Risk management in commercial banks of Vietnam

- Research the risk expression in professional competences of commercial bank such as: credit operations, capital management, and international bank services in bank - Research the risk

ĐẠI HỌC QUỐC GIA HÀ NỘI

TRƯỜNG ĐẠI HỌC KINH TẾ

NGUYỄN HỘI TIÊN

Risk management in commercial banks

of Vietnam

LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH

NGƯỜI HƯỚNG DẪN KHOA HỌC: TS Tạ Ngọc Cầu

Hà Nội – 2007

ĐẠI HỌC QUỐC GIA HÀ NỘI

TRƯỜNG ĐẠI HỌC KINH TẾ

NGUYỄN HỘI TIÊN

LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH

NGƯỜI HƯỚNG DẪN KHOA HỌC: TS Tạ Ngọc Cầu

Hà Nội – 2007

TABLE OF CONTENTS

Abstract i

Acknowledgements iii

Table of contents……….iv

INTRODUCTION 1

1 NECESSITY OF THE THESIS 1

2 OBJECTIVE OF THE RESEARCH 1

3 KEY RESEARCH AREA 2

4 METHODOLOGY 2

5 CONTRIBUTIONS OF THE THESIS 2

6 THESIS STRUCTURE 2

Chapter 1: Literature review 3

1.1 Commercial Bank and the main risks in the bank operations 3

1.1.1 Commercial Bank and the main risks 3

1.1.1.1 Concept 3

1.1.1.2 Functions 3

1.1.1.3 Main professional competences 4

iv

1.1.2 Main risks in operations 5

1.1.3 Risk measurable indexes 8

1.2 Risk management in operations of Commercial Banks 10

1.2.1 Concept and role of risk management 10

1.2.2 Tools of risk management 11

1.2.2.1 Group tools limited credit risk 11

1.2.2.2 Group tools sponsored risk 16

1.2.2.3 Group tools prevented other risks 17

1.2.3 Factors impact risk management 18

1.3 Experiences in risk management of Foreign Banks 19

1.3.1 Model assessed credit risk 19

1.3.2 Model determined interest rate risk 21

1.3.3 Model reassessed 22

Chapter 2: Methodology, research paradigms, analysis 23

2.1 Status quo risk management in Commercial banks of Vietnam 23

2.1.1 Background of Commercial banks in Vietnam at present 23

2.2 Status quo risk management of commercial banks 24

2.2.1 Status quo of credit risk 24

2.2.2 Status quo of foreign exchange risk 27

2.3 Risk management policy of commercial banks (period 2005-2010) 29

Chapter 3: Recommendation and conclusion 33

3.1 Improving risk management in Commercial banks of Vietnam 33

3.1.1 Group of risk management solutions 33

3.1.1.1 Customers selection by grade system and credit rank 33

3.1.1.2 Criteria assessed by kind of customers 33

3.1.1.3 Some of methods support to fulfill credit grade process 43

3.1.2 Improving the evaluation quality of debts 45

3.1.3 Solution for improving guarantee assets management in credit operations 49

3.1.3.1 Improving assessed technique and propose methods for guarantee assets management 49

3.1.3.2 Solutions for support to fulfill 53

3.1.3.3 Solutions for deduction particular standby 55

3.2 Group of foreign exchange risk management solutions 55

3.2.1 Opening the mobilizing foreign currency resources and intensify to seek customers had import/export payment demands 55

3.2.2 Combination buy/sell foreign currency spot and forward 57

3.3 Group of interest rate risk management solutions 59 3.3.1 Prevention interest rate risk by Swap 61 3.3.2 Determine the suitable exchange ratio between fixed and

floated interest rate 62 3.4 Group of improving organization system management 62 3.4.1 Signification in arranging organization framework suitable for risk

management functions 62 3.4.2 Organizing system professional competences management 62 3.4.3 Strengthen internal control 65 3.5 Some of petitions for State-owned Commercial banks to support for Commercial banks in risk management 67 3.5.1 Some of petitions for State-owned Bank in credit management 67 3.5.2 Some of petitions for State-owned Bank to support in strengthen foreign exchange risk management of Commercial Banks 69 3.5.3 Petition for Government and relative industries 70 CONCLUSION 72 REFERENCES

