group assignment commercial banking 2 credit rating to customers in commercial banks rationality and issues

+ Discounting commercial paper is when the bank advances money to thecustomer corresponding to the value of the commercial paper minus the bank'sincome to own an undue commercial paper o

NATIONAL ECONOMICS UNIVERSITY

Nguyễn Đình Minh Trung – 11215991

Lecturer : Lê Thanh Tâm

Hanoi – 9/2023

Table of Contents

I Overview of credit rating 3

1 Credit 3

2 Credit rating 4

II Credit rating system in BIDV 7

1 An Overview of BIDV 7

2 BIDV’s credit rating system to customers 10

2.1 For individual customers 11

2.2 For corporate customers 15

III Rationality and issues of BIDV’s credit rating system 23

1 Rationality 23

2 Issues 25

3 Solutions contributing to completing BIDV's customer credit rating model 26

REFERENCES 28

I Overview of credit rating

1 Credit

a Definition

- Credit is the process of one party receiving financial (or other) resources of valuefrom another party and repaying at a later date The most common form is bankcredit, where a bank lends money to a borrower who is then obligated to makescheduled or periodic interest payments and repay the principal upon maturity tothem

- Bank credit, like other types of commercial credit, is granted because the creditortrusts in the credit recipient's ability to repay Therefore, credit risk is constantlylinked to bank credit

b Types of credit

- By term:

+ Short-term credits: are loans with a loan term of less than 1 year

+ Medium-term credits are loans with terms from 1 to less than 5 years

+ Long-term credits are loans with a term of 5 years or more

- By way of credit granting: according to this classification, bank credit includesdiscounting, lending, guaranteeing, and leasing activities

+ Discounting commercial paper is when the bank advances money to thecustomer corresponding to the value of the commercial paper minus the bank'sincome to own an undue commercial paper (or a debt paper).

+ Lending is a credit operation in which the bank permits the customer to utilizethe bank's money on the basis of a credit contract based on the payback principle.+ Guarantee is the commitment of the bank to fulfill its financial obligations onbehalf of the customer Even though they did not have to pay out money, the bankallowed customers to use their reputation to profit

+ Leasing occurs when a bank spends money to purchase assets to lease tocustomers in accordance with specified agreements After a specified period of time,the consumer is required to pay both principal and interest to the bank Leasing istypically used as a medium to long-term kind of borrowing

- By customer: credit for governments, financial institutions, businesses, andindividuals

- By the purpose of capital use: production and business credit, consumer credit

- By economic sector: industrial credit, agricultural, etc

c Credit risk

- According to 493/2005/QD-NHNN, credit risks in the banking activities of creditinstitutions are potential losses that may arise in the banking activities of the creditinstitutions due to the failure of their customers to perform or their not being able toperform their obligations in accordance with their commitments

- Credit risk is the probability of a financial loss resulting from a borrower's failure

to repay a loan Banks can mitigate credit risk by analyzing factors about a borrower'screditworthiness, such as their current debt load and income

=> Banks have come up with a credit rating system of their own to assess thecredit risks of their current and potential customers

2 Credit rating

a Definition

- Credit rating in banking refers to the assessment of a borrower's creditworthinessbased on their credit history and ability to repay a loan Banks use credit ratings todetermine the interest rate and terms of a loan, as well as the likelihood of repayment.

- A high credit rating shows that the borrower has the ability to repay debts withoutdifficulty A poor credit rating indicates that the borrower may have difficulty makingpayments or even be unable to repay the loan

- Customer credit rating is intended to help commercial banks clearly know thecustomer's status Based on this result, the commercial bank will make decisions togrant or refuse loans; increase or decrease line of credit; apply interest rate incentivesfor customers to protect the interests of banks and customers

b Role of credit rating

- For businesses:

+ Increase opportunities for businesses when accessing the capital market Acompany with a high-ranking order will have more opportunities to access morediverse financial markets at cheaper rates Because banks' primary goals are safetyand profitability, they are willing to lend to borrowers who can demonstrate theirability to repay

+ Credit scoring also helps businesses evaluate their financial capacity and haveappropriate development and management strategies Businesses can be aware of theirability to repay debt and mobilize capital in the market based on the rating scaleprovided by banks, from which they can take measures to build their financialstructure, policies, and proper investment policies, for development

+ Enterprises with a high-ranking order are not only favored by banks, but theyalso have the opportunity to boost their reputation, competitiveness, and brand name

in the market

- For commercial banks:

+ Customer credit ratings assist commercial banks in improving their riskmanagement skills This is the foundation for banks to propose solutions to problemloans in order to avoid potential risks.

