are also utilized to make the thesis more objective and reliable Additionally, to make it clearer, some charts are drawn to see the proportion and trend of movement of the integer 5.Thesis structure Apart from the introduction, conclusions, table of abbreviation, list of tables, list of illustrations and references, structure of thesis comprised of three chapters, namely: Chapter 1: Literature review Chapter 2: The reality of credit risk in lending activity in EVN Finance Joint Stock Company Chapter 3: Solutions to credit risk mitigation in lending activity in EVN Finance Joint Stock Company Mai Hong Van Class: ATCC- K14 Banking Academy Graduation thesis CHAPTER 1: LITERATURE REVIEW 1.1 Overview of credit risk 1.1.1 Definition of credit risk According to Article 02, item 01 of Decision No 493/2005/QĐ – NHNN dated April 22nd , 2005 of the Governor of SBV, credit risk is the possibility in which a loss can happen in banking activities of credit institutions since customers not take on or not have the ability to take on their responsibilities as commitment According to Circular No 02/20123/TT-NHNN of the State bank of Vietnam, credit risk is a potential loss happening to loans of credit institutions because customers not fulfil or cannot completely or partly fulfil their obligation Briefly, credit risk, per se, is a latent loss which is made when credit institutions grant loans to customers 1.1.2 Causes of credit risk 1.1.2.1 Causes from credit institutions a Causes from humans: Low qualification of credit officers could lead to risk when granting loans Loan officers cannot obtain profound knowledge about business’s field of customers, which contributes to the incorrectness in analyzing business’s outcomes and the ability to pay off debts Additionally, bad work ethics of loan officers also results in credit risk b Credit policy: Inappropriate credit policy is one of the reasons causing credit risk If credit policy is not clear and informative, the ineffectiveness of credit may increase c Causes from information system: Credit institutions not develop a thorough information system A lack of monitoring system, risk management and risk classification based on types of customers detrimentally influences credit quality 1.1.2.2 Causes from customers One of the most prevalent reasons inducing credit risk is the failure in business operation of enterprises Poor management skills and venture investments could lead to a constant financial loss in business As a result, businesses encounter Mai Hong Van Class: ATCC- K14 Banking Academy Graduation thesis The data gives information about the total number of debts in groups and the actual provision in years from 2012 It is clearly shown that the company’s provision gradually increased over years EVNFC is demonstrated to correctly follow regulations on provision and make great efforts to minimize credit risk as well as ensure credit safety b Quantitative standards One of the quantitative standards is how finance company performs Government and SBV’s regulations When executing credit activities, EVNFC has strictly followed the Law and regulations published by the Government and SBV This helps the company gain positive outcomes in business activities in general and lending activity in particular Moreover, together with focusing on the target customers and objectives of providing services for the electricity sector and members of EVN, EVNFC has expanded its customer base outside EVN This assists the company in avoiding concentration credit risk 2.3 Evaluation of credit risk and credit risk management in EVNFC 2.3.1 Achievements and reasons Financial market in Vietnam from 2011 until now has witnessed a complicated period of fluctuation, which results in difficulties in controlling lending activity and credit activities in general Despite certain regulations in fund mobilization which lessen the competitiveness of finance company, EVNFC has paid much attention to credit risk limitation and obtained some positive outcomes as follows: Firstly, credit structure has seen great movements Outstanding loans of outside EVN customers has increased marginally EVNFC strives to expand target customers beyond EVN Secondly, credit activities has operated effectively It not only assures safe improvement, limits an increase in bad debts but also ensures the risk management regulation Thirdly, the ability to collect debts is positive EVNFC cares about disbursed loans as well as debt-collecting activity Mai Hong Van 25 Class: ATCC- K14 Banking Academy Graduation thesis Fourthly, credit risk provision has increased gradually over the period It indicates that EVNFC has strictly followed law and credit regulations The success of EVNFC results from the company itself To improve credit activities and prevent adverse impacts of risks, EVNFC has performed credit risk management appropriately and systematically The company focuses on evaluating corporate customers having good financial results and thoroughly considering loan structure options which facilitate the customers’ business operation as well as debt redemption sources In addition, EVNFC continuously develops and consolidates customer base, both inside and outside the electricity sector Consequently, the company now has been in trade contacts with more than 400 companies and financial institutions, which assists EVNFC in diversifying lending activity and in turn, minimizing losses 2.3.1 Drawbacks and causes Although EVNFC has experienced striking improvements in credit quality, there are still some drawbacks as follows: Firstly, loan collection ratio