Credit risk in commercial banks the case of vietnam prosperity joint stock commercial bank phu tho branch,graduation thesis

STATE BANK OF VIETNAM BANKING ACADEMY Foreign Language Faculty CREDIT RISK IN COMMERCIAL BANKS: THE CASE OF VIETNAM PROSPERITY JOINT-STOCK COMMERCIAL BANK - PHU THO BRANCH Student : Nguyen Thi Nhu Ngoc Class : ATCA-K11 Lecturers : PhD Do Thi Kim Hao MA Bui Le Minh Hanoi, 6th June 2012 Banking Academy Graduation Thesis ACKNOWLEDGEMENTS After several months of hard work, my thesis has been finished Now it is time to thank everyone warmly who provided their kind assistance to me First of all, I would like to thank my supervisors PhD Do Thi Kim Hao - Dean of Banking Faculty, Banking Academy and MA Bui Le Minh - Academic Manager of English for Specific Purposes (ESP), Hanoi University, for their guidance and suggestion through my work I am grateful to them for providing helpful knowledge in area of bank credit and of English for finance and banking In addition, the same appreciations are given to the officials of VP Bank-Phu Tho branch for facilitating me a lot during my internship I also would like to express my thanks to all teachers at Banking Academy, especially teachers of Banking Faculty, Financial Faculty and Faculty of Foreign Languages, for giving their valuable lectures during the time I have studied there Without them, my thesis would not have been finished Last but not least, the dearest appreciations are directed to my family and friends, for giving me great support and help during these months Special thanks go to my mother for being patient and “compassionate” to her daughter Nguyen Thi Nhu Ngoc ii Class: ATCA - K11 Banking Academy Graduation Thesis ABSTRACT In this research analysis, the subject of credit risk, which carries a lot of significance for the banking sector, has been examined for Vietnam Prosperity jointstock commercial bank- Phu Tho branch It is observed that the credit problem have made a profound impact on the whole banking activity of the branch studied The secondary data was mainly exploited to measure the credit performance of VP Bank Phu Tho, as the base for improving the branch’s credit quality Hence, to serve this purpose, many credit risk indicators are discussed and illustrated in this paper to find out the actual credit problem along with causes of the case study The major findings of the study show that among those risk measures, to be very apparent to analyze is the extremely high rate of non-performing loan and loan loss, which leads to lots of credit exposure for the branch during the past few years Several reasons, then, are found out to define the responsibilities between the branch and its customers in causing severe credit risk Finally, recommendations for mitigating loss as well as enhancing credit activity are also provided, mainly focusing on clamping down on lending procedure, diversifying credit, and advancing human resource Nguyen Thi Nhu Ngoc iii Class: ATCA - K11 Banking Academy Graduation Thesis TABLE OF CONTENTS Acknowledgements ii Abstract iii List of tables and figures vi List of abbreviations vii CHAPTER I: INTRODUCTION 1.1 Problem discussion 1.2 Objectives and research questions 1.2.1 Objectives 1.2.2 Research questions 1.3 Scope and limitation 1.4 Methodology 1.5 Disposition CHAPTER II: THEORETICAL FRAMEWORK 2.1 Definition of credit risk in commercial banks 2.2 Credit risk indicators 2.2.1 Loan classification 2.2.2 Delinquency ratio 2.2.3 Non-performing loan ratio 2.2.4 Loan loss ratio 2.2.5 Provision against loan loss 2.2.6 Credit concentration 2.3 Impacts of credit risk 2.3.1 To the lender (bank) 10 2.3.2 To commercial bank system 10 2.3.3 To the economy 10 2.4 Causes of credit risk 11 2.4.1 External causes 11 2.4.1.1 From macro environment 11 2.4.1.2 From customers 13 2.4.2 Internal cause (by commercial bank itself) 13 2.5 Summary of theoretical framework 14 CHAPTER III: ASSESSMENT OF CREDIT RISK IN VP BANK – PHU THO BRANCH 15 Nguyen Thi Nhu Ngoc iv Class: ATCA - K11 Banking Academy Graduation Thesis 3.1 Overview of credit activity of the branch studied 15 3.1.1 Brief introduction of VP Bank - Phu Tho 15 3.1.2 Credit activity in recent years 17 3.2 Credit risk assessment 22 3.2.1 Credit risk indicator analysis 22 3.2.1.1 Delinquency ratio 22 3.2.1.2 Non-performing loan ratio 24 3.2.1.3 Loan loss ratio 27 3.2.1.4 Provision against loan loss 28 3.2.1.5 Loan concentration 29 3.2.2 Impacts of credit risk 31 3.3 Causes of credit risk 33 3.3.1 External causes 33 3.3.1.1 From macro environment 34 3.3.1.2 From customers 35 3.3.2 Internal cause (by the branch) 37 3.4 Summary of empirical data and analysis 39 CHAPTER IV: RECOMMEDATIONS AND CONCLUSIONS 40 4.1 Recommendations 40 4.1.1 To the government 40 4.1.2 To VP Bank – Phu Tho branch 40 4.1.2.1 Enhancing the loan appraisal 41 4.1.2.2 Improving the efficiency in collecting and using information 42 4.1.2.3 Diversifying loans to disperse risk 42 4.1.2.4 Clamping down on monitoring process 44 4.1.2.5 Developing human resource 45 4.1.2.6 Expanding the branch network 45 4.2 Conclusions 46 References 48 Appendix 49 Nguyen Thi Nhu Ngoc v Class: ATCA - K11 Banking Academy Graduation Thesis LIST OF TABLES AND FIGURES Chart 3.1.Organizational Structure of VP Bank Phu Tho 16 Chart 3.2: Net Revenue Structure 18 Chart 3.3: Total Outstanding Loan Classified By Client Types 21 Chart 3.4: Total Outstanding Loan Classified By Credit Types 21 Chart 3.5: Delinquent Loans Classified by Client Types 24 Chart 3.6: Non-Performing Loans Classified by Terms 26 Chart 3.7: Corporate Loans Classified by Economic Sectors 30 Chart 3.8: Individual Loans Classified by Economic Sectors 30 Table 3.1: SWOT analysis of the branch 17 Table 3.2: General Credit Activity 18 Table 3.3: Total Outstanding Loan Classified By Types of Client and Credit 20 Table 3.4: Loan Classification 22 Table 3.5: Calculating Portfolio Quality Ratios 23 Table 3.6: Calculating Portfolio Quality Ratios (cont.) 24 Table 3.7: Non-Performing Loans by Terms 25 Table 3.8: Calculating Portfolio Quality Ratios (cont.) 27 Table 3.9: Loan Loss Reserve and Loan Loss Provision 28 Table 3.10: Some Indicators in Balance Sheet & Income Statement 32 Nguyen Thi Nhu Ngoc vi Class: ATCA - K11 Banking Academy Graduation Thesis LIST OF ABBREVIATIONS ALL Allowance For Loan Loss Agribank Vietnam Bank For Agriculture And Rural Development BIDV Bank For Investment And Development Of Vietnam CIC Credit Information Center Cont Continue/Continued Dept Department DR Delinquency Ratio FS Financial Statement LLP Loan Loss Ratio LLR Provision For (Against) Loan Loss NPL(R) Non-Performing Loan (Ratio) POS Point Of Sale SBV State Bank Of Vietnam SME Small And Medium-sized Enterprise SWOT Strength-Weakness-Opportunity-Threat Analysis TA Total Earning Asset Techcombank Vietnam Technological And Commercial Joint- Stock Bank TL Total outstanding loan Vietcombank Joint Stock Commercial Bank For Foreign Trade Of Vietnam Nguyen Thi Nhu Ngoc vii Class: ATCA - K11 Banking Academy Graduation Thesis Vietinbank Vietnam Joint Stock Commercial Bank For Industry And Trade VP Bank Vietnam Prosperity Joint Stock Commercial Bank VND Vietnam Dong (Vietnam Currency Unit) WTO World Trade Organization Nguyen Thi Nhu Ngoc viii Class: ATCA - K11 Banking Academy Graduation Thesis CHAPTER I: INTRODUCTION In this chapter, I present the background of the thesis followed by the problem statement The discussion also contains the motivation for my thesis Finally, the chapter expresses the research question, purpose, methodology and limits the area of the study 1.1 Problem discussion The banking sector of Vietnam has become more complex over the last decades due to the volatility of financial market Without fully realizing the risk level, a lot of commercial banks have been getting involved in the big non-performing loans (NPL) of up to trillions of dong by the end of 2011 Particularly to private joint-stock banks, the same problem has been reported that while the volume of outstanding loans has decreased, the NPL ratio has increased rapidly The consequence of this risk, called credit risk, therefore, is regarded as a nightmare for any Vietnam’s banks by the fact that it is linked to the problem of bank assets once no method is handled to deal with Unfortunately, the above situation absolutely fits with the case of Vietnam Prosperity joint-stock commercial Bank – Phu Tho branch, where I have experienced my internship course for four months Although VP Bank Phu Tho has established and developed for five years, it has evidently suffered from the credit risk exposure The NPL ratio at a period of time bounced up to approximately 30% (in 2008) - an incredible figure that ever put the branch itself in the chasm of default Despite the fact that this ratio was on the way to lower in the previous year, it has still kept a far distance from the standard indicator (≤ 3%) which is appointed by the VP Bank Head Office at present Thus, the central question here is how to untie the knot of credit risk with which VP Bank Phu Tho has been confronted That problem has motivated me to pursue this study and this thesis is an endeavor to find the answer Nguyen Thi Nhu Ngoc Class: ATCA - K11 Banking Academy Graduation Thesis 1.2 Objectives and research questions 1.2.1 Objectives The thesis aims at finding out VP Bank - Phu Tho branch’s the most problematic issue - the credit weaknesses and bringing out some solutions to credit risk 1.2.2 Research questions The discussed problem formulation makes me to have the following research questions: - What is credit risk in commercial banks and how to measure it? - What are the causes and impacts of credit risk? - How is credit risk measured in VP Bank - Phu Tho branch? - What are consequences that the branch has to suffer from? - What causes serious credit risk in this branch from both external and internal perspective? - How to deal with the current credit risk situation there? 1.3 Scope and limitation The research is limited on identifying the credit risk situation and recommendations in VP Bank Phu Tho Hence, the other risks in this branch are not discussed Due to the unavailability of information disclosure in official reports I have obtained, my sample only contains Phu Tho branch’s reports and data from 2009 to 2011 respectively Since the branch in sample rejected to participate in my survey, the primary data was not possible to carry out Considering the above mentioned circumstances, the results of the study are limited to VP Bank Phu Tho and are not generalized for any other branches and commercial banks in Vietnam Nguyen Thi Nhu Ngoc Class: ATCA - K11 Banking Academy Graduation Thesis and individuals are offered The information about individuals or corporates who not have credit relations with banks has not been absolutely updated (5) Other causes: yearly, Phu Tho has to bear from natural disaster and losses that it causes Flood accompanied with tornado and landslide harms both human and properties for corporates as well as individual clients of the branch In addition, diseases out-breaking in poultry, in recent years, have made farmers become penniless and narrow the likelihood of paying loans for farm business 3.3.1.2 From customers (1) Enterprise clients: - Capital used for improper purposes, no goodwill in making payment: in VP Bank Phu Tho, most firms, when making the loan application, have had concrete and feasible business plans The proportion uses capital in wrong purposes or defrauds the branch intentionally is not much However, due to the important size and the large amount of such loans, the cases of irrecoverable debts involved are extremely serious, causing adverse effects to the branch and other businesses Being prominent are: Phu An investment trading company limited with the amount of fraud up to 1,787,000,000 VND, Thai Hung trading and material joint-stock company with 600,000,000 VND - Poorly-managed business operation: lack of financial information, no business plan being implemented, no connection among products, weak financial capacity, no ability to adapt to market changes By observing, a fact existing persistently in locality is that when borrowing with the aim to expand business scale, the enterprises almost partially focus on property investment, rather than on renovating management style or financial-accounting monitoring machinery Hence, business size not in accordance with business capacity is the main cause of bankruptcy, leading to loan loss for the branch - Dishonest financial statements (FS): the Profit and loss statement (P&L) provided by clients, actually, does not comply with Vietnam accounting regime In fact, more than half of financial statements appraised by the branch’s credit officers has not been fully audited annually This, therefore, lessens the effectiveness of client Nguyen Thi Nhu Ngoc 35 Class: ATCA - K11 Banking Academy Graduation Thesis assessment when the credit staff only works on accounting books for form, rather than substance An incident ever happened in 2009 at VP Bank Phu Tho was that profit was recorded in FS but that company, actually, got loss during two consecutive years and had no possibility to honor loan contract’s obligation Fortunately, such inauthentic data was detected, rescuing the branch from an actual loss of principal and interest nearly billion VND - Inability to repay due to external reasons: over the past year, there was a certain portion that some businesses worked effectively but found difficulties in payment of due debts The main reason came from their partners, for example, couples of construction enterprises like PETEC construction joint-stock company or Van Phu agricultural material import-export company limited… did not make payment of supplies in full or in time from their counterparts As a result, such unforeseen cases contributed directly to increase the number of overdue debts of the branch (2) Individual clients: - Risk from failure of business operation has been counted as the primary cause coming from individual group