+ Credit ratings also help commercial banks improve their credit quality.+ Furthermore, credit score results are used to estimate the amount of loanedcapital that will not be recovered in order to set up credit risk provisions

c Credit rating process

- Each bank has its own credit rating system for each sort of customer However, asimple credit rating procedure entails the following steps:

+ Collect data on the criteria used in analysis and evaluation In addition to theinformation provided by consumers, credit officers can acquire information fromsources such as CIC, etc during the collection process

+ Analyze by model to conclude the rating, using financial and non-financialcriteria simultaneously

+ Monitor customer credit status to adjust rating Summarize the results obtained tocompare with the actual risk, and then consider altering the rating model

d Factors affecting credit ratings

- Quality information about customers: the collection of information aboutcustomers is a crucial step that has a direct and decisive impact on the correctness ofcredit scores This requires that the information be thorough and precise, correctlyreflecting the borrower's financial status and ability to repay debt As a result, beforebeing utilized to evaluate customers, this information must be properly filtered andvalidated

- The physical conditions and information systems in the bank also have a largeimpact on the effectiveness and dependability of the credit rating system Creditscoring is complicated and demands great accuracy, so information must be stored,processed, and updated using advanced, current, and scientific software

- Credit officers qualifications and capabilities Credit officers must beprofessionally certified, comprehend risk management in credit operations, and befamiliar with credit rating application software Furthermore, credit officers must haveprofessional ethics in order to ensure that the scoring process is honest anddependable.

e Credit rating criteria

- Business type

- Non-financial indicators

- Financial indicators

+ Profit indicators: ROA, ROE, ROAA, etc

+ Financial leverage indicators: D/E

+ Performance indicators: working capital turnover, inventory turnover, etc.+ Liquidity indicators: current ratio, quick ratio, etc

II Credit rating system in BIDV

1 An Overview of BIDV

- The Joint Stock Commercial Bank for Investment and Development of Vietnamcommonly known as BIDV, is a Vietnamese state-owned bank in Vietnam It is thecountry's biggest bank by assets ($72 billion USD) as of June 2021 According to theUnited Nations Development Programme report on the 100 largest enterprises inVietnam, BIDV came in at the 4th position after Agribank, VNPT, and EVN

- As one of the largest commercial banks, BIDV has its network spread across thewhole territory of Vietnam and a commercial presence in many countries around theworld, BIDV was recognized as the major brand name by the domestic andinternational community, pillars of Vietnam Banking system, BIDV is operating in thefield of ” Finance – Banking – Insurance” providing for customers a full range offinancial services such as raise capital, credit, project finance, international trade,foreign exchange, retail banking services, electronic banking, etc keep up with therequirement of international integration BIDV has used the comprehensive

technological infrastructure of modern banking, today’s most advanced, from 2007 tonow BIDV has kept the leading position of Vietnam ICT Index (available index fordevelopment and informative technology application).

1.1 Business performance in recent years

- In 2020, despite being significantly affected by the double effect of the

COVID-19 pandemic, BIDV maintained safe and smooth operations with no employees beinginfected with COVID-19; the scale of growth was consistent with the developments

of the market and the economy BIDV comprehensively completed the 2020 businessplan as assigned by the General Meeting of Shareholders, fulfilling its obligations tothe State budget, preserving and growing the State’s capital at BIDV, and ensuring fullrights of shareholders and employees

- BIDV had total assets of VND 1,516,686 billion, an increase of 1.8% compared to

2019, continuing to be the largest commercial bank by total assets in Vietnam Theslow growth rate compared to the past years was mainly due to BIDV’s restructuring

of its asset portfolio to improve business efficiency

- Total outstanding loans and investments reached VND 1,438,520 billion, up 8.5%compared to 2019; of which loan balance hit VND 1,230,569 billion, growing by8.5% compared to 2019 in compliance with the credit limit assigned by the StateBank of Vietnam (maximum 9%), accounting for 13.4% of total credits of the entireeconomy, leading the market in terms of loans to economic organizations andindividuals among commercial banks

- By December 31, 2021, BIDV's total assets have grown steadily over the years,reaching VND 1,761,696 billion, up 16.2% compared to 2020, continuing to be thelargest joint stock commercial bank by total assets in Vietnam

- Mobilized capital fully met the demand for capital, and ensured the systemliquidity In 2021, total capital mobilized from organizations and residents reachedVND 1,509,483 billion, an increase of 16.5% compared to 2020, 1.8 times higher than

the growth rate in 2020, increasing BIDV’s total mobilized capital to VND 1,641,777billion.

