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

Other external difficulties...16IV.How do Vietnam commercial banks deal with bad debts...17 Trang 3 I.Overview of credit risk in Vietnam Commercial bankIn fact, there are many concepts

*THUONG MAI UNIVERSITY*

BANKING AND FINANCE

COMMERCIAL BANK MANAGEMENT

Topic: Credit risk management in Vietnam commercial banks.

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 3

II Credit risk management in Vietnam Commercial bank 4

2.1 Situation of credit risk management in Vietnam Commercial bank 4

2.1.1 Bad debts of Vietnam commercial banks 5

2.1.2 Control high-risk credit groups 7

2.2 Evalution of credit risk management in Vietnam Commercial bank 8

2.2.1 On the positive side 8

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 do 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 bankgrants credit to a customer, meaning the revenue stream The expected incomefrom 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 incomeand market price when customers do not pay or pay late."

According to Clause 1, Article 3 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 thebank's credit granting process, due to borrowers not fulfilling their debtrepayment 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 withcredit activities, leading to financial losses such as reduced net income andreduced 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 manyobjective factors from the economic environment, political environment,cultural characteristics - society, legal environment and general regionaland 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 isone of the subjective causes leading to credit risk In addition, excessivecredit expansion means less careful customer selection, reduced ability of

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credit officers to monitor loan usage, and stricter compliance strictlyfollowing the lax credit process Along with the weakness of bankofficials 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 marketfluctuations; Customers intentionally defraud to misappropriate bankcapital

Another cause of credit risk for commercial banks is that some companies

and corporations guarantee or authorize affiliated branches to borrowcapital from commercial banks to avoid the bank's inspection andsupervision main loan When the borrowing unit becomes insolvent, theguarantor and authorizer refuse to repay the debt on their behalf Creditrisk causes financial loss, reduces the market value of bank capital, and inmore serious cases can cause bank business losses and even bankbankruptcy Measures to prevent and limit credit risks need to beresearched 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 manyunrecoverable loans or that bank being placed under inspection by theState Bank under special control, the bank's reputation will be seriouslyreduced In addition, the occurrence of credit risk will reduce the ability ofcommercial 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 atthe 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 factorsdeciding the existence and development of commercial banks is their ability tomanage risks, especially credit risks in a comprehensive and systematic manner

It is very hard and complicated to limit credit risks which are often difficult tocontrol and lead to losses of capital and income The well-implemented creditrisk 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 astable financial management capacity of commercial banks, especially riskmanagement has changed dramatically and effectively, which step by step meetsthe requirements of international integration The legal framework for safetystandards of credit institutions has been improved, moving closer tointernational banking practices and standards, creating a basis for creditinstitutions to operate more safely and to promote restructuring according to theset goals and orientations Vietnamese commercial banks have graduallyimplemented and applied Basel II capital safety standards as scheduled.However, risk management in the financial market is still a problem that needsspecial attention, because the banking system is having a high number of baddebts compared to international standards

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The recently released financial statements of commercial banks for thethird quarter of 2022 showed good growth compared to the same period lastyear 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 ofthe end of April 2023, the non-performing loans (NPLs) across the entirebanking system reached approximately 3 percent, double the level at the end of

2021 The overall gross NPL ratio for the banking system has now risen to 5percent Among them, statistics from 27 listed commercial banks on the stockexchange indicate that as of March 31, the total domestic NPLs exceeded VND170.5 trillion, marking a 24.3 percent increase compared to the beginning of theyear

Furthermore, a significant number of commercial banks have NPL ratiosthat surpass the 3 percent threshold set by regulations Specifically, NCB has anNPL ratio of up to 23 percent, VPBank 6.24 percent, BaovietBank 4.69 percent,

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and VIB 3.64 percent Experts predict that the risks associated with bankingNPLs will continue to rise as the real estate and corporate bond markets have yet

to recover, both of which are sectors with high NPL ratios

In reality, despite many commercial banks reporting decent profits in achallenging economic environment, the financial reports for the first quarter of

2023 from the 27 listed commercial banks on the stock exchange show a 4.4percent decrease in profits compared to the same period, mainly due to the need

to significantly increase provisions for risk management This indicates that highlevels of bad debts have eroded bank profits

Specifically, due to the increase in NPLs, VPBank had to raise provisionsfor risk management by 55 percent, resulting in a 77 percent decline in profits inthe first quarter of 2023 Similarly, Techcombank experienced a 17 percentdecrease in profits in the first quarter of 2023 due to doubling provisions for riskmanagement to VND 534 billion compared to the same period