Fault by business decision or external risks affecting business all leads to loss or decline in profit If not being timely solved, they could not have another capital source to make payment or accept the penalty of 150% - In loans for consumption, in case of job loss, job changes or no working ability any longer, the main reimbursement source from basic income (salary, wage) of individual customers would be lost or reduced It means that the branch has to reschedule such loans or use other measures to recover debts in order to face the fear of exposure - Clients themselves have experienced unusual or unexpected events of life, such as: theft, fire or illness Especially, damage caused by natural disasters (flood, landslide) is unavoidable to majority of public in Phu Tho, including customers of the branch A big amount of money, therefore, is used to offset such losses, which influences their ability of repayment The branch, for many times, has had to apply Nguyen Thi Nhu Ngoc 36 Class: ATCA - K11 Banking Academy Graduation Thesis method of rescheduling or moving into another overdue debt group with these cases from individual customers - Another risk beyond control being counted in the branch is bad personal morality As mentioned in credit risk assessment, vehicle loan for business has stood out among such type of risk In detail, the content proposed to borrow fund from the branch is to pay for vehicles (trucks, buses or ships), then use them as collateral for loan However, for various reasons including failure of business, traffic accidents or even deliberate trick when borrowing, etc, clients decide to escape from payment or penalty, taking the collateral away with This is considered as the most serious loss for branch (due to moral hazard or adverse selection) once an extremely high amount of LLP threatens to lose both/either principal and/or interest and to settle collateral it no longer controls 3.3.2 Internal cause (by the branch) Assessing soundly causes of credit risk from perspective of the branch is deemed as a prerequisite to narrow down current credit problem From collective analysis, credit risk at Phu Tho branch has mainly existed in the following reasons: (1) Lack of comparable standards in appraisal procedure: because of not defining the actual business size, competitiveness of clients within their industry, and the cash flow in – out, credit officers find it hard to determine a sound lending amount, period and a reasonable supervising method On the other hand, the customer prestige, an essential factor associating with the willingness of refund, has usually been neglected during the initial appraisal process (2) Risk from unreliable source of information: in fact, it is very difficult for the branch to verify the entire information that customers provide In such fierce competition among commercial banks, getting information promptly and accurately is necessary for the branch to make right lending decision However, the branch itself has not created a close coordinate with other agencies such as taxation and custom-house departments … to make confirmation for financial data from clients Nguyen Thi Nhu Ngoc 37 Class: ATCA - K11 Banking Academy Graduation Thesis (3) Risk because of credit concentration: As analyzed above, grouping major source of fund to lend one or a few high-risk industry, such as construction, waterway transportation and real estate investment, has caused a lot of losses for the branch so far One obstacle for not being diversified yet is that when lending to a certain industrial or geographic sector, the branch wishes to gain expertise about that sector However, fact has proved that instead of mastery of a business line, a single event, in turn, has resulted in a great loss to the branch (4) Poor monitoring process: with five years’ operation in banking industry in this region, “after-lending” activity of VP Bank Phu Tho has still been underestimated This monitoring procedure fills with errors and weak spots, bringing many disadvantages for branch in checking the use of funds Due to laxly monitoring, although some loan plans are effective and sales income is paid fully, clients still delay to pay debts by using repayment source for other purposes and get lost (5) Limited capacity of personnel: it is undeniable that business lines of borrowers in locality are very diverse, from agriculture – forestry – fishery, to trading, transportation, construction, hotels – restaurants and other services In contrast, most of credit officers of the branch not have enough information as well as understanding about the industrial sector in which their clients invest Several business plans are not