- In 2022, total assets reached VND 2,120,609 billion, an increase of 20.4%compared to 2021, BIDV was the first commercial bank to surpass the milestone ofVND 2 quadrillion, continuing to be the largest joint stock commercial bank by totalassets in Vietnam

- Mobilized capital met the demand for capital use and ensured the systemliquidity: total mobilized capital as of 31 December 2022 was VND 1,973,861 billion;

in which capital mobilized from organizations and individuals reached VND1,636,341 billion, up 8.4% compared to the beginning of the year; accounting forabout 14% of the deposit market share of the entire banking industry

1.2 Overview of BIDV's lending activities to individual and corporate customers from 2017 to 2022

a An overview of BIDV's lending to individual and business customers from 2018 to 2022

Outstanding loans from 2018 through 2022

(Source: Based on BIDV's financial statements for the period 2018-2022)

- BIDV's total outstanding loans increased steadily during the 5 years from 2018 to

2022 Specifically, at the end of the 2019 reporting period, outstanding loans reached1,116,997 billion, an increase of 12.32% over the year 2018 This spending has grownsteadily over the years, reaching 1,522,221 billion in 2022, equivalent to an increase

of 11.01% compared to the previous year

b Bad debt situation of lending activities to corporate and individual customers

- A graph showing the total amount of outstanding loans to both individual andbusiness customers and the total amount of outstanding loans

NPL ratio of BIDV bank compared to the entire banking system

(Source: Based on BIDV's financial statements for the period 2018-2022)

- Although BIDV's total outstanding loans have grown steadily over the years,especially in 2019 and 2022, BIDV's total outstanding loans grow by about 11% peryear, but BIDV still ensures strict control Credit quality, reflected in the bad debtratio, is always maintained at below 2%, much lower than the entire banking systemthanks to:

+ Credit quality management and bad debt handling are promoted and givenpriority In addition, the investment portfolio is also regularly reviewed, so creditofficers can promptly detect customers with weak financial performance or at risk ofnot being able to repay their debts and move them to the debt group bad and haveplans and measures to handle it Synchronously deploy drastic solutions to control

risks such as establishing inspection teams, promoting bad debt recovery, andhandling bad debt flexibly and effectively.

+ In addition, building a strict and reasonable credit process as well as thesignificant role of the internal credit rating system before making loan proposals hascontributed to helping BIDV manage well

2 BIDV’s credit rating system to customers

- According to the provisions of Article 7 of Decision 493/2005/QD-NHNN,commercial banks perform debt classification based on customer rating results fromthe Internal Credit Rating System - essentially based on the assessment ofsummarizing financial, non-financial, business, and production results of customers.Therefore, the classification results will be more accurate This is also the methodbeing applied by banks around the world

- Implementing the Decision of the State Bank of Vietnam, with an effort to makefinancial soundness according to the bank restructuring project approved by theGovernment, BIDV has proposed to carry out the debt classification according toArticle 7 of Decision 493 On November 14, 2006, the Governor of the State Bank ofVietnam issued Decision No 9745/NHNN-CNH approving BIDV to implement thepolicy of debt classification and risk provisioning according to the qualitative method.Therefore, BIDV is the pioneer commercial bank to deploy the internal credit ratingsystem

2.1 For individual customers

a Scoring criteria on personal identity and debt repayment ability

level

Post-graduate

Undergraduate

College Secondary

education

Undersecondary

10%

30 - 50 milVND

< 30 milVND

10%Working

feature

Manager Specialist Vocationally

trainedworkers

Seasonalworker

Unemployment

10%

Working

experience

> 7years 5 - 7 years 3 - 5 years 1 - 3 years < 1years 10%

Part 2: Relationship with bank

3 - 5 milVND

1 - 3 milVND

< 1 milVND

Overdue debt and unstable payment

Delayingpayment

Services Deposit

and other

Onlypayment

- In which:

+ The proportion for the indicator of personality is 40%

+ The ratio for the indicator of debt repayment ability is 60%

- Customer ratings: customers will be classified into 3 groups based on the number

Real Estate( House)

Realestatesecurities

Nocollateral

(Source: Bank for Investment and Development of Vietnam)

- After summarizing, collateral assets will be ranked on the following scale: