(Tiểu luận) topic credit risk management in vietnam commercial banks

*THUONG MAI UNIVERSITY* BANKING AND FINANCE COMMERCIAL BANK MANAGEMENT Topic: Credit risk management in Vietnam commercial banks GROUP :1 SECTION CLASS : 231_BKSC0811_01 LECTURER : PhD ĐINH THỊ PHƯƠNG ANH HÀ NỘI, 2023-2024 TABLE OF CONTENT I Overview of credit risk in Vietnam Commercial bank II Credit risk management in Vietnam Commercial bank 2.1 Situation of credit risk management in Vietnam Commercial bank 2.1.1 Bad debts of Vietnam commercial banks 2.1.2 Control high-risk credit groups .7 2.2 Evalution of credit risk management in Vietnam Commercial bank 2.2.1 On the positive side 2.2.2 On the negative side 10 2.3 Casestudy of VINASHIN 12 III Challenges and difficulties 14 3.1 Internal difficulties .14 3.1.1 Complex Regulatory Requirements 14 3.1.2 Data Quality And Availability 14 3.1.3 Shortage Of Skilled Personnel .14 3.2 External difficulties .15 3.2.1 Economic cycle 15 3.2.2 Interest rates, inflation, required reserve ratio 15 3.2.3 Other external difficulties .16 IV How Vietnam commercial banks deal with bad debts 17 REFERENCES DOCUMENT .20 I Overview of credit risk in Vietnam Commercial bank In fact, there are many concepts about banking credit risk, specifically: Anthony Sauders (2007) defines: "Credit risk is the potential loss when a bank grants credit to a customer, meaning the revenue stream The expected income from the bank's loan cannot be realized in both quantity and duration According to Timothy W Koch (2006), "Credit risk is the potential change in net income and market price when customers not pay or pay late." According to Clause 1, Article of Circular No 02/2013/TT-NHNN: "Credit risk is the loss that can potentially occur on debts of credit institutions and foreign bank branches due to customers not performing or not having ability to perform part or all of its obligations according to commitments.” Thus, credit risk can be understood as potential losses that can occur during the bank's credit granting process, due to borrowers not fulfilling their debt repayment obligations (including interest and principal) or not repaying the debt on time to the bank as committed in the contract This is a risk associated with credit activities, leading to financial losses such as reduced net income and reduced market value of capital Causes of credit risk are classified as:  Group of environmental causes: Like the activities of other economic entities, credit activities of commercial banks are influenced by many objective factors from the economic environment, political environment, cultural characteristics - society, legal environment and general regional and local impacts  Group of reasons from the bank: Each bank's risk appetite reflects its attitude towards accepting risk at a certain limit/level Within that limit, the bank is able and willing to bear, overcome and overcome risks This is one of the subjective causes leading to credit risk In addition, excessive credit expansion means less careful customer selection, reduced ability of credit officers to monitor loan usage, and stricter compliance strictly following the lax credit process Along with the weakness of bank officials and employees, there is a very high risk of credit risks  Group of reasons from customers: Many customer loans are for the purpose of investing in investment portfolios sensitive to market fluctuations; Customers intentionally defraud to misappropriate bank capital  Another cause of credit risk for commercial banks is that some companies and corporations guarantee or authorize affiliated branches to borrow capital from commercial banks to avoid the bank's inspection and supervision main loan When the borrowing unit becomes insolvent, the guarantor and authorizer refuse to repay the debt on their behalf Credit risk causes financial loss, reduces the market value of bank capital, and in more serious cases can cause bank business losses and even bank bankruptcy Measures to prevent and limit credit risks need to be researched and proposed in accordance with the business characteristics of each bank Credit risk leads to many consequences, specifically:  For the bank itself: If a commercial bank has a large bad debt to total outstanding debt ratio, there is information about the bank having many unrecoverable loans or that bank being placed under inspection by the State Bank under special control, the bank's reputation will be seriously reduced In addition, the occurrence of credit risk will reduce the ability of commercial banks to pay for deposits  For the economy: Once credit risk occurs, the bank's reputation and solvency are affected first Next, people and organizations with deposits at the bank came en masse to withdraw money and end their relationship II Credit risk management in Vietnam Commercial bank 2.1 Situation of credit risk management in Vietnam Commercial bank In the context of today’s competition and integration, one of the factors deciding the existence and development of commercial banks is their ability to manage risks, especially credit risks in a comprehensive and systematic manner It is very hard and complicated to limit credit risks which are often difficult to control and lead to