toward long-term loans and EVN customers was atrocious It means that debt collecting activity of these loans was not taken into account Secondly, total outstanding loans in 2012 saw a decrease due to the effect of internationally financial crisis Total outstanding loans in 2013-2014 soared because of on-lending activity under instruction of Ministry of Finance Therefore, customer-expanding activity is still limited Thirdly, credit structure is still in trouble since short-term loans stand at a moderate figure This could easily lead to liquidity risk in lending activity Fourthly, EVNFC did not closely follow financial situation and business operation of customers Therefore, specific solutions to minimize credit risk are not proposed There are many subjective and objective causes of those drawbacks In terms of subjective causes, limitation of operating network is one of prevalent reasons inducing negative consequences in credit activities EVNFC currently has had other branches in Ho Chi Minh City and Da Nang City If there are more branch Mai Hong Van 26 Class: ATCC- K14 Banking Academy Graduation thesis openings, it will enable EVNFC to seek for a large number of potential customers from different areas, thereby avoid concentration risk in lending activity Furthermore, lending procedure has not been completed in a synchronized way Despite the fact that customer is a vital factor in lending activity, lending procedure of EVNFC is just built up under loan terms, not under target customers yet Together with imperfect lending procedure, restricted quality of human resources is another cause resulting in credit’s drawbacks in recent years In general, loan officers are inexperienced in some other fields such as construction or engineering, which causes a major setback for analyzing, evaluating business plans and investment projects Besides, other causes lie in feeble information system and lax supervising and investigating activity As for objective causes, it can be clearly seen that customer-related inadequacies which exacerbate credit risk need to be concerned Increasing bad debt ratio in 2013 in EVNFC was a consequence of customers’ dishonesty in presenting financial statements to the company Moreover, unsustainable development of Vietnam stock market, a frozen real estate market and other changes also influence business operation and the quality of lending activity in EVNFC There might be a number of enterprises going bankrupt due to enormous competitiveness constraints; therefore, a rise in past-due loans and non-performing loans is inevitable Mai Hong Van 27 Class: ATCC- K14 Banking Academy Graduation thesis CONCLUSION OF CHAPTER Having been in business for years, EVNFC has obtained several noticeable achievements in lending and other business activities Not only did the company mobilize a larger number of funds used for EVN investment but also attempted to gradually decline bad debt ratio in 2014 However, at present, EVNFC has to face tremendous challenges in limiting credit risk in lending activity owing to a number of subjective and objective causes These were clarified and analyzed with the figures from 2012 to 2014 The subsequent chapter is providing some solutions and recommendations to mitigate credit risk in lending activity in EVNFC Mai Hong Van 28 Class: ATCC- K14 Banking Academy Graduation thesis CHAPTER 3: SOLUTIONS TO CREDIT RISK MITIGATION IN LENDING ACTIVITY IN EVN FINANCE JOINT STOCK COMPANY 3.1 Orientation toward the development of credit activity in EVNFC 3.1.1 Strategies of credit activities In the period of 10 years from 2010 to 2020, EVNFC has made a remarkable attempt to be the top finance company in Vietnam EVNFC has set its strategies for the development of credit activities with elementary contents as follows:  Specifying general goals and visions about total outstanding loans and customer base, investment field, loan terms, lending currency and bad debt ratio;  Specifying measures and essential resources involved in order to achieve these goals General goals of credit strategies for the forthcoming period include:  Implementing flexible operating model with customer-oriented and profit-centered principle  Enhancing competitiveness with advanced technology to modernize credit process  Diversifying credit activities in general and lending activity in particular  Expecting the credit growth rate to be at 20-22% annually  Expecting the bad debt ratio to be at less than 3% 3.1.2 Orientation to lending activity By 2020, EVNFC is anticipated to encounter several difficulties and challenges such as the instability in national economy, interest rate fluctuation and strict regulations from SBV To overcome those troubles, a suitable and short -term orientation is to concretize the contents of credit strategy Firstly, in terms of corporate customers, EVNFC aims at continuing to provide services for EVN and other related entities Additionally, it is imperative for EVNFC to improve competitiveness by expanding customer base, particularly giving priority to businesses having financial strength and operation effectiveness Mai Hong Van 29 Class: ATCC- K14 Banking Academy Graduation thesis Furthermore, the group of clients with good credit rating and collateral would be offered a preferential lending policy with lower lending interest rate All of credit requirements as well as lending documentation is planning to be declared publicly, which enables enterprises to not only access resources easily but also utilize these advantages to develop their businesses Secondly, regarding individual customers, apart from