accurately evaluated on capital capacity, capacity of business owners, labor resource in the area projects being developed, … Therefore, it is so risky that the project could not come into operation as predicted, leading the potential not to repay bank loan More dangerously, relating to the criminal case of credit fraud at the branch in 2010, there were signs proving that some credit officers broke the rule of lending appraisal procedure in order to be in collusion with swindlers This has implied that risk arising from staff morality should be at top-hit concern in VP Bank Phu Tho (6) Pressure from highly intensive working: scale of VP Bank Phu Tho branch’s operation has been limited: only credit officers work (in both head branch and transaction bureau) in a large area of 3,553.4 square kilometers with a population of 1,300 people, including 3,500 enterprises and 62,000 individual economic units Credit officers not only take responsibility for the whole lending process, covering: Nguyen Thi Nhu Ngoc 38 Class: ATCA - K11 Banking Academy Graduation Thesis loan appraisal, customer monitoring, collateral supervision… of about 260 corporate and individual customers but also a lot of paperwork like: documents marking, proposal writing, reporting, This causes a lot of troubles for their efficiency, directly reducing the credit quality as well as credit growth 3.4 Summary of empirical data and analysis It can be undeniable that VP Bank Phu Tho has gained some initial achievements during the time of establishment and development However, in recent years, credit risk has been declining, accompanied with high rate of delinquency and non-performing loan Thus, mitigating and clamping down on credit problem must be the top target as well as the challenge that the branch has to overcome in near future Chapter III of this thesis has studied and analyzed the situation of credit activity, credit risk then found out causes of credit problem in this VP Bank Phu Tho, making practical basis for solutions proposed in chapter IV Nguyen Thi Nhu Ngoc 39 Class: ATCA - K11 Banking Academy Graduation Thesis CHAPTER IV: RECOMMENDATIONS AND CONCLUSIONS In this chapter, I propose some sound recommendations as well as draw some conclusions to the matter given above 4.1 Recommendations 4.1.1 To the government At present, it is vital to build a synchronous legal system as the base for commercial banks and their clients: - In settling overdue debts by guaranteed assets, the government should let the bank proactive in dealing with collaterals for their debt collection When the maturity comes, if the customers fail to implement their obligations, the bank can sell the assets by order of the court immediately (so as to reduce the cost and mitigate loss) - The Government needs to improve the operation of Credit Information Center (CIC) and establish more information exploiting and providing centers The purpose is to help credit organizations and commercial banks minimize risks - Finally yet importantly, the Government had better interfere to stabilize interest policy This is considered as the most-needed action in the time of competitiveness on lending interest among commercial banks, which causes a lot of obstacles for customers 4.1.2 To VP Bank - Phu Tho branch Nguyen Thi Nhu Ngoc 40 Class: ATCA - K11 Banking Academy Graduation Thesis 4.1.2.1 Enhancing the loan appraisal The full and tight implementation of credit procedures, especially step of loan appraisal, is very meaningful in reducing errors, limiting the ability of risk and improving the quality of each loan In order to make a right decision and hold, at the same time, the safety of bank asset and the convenience of customer, the quality of assessing procedure is regarded as the prerequisite factor Hence, the goal here is checking the economic efficiency of loan, reviewing its business plan whether being consistent with market growth tendency or not, analyzing figures of income-expense, and defining the source of repayment In detail, when implementing the loan appraisal, credit officers should pay attention to the following issues: - Updating credit mechanism as well as legal documents relating to credit activities, frequently testing mutually in accomplishing credit procedure To a certain project, it is essential to evaluate its objectives, in which: consider the objective whether satisfies the governmental orientation of economic-social development, whether to be of the group allowed or restricted by government and local authorities or belongs to preferential client group or not - Evaluating multivariate information about customer and borrowings (see article Improving the efficiency in