losses of capital and income The well-implemented credit risk prevention activities will bring benefits to banks, including:  Reducing costs, improving incomes, preserving capital;  Creating trust for depositors and investors;  Creating a premise to expand the market, and improve the prestige, position, image, market share for the bank In recent years, the credit institution system in Vietnam has maintained a stable financial management capacity of commercial banks, especially risk management has changed dramatically and effectively, which step by step meets the requirements of international integration The legal framework for safety standards of credit institutions has been improved, moving closer to international banking practices and standards, creating a basis for credit institutions to operate more safely and to promote restructuring according to the set goals and orientations Vietnamese commercial banks have gradually implemented and applied Basel II capital safety standards as scheduled However, risk management in the financial market is still a problem that needs special attention, because the banking system is having a high number of bad debts compared to international standards The recently released financial statements of commercial banks for the third quarter of 2022 showed good growth compared to the same period last year However, bad debts are still on the rise 2.1.1 Bad debts of Vietnam commercial banks SOURCE: WWW.CEICDATA.COM | State Bank of Vietnam The latest report from the State Bank of Vietnam (SBV) reveals that as of the end of April 2023, the non-performing loans (NPLs) across the entire banking system reached approximately percent, double the level at the end of 2021 The overall gross NPL ratio for the banking system has now risen to percent Among them, statistics from 27 listed commercial banks on the stock exchange indicate that as of March 31, the total domestic NPLs exceeded VND 170.5 trillion, marking a 24.3 percent increase compared to the beginning of the year Furthermore, a significant number of commercial banks have NPL ratios that surpass the percent threshold set by regulations Specifically, NCB has an NPL ratio of up to 23 percent, VPBank 6.24 percent, BaovietBank 4.69 percent, Document continues below Discover more from: trị ngân Quản hàng thương mại BKSC0811 Trường Đại học… 119 documents Go to course [123doc] - du-an42 kinh-doanh-tiem-… Quản trị ngân hàn… 92% (12) Qtnhtm 1-Chuong-2 22 - slide quản trị ngâ… Quản trị ngân hàn… 100% (3) XU HƯỚNG CHỌN ĐỊA ĐIỂM CỦA CÁC… Quản trị ngân hàn… 100% (2) Bài tập tình TDNL tuyển dụng… Quản trị ngân hàn… 100% (2) Qtnhtm 1-Chuong-4 46 - Slide Quản trị ngâ… and VIB 3.64 percent Experts predict that the risks associated Quản trị with banking 100% (1) NPLs will continue to rise as the real estate and corporatengân bond hàn… markets have yet to recover, both of which are sectors with high NPL ratios Câudecent hỏi lýprofits thuyết In reality, despite many commercial banks reporting in avà tậpfirst cóquarter lời giải… challenging economic environment, the financial reportsBài for the of 76 2023 from the 27 listed commercial banks on the stockQuản exchange trị show a 4.4 100% (1) percent decrease in profits compared to the same period, ngân mainlyhàn… due to the need to significantly increase provisions for risk management This indicates that high levels of bad debts have eroded bank profits Specifically, due to the increase in NPLs, VPBank had to raise provisions for risk management by 55 percent, resulting in a 77 percent decline in profits in the first quarter of 2023 Similarly, Techcombank experienced a 17 percent decrease in profits in the first quarter of 2023 due to doubling provisions for risk management to VND 534 billion compared to the same period On the other hand, VietinBank achieved a percent growth in profits in the first quarter of 2023 due to a 52 percent increase in provisions for risk management BIDV, in particular, reduced provisions for risk management by 25.2 percent, leading to a significant increase of 58 percent in pre-tax profits Interestingly, some banks reduced provisions for risk management to "beautify" their profits, despite a surge in bad debts For example, although Eximbank's total bad debts increased by 30 percent in the first quarter of 2023 compared to the beginning of the year, a 42 percent reduction in provisions for risk management (about VND 66 billion) led to an percent increase in pre-tax profits compared to the same period 2.1.2 Control high-risk credit groups Although the State Bank has issued a policy of tightening credit to real estate, since the beginning of the year, capital flowing into this field has increased sharply Lending structure of some banks also focuses heavily on real estate segment (including consumer loans), so the risk of bad debt is very high In the report submitted by the State Bank to the National Assembly, credits in real estate and consumer have increased compared to the end of last year Specifically, in August 2022 real estate credit increased by 14.58% (including business and individual purposes) compared to the end of 2020, accounting for 19.14% of total outstanding loans Real estate inventory of 67 listed companies, as of June 