developing consumer loan products for staff in the electricity sector, EVNFC could take advantages of close relationship with loyal clients to seek for new customers and diversify investment sectors Co-operating with higher education institutions which belong to EVN such as Electric Power University and Electric Power College to develop educational loans for students to study abroad is a feasible approach It will offer a wide range of customers with various loan products for EVNFC to perfect its lending activity Lastly, together with diversifying loan products, it is pivotal for EVNFC to develop support services such as customer consulting services on requirements or on business and production plans so as to help customers use funds effectively 3.2 Solutions to credit risk mitigation in EVNFC 3.2.1 Tackling problems of overdue loans thoroughly To reduce credit risk, tackling overdue loan problems is definitely important It helps finance companies release frozen capital, collect funds to expand credit activities If there is any overdue loan, loan officers have to figure out the reasons for this situation, hence solution implementation to limit damages for finance companies If clients are willing to repay overdue loans, finance companies consider supporting clients to deal with difficulties By contrast, after recognizing customers’ intention of using funds for wrong purposes or evaluating potential irrecoverable debts, the finance company has to stop disbursing and send those irrecoverable debts to Debt Resolution Department to control collaterals as well as avoid financial loss Mai Hong Van 30 Class: ATCC- K14 Banking Academy Graduation thesis 3.2.2 Perfecting lending procedure and lending policy Since EVNFC has been operating for years, lending procedure and policy still have some shortcomings It is vital for EVNFC to have a lending procedure which is suitable with new regulations and international practice Moreover, the procedure needs classifying target customers, depending on whether customers are in EVN or not Risk management and processing are also required to be supplemented in lending procedure Turning to lending policy, it is imperative for EVNFC to specify a policy on collaterals Not only does the company need to branch out into new types of collateral but it also has to control the customers’ s business cash flow carefully EVNFC then should implement an appropriate debt collection policy as well as timely credit adjustments 3.2.3 Improving the quality of lending activity The quality of lending activity plays a crucial role in bad debt controlling and credit risk mitigation To obtain safe and sustainable development, EVNFC has to pay more attention to lending activity’s quality This will be done by performing lending activity well under regulations of SBV such as Circular 02/2013/TT-NNHH and other regulations relating to loans and security assets Furthermore, credit appraisal is one of the keys leading to the high quality of lending activity Before making any lending decision, loan officers need to examine customers’ creditworthiness in transactions with other credit institutions, or refer to credit information of CIC or other institutions having good reputation With giant lending proposals, EVNFC ought to hire consulting institutions to appraise and check customers’s profiles due to their high professional skills in credit appraisal This might increase expenses but it ensures credit safety for finance companies In addition, after disbursing loans for clients, EVNFC needs to continue controlling and supervising task-completed process of customers’ project If there is any derogation from the contract, loan officers have to collect debts earlier or move the loan to overdue loan groups so as to limit potential credit risk Mai Hong Van 31 Class: ATCC- K14 Banking Academy Graduation thesis Finally, the development of technology, nowadays, has a substantial effect on the quality of credit appraisal It is essential to have a soft ware helping the company rank customers in order to appraise projects quickly as well as increase the accuracy of appraisal results Due to the competition among credit institutions, those who use advanced technology in credit appraising stage to accurately process information in leaps and bounds will grasp more opportunities Therefore, an investment in technology is one of strategic activities to improve lending quality and reduce credit risk 3.2.4 Improving the quality of human resources Being the ones who directly make lending contracts with customers, loan officers are considered the most essential element in credit activity Well-qualified and honorable credit officers are the key to considerably mitigate credit risk Thus, EVNFC needs to develop an effective and suitable strategy for recruiting, training and managing loan officers Firstly, EVNFC has to run a fair and successful recruitment program Since credit-related tasks require the staff to possess excellent analyzing and evaluating skills and a strong sense of responsibility, highly potential and talented applicants with good personal dignity should be employed Besides, other certificates and soft skills such as foreign languages, IT and communication skills are also preferred Secondly, in order to enhance the quality of human resource, EVNFC ought to encourage loan officers to improve their expertise For instance, the company could set a fund aside to sponsor the staff to study abroad with the commitment to work for EVNFC after finishing their overseas study Moreover, training session might be implemented for them to raise