APPENDIXES

INTRODUCTION

.1 NECESSITY OF THE THESIS

Risk management was interested in by the managers, especially, bank industry Risks always threaten existence of the commercial banks and that thing effected to the economic Risk is a significant barrier in trading of banks Therefore, researching the preventative solutions to ensure the security and limit risks in business is very necessary Risk management in commercial bank operations is a new field Besides, risk management standard of Vietnam banks is the beginning period in comparison with the countries had the development financial market in hundreds years As well as, banks are poor in financial products and services, small scale and business capital sources Operation scope is also major in domestic market; weakness in financial management ability and unclear, closed the financial system Through the working in bank, I have chance to face with the practices and

compare to theory and practice, I decide to choose the topic: “Risk management in

trading in commercial banks of Vietnam”

.2 OBJECTIVE OF THE RESEARCH

- Research the issues about risks which banks have to face with including discovery, measure and the overcome methods

- Research the risk expression in professional competences of commercial bank such as: credit operations, capital management, and international bank services in bank

- Research the risk impact level because of the payment over time situation of customers, the change of interest rate, foreign exchange to the direct income

in bank Simultaneously, finding the limited reasons in risk management tools application of bank in particular and commercial bank on general

Reply on the realistic experiences of banks in the world, propose solution groups to improve the risk management process, included the deploy some of new preventive professional competences in practice conditions of bank

Thesis only concentrates on major risks and the relation among risks in capital trading of commercial bank to give out the preventive solutions

.4 METHODOLOGY

Thesis is used methodology of dialectic materialism, logic reason combination materialistic history, methods in raising the issues, interpretation, analysis and giving the conclusion

Thesis is also used statistic, formula illustration, interpreting the issues means .5 CONTRIBUTIONS OF THE THESIS

- Systematize the views about risks, the relationship among risks affect to the operations in commercial banks

- Analysis to seek the reasons, appreciate the status quo to conduct the preventing risk methods and apply for the commercial banks

.6 THESIS STRUCTURE

Topic: “Risk management in commercial banks of Vietnam ”

INTRODUCTION

Chapter 1: LITERATURE REVIEW

Chapter 2: METHODOLOGY, RESEARCH PARADIGMS, ANALYSIS Chapter 3: RECOMMENDATIONS AND CONCLUSION

CONCLUSION

References

CHAPTER 1

LITERATURE REVIEW

1.1 Commercial bank and the main risks in bank operations

1.1.1 Commercial Bank and the main risks

1.1.1.1 Concept

America: Commercial Bank is a business company specialized in providing financial services and operating in financial service industry France: Commercial Bank is an enterprise frequently receives from the people deposit form or the other forms which their money was not used to theirselves in discount professional competences, credit or financial services

India: Commercial Bank is a place to receive the deposit to loan or sponsor and invest

Vietnam: Commercial Bank is an organization trading in currency major

in and frequently to receive deposit from the customers with the responsibility to refund and use that money to loan, carry out discount operation and make payment means

1.1.1.2 Functions

- Assets rotation function: Banks conduct at the same time two operations The first one, Banks mobilize capital by issuing deposit certificate The second one, Banks invest by providing credit and stock investment

Table 1.1 Balance sheet assets of Bank (simple)

Bank

Credit assets Primary stocks

- Bonds

- Stocks

- Credits

Debit assets Secondary stocks

- Deposit certificates

- Saving deposit

- Payment deposit

- Intermediary payment function: On behalf of customers to carry out payment for buying goods or services by issuing and balance cheque, providing e-payment networks, connecting funds and distribution paper-money, coin-money; guarantee and commitment

in refund for customers, managing and protecting their assets; issuing or redeeming stocks,…

- Function makes “book value” in economy

- Intermediary function in conduct the country economic policy 1.1.1.3 Main professional competences

- Debit operations (mobilizing capital): Commercial Bank conducted its operations throughout not only using its capital but also mobilizing capital from the customers

- Credit operations (business loan) currently, this is still the basic operation of Commercial Bank

protection documentary, valuable assets,…)

Trading principles of Commercial Bank

Firstly, banks ensure the benefit for customers with the providing financial services Secondly, banks have to conduct the safe methods in trading: maintaining the fixed capital, ability in resisting the market change, selecting customers, limited credit, controlling in perform, diversifying assets to disperse risks Besides, banks utilize forward deposit market, optional market,…

1.1.2 Main risks in operations

Concept of risks

Banking operation is one of the economics ones had a lot of risks the most It is very difficult to define risk accurately for the trading environment as well as all development economic and society periods However, the banking risks conception like that: “Risk in bank is unexpected events make causes losses and damages to assets, income of bank in operations.”