collecting and using information) - Focusing on assessing the feasibility of loan project Once project is feasible, its owner is more likely to earn interest, then fulfills the obligations to the branch - Building up clear rules and regulations for the content of each stage of work, allotting specific responsibilities of staff involved in the process of appraising, monitoring and approving The branch should set up a process under the principle of defining single duty and joint duty during the process - Last but not least, inscribing in mind “never accept a loan based on collateral only” because the sale of collateral in only used as the last resort to repay loan Nguyen Thi Nhu Ngoc 41 Class: ATCA - K11 Banking Academy Graduation Thesis 4.1.2.2 Improving the efficiency in collecting and using information Adequate and accurate information about clients and market has played an important role in ensuring credit quality and controlling risks The following stages are needed to be done: - Collecting information about clients: currently, getting information of customers via non-audited or inaccurate FS has created lot of interference for credit officers’ assessing procedure Thus, besides information provided by clients, credit officers should collect secondary data from: customer’s partners, other commercial banks that clients have made relationship and CIC of SBV - Collecting information about market: it is a must that credit staff explores information about products that customers have been trading, for example: supplydemand prediction, product market price, collateral - Analyzing and settling information: based on information gathered, credit officers focus on evaluating and determining credit rating for customers as a basis of a sound lending decision - Setting up relationship with local authorities and departments: to avoid mistakes arising from client’s subjective information, credit officers should proactively build relations with all level of authorities in various industrial sectors, thereby evaluating accurately customer’s legal capacity, their relationship, business prestige and social activity, as well as statistic figures in FS and business plan 4.1.2.3 Diversifying loans to disperse risk The obvious benefit to holding a diversified portfolio of loans is to spread risk exposures so that a single one cannot lead to a great loss to the branch However, being diversified requires that the branch must become familiar with many more different areas, various pools of business Hence, plan to diversify credit needs to be done properly: - The branch should extend the amount of loan to medium – long terms; encourage clients of non-state owned enterprises As lending with longer term holds Nguyen Thi Nhu Ngoc 42 Class: ATCA - K11 Banking Academy Graduation Thesis the greater level of risk, the branch must pay more attention to loan assessment so as to avoid unexpected mistakes Research has shown that Phu Tho’s people tend to be interested in short term loans, rather than medium and long term ones Therefore, to eliminate their fear and motivate them in medium and long term loan, the branch should be ingenious to understand and create comfort for each type of borrowers, offer advisory and necessary information relating to their field of business - Particularly, to traditional obligors who frequently make transaction with the branch, some methods should be implemented to facilitate them in preferential interest rate, capital need, and rescheduling period, so as to ensure a stable source of clients for the branch Moreover, activities focusing on VIP customer group should also be taken notice, such as gratitude celebration to customers (birthday, foundation day of business, international and Vietnamese women’s day) to consolidate their confidence and satisfaction about products and services - Further promoting consumption loan to staff members had better be done because this kind of credit is less risky than the others - To customers working in sectors with stable income like post, education, public security, electricity, banking…, the branch should study to extend credit line or period In addition, method of interest calculation and debt collection for such loans should be simplified and comprehensive Principal and interest collection according to repayment period not only is compatible with income period of clients but also brings the comfort of repayment psychology Simultaneously, this method allows the branch to monitor the use of fund and repayment capacity of customers, creating favorable condition to early detect the seeds of risk - With the advantage of level branch, VP Bank Phu Tho can gain a lot of benefits in pushing