THEORETICAL BACKGROUND OF CREDIT RISKS IN
Credit risk in banking activities
According to Decision No 493/2005/QĐ - NHNN issued on April 22, 2005, by the Governor of the State Bank of Vietnam (SBV), credit risk refers to the potential loss faced by credit institutions in their banking activities when customers fail to fulfill their commitments or lack the ability to meet their obligations.
In "Financial Institutions Management - A Modern Perspective" by A Saunders and H Lange, credit risk is defined as the potential loss a bank faces when extending credit to customers, particularly when the expected income from loans cannot be realized in full, both in terms of amount and time frame.
The Basel Committee on Banking Supervision defines credit risk as the likelihood that a borrower or counterparty will not fulfill their obligations as per the agreed terms.
Credit risk refers to the potential financial losses that arise when borrowers fail to meet the terms of their credit agreements This can occur through delayed payments, partial repayments, or complete defaults on loans and interest obligations Such scenarios create significant challenges for commercial banks, impacting their financial stability and overall business operations.
Basing on causes, credit risk is classified into transaction risk and portfolio risk
Diagram 1: Classification of Credit risk
Transaction risk encompasses three key components: selection risk, underwriting risk, and operational risk Selection risk arises when a bank fails to thoroughly investigate a client's creditworthiness, potentially leading to the acceptance of poor risks Underwriting risk occurs when a bank does not adequately protect itself against payment issues and defaults, which can be mitigated through the use of collateral and reinsurance Lastly, operational risk refers to the potential loss of revenue due to errors in recording loan transactions.
Portfolio risk encompasses both intrinsic and concentration risk Intrinsic risk is influenced by unique factors related to specific lenders or industries, including clientele, solvency, and earning power In contrast, concentration risk arises when a bank's credit portfolio is heavily focused on particular groups of lenders, industries, or geographic regions.
Credit risk is an inherent aspect of banking operations, closely tied to credit activities Commercial banks must assess business opportunities by analyzing the relationship between risks and profits to identify beneficial prospects within acceptable risk levels Successful banking operations and growth depend on maintaining a reasonable and controllable risk level that aligns with their financial capacity.
Selection risk Underwriting risk Operation risk
Central banks (CBs) often find themselves in a passive position after disbursing loans due to asymmetric information regarding customers' loan usage They typically receive insufficient or inaccurate information about borrowers' difficulties and failures, leading to delayed reactions and imprecise decision-making in financial transactions This lack of transparency contributes to adverse selection and moral hazard issues within financial markets, further complicating the lending process.
1.1.3.3 Credit risk is diverse and complex
Credit risk is characterized by its diversity and complexity, stemming from various intricate causes and consequences To effectively prevent and manage credit risk, it is essential to understand its underlying causes, nature, and adverse effects, allowing for the development of suitable solutions.
1.1.4.1 Objective reasons a Unpreventable reasons: coming from nature such as: fires, floods, natural disasters, diseases… These reasons are unpredictable causing serious consequences b Reasons from political, social and law environment: Stable political environment is the basis for economic development A nation with the unstable, violent and terrorist political system, business activities of enterprises are unstable and difficult that makes using capital of enterprises ineffective As a result, enterprises will have difficulty in repaying money to banks c Reasons from economy:
Monetary policy: When central bank implements the expansionary monetary policy, more customers have more chances to borrow money Therefore, outstanding loans increase and credit risk can happen
Economic cycles significantly influence banks' credit risk, as periods of prosperity lead to successful business operations and improved repayment capabilities among borrowers In contrast, during economic downturns, the ability of individuals and businesses to repay loans diminishes, increasing the risk for banks.
Exchange rate volatility can significantly impact the cost of foreign currency loans, making them either more expensive or cheaper depending on fluctuations Substantial changes in exchange rates may leave borrowers unable to repay their bank loans, highlighting the financial risks associated with currency fluctuations.
Inflation significantly impacts the business cycle, leading to increased input costs for both individuals and enterprises This rise in expenses can create financial challenges, ultimately heightening credit risk for businesses.
Credit risk arises from various factors related to customers, particularly when enterprises lack operational experience and timely access to information, which hampers their ability to adapt to competition This often leads to difficulties in loan repayment when businesses face challenges Additionally, some customers exploit the weaknesses of credit banks by using fraudulent methods, such as forging pledging documents or obtaining loans from multiple banks with identical profiles Misallocation of funds also contributes to repayment difficulties, increasing credit risk Furthermore, poor capital management and ongoing business losses significantly diminish customers' solvency, further heightening the likelihood of credit risk.