- Credit risk: risks associated with bank operations due to irrecoverable debt up to due date Credit risk did not only limit in business loan but also include creditable operations such as: guarantee, trade sponsor, inter-bank loan operations

- Unusable capital risk: rising from transforming utilization of forward capital and bank capital Generally, the utilization of forward capital has

the long time compared with bank capital sources Thus, bank has two difficulties: dissatisfy its short-time commitment, the shorter forward capital sources still be used capital in fixed-time

- Interest rate risk: bank risk in transforming assets including buying primary stocks, loaning (using capital), issuing secondary stocks (mobilizing capital) Forward time and conversion in Debit assets items

do not correspond with Credit assets items This thing makes bank taken interest rate risk It means that if the sensitive interest rate of bank Debit assets is more than the sensitive interest rate of bank Credit assets, net income of interests will be decrease when interest rate increase Therefore, bank income will go down But when interest rate decrease, the situation is vice versa

The interest rates of bank products usually divide two kinds: fixed and changed interest rate in bank operations Thus, following, analyzing and managing interest rate risk also carry out two kinds: fixed interest rate risk and changed interest rate risk

+ Changed interest rate risk will be happened when interest rate of items in Credit assets and in Debit assets do not changed at the same time

as well as changeable level of market interest rate

+ Fixed interest rate risk: impact on Debit assets and Credit assets at once There are two cases: the first one, if fixed interest rate of the amount of items Debit assets is higher than fixed interest rate of the amount of items Credit assets, banks get a lot profits when market interest rate go up and incur risks when market interest rate go down The second one, the situation will be vice versa if fixed interest rate of amount of items Credit assets is higher than fixed interest rate of the amount of items Debit assets

- Foreign exchange risk: this risk is happened when bank provided credit for customers or kept stocks by foreign currencies The change of rate decreased the income value when foreign currency converted domestic currency involving original debts and interests by foreign currencies

- International credit risk and foreign trade credit risk: besides the general credit risks, banks also had other risks such as: currency, country and legal risk

- Insolvency risk: this is the risk of bank The one or many of over risks make consequence of this risk and banks go bankrupt

Relationship among the risks

After researching risks, we are considerable that there is really the relationship closely among them This risk is a cause or consequence of another one

Indeed, credit risk-customers insolvency- makes banks can not pay for the deposit of customers This expresses risk in capital If there are a lot credit risks, banks will reduce loan limit as well as the approving of loan also will be restricted Thus, banks were stagnated capital

And between interest rate and foreign exchange also have the nearly relation because if interest rate changes, foreign exchange will change Normally, interest rate and foreign exchange risk affected mutually This

is the one of many reasons makes losses for banks and borrowers

All over risks are causes of insolvency and bankrupt in bank

Figure 1.1: Relationship among risks 1.1.3 Risk measurable indexes

- The ratio between allocated in prevention credit losses and total of loan and lease debts or total of owner capital

debts or total of owner capital

The overdue debts are debts did not pay from 90 days and more

The loans forgiven debts are loans, which bank declared none value and delete in records

Risks in bank

and foreign trade risk

Insolvency

When the first two indexes increase, bank credit risks also increase Banks nearly go bankrupt The last two indexes express the preparation

of bank for the credit losses through deducting credit losses prevention every year of present income

Interest rate risk

The change of market interest rate also influence strongly on earnings and expenditures of bank operations The measurable interest rate risk methods are utilized the most in banks:

- The ratio between sensitive interest rate assets and sensitive interest rate capitals When scale of sensitive interest rate assets is bigger than scale

of sensitive interest rate capitals in the fixed time, it is a disadvantage status quo of bank Banks will be suffered losses when interest rate decreased Otherwise, loss is happened certainly if interest rate increased when scale of sensitive interest rate capitals is larger than scale of sensitive interest rate assets

- The ratio between uninsured deposits and total of deposits Normally, deposits exceed the set standard maximum insurance and very sensitive about interest rate They will be withdrawn when the interest rate of competitors is higher

Foreign exchange risk

Banks can utilize one of many modes of foreign currency state to determine foreign exchange risk level Managing foreign currency state mode of each foreign currency, bank measured through index:

Net present foreign currency state: the difference between total of Credit

assets and total of Debit assets

Net present foreign currency state of one foreign currency is calculated like that:

Net present foreign currency state (i) = inside state (i) + outside state (i) = [Credit assets of foreign currency (i) – Debit assets of foreign currency (i)] + [buying sales (i) – selling sales (i)]