up syndicated loan This also seems to be an effective way to seek profit, ensure collateral and diversify risk Lending conducted by syndicated method will guarantee the capital supply under the needs of customers, maintain the outstanding loan in good condition Co-sponsors who participate in syndicated loan altogether evaluate project, assess clients…, which allows to minimize risks the branch Nguyen Thi Nhu Ngoc 43 Class: ATCA - K11 Banking Academy Graduation Thesis may encounter In case of risk occurrence, it would be distributed by many parties – risk dispersion - In terms of credit products, the branch should make an accurate assessment on the gain of profit over outstanding loan on each product, as well as analysis on competitive pressure and branch status in comparison with other contenders This is extremely essential for the branch to determine on whether concentrating, maintaining or eliminating which type of lending products (see appendix 1) Furthermore, the branch should continue market research with the orientation of extending to new client and product segments 4.1.2.4 Clamping down on monitoring process Due to the little number of credit staff and burden of workload in VP Bank Phu Tho, it is very difficult to implement frequent monitoring process, especially operating supervision at the address of clients Consequently, to overcome such disadvantages, credit officers should improve their skills in monitoring, collecting information by other means that strengthen quality of credit supervision but save time The branch should review periodically credit and credit rating by: - Predicting the likely detrimental potential to current financial situation of customer - Assessing the ability of repayment and fluctuation on source of payment All aims to evaluate soundly and identify properly the current credit activity at branch This process creates a favorable condition for the branch to review credit rating and classify the quality of loan by good – normal – bad or by possibility of debt recovery After inspecting, particularly to some loans with credit problem, credit officers should actively transfer them to department of credit risk management to set up a sound rescheduling method before overdue, or even make reprimand letters or penalties to send a strong message against breaking obligations Nguyen Thi Nhu Ngoc 44 Class: ATCA - K11 Banking Academy Graduation Thesis 4.1.2.5 Developing human resource So as to reinforce the efficiency of credit operation, VP Bank Phu Tho should take measures to improve the quality of credit team Specifically: - Regularly training: for new employees, they need training intensively on the job assigned For current employees, they should be updated with professional knowledge, laws and regulations as well as communication skill to deal with each type of customers Credit officers must always be equipped with knowledge of the market, methods of evaluating investment projects…, thereby helping them control loans, mitigate credit problems effectively and timely - Periodically implementing personnel rotation: this is regarded as an effective method in human resource management, especially in banking sector Once or twice per year, credit officers will be rotated between transaction bureau and branch head office This method should be applied as soon as possible in order to narrow down credit risk and error, create new motivation and challenge for staff - Enhancing staff’s morality: in the case of VP Bank Phu Tho, from lesson in the past, fostering the ethics is an urgent issue requiring effort of the whole staff Moreover, the branch should propose proper reward and recognition policies for officers, which support and encourage them to stay away from moral fraud - Strictly handling cases of violation: both unintentional and intentional mistakes of credit staff deserve to be punished by different forms This measure is not only as an example for staff but also to prevent from loosening credit conditions which may lead to alleviate credit quality and increase the possibility of risk 4.1.2.6 Expanding the branch network In near future, the branch should build up a project of recruiting new credit officers, opening other transaction bureaus scattering through the area Purpose of this project is to ease the pressure from highly intensive working among credit officers as well as supplement the number of personnel Once the staff is increased and available Nguyen Thi Nhu Ngoc 45 Class: ATCA - K11 Banking Academy Graduation Thesis all over the locality, it can help access faster credit customers, facilitate credit activity more timely and credit growth more effectively 4.2 Conclusions The conclusions