The excessive expansion of credit activities in banks is linked to an increase in credit risk, exacerbated by inadequate and outdated information and databases Unreasonable indicators, such as lending limits and loan periods, further contribute to this risk Banks often focus their lending on specific sectors in pursuit of high profits, which can lead to significant losses when those sectors face difficulties Additionally, lax security measures by credit banks can result in substantial damage if credit staff misjudge collateral values, leaving banks vulnerable when borrowers default Limited analysis and assessment of customers and lending projects by credit staff also heighten the risk of financing unreliable ventures or falling victim to deceitful customers.
Credit risk management
1.2.1 The necessity of credit risk management
Credit risk management aims to optimize a bank's risk-adjusted returns while keeping credit risk exposure within acceptable limits It is essential for banks to manage both the overall credit risk of their portfolio and the risks associated with individual credits or transactions Additionally, banks must recognize the interconnectedness of credit risk with other types of risks Effectively managing credit risk is crucial for a holistic risk management strategy and is vital for the long-term success of any banking institution.
Banks face various risks, with credit risk representing a significant portion of their overall risk profile Effective credit risk management is crucial for maintaining business efficiency and preventing potential bankruptcies This management function ensures that loans are properly maintained post-disbursement, and facilitates the effective execution of credit profiles, contracts, and mortgage assets Strong risk management not only provides a competitive edge but also enhances value creation, thereby improving banks' operational capabilities and enabling the development of more effective business strategies.
To enhance business effectiveness and mitigate risks, commercial bank managers must possess comprehensive knowledge of risk management and access to the latest economic information As emphasized by Dr S.L Srinivasulu, President of KESDEE Inc., understanding risk management practices is crucial for evaluating a bank's overall performance Therefore, it is essential for commercial banks to engage in thorough consultation, testing, and investigation to effectively manage and limit potential risks.
1.2.2 Techniques to manage credit risk
Credit risk is managed in various ways The most important techniques to manage credit risk are:
Effective credit risk management begins with the careful selection of customers and products Utilizing robust risk assessment models and employing qualified credit officers are essential for a successful selection strategy Critical credit decisions are often made by credit committees, and for customers deemed to have a higher default risk, it is necessary to require additional collateral to mitigate recovery risk.
Limitation plays a crucial role in managing a bank's exposure to individual customers, ensuring that potential losses do not jeopardize the bank's solvency By implementing a system of credit limits, banks can effectively restrict the total exposure to higher-risk customers The process of setting these limits is essential, as it dictates the amount of credit that customers with specific risk profiles can access.
Diversification is essential for banks as it enables them to allocate resources effectively across a variety of borrowers, industries, and geographical regions By implementing diversification strategies, banks can mitigate credit risk and prevent overexposure to potential credit issues, thereby enhancing overall financial stability.
Credit enhancement occurs when a bank seeks to reduce its exposure to specific customer categories by purchasing credit protection from financial guarantors or through credit derivative products This strategy improves the credit quality of the secured assets, a process commonly referred to as credit risk mitigation.
Banks’ credit risk is natural and inevitable Thus, banks need to try their best to control, limit credit risk in the lowest acceptable level
This chapter explores the theoretical aspects of credit risk and credit risk management in commercial banks, including definitions, evaluation standards, effects, and the importance of effective management While these concepts provide a foundational understanding, their practical applications vary among banks, as each institution has its own methods for assessing credit risk and implementing management strategies To ensure effective credit risk management, banks must rely on established theories and guidelines These fundamental principles will serve as the basis for evaluating the credit risk management practices of BIDV - Bac Ninh Branch.
REAL SITUATION OF CREDIT RISK IN BANK FOR INVESTMENT
Overview of Bank for Investment & Development of Viet Nam - Bac Ninh Branch
BIDV Bac Ninh traces its roots back to the Ha Bac Construction Bank, established in 1958 Initially functioning as an agent for Ha Bac Financial Company, it became a branch of the Construction Bank in 1963, tasked with allocating funds for government and local building projects In 1981, it was renamed the Bank for Investment & Construction, maintaining its allocation responsibilities By 1988, it operated under a two-level banking system, and in 1990, it transitioned to the Bank for Investment & Development of Vietnam, leading to the rebranding of Ha Bac Bank for Investment & Construction to Ha Bac Bank for Investment & Development.
In early 1995, the Investment & Development Banking system in Vietnam executed the government's directive to transfer all state budget and incentive credit funds to the Investment Department, effectively transforming the Bank for Investment & Development into a commercial bank.
In 1997, Ha Bac Province was divided into Bac Ninh and Bac Giang as part of the National Assembly's administrative border reorganization BIDV Bac Ninh was reestablished on January 1, 1997, and officially renamed Bac Ninh Commercial Bank for Investment & Development on May 2, 2012 The bank's headquarters is situated at No 1 Nguyen Dang Dao Street, Suoi Hoa Ward, Bac Ninh City, and employs 164 officers.
Despite being newly established, BIDV Bac Ninh is committed to enhancing its services for clients, achieving positive outcomes, and solidifying its role in the overall development of Bac Ninh Province.
2.1.2 The organizational structure of the branch
Currently, BIDV Bac Ninh includes: Executive board, Administration and Organization Department, Customer Relationship Department, Risk management
The organization comprises several key departments, including the Accounting and Financial Department, Credit Department, Planning and Capital Resource Department, Computing Board, and Treasury Department Additionally, it operates five transaction offices located in Que Vo, Tien Son, Gia Binh, Thuan Thanh, and Yen Phong, along with five saving funds The total staff count at the branch is 185, which includes both managers and officers.
Planning and Capital Resource Department Credit Department
2.1.3 Functions and duties of the branch a Functions
BIDV Bac Ninh is responsible for three basic functions of a CB including: performing a function of a financial intermediary, creation of money and being a payment intermediary
A central bank serves as a crucial financial intermediary by channeling savings into investments, which stimulates economic growth and enhances the efficiency of financial markets By utilizing raised funds to lend to various economic sectors, the bank effectively mobilizes idle money from households, individuals, and enterprises, thereby promoting overall investment activity.
The creation of money occurs through lending and investment activities, as banks extend credit in the form of loans, leading to an increase in demand deposits and the overall money supply Banks hold the majority of business, individual, and government deposits, reinforcing their dominant position in the demand deposit market, despite the presence of thrift institutions.
Being a payment intermediary: On behalf of clients, the bank pays for purchased goods and services In addition, the bank implements payment through out central banks or payment centers b Duties
Bac Ninh Bank for Investment & Development (BIDV Bac Ninh) is dedicated to exploring market opportunities and expanding its business in the monetary and banking sectors within Bac Ninh province The bank is committed to fulfilling its responsibilities to both the State Bank and BIDV, ensuring compliance and effective operations Additionally, the Risk Management and Credit Departments play crucial roles in overseeing financial risks and managing credit processes to support the bank's objectives.
The functions and duties of the Risk Management Department and Credit Department at BIDV Bac Ninh are outlined in the regulations established by Decision No 447/QĐ-TCHC on September 25, 2008, and No 126/QD-TCHC on March 17, 2009.
- Consulting and suggesting policies and development measures
- Managing, monitoring, analyzing and evaluating potential risks
- Supervising debts classification and implementing provision based on results of debt classification
- Cooperating, supporting the customer-relationship department to detect and deal with troubled debts
- Being completely responsible for installing, operating, testing and monitoring risk system of the branch
- Being directly responsible for lending, disbursement and loans management
- Being totally responsible for safety during the lending process.
Status of raising capital in Bank for Investment and Development of Viet
Raising capital is a crucial responsibility for commercial banks, as it does not directly generate profits but enables banks to engage in other profitable activities Effective capital-raising efforts provide the necessary funds for banks to operate and enhance their profitability Additionally, the capital raised serves as a key indicator of a bank's credibility and reputation among customers, highlighting its importance in the banking sector.
Being well awared of customers’ psychology, BIDV Bac Ninh has a lot of positive and effective methods to guarantee its capacity to raise capitals In the period of 2011-
2013, BIDV Bac Ninh always achieves nice results in raising capital
Table 1: Total mobilized capital from 2011 to 2013
Amount Proportion Amount Proportion Amount Proportion
(Sources: Restructuring project period 2013-2015 & Annual report 2011-2013)
Over the past three years, BIDV Bac Ninh has consistently increased its raised capital In 2011, the total capital reached 1,236 billion VND, achieving 67% of the target set by the State Bank of Vietnam (SBV) and reflecting a 75% increase compared to 2010 The following year, 2012, saw significant growth, with raised capital rising to 1,769 billion VND, exceeding the SBV's plan by 7% and ensuring both capital utilization and liquidity security By December 31st, the raised capital further increased to 1,996 billion VND.