In there: (i) as sequence of foreign currency

If net present foreign currency state (i) is more than zero (0), this state is positive It its state (i) is less than zero, state is negative

To avoid the foreign exchange risk of fixed foreign currency, it means that state of this foreign currency equal zero, Bank could conduct by two ways:

- The first one, making balance between “buying and selling sales” and

“Credit and Debit assets” of this foreign currency

- The second one, making inside and outside state had opposite mark Logically, if banks want to avoid foreign exchange risk, their state of all foreign currencies has to equal zero When foreign currency state is positive, bank will face with risk if price of this one rises up Therefore, if foreign currency differ from zero, banks usually get risks when exchange rate changes

1.2 Risk management in operations of Commercial banks

1.2.1 Concept and role of risk management

Risk management is the preventing solutions to limit risk Besides, it also deals with risks when banks have to face with them Depend on the kind of risks; banks will have appropriate managing solutions

Roles of risk management in bank operations;

Risk management is the central position in financial management at present It is very important and necessary for bank operations Because if without it, there are a lot of risks happened make banks can not show all theirselves functions So, economy will be losses

1.2.2 Tools of risk management

1.2.2.1 Group tools limited credit risk Risk management of credit operations is the process which did not have loan losses, increased maximum interests while reduced maximum losses

in limited capital scale

The main objective of credit risk management is prevention In there, banks have to set up legal barrier closely and completely And, they also build and perform the perfect credit process

To restrict credit risk minimum, credit organizations frequently apply the following preventing tools:

a) Grade system and customer rank

This grade system and customer rank is the probability evaluation process

of customer which did not fulfill its financial obligation for the bank such as: unpaid due date loan and interests or violated other credit conditions Grade system and customer rank support to banks decisions in supplying credit, involve limit, term, interest rate, loan guarantee methods, ratify or not

Figure 1.2: Credit grade process

b) Guarantee loan

Guarantee loan is bank application in protecting bank from risk It makes conditions of economic base and legal to recover customer loans Its purpose is to enhance responsibility of loan payment commitment and prevent risks such as: the expectation of loan payment plan could not carry out or unexpected risks

Banks usually manage guarantee assets following the nature of each kind

of assets

- Movables: banks hold and preserve during borrowed time

- Immovable: banks keep completely original documents, including proprietary certificate, buy/sell invoices, insurance contracts, and documents conformed by relative organizations

Ratifying and

ranking customer

Collecting and ranking enterprises

It will help banks to manage easily its credit portfolio From there, banks can determine managing solutions, prevent timely and suitable to minimize risks Loans are classified like that:

-Loans with perfect document, completed about right of guarantee assets, high payment ability, ensure enough savings certificates, bond, cash value of insurance,…

-Potential income at present and future is strong Rank 3

(accepted

quality)

-Fairy convertible ability and suitable financial conditions -Income can be unusual and payment ability enough, but non ensure in all conditions

-Loans are guaranteed by account receivable and inventory which it is difficult and not sure to transfer to cash

-Replaced sources are limited Rank 4

-Information in credit document is not enough to give out any conclusion about quality

-Do not obey payment schedule, payment sign is not on time

(low

quality)

support for loan -Unclear payment sources, if there is not usual and closely check, loss of one part or whole loan can be happened

-Payment is not on time, if there is not usual and closely check, loss of one part or whole loan can be happened

-Supplement guarantee assets and clearly losses -Payment is not on time and can be applied recover debt solutions

-Overdue debt under 360 days -Have to apply solutions of recover debt Rank 7

-Must use solutions to recover debts

d) Follow up and appreciate loans utilization

To limit loans utilization with wrong objective or invest in high risk trading caused insolvency for bank, terms of bank contracts were drafted detailed and closed During loan contract time, creditors always check, assess the operations of loan projects which obey loan contract terms or

not as well as their progress and outcome satisfactory the formed loan plan This is the reason why it is necessary for auditing and collecting information to evaluate the progress and outcome of customer loan projects

e) Building the long-term relationship with customers

This is one of the important principles in credit risk management term relationship with customers will help bank to minimize expenditures significantly related collecting information about the credit potentiality and risk of customers And it is easier to classify customers based on credit risk

Long-If customers have ever borrowed money of bank before, establishing the procedures in evaluating operations after borrowing will be easily Thus, lenders minimize risks and controlling expenses for the long time

With borrowers, based on the long-term relation, they can get special interest, simple loan procedure; value of loan can be higher than general customers It is useful for lenders because they can minimize the collecting information fees to assess credit risk of customers

f) Retaining the loan and controlling loan utilization through bank accounts

Besides, banks require customers to open their accounts at their banks and retain the minimum loans (for example, 10% of loan value for standby) By this way, bank can control loan utilization through bank accounts

For example: customers change supplier, it means that customers may open new business trend; when appearing unusual withdraw money, it

may be customers met difficulty about finance or money is used for high risk operations

This controlling methods help bank to set up long-term relationship with customers as well as minimize expenses in following up and assessing loans

g) Credit limit

Credit limit is performed by two forms The first one, credit organization can refuse to supply credit although customers have loan demands and readily pay with high interest rate The second one, credit organizations only satisfy part of loans not the whole

The first form is applied for prevent inverse choice because if customers want to borrow with high interest, they usually use loans for the high risk projects

The second form is credit limit aim to avoid ethical behavior risk because

of the large loans, it is easy for customer to use loans with wrong propose which lenders can not control With 1000 USD loan, it is easier for customer to pay than 5000 USD loan and with 1000 USD loan, it is more difficult for customer to attend risk operations than 5000 USD loan 1.2.2.2 Group tools sponsored risk

a) Credit insurance

Credit insurance is the form transferred one part or whole credit risks of credit organizations to insurance organizations or required customers buy insurance theirselves in insurance organizations Credit organizations consider this form of credit guarantee my credits This is the solution aim

to share credit risk And it is usually carried out by loan operation insurance, assets insurance, loan insurance

b) Selling debts

Selling debts is the important method aim to reject the low interest rate assets from the list It makes place for high convertible assets when market interest rate rise Selling debts in order to replace by higher convertible assets as well as reject credit risks and interest rate risks Therefore, banks can get profit immediately instead of waiting for due date loans

Figure 1.3: Buy/Sell debts relation

c) Deducting for standby

This is the solution which banks deduct one part of income to make up for damage from credit losses as well as other assets Based on classification loans of each group depended on a lot of different criteria and consider risk level for each loan, banks deduct with correlative ratio

of each loan value

Assets Cash account

Total of credit balance in

book of bank decreased

contract Then, investors

can approach income flow

from loan

Individual and organizations

program of debts (investors based on capacity of bank in assessing the quality of credit to limit risks)

Earnings from buy/sell debts

Sell loans or payment program of loans

1.2.2.3 Group tools prevented other risks

a) Interest rate risk

Interest rate affected directly on value of Credit and Debit assets in balance sheet So, impact on increasing/decreasing income, expenditures and profits of bank

The first step of assessing interest rate risk has to determine which assets

or loans are sensitive about interest rate change Then, banks analysis what will be happened if interest rate changes

To manage interest rate risk, banks usually use the below solutions:

- Set up the balance relatively of time-limit

- Reduce interest rate risk by Forward and Future contracts

+ Future contract + Swap contract

b) Foreign exchange risk

There are two methods

- Method of inside state prevention

Banks lend foreign currency by its capital which banks mobilized at the same time It means that if foreign exchange state of Credit and Debit assets balance, banks will have net profit positive

- Methods of outside state prevention

+ Utilizing forward contract in order to mobilizing foreign currency capital when banks lend foreign currency loan for customers At that time, banks can protect from risk because of change rate

+ Financial derivative tools They are the forward, exchange, option contracts used by banks operated in high development monetary market to cope with interest rate, foreign exchange risks

c) Insolvency risk

The methods of over risk prevention are also method which protect bank from insolvency risk to minimize risk and banks go bankrupt It is owner capital of banks Therefore, the first solution is banks how managed their owner capital to ensure payment ability Another solution applied to prevent that risk is determine convertible state everyday

1.2.3 Factors impact risk management

- Objective factors group: development standard of economy, government policies, the particular operations of enterprises, legal systems and legal executed awareness as well as the clear of economic, social operations,…

- Subjective factors group: skillful, vision of managers, monitor; capacity

of creditors staff, technological managing standard; financial ability; scale and structure of commercial banks organization networks

1.3 Experiences in risk management of Foreign Banks

1.3.1 Model assessed credit risk

- Credit quality model: assessing credit risk level of customer before lending

In the book “Financial Management of Commercial Banks” of JF.Sinkey, model involves five factors from customers caused credit risks When analyzing about credit, Sinkey said that banks have to determine the relationship between financial and non-financial characteristics of borrowers

This relation is expressed like: D = d [ I (C), CF, NW, G]

In there, d (default) is the insolvency of customers and depends on I (information) which is quality of information about theirselves customers provided for lenders

C (character) is personality of borrowers

CF (cash flow) effectiveness in business replied on quantity of and stable income of borrowers

NW (net worth) is owned capital of borrowers

G (guarantee) is the guarantee of the third side for borrowers

If one of factors is not good, the insolvency (credit risk) of borrowers will increase and vice versa

- Credit grade model

This model is usually used figures reflected characteristic of partners, which are sponsored, to calculate credit risk probability or classify partners based on determined risk level To utilize the grade models, banks need to define reflected norms of financial and trading characteristics related credit risks for each partner There are some basic

models help to grade credit such as: linear probability model, logarithm model, linear distinction model

- Z-Credit scoring model

E.I.Alman built Z-Credit scoring model to score credit for the direct manufacturing companies Z is general measurable to classify credit risks for borrowers, depends on:

+ Numeric value of financial indexes of borrowers (Xj)

+ The importance of these indexes in defining insolvent probability of borrowers in the past

Therefore, Alman built scoring model like that:

Z = 1.2 X 1 + 1.4 X 2 + 3.3 X 3 + 0.6 X 4 + 1.0 X 5

In there:

X1: ratio of “net working capital and total assets”

X2: ratio of “profit and total assets”

X3: ratio of “income before tax and total assets”

X5: ration of “turnover and total assets”

1.3.2 Model determined interest rate risk

This model based on the table of interest rate balance In there, items of Credit assets and Debit assets gathered correlative with fixed interest rate and changed interest rate

Credit assets Debit assets

Items have balanced fixed interest rate

Items utilized fixed interest

rate (but not have fixed

interest rate items sources)

Items sources with changed interest rate (but utilize fixed

interest rate) Items have balanced changed interest rate

About interest rate on balance sheet, there are below cases happened:

- Between Credit assets and Debit assets, there is equilibrium about quantity of fixed interest rate as well as changed interest rate items

- Total quantity of fixed interest rate items of Credit assets are more than these ones of Debit assets

- Total quantity of fixed interest rate items of Debit assets are more than these ones of Credit assets

With this model, banks can identify easily about the change of interest rate risk or not In the ideal circumstance, with fixed interest rate, when Credit assets balanced with Debit assets; there is no risk happened if interest rate changed If utilized items of fixed interest rate capital is not balance with fixed interest rate debts, risks will be happened when interest rate in the market change

1.3.3 Model reassessed

Banks usually calculate the disproportion between Credit assets and Debit assets for each limit-time and put it in relationship with interest rate sensitivity of market The sensitivity of interest rate in this case is time which Credit assets and Debit assets assessed again (follow up market interest rate)

It means that how long bank managers have to wait for applying new interest rate level in each differently period Banks commonly report periodic every quarter the disproportion between Credit assets and Debit assets with below time: one day, from more than one day to three months, from over three months to six months, from over one year to five years and over five years

CHAPTER 2 METHODOLOGY, RESEARCH PARADIGMS, ANALYSIS

2.1 Status quo risk management in Commercial banks of Vietnam

2.1.1 Background of commercial banks in Vietnam

History of bank industry is different from other countries in the world about the secondary role from settlement Bank industry ranks behind manufacturing industry; only like the supported industry for development of other industries as well as the tools for performing monetary policy of government This weakness rose from non-economic and non-profit in its industry during the long time The over-interested of government, showed by the closely managing about interest rate, foreign exchange and the other price in this industry And the certain consequence is the immature managing

of bank industry on general before the changing rapidly of status quo

The over-due debt status quo is at high level in almost Vietnam commercial banks Following the statistic of Vietnam State-owned bank, the total of over-due debts make up 11% lend assets of commercial banks while the investigative statistic of World bank, this number is reach 30%, so high compared with branches of foreign banks in Vietnam Hence, it is fault of objective reasons, crisis, and going down of business environment Credit appraised standard of Vietnam commercial banks has problems or relax managing so that arbitrary lending and combine to swindle in drawing up

loans or plead lend following the government guide These things were distort trading operations of state-owned banks

2.2 Status quo risk management of commercial banks

2.2.1 Status quo of credit risk

Credit risk in bank operations of credit organization, followed stipulate at Article 2 Stipulate for classification debts, deduct and utilize standby to handle credit risk promulgated Decision number 493/2005/Decision-Stated-owned Bank of Governor in State-owned Bank, is chance happened losses and damage in bank operations of credit organization due to customers did not implement or not enough ability to carry out their