their academic background on professional skills as well as to give them real experience in lending activity Thirdly, in terms of staff management policy, EVNFC needs to build up a clear and reasonable rewarding and discipline system To good credit officers who show a great performance on their jobs and always greatly complete given tasks, the company ought to compliment them on their work It is not only a way to attract more young talents but also a measure to motivate staff’s creativeness and devotion Mai Hong Van 32 Class: ATCC- K14 Banking Academy Graduation thesis However, strict discipline policy also needs to be applied for those having poor work ethics Lastly, EVNFC ought to consider monitoring management system in a simple and intensive way This could be done by mergers between departments such as Department of fund arrangement with Credit Department 3.2.5 Building up a credit information system Being a type of business providing financial services, EVNFC needs to set up completed, accurate and synchronized information system among departments to save cost and assure credit safety A closely internal information network system together with a connected information transmitting mechanism could assist the company in having an overall view about customers’ aspects Additionally, it is subjective for EVNFC to diversify sources of information These factors will result in the improvement of lending activity effectiveness as well as the significant limitation in credit risk One of the measures to develop credit information system is that finance companies need to seriously follow the instruction of credit information system which is attached with Decision No.1117/2004/QD-NHNN dated September 8, 2004 on the issuance of the regulation on credit information activity and other SBV’s decisions on credit information activity This partly contributes to the improvement of credit quality, with effective, safe and sustainable development Furthermore, the quality of collected information needs taking into account In recent years, EVNFC collects information by interviewing clients directly or through financial statements provided by customers This approach is cost-effective and is a simple one to get information However, to guarantee the safety and the effectiveness of lending activity, EVNFC ought to extend its information collecting scope Investigating business site could provide a reliable source of information It helps EVNFC seize the production and business situation of borrowers Thus, the company finds it easier to evaluate the reliability, prestige and repayment capacity of borrowers Mai Hong Van 33 Class: ATCC- K14 Banking Academy Graduation thesis Besides, EVNFC should take the initiative in establishing its own group of staff specializing in collecting, aggregating and storing information on customers to use information in the most effective way Other sources of information that the company can exploit are bank’s database in which clients’ profiles are revealed and Credit Information Center (CIC) EVNFC needs to frequently update information system by connecting with these sources to catch accurate and timely information about customers’ business activities 3.2.6 Executing credit insurance Credit insurance has been used by some credit institutions recently, in which customers are required to purchase insurance for goods and collaterals It is one of the effective ways to limit the damage of credit risk Therefore, it is suggested that EVNFC develop credit insurance so as to partly mitigate credit risk In details, after lending to clients, EVNFC could sell loan insurance to customers by collecting insurance fees The amount will be used to make up for loss in case borrowers lose their repayment capability To implement this type of loan insurance, EVNFC needs a preferential lending policy to attract more clients With operation capability and prestige, the company can practically apply this method to avoid credit risk as well as generate more profits 3.3 Petitions 3.3.1 To Vietnam Electricity Corporation To have the greatest operation efficiency in credit activities, particularly lending activity, EVN also needs to acts as a facilitator by - Helping EVNFC build up the relationship with clients who suffer from a budget deficit; thereby, the company could represent the image of an effective fund arrangement entity in the corporation - Improving capital scale invested in EVNFC in order to enhance financial capability and acquire more comparative advantages than other finance companies - Encouraging workers and employers in the electricity sector to access and use consumer loan products which have been being launched by EVNFC Mai Hong Van 34 Class: ATCC- K14 Banking Academy Graduation thesis 3.3.2 To the State Bank of Vietnam The State Bank of Vietnam needs to prove its active role as a guide for credit institutions by considering some recommendations as follows:  Intensifying and improving the effectiveness of supervising and inspecting activity Supervising and inspecting activity is one of the most important duties of SBV so as to quickly recognize and tackle the problems of violating law In fact, SBV performs the examining activity after realizing that risks have been occurred and hardly ever carries out an inspection of credit institutions’ operations Therefore, it is imperative for SBV to intensify the supervising and inspecting activity to control credit activities of credit institutions in general and finance companies in particular This could positively affects credit quality as well as credit risk mitigation  Promoting credit information system in order to develop the quality of risk management Credit information system is proved to remarkably contribute to the decrease in asymmetric information between lenders and borrowers and enable lenders to exactly evaluate customers, thereby gradually reducing credit risk Despite encouraging achievement of SBV’s credit information system in supporting credit activities, there are still some difficulties such as poor information quality, low-updated information or incorrect information transmit Therefore, in the near future, CIC should be equipped with modern devices to meet some requirements such as processing and analyzing information accurately and promptly Furthermore, SBV ought to design training programs for credit staff, especially staff in CIC to improve both their professional and soft skills Credit risk, then, will significantly decline  Increasing the role of Vietnam Asset Management Company (VAMC) in improving lending quality, mitigating bad debts as well as purifying financial positions of credit institutions Once VAMC operated effectively under Mai Hong Van 35 Class: ATCC- K14 Banking Academy Graduation thesis SBV’s regulation, it could decrease a number of irrecoverable debts and strengthen the financial system 3.3.3 To the Government In order to encourage credit activities in general and lending activity in particular and to assist finance companies in expanding and improving credit quality, it is essential for the Government to  Perfect legal system to form a basis for financial operation and credit activities In the finance and banking sector, Law on State Bank of Vietnam and Law on Credit institutions have been being applied, which are vital legal corridors In addition, other regulations such as Law on insurance and Law on mortgage have to be clearly publicized The Government needs to implement plain guidelines on how to conduct these degrees or circulars in a synchronized and united way among credit institutions This will guarantee safety in operations of finance companies  Pay more attention to control enterprises It is imperative for the Government to supplement a regulation on the compulsory requirement of external auditing in joint stock companies Most businesses, particularly joint stock companies and limited liability companies are not required to audit their financial statements periodically This, thereby, detrimentally impacts appraising activity of credit institutions If the Government implements regulations on external audit for all types of enterprise, credit risk will be limited Moreover, the Government needs to carefully consider before providing establishment license for businesses to avoid negative consequences on business partners and the society Mai Hong Van 36 Class: ATCC- K14 Banking Academy Graduation thesis CONCLUSION OF CHAPTER Stemming from the status of credit risk in lending activity in the previous chapter, some solutions to mitigate credit risk as well as increase the quality of credit activities are proposed in chapter Furthermore, recommendations for Vietnam Electricity Corporation, for SBV and for the Government have been discussed In order to achieve safe and sustainable development, it is required to have the coordination between the company and national authorities While EVNFC makes an attempt to minimize credit risk, EVN and the Government should create advantageous microeconomic environment which firmly facilitates credit activities This, in turn, contributes to the prompt and prosperous development of Vietnam economy throughout the integration process Mai Hong Van 37 Class: ATCC- K14 Banking Academy Graduation thesis CONCLUSION Being a primary and traditional activity, credit in general and lending in particular are always the top concern in every credit institution Finance companies’ operation effectiveness highly depends on the result of lending activity Hence, improving the quality of lending activity and mitigating credit risk in lending activity should be closely paid attention Based on the reality in EVNFC, the thesis has profoundly studies the following issues Firstly, several theoretical backgrounds of credit risk in lending activity and finance companies have been presented Secondly, status of credit risk in lending activity together with achievements and drawbacks in lending activity in EVNFC from 2012 to 2014 have been researched Thirdly, depending on the reality of credit risk in lending activity, a number of solutions and recommendations have been proposed to mitigate credit risk in EVNFC To obtain sustainable development and remain the position of top finance company in Vietnam, EVNFC needs to take credit risk mitigation into account and make it high on the company’s list of priorities Mai Hong Van 38 Class: ATCC- K14 Banking Academy Graduation thesis REFERENCES Decision No 493/2005/QD-NHNN dated on 22nd April 2005 Law on Credit institutions 2010 Circular No.02/2013/TT-NHNN dated on 21st January 2013 Degree No.79/2002/ND-CP dated on 4th December 2002 Degree No.141/2006/ND-CP dated on 22nd November 2006 Decision No.1627/2001/QD-NHNN dated on 31st December 2001 Peter S.Rose, 2002 Commercial Bank Management Irwin/McGraw-Hill Anthony Saunders & Linda Allen, 2002 Credit Risk Measurement John Wiley and Sons, Inc PhD Dinh Xuan Hang, M.S Nguyen Van Loc, 2012 Credit Management of Commercial Banks Finance Publishing House 10 EVNFC’s Annual Report from 2012-2014 11 EVNFC’s Income Statement from 2013-2014 12 http://www.sbv.gov.vn 13 http://www.evnfc.vn 14 http://www.cafef.vn 15 http://vneconomy.vn Mai Hong Van 39 Class: ATCC- K14