section covers all the summary of the whole thesis Chapter I – “Introduction” reveals the reason why I have chosen VP Bank Phu Tho and its credit problem as the subject for my thesis It states directly the credit risk and credit exposure that the branch has to encounter over the years The thesis is conducted with the aim of realizing the matter of credit risk, analyzing the causes and suggesting solutions for improvement Due to the limitation of gathering primary data, the analysis in this research would be covered by using secondary data and the result should not be applied for any other commercial banks in Vietnam Chapter II – “Theoretical framework” or literature review provides readers with the definition of credit risk in commercial banks The information about some major credit risk indicators are insightfully discussed and clarified This chapter also points out the general causes and consequences of credit risk as a theoretical basis for credit problem of the branch studied Chapter III assesses the credit risk of the case study At the first place, the chapter provides a brief overview on VP Bank Phu Tho during its establishment and development as well as particularly focuses on credit activities to find out its credit weaknesses From this general analysis, many matters arising from credit operations have been disclosed To closely approach, the credit risk indicators given in Theoretical framework are all analyzed in details The results obtained from those figures show that credit risk of the branch has been incredibly serious: extremely high rate of NPL (14.8 % and 9.6% in 2010 and 2011 respectively), high rate of loans in arrears (16.5 % and 12.1%), high rate of loan loss (5.3% and 3.6%), mistakes in credit concentration as well as confusion in diversifying loan Consequently, the chapter interprets the impacts of credit problem after data analysis, which mainly makes clear on the low bank asset and profit due to high LLR and LLP Besides the external causes Nguyen Thi Nhu Ngoc 46 Class: ATCA - K11 Banking Academy Graduation Thesis and causes from customers which are uncontrollable, the branch should be in charge of its credit exposure by loan process violation and capacity weakness Chapter IV presents further support for mitigating and improving credit activity The chapter aims at giving solutions that directly fit with each cause by VP Bank Phu Tho in chapter III The branch should pay much attention to deal with credit risk and loss by controlling loan appraisal and monitoring process, especially the step of analyzing information from customers; diversifying loan properly; enhancing staff’s quality and expanding the branch network Such methods can be separated to implement for each period of time, from short to long-term, linking tightly to its specific credit orientation In conclusion, this study contributes to the literature by providing empirical evidence of weak credit performance in VP Bank Phu Tho Credit risk and loss due to bad credit activities of the branch has occurred for a long time and severely Thus, the thesis attempts to find out the actual level of risk, causes leading to risk and propose some recommendations for improvement Nguyen Thi Nhu Ngoc 47 Class: ATCA - K11 Banking Academy Graduation Thesis REFERENCES Consultative Group to Assist the Poor/The World Bank (2009) Delinquency Management and Interest Rate Setting for Microfinance Institutions CGAP, Washington, DC Fight, A (2004) Credit risk management Elsevier Butterworth-Heinemann Press, Great Britain Glantz, M and J Mun (2008) The banker’s handbook on credit risk: implementing Basel II Elsevier Academic Press, Oxford, UK Heffernan, S (2005) Modern Banking John Wiley & Sons Ltd, England Mishkin, Frederic S (2004) The economics of money, banking and financial markets, 7th edition The Addition –Wesley Inc., United States of America Monetary Authority of Singapore, (February 2006) Guidelines on risk management practices - credit risk Reynolds, D (January 2009) Analyzing Concentration Risk Algorithmics Inc., Canada Rose, Peter S (2002) Commercial bank management, 5th edition McGraw-Hill, Boston, USA Santomero, Anthony M (1997) Commercial bank risk management: an analysis of the process The Wharton financial institutions center, United States of America 10 State Bank of Vietnam (2005) Decision No 493/2005/QD-NHNN 11 State Bank of Vietnam (2007) Decision No 18/2007/QD-NHNN 12 Tarullo, Daniel K (2008) Banking on Basel: the future of international financial regulation Peterson Institute for International Economics, Washington, DC Nguyen Thi Nhu Ngoc 48 Class: ATCA - K11 Banking Academy Nguyen Thi Nhu Ngoc Graduation Thesis 49 Class: ATCA - K11