2013, increased 12.9%, approximately 227 billion VND in comparison with the number of 2012
In recent years, BIDV Bac Ninh has successfully exceeded its capital-raising targets by conducting thorough research on local banking operations, closely monitoring market interest rate fluctuations, and implementing flexible measures to adjust its capital-raising interest rates.
In 2012, short-term funds surged to 489 billion VND, surpassing the previous year's figures, but fell by 67 billion VND in 2013 Conversely, medium and long-term funds experienced steady growth over three years, increasing by 32% in 2011, 25% in 2012, and approximately 37% in 2013 Despite this growth, short-term funds continue to dominate the funding landscape compared to medium and long-term options.
BIDV Bac Ninh predominantly relies on VND deposits, which constitute approximately 90% of its total raised funds However, there has been a fluctuating trend in this period: in 2011, domestic currency deposits accounted for 88%, rising to 93% in 2012 before slightly declining to 92.4% in 2013 In contrast, foreign currency deposits remain minimal, under 10% during 2012 and 2013 To enhance its financial stability and support import-export activities, the bank should consider strategies to increase foreign currency deposits.
In terms of economic sectors, raised funds from financial institutions account for relatively high proportion, however, this number is still lower than inhabitants’ deposits.
The status of credit activities in Bank for Investment and Development
Credit activities chiefly make profits for banks Although modern service activities of CBs are increasingly paid attention and developed, credit still plays the most important role in banks’ activities
2.3.1 Outstanding loans classified by the term loan
Table 2: Outstanding loan classified by the term loan
Figure 1: Outstanding loans classified by the term loan
(Source: Annual Report of BIDV Bac Ninh 2011-2013)
As can be seen from the graph:
BIDV Bac Ninh primarily focuses on short-term loans, with over 80% of its total lending portfolio dedicated to this segment This trend has shown a steady increase over the years, reaching 81.4% in 2012, which marks a 0.8% rise compared to previous years.
Short-term loanMedium and Long term loan with 2011 and in 2013 this ratio is 81.90% In contrast, the ratio of long-term lending decreased over years, from 19.4% in 2011 to 18.1% in 2013
2.3.2 Outstanding loans classified by economic sector
Table 3: Outstanding loan classified by economic sector
Figure 2: Outstanding loan classified y economic sector
(Source: Annual Report of BIDV Bac Ninh 2011-2013)
The chart illustrates that the outstanding loans across various economic sectors at BIDV Bac Ninh remained relatively stable Notably, the lending structure primarily targeted Enterprises and Economic Organizations, which constituted 80% of the total credit debts However, this percentage has gradually declined over the years.
In 2013, the proportion of loans to individuals and households rose to 22.5% of total debts, marking a 2.5% increase since 2011 Conversely, loans to enterprises and economic organizations accounted for approximately 77.5% of total debts, reflecting a 2.5% decrease compared to 2011.
2.3.3 Outstanding loans classified by currency
Table 4: Outstanding loan classified by currency
Figure 3: Outstanding loan classified by currency
(Source: Annual Report of BIDV Bac Ninh 2011-2013)
As we can see from the chart, credit debts in VND always accounted for a very high proportion of the total of debts In 2011, this ratio was 75% and continuously
Foreign currencyVND increased to nearly absolute number of 98% and 99% in 2012 and 2013 respectively Conversely, foreign currency loans significantly decreased from 25% to appropriately 2% in two years later
2.3.4 Outstanding loans classified by collateral
Table 5: Outstanding loans classified by collateral
Figure 4: Outstanding loans classified by collateral
(Source: Annual Report of BIDV Bac Ninh 2011-2013)
From 2011 to 2013, collateralized loans at Bac Ninh BIDV represented 90% of total credit debts, highlighting a strong focus on effectiveness and safety in business practices This high reliance on secured lending limited the proportion of unsecured loans, or fiduciary loans, indicating a significant opportunity for the bank to enhance profitability through this underutilized lending avenue.
2013Loans with collateral Unsecured loans use effective professional methods on controlling, testing and evaluating, fiduciary loans can help the banks have higher income resources and profits
2.3.5 Outstanding loans classified by business sector
Table 6: Outstanding loans classified by business sector
Figure 5 : Outstanding loans classified by business sector
(Source: Annual report of BIDV Bac Ninh 2011-2013)
In 2011 and 2013, lending for steel manufacturing represented the largest share, exceeding 22% Meanwhile, lending for construction steadily rose, reaching 25% in 2013, thereby tying with steel manufacturing for the highest lending category during that period.