30, 2022 was nearly VND 170,319 billion, an increase of 1.7% compared to the beginning of the year For real estate, the existence of planned inventory, and inventory during distribution and circulation is normal However, it is worth taking notice of inventories that have been put on the market but not yet sold due to liquidity issues and bad debt In addition, increased consumer loans also lead to many risks contributing to the increase of non-performing loans According to the SBV, credits for life needs in the first months of 2022 increased by 13.92% compared to the end of 2020 and accounted for 20.69% of the total outstanding loans of the economy Many banks are stepping up the retail segment because of high interest rates, helping to increase profits However, it is worrisome that some banks have lowered consumer loan standards but increased lending to compete for market share Many banks are lending to customers and over drafting on credit cards According to financial experts, if the consumer loan sector experiences sharp growth, especially in low-income countries, the risk is very high 2.2 Evalution of credit risk management in Vietnam Commercial bank 2.2.1 On the positive side Commercial banks' profitability increases over time: banks' business results continue to improve In 2015, the net profit margin on equity (ROE) of the entire system was only 12.2%, then by the end of 2020, ROE reached 18.1% and increased sharply compared to previous years Strategies and policies guiding credit risk management activities are increasingly clear and practical: Most banks have built strategic orientations in credit granting Every year, there are priority policies, focusing on credit development for a number of industries in accordance with the bank's economic development policies and target markets This is extremely important for the bank's credit activities in each period and period Start forming a centralized organizational model for credit risk management: The Law on Credit Institutions in 2010 and its amendments and supplements in 2017 have introduced many new regulations on the organization of management and operations in banks Most banks have built organizational models according to international practices, focusing on risk management in general, including credit risk management Specifically, all banks form a Risk Management Committee, with the role of advising the Board of Directors and the Board of Members on issues related to risk management Build a strict credit granting process, creating conditions to control credit risk right from the time it first appears: Although there are differences between banks, basically the credit process has been approved by banks The construction bank is very strict, including many specific steps, with connection, inheritance and mutual control between steps/stages in the process In the credit appraisal/analysis stage - a content of the credit process, banks have focused on analyzing the borrower's operating situation, researching and improving the quality of appraisal of loans and projects investment project, pay attention to analyzing efficiency and factors affecting the project to see the risks of the loan Perform credit checks well, coordinate well with internal control in cross-checking Building and applying an internal credit rating system to measure credit transaction risk: Banks' internal credit rating system is often structured separately for three groups of customers Main customer groups include: Corporate customer groups (regular businesses, newly established businesses, potential businesses), individual/business customer groups and financial institution customer groups Although the internal credit rating system only helps banks measure transaction risks and does not assess overall portfolio risk, the construction and application of the internal credit rating system also shows that A new step for banks in the process of applying international standards on risk management to specific conditions in Vietnam 2.2.2 On the negative side Banks' bad debt ratio tends to increase: The bad debt ratio of Vietnam's commercial banking system in the period 2015-2020 has an increasing trend, especially in 2020 due to the impact of the Covid-19 pandemic, bad debt increased compared to previous years Decision No 1058/QD-TTg of the Prime Minister approving the Project "Restructuring the system of credit institutions associated with handling bad debts in the period 2016 - 2020" has also come to an end and more than years of implementing Resolution No 42/2017/QH14 of the National Assembly on pilot handling of bad debts of credit institutions, but the goal of bringing gross bad debts to below 3% by the end of 2020 is difficult to complete Bank credit growth tends to decrease: Credit institutions have implemented many lending programs with preferential interest rates Because credit demand weakened due to the negative impact of the Covid-19 pandemic, credit growth was lower than previous years Data as of December 31, 2020 show that the 10 economy's credit balance reached nearly 9.2 million billion VND, an increase of about 12.13% compared to the end of 2019 To support customers in overcoming difficulties caused by the impact of the Covid-19 