On the other hand, VietinBank achieved a 3 percent growth in profits inthe first quarter of 2023 due to a 52 percent increase in provisions for riskmanagement BIDV, in particular, reduced provisions for risk management by25.2 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, althoughEximbank's total bad debts increased by 30 percent in the first quarter of 2023compared to the beginning of the year, a 42 percent reduction in provisions forrisk management (about VND 66 billion) led to an 8 percent increase in pre-taxprofits 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 realestate, since the beginning of the year, capital flowing into this field has

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increased sharply Lending structure of some banks also focuses heavily on realestate 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 lastyear 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 wasnearly VND 170,319 billion, an increase of 1.7% compared to the beginning ofthe year For real estate, the existence of planned inventory, and inventoryduring 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 liquidityissues 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 lifeneeds in the first 8 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 interestrates, helping to increase profits However, it is worrisome that some banks havelowered consumer loan standards but increased lending to compete for marketshare Many banks are lending to customers and over drafting on credit cards.According to financial experts, if the consumer loan sector experiences sharpgrowth, 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 resultscontinue to improve In 2015, the net profit margin on equity (ROE) of the entire

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system was only 12.2%, then by the end of 2020, ROE reached 18.1% andincreased sharply compared to previous years.

Strategies and policies guiding credit risk management activities areincreasingly clear and practical: Most banks have built strategic orientations incredit granting

Every year, there are priority policies, focusing on credit development for anumber of industries in accordance with the bank's economic developmentpolicies and target markets This is extremely important for the bank's creditactivities in each period and period

Start forming a centralized organizational model for credit riskmanagement: The Law on Credit Institutions in 2010 and its amendments andsupplements in 2017 have introduced many new regulations on the organization

of management and operations in banks

Most banks have built organizational models according to internationalpractices, focusing on risk management in general, including credit riskmanagement Specifically, all banks form a Risk Management Committee, withthe role of advising the Board of Directors and the Board of Members on issuesrelated to risk management

Build a strict credit granting process, creating conditions to control creditrisk right from the time it first appears: Although there are differences betweenbanks, basically the credit process has been approved by banks The constructionbank is very strict, including many specific steps, with connection, inheritanceand mutual control between steps/stages in the process

In the credit appraisal/analysis stage - a content of the credit process, bankshave focused on analyzing the borrower's operating situation, researching andimproving the quality of appraisal of loans and projects investment project, payattention to analyzing efficiency and factors affecting the project to see the risks

of the loan Perform credit checks well, coordinate well with internal control incross-checking.

Building and applying an internal credit rating system to measure credittransaction risk: Banks' internal credit rating system is often structuredseparately for three groups of customers Main customer groups include:Corporate customer groups (regular businesses, newly established businesses,potential businesses), individual/business customer groups and financialinstitution customer groups

Although the internal credit rating system only helps banks measuretransaction risks and does not assess overall portfolio risk, the construction andapplication of the internal credit rating system also shows that A new step forbanks in the process of applying international standards on risk management tospecific conditions in Vietnam

2.2.2 On the negative side

Banks' bad debt ratio tends to increase: The bad debt ratio of Vietnam'scommercial banking system in the period 2015-2020 has an increasing trend,especially in 2020 due to the impact of the Covid-19 pandemic, bad debtincreased compared to previous years Decision No 1058/QD-TTg of the PrimeMinister approving the Project "Restructuring the system of credit institutionsassociated with handling bad debts in the period 2016 - 2020" has also come to

an end and more than 3 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 isdifficult to complete

Bank credit growth tends to decrease: Credit institutions have implementedmany lending programs with preferential interest rates Because credit demandweakened due to the negative impact of the Covid-19 pandemic, credit growthwas lower than previous years Data as of December 31, 2020 show that the

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economy's credit balance reached nearly 9.2 million billion VND, an increase ofabout 12.13% compared to the end of 2019.

To support customers in overcoming difficulties caused by the impact ofthe Covid-19 epidemic, the State Bank directed credit institutions to restructuredebt repayment terms, waive and reduce interest and fees, and maintain the samedebt group for customers with debts affected by the Covid-19 epidemic; reduceoperating 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 tolimit direct transactions while still creating favorable conditions givingcustomers easy access to credit and banking services

The credit risk management environment does not meet the requirements ofthe Basel Committee and international practices: First of all, it must bementioned that strategic planning is still quite simple, most of it only hasdevelopment-oriented content In general, a credit list and specific plan have notbeen provided; in which the proportion of outstanding debt for each industry,each region, and each subject has not been specifically built to limitconcentrated credit risk

Besides, the set goals are only simple, through the numbers on creditgrowth rate for the entire bank, the proportion of bad debts/overdue debts thatneed 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, andeach type of credit product

Maintaining a distributed management organization model, not separatingfunctions, easily leads to conflicts of interest in credit risk management: In somebanks, the functions of the risk management department are not properlyunderstood The situation where the risk management department participates

in the credit appraisal/re-evaluation process is not only found in small banks, but