Loans for commercial business increased from14% in 2011 to 22% in 2012 (equal an increase of 8%), however in 2013, this number decreased to 10.4%
Loans for paper manufacturing and business generally went down in this period with appropriately lending debts for commercial business
From 2011 to 2013, consumption loans represented a minor share of total debts, consistently ranging from 5% to 8% As of December 31, 2013, loans for surface transport had the lowest ratio, increasing from 3% in 2012 to over 4% in 2013.
Status of credit risk management in Bank for Investment and
of Viet Nam-Bac Ninh Branch
To make sure credit activities develop in the right direction, BIDV Bac Ninh
In 2013, various sectors including construction, commercial business, water transport, paper production, and steel manufacturing adhered strictly to credit risk management policies These policies emphasize key elements such as a decentralized authorization mechanism, a customer-ranking system, guidelines for credit products, policies on guaranteed properties, and provisions for risk management.
BIDV is evolving its credit management approach by centralizing the decision-making process for large project financing at its headquarters This new model involves collaboration among various departments, including customer relations, credit, and risk management, within branches to ensure objectivity and thoroughness in credit decisions.
At the end of 2006, the bank used a internal credit ranking system to evaluate customers
The internal credit ranking system utilizes a scoring method that evaluates both financial targets (40 in total) and non-financial targets (14 in total) Customers are assigned a score out of 100 and categorized into one of ten ranking groups: AAA, AA, A, BBB, BB, B, CCC, CC, C, and D.
Group A (AAA, AA, A) includes customers with high repayment capacity
Group B (BBB, BB, B) includes customers who have enough capacity to repay but their repayment capacity is affected by external factors
Group C (CCC, CC, C) comprises customers with limited repayment ability, whose capacity to repay is significantly influenced by market fluctuations If market conditions deteriorate, there is a risk that customers in this group may default on their debts.
Group D includes customers without capacity to pay their debts and damage for banks is natural. b Customer blacklist
BIDV Bac Ninh has established a list of non-payers and late payers to monitor customers facing repayment risks and assist banks in making informed credit re-granting decisions Customers on this list will incur higher interest rates compared to regular clients when applying for new loans However, if these customers demonstrate improved repayment capacity, they can be removed from the list and will be treated like other standard customers.
2.4.1.3 Policy on credit products and collateral
Credit products are provided for all subjects in all careers, manufacturing sectors, businesses, services allowed by the government
BIDV Bac Ninh also implement policy on collateral and risk provision according to regulations of the Government, SBV and BIDV
2.4.1.4 Policy on debt classification and risk provision
At present, BIDV has classified debts according to Article 7 instead of Article 6 of Decision 493/2005/QĐ-NHNN Classifying debts according to Article 7 is based on
The qualitative method for classifying debts aligns with the five groups established in the quantitative method, as outlined in Article 6 of Decision 493 This classification goes beyond merely considering overdue days; it also incorporates an internal credit-ranking system and the risk prevention policies set by credit organizations approved by the State Bank of Vietnam (SBV).
Classifying debts according to “qualitative” method:
Category 1 (pass): debts for which the borrower is able to pay the principal and interest in a full and timely manner
Category 2 (special mention): debts for which the borrower is able to pay the principal an interest in full but there exists a sign of decreasing payment ability
Category 3 (Substandard) debts for which the borrower is not able to pay the principal and interest in a timely manner and some loss of principal and interest is possible
Category 4 (Doubtful) debts in relation to which the loss of principal and interest is highly probable
Category 5 (Loss) debts that are uncollectible
The traditional quantitative method of debt classification relies solely on loan data, overdue periods, and restructuring instances, failing to accurately represent debt risk levels In contrast, the new classification method comprehensively assesses both financial capacity and repayment ability of customers, allowing for a precise categorization of debts according to risk levels This approach enables banks to establish appropriate risk provisions effectively.
2.4.2 The status of overdue debts and bad debts of Bank for Investment and Development of Viet Nam - Bac Ninh Branch
Total outstanding loans 1992 1451 1413 -541 27% -38 2.6% Delinquency ratio 41.16% 27% 2.86%
(Source: Annual Report of BIDV Bac Ninh 2011-2013)
Recent data indicates a significant positive shift in overdue debts, with the delinquency ratio dramatically decreasing over the past three years In 2011, bank delinquency reached 820 billion VND, representing 41.16% of total debts By 2012, this figure dropped to 392 billion VND, reflecting a substantial decrease of approximately 52% As of December 31, 2013, delinquency further declined to just 40 billion VND, making up only 2.86% of total debts, which marks an impressive reduction of about 90% compared to 2012 This achievement is a testament to the dedicated efforts of the entire banking sector during this period.