epidemic, the State Bank directed credit institutions to restructure debt repayment terms, waive and reduce interest and fees, and maintain the same debt group for customers with debts affected by the Covid-19 epidemic; reduce operating costs, have conditions to reduce interest rates to the maximum level; Promote non-cash payments, diversify appropriate credit programs and products, and promote administrative procedure reform, applying advanced technology to limit direct transactions while still creating favorable conditions giving customers easy access to credit and banking services The credit risk management environment does not meet the requirements of the Basel Committee and international practices: First of all, it must be mentioned that strategic planning is still quite simple, most of it only has development-oriented content In general, a credit list and specific plan have not been provided; in which the proportion of outstanding debt for each industry, each region, and each subject has not been specifically built to limit concentrated credit risk Besides, the set goals are only simple, through the numbers on credit growth rate for the entire bank, the proportion of bad debts/overdue debts that need to be controlled, or handled The level of credit loss represents the bank's "risk appetite" which is not specified for each industry, each market area, and each type of credit product Maintaining a distributed management organization model, not separating functions, easily leads to conflicts of interest in credit risk management: In some banks, the functions of the risk management department are not properly understood The situation where the risk management department participates in the credit appraisal/re-evaluation process is not only found in small banks, but 11 even in large banks such as BIDV or Vietinbank This shows that there is no real separation between the risk creation (operational) function and the risk management function; the independence of risk management is not guaranteed, leading to low management efficiency There is not yet a credit risk measurement system consistent with international practice: Each risk component has its own measurement method The Basel Committee in the Basel II Accord encouraged banks to use internal models to measure their banks' unique risks Many banks in developed countries have used different models to measure risks, thereby making provisions or calculating adequate capital levels to compensate for losses However, these models have not been applied in Vietnam 2.3 Casestudy of VINASHIN Currently, Vietnam Shipbuilding Industry Group (Vinashin) has restructured and changed its name to Shipbuilding Industry Corporation (SBIC) This business borrowed a huge amount of money from different banks, which caused many banks to fail in credit risk management After declaring bankruptcy, Vinashin transferred some debts to Petrovietnam and Vinalines, but still owes banks 26,000 billion VND The question is being asked now, with a huge debt of 26,000 billion outstanding at credit institutions, including the Bank for Investment and Development of Vietnam (BIDV) and Saigon Commercial Joint Stock Bank - How did Hanoi (SHB), Vietnam Technological and Commercial Joint Stock Bank (Techcombank) , handle this "bad debt"? In 2014, BIDV Bank's total outstanding debt with Vinashin was still VND 6,600 billion, accounting for about 3.2% of the total outstanding debt at this bank Of which, the amount of debt transferred to Vinalines is 1,600 billion VND, reducing Vinashin's "huge" debt at BIDV to 5,000 billion VND, equivalent to 2.4% of the total outstanding debt 12 Hanoi Housing Commercial Joint Stock Bank (Habubank) also provided Vinashin with up to 3,345 billion VND (including loans and bond purchases), equivalent to 83% of charter capital Because of the consequences of this large customer, Habubank finally had to choose to merge with SHB to solve financial difficulties At Techcombank, Vinashin's outstanding debt is over 500 billion VND According to Techcombank Board of Directors Chairman Ho Hung Anh, this loan was set aside by the bank for more than 100% of the asset value This loan also pushed Techcombank's bad debt from 2.69% in 2012 to 3.64% at the end of 2013 One of the banks that handles Vinashin's bad debts the fastest is SHB bank After merging with Habubank, SHB had quite good plans to handle Vinashin's bad debts As of December 31, 2012, Vinashin's outstanding debt at SHB was VND 4,004 billion, accounting for more than 44% of the bank's total overdue debt By the end of 2013, this debt was only over 1,200 billion VND Although not the direct cause, the Vinashin "storm" also contributed to bringing down Oceanbank According to OceanBank's 2013 financial report, as of December 31, 2013, OceanBank's total credit balance granted to a number of companies under the Shipbuilding Industry Corporation (SBIC), formerly Vinashin, was 689,400 million VND, of which overdue debt is 689,400 million VND Not only that, as of December 31, 2013, Oceanbank had deposits at Shipbuilding Industry Finance Company Limited with a total amount of VND 1,085 billion, as of December 31, 2012, it was VND 1,080 billion withdrawal deadline Based on the guiding document of the State management agency on considering debt freezing, restructuring SBIC's debts and allowing credit institutions to set up specific provisions in accordance with the financial capacity of credit institutions OceanBank has implemented the instructions, 13 maintaining the current debt status and making provisions with an amount of 115 billion VND, as of December 31, 2012, it was 88,326 million VND For deposits at Shipbuilding Industry Finance Company Limited, OceanBank has set aside 289 billion VND PGBank is also one of the banks that strongly lends money to Vinashin According to the 2014 financial report, as of December 31, 2014, PGBank had a bond of VND 50 billion for Vinashin and had made an allowance of VND 35 billion PGBank is also a bank forced to merge According to the plan approved by the State Bank, PGBank will merge into Vietinbank and is expected to be completed in the third quarter of 2015 However, now it is the fourth quarter of 2015 and there is still no new information related to this deal III Challenges and difficulties 3.1 Internal difficulties 3.1.1 Complex Regulatory Requirements One of the foremost challenges in credit risk management is keeping up with regulatory shifts Compliance burden with constantly changing regulations imposed by the industry authorities, government, and regulatory bodies pose a significant challenge to banks and financial institutions Meeting these requirements demands robust risk models, transparency, and significant resources 3.1.2 Data Quality And Availability Banks and financial institutions need to process large amounts of data for risk assessment, which is a daunting task, to say the least They heavily rely on data processing to detect and assess potential risks and make informed decisions about their borrowers However, most banks struggle with data quality, data accuracy, data availability, data, and data security This hampers risk assessment and decision-making and may happen due to the following reasons: 14  Lack of data governance;  Data silos (a collection of data held by one group that is not easily or fully accessible by other groups in the same organization);  Unreliable third-party data;  Legacy or age-old systems;  Issues with data integrity and relevance It is critical to maintain data accuracy, consistency, and relevance It involves forming policies, processes, and controls to govern data throughout its lifecycle, from collection to disposal 3.1.3 Shortage Of Skilled Personnel Credit risk management requires a diverse skillset, including expertise in  Statistical modeling;  Data analysis;  Risk assessment However, finding and retaining a skilled workforce for credit risk management is challenging for banks and financial institutions Banks and lending institutions can partner with managed service providers specializing in credit risk management Managed services can provide operations support and scale up the lender’s credit risk management capacity and capabilities in several ways:  Global availability of trained and experienced workforce;  Right-shoring model to support credit risk management on the preferred shore;  Integrated quality and compliance and high manageability;  Scalability and agility to ramp up/ramp down the capacity based on the demand This collaboration helps banks with access to skilled professionals and enhances their overall credit risk management capabilities 3.2 External difficulties 15 3.2.1 Economic cycle One of the common factors leading to credit risk is that the borrower encounters unpredictable changes in the business environment and the impact of the economic cycle During the high growth period, businesses business well so it is easy to recover loans and credit risk is low On the contrary, during the recession, many businesses encountered difficulties, so loans were susceptible to risks, especially medium and long-term loans 3.2.2 Interest rates, inflation, required reserve ratio High base interest rates reflect the Central Bank's intervention policy when inflation exceeds the allowable level The operating mechanism of the compulsory reserve tool is to control the ability to create money, limit the credit multiple of commercial banks, and indirectly affect credit risk at commercial banks When inflation is high, the Central Bank raises the required reserve ratio, the lending capacity and solvency of banks shrink (due to a decrease in the money multiplier), the amount of credit in the economy decreases, leading to a decrease in the amount of credit in the economy to increase interest rates, increased interest rates include loan interest rates This may increase the debt repayment pressure of existing borrowers as well as the possibility of higher credit risks On the contrary, if inflation is low, the Central Bank reduces the required reserve ratio, which increases the ability to create money, the supply of credit also increases and the loan interest rate is reduced compared to before Customers are not under pressure to pay interest to banks, the probability of credit risks is reduced However, when loan interest rates decrease, the amount of credit increases and in the long term it will lead to high inflation 3.2.3 Other external difficulties  Changes in policies and regulations: 16 Regulations related to credit risk management are often changed and updated continuously This requires banks to firmly grasp and implement new policies quickly and effectively  Economic crisis: When the economy declines and the economy declines, banks will have difficulty collecting debt and maintaining credit quality  Changes in monetary policy: When governments change monetary policies, such as interest rates or payment restrictions, banks may have difficulty securing loans and collecting debt  Regulatory jurisdiction: Some countries have complex rules and regulations on credit risk management, leading to difficulties in applying and adding tricks to these regulations  Political instability: Political conflicts, war or terrorism can increase signaling risks and reduce the trust of borrowers and partners in the banking industry  Market situation: The market can be highly volatile and unpredictable, which can be dangerous for banks  Social and cultural factors: Social and cultural factors, such as the unlimited consumption habits of some customers, can create risks when lending to banks  Social context Social context has a great influence on credit risk management of commercial banks For example, when Covid 19 happened, even when borrowers or businesses made plans, production and business plans could not predict or take into account all market fluctuations, affecting the supply of raw materials and fuel as well as changing the sales plan, similarly influenced by the buyer 17 Therefore, customers are naturally late on all goals, leading to losses, and consequently delaying loan repayment or not being able to repay the loan In summary, credit risk management at banks not only faces internal difficulties but also faces external factors that can negatively affect the bank's business operations Therefore, banks need to be sensitive, flexible and ready to respond to market and regulatory changes Banks need to ensure the ability to manage possible risks to protect assets and enhance customer trust IV How Vietnam commercial banks deal with bad debts In the structure of a credit institution, there is always a department consisting of debt handling and collection specialists who carry out debt handling activities according to the principle of and provisions of law Normally, the bank's overdue debt handling process will be carried out based on two legal sources: The first is the State Bank's general regulations on handling overdue debt The second is the separate regulations in the charter, loan agreement and loan guarantee contract of each bank Step 1: Notify customers of overdue debt For this activity, the credit institution builds processes and inspects the customer's loan and debt repayment process in accordance with the credit institution's operational characteristics as stipulated in the charter and be accessed and understood by customers The purpose of this activity is to ensure efficiency and ability to recover loans for the credit institution Step 2: Restructure the debt repayment term After notifying the customer of the overdue debt problem and the customer presenting the reason for not being able to repay the debt on time, the bank can restructure the debt repayment period based on their financial capacity and results from assessing the customer's ability to repay debt 18 Step 3: Handle collateral If the customer still does not pay the overdue debt, in principle the bank has the right to handle the loan security assets according to the agreement in the contract to recover the debt recovery according to the provisions of law The bank will handle the assets according to the loan security contract agreed upon by both parties Methods of asset disposal that are currently prescribed by law include: asset auction; Banks sell assets themselves; The bank receives replacement assets for customers' overdue debt payments and other methods not prohibited by law  Some solutions for commercial banks to handle bad debt: Firstly, handle bad debts in bank lending activities through direct recovery and through the sale of assets securing loans Based on the results of periodic debt classification, banks need to review and develop plans to handle and recover bad debts according to each specific measure Second, handle bad debt in bank lending activities by debt restructuring measures Debt restructuring is a measure used when a debt is due for repayment but the bank assesses that the customer is unlikely to be able to repay the bank Third, handle bad debts in bank lending activities by setting aside and using risk reserve funds Fourth, handle bad debt in the bank's lending activities by reducing and waiving interest This measure is applied to reduce financial difficulties for customers, creating conditions for customers to restore their operations production and business activities, encourage customers to pay part or all of the remaining bad debt at the bank Fifth, handle bad debt in the bank's lending activities by debt trading Debt sellers are usually creditors, debt buyers are professional debt trading organizations, and the traded assets are debts Selling this debt is also considered the fastest debt settlement solution, helping creditors recover part of their 19