(Source: Annual Report of BIDV Bac Ninh 2011-2013)
From 2011 to 2013, the proactive evaluation and classification of debts led to effective management solutions for enhancing credit quality and preventing bad debts As a result, the bad debt ratio significantly declined from 37.3% on December 31, 2011, to 16.6% by the end of the period.
Between 2012 and 2013, the ratio of overdue debts at BIDV Bac Ninh decreased by approximately 35.42%, reaching just under 1.88% During this period, the bank implemented effective strategies to enhance credit quality, including closely monitoring overdue debts and those classified as Group 2 to prevent a sudden rise in bad debts Additionally, BIDV Bac Ninh employed targeted solutions for managing and collecting arising bad debts.
Table 9: Standard Loan ratio, overdue loan ratio and bad debt ratio
Total outstanding loan Bad debts
Figure 7: Standard Loan ratio, overdue loan ratio and bad debt ratio
The BIDV Bac Ninh Annual Report (2011-2013) reveals a significant decline in the bank's delinquency ratio over three years The ratio decreased from 41.16% in 2011 to 27% in 2012, reflecting a drop of 14.16% By 2013, the delinquency ratio further decreased to just 2.86%, marking a substantial reduction of 24.14%.
The ratio of standard debts rose sharply from approximately 60% in 2011 to over 97% by 2013, reflecting a significant improvement in financial stability In contrast, the ratio of bad debts decreased to below 2%, aligning with the goals of targeted reconstruction projects initiated in 2013.
Standard LoanOverdue loanBad debt
(Source: Annual Report of BIDV Bac Ninh 2011-2013)
The credit risk ratio at BIDV Bac Ninh experienced a significant decrease, falling from 301 billion VND (about 15.1%) in 2011 to 152 billion VND (nearly 10.5%) in 2012, and further declining to 68.04 billion VND (approximately 4.8%) by the end of 2013.
In 2011, with the economic recovery, bad debts were partially collected, the bank successfully managed risks during the three-year period The bank’s provision decreased to 68.04 billion VND in 2013
Provison ratio was made in the period of 2011-2013
Evaluation credit risk status and credit risk management in Bank for
2.5.1 Implemented methods and achieved results
Between 2011 and 2013, the branch consistently achieved positive outcomes in credit risk management During this period, the branch experienced a decline in its debt scale, primarily due to government policies that permitted the transfer of off-balance sheet debts and the recovery of bad debts.
The branch is enhancing credit supervision by assessing credit quality and developing effective solutions to manage bad debts in accordance with BIDV regulations The bank is focused on improving credit quality, preventing the rise of bad debts, and efficiently collecting existing bad debts This involves assigning specific responsibilities to each officer and implementing both material and administrative measures to address accountability issues related to subjective errors that contribute to bad debts.
The branch actively monitors and collaborates with customers facing challenges but possessing the potential for recovery and effective business strategies It creates opportunities for these clients to stabilize and generate profits while assisting them in gradually identifying markets Additionally, the branch works with clients to seek financially capable partners to partially or fully acquire production facilities and collateral assets, maximizing resources to meet banking obligations.
The branch evaluates customers who are unwilling or unable to repay their debts to prepare the necessary profiles for potential legal action by the bank.
Despite significant improvements in the branch's credit quality, high overdue debts continue to impact its business operations While the effectiveness of retail credits is notably high, the development of these credits falls short of the assigned goals, resulting in a scale that is insufficient and misaligned with the branch's overall size.
Credit activities span various sectors and products, typically involving staff trained in economics However, this training often leaves them lacking experience in engineering and construction, which poses challenges in analyzing and evaluating business plans and investment projects.
Collateral serves as a secondary income source for loans when risks arise, necessitating BIDV to enhance regulations on notarization and transactions Additionally, it is crucial to improve the qualifications and responsibilities of officers tasked with assessing security prices and monitoring customer usage The slow process of handling property for debt collection poses challenges for banks, with many assets remaining unresolved Furthermore, due to competitive pressures and a shortage of human resources, credit staff are currently burdened with marketing duties, initial assessments, and credit decision-making.
The risk management department has not effectively defined its roles, leading to a widespread neglect of financial reporting among enterprises Many businesses fail to recognize the significance of accurate financial reports, resulting in poorly structured submissions to banks Consequently, the quality of these reports is often subpar, characterized by insufficient and inconsistent information This lack of clarity complicates banks' ability to assess the true financial status of clients, forcing bank officials to conduct time-consuming on-site verifications Additionally, few enterprises engage in auditing their financial reports, further hindering banks' efforts to identify accounting discrepancies, which can lead to erroneous credit decisions.
This thesis evaluates the current state of credit risks at BIDV Bac Ninh, drawing on insights from chapters 1 and 2 It aims to clarify the branch's credit risk management practices and assess its effectiveness, identifying shortcomings and their underlying causes The findings will serve as a foundation for proposing solutions and recommendations to enhance credit risk management within the branch.
SOLUTIONS TO PREVENTING AND REDUCING CREDIT
Development orientations of credit activities in the near future (until 2015)
The branch will prioritize credits for importing and exporting while closely monitoring and gradually reducing lending to construction services and craft villages like Phong Khe and Phu Lam The credit structure will be tailored to the potential of each region and expanded to include effective business areas Additionally, the branch will develop a credit list based on specific careers and suitable fields to ensure risk diversification and prevent significant investments in a limited number of sectors.
The branch will conduct a thorough evaluation and ranking of clients to classify bad debts and allocate sufficient provisions, aiming to minimize bad debts while actively managing them By enhancing service quality and ensuring a balance between assets and liabilities, the branch will focus on promoting credit growth that maintains high credit quality and prevents the accumulation of bad debts and uncollected profits.
Appling deep training with professional staff, meet the requirements of banking integration, especially educate moral characteristic for staff
Implementing monetary policy closely as well as flexible to maximize the effectiveness of management and credit business in the near future
- Total outstanding loan: the average growth of 16%/year
- Ratio of bad debts until 2015 : 0.34%
- Proportion of medium-long term loan/ total outstanding loan : 19%
- Proportion of retail credit/total outstanding loan : 19%
- Ratio of loans in group 2/total outstanding loan : ≤ 12
Solutions to reduce credit risk in Bank for Investment and Development
3.2.1 Increasing the quality of credit information management system to meet needs of credit risk limitations
Information is crucial in the credit activities of commercial banks, enabling them to accurately assess borrowers' credibility, repayment willingness, and the feasibility of their investment projects To ensure loan safety and effectiveness, banks must gather and verify information from various sources, including customer profiles and relevant authorities like tax agencies and the State Bank of Vietnam's Credit Information Center (CIC) Additionally, direct interviews with customers are essential for banks to stay updated on market information throughout the credit process Upon receiving credit applications, banks analyze customers' current capabilities and potential for credit utilization and repayment, allowing them to implement preventive measures By generating accurate and sufficient information, banks can make informed credit decisions, ensuring timely repayment and enhancing the quality of their credit and banking activities Furthermore, establishing a two-way information system between commercial banks and the CIC can expand information resources.
The branch must establish a dedicated team to collect, analyze, and manage customer information while actively seeking effective ways to utilize this data Key information sources include data from current clients, past transaction relationships, other commercial banks, market insights, and relevant authorities such as auditing and tax agencies.
To enhance customer satisfaction and improve safety, the branch should invest in modern technological equipment, including informatics systems and automated machines This investment will not only stimulate growth but also enable the branch to handle a higher volume of transactions effectively.
The branch should prioritize the implementation of advanced informatics technologies, including banking software for efficient storage and management of client, financial, and property information Additionally, utilizing software for analyzing and classifying clients is essential for informed credit decision-making.
3.2.2 Improving the quality of human resources; building up investment and labor forces strategies
To effectively assess and mitigate credit risk, it is crucial to prioritize human resources, as they significantly influence credit losses due to unethical behavior and inadequate skills Therefore, investing in a qualified workforce is essential for enhancing credit risk management and preventing potential losses.
To ensure long-term success, banks must prioritize the recruitment of highly skilled employees with strong career ethics Credit officers, in particular, should possess excellent analytical and evaluative skills, along with a high sense of responsibility Additionally, implementing an effective recruiting strategy is essential for expanding the branch’s business scale.
Creating a professional and friendly work environment is essential for helping employees fully realize their potential Implementing regular training programs is crucial for enhancing their expertise at various stages of development.
In addition, enhancing incentives mechanism based on each person’s working quality and credit effectiveness to increase workers’ commitment, responsibility and devotion to their current working environment
3.2.3 Strengthening credit testing and supervision
Credit inspection and supervision are crucial for ensuring the security of loans These processes enable banks to swiftly identify and rectify errors, ultimately impacting their future debt collection efforts.
To enhance the effectiveness of credit risk management, the branch must bolster credit supervision and closely monitor loans Additionally, it is essential for the bank to establish specific credit limits for various sectors and targeted economic regions.
Other recommendations
The Government should create opportunities to innovate and modernize the credit information system:
Information is crucial in credit activities, yet banks have not fully utilized it throughout the credit process Factors hindering this include outdated information, inadequate resources, and ineffective communication To address these issues, the government should foster an environment conducive to the development of information systems.
The Government needs to enhance inspection, give proper sanctions to credit organizations which do not provide information sufficiently, timely and accurately for CIC as required
Appropriate policies, sanctions on security:
Security is crucial for commercial banks in managing credit risk, yet existing collateral policies face significant challenges, including delays in title deed issuance, cumbersome transaction registrations, and slow property notarization, which hinder business and credit investment opportunities To address these issues, the Government should implement reforms and specific remedies that enhance conditions for banks and protect the rights of customers Additionally, it is essential for the Government to strengthen the legal system and develop mechanisms and policies that establish a stable legal framework for credit activities and broader economic operations.
SBV should consider some recommendations to reduce credit risk in the bank as follows:
To enhance bank management, it is essential to implement mandatory audits and conduct regular inspections Strengthening oversight and providing support will help banks identify potential risks, leading to effective solutions that minimize these risks.
To enhance credit risk management for commercial banks (CBs), it is essential to share best practices from both domestic and international banking experiences This includes establishing standardized regulations for risk management and implementing stringent penalties for non-compliance Additionally, providing training for specialized staff will further support CBs in effectively managing credit risks.
The CIC's role in providing information to the SBV is crucial for enhancing risk management quality To achieve this, information must be clearly publicized, facilitating transparency not only between commercial banks (CBs) and the SBV but also among CBs themselves and in their interactions with investors and the community.
To ensure long-term and secure development, it is essential for the State Bank of Vietnam (SBV) to effectively supervise and control the business activities of commercial banks This is crucial in preventing unfair competition, which can manifest through practices such as lending to repay loans from other banks, lowering lending standards, and imposing conditions that increase credit risk.
BIDV must establish a cohesive risk management model that involves the board of directors and bank executives Implementing appropriate policies, procedures, and a standardized limitation system will enable the bank to effectively measure, monitor, and control credit risks throughout its business processes Additionally, it is essential for BIDV to clearly define the responsibilities and authorities of each department and individual involved in credit risk management.
BIDV should establish credit development strategies that align with its goals, capabilities, and strengths, ensuring compliance with economic regulations This approach will facilitate stable and effective credit activities while minimizing risks.
BIDV should adopt coordinated credit support solutions, including IT development, workforce enhancement, improved marketing strategies, and customer care initiatives Additionally, the bank must implement a quality management system compliant with ISO 9001:2000 standards across all sectors Furthermore, prioritizing risk management is essential; BIDV must enhance the quality of information to ensure it is sufficient, timely, and accurate Regular risk prediction and evaluation should be tailored to focus on specific regional needs.
Chapter III outlines strategies to enhance credit risk management at BIDV Bac Ninh, addressing existing challenges that negatively impact credit quality It emphasizes the importance of improving credit risk prevention capabilities and offers recommendations for the State Bank of Vietnam (SBV) to foster a robust business and risk management environment, ensuring a stable financial system With BIDV Bac Ninh's commitment and support from national authorities, effective credit risk management will align with the goals of safe and sustainable credit growth, ultimately contributing to the rapid and enduring development of Vietnam's economy during its integration phase.
Credit activity remains a fundamental component of commercial banks' income, significantly influencing their overall success Consequently, effective strategies to mitigate credit risks are crucial, as these risks are inherent and unavoidable This study focuses on the rational and practical approaches employed by BIDV Bac Ninh to address these challenges.
This thesis explores fundamental aspects of credit risk within banking operations, focusing specifically on the assessment of credit risk at BIDV Bac Ninh over a three-year period from 2011 to 2013.
The thesis evaluates the current state of credit risk at BIDV Bac Ninh and proposes strategic orientations and solutions aimed at minimizing these risks within the Bank for Investment & Development's Bac Ninh Branch.
To enhance its contributions to BIDV's overall growth and establish itself as a leading bank in Vietnam's credit sector, BIDV Bac Ninh must prioritize effective credit risk management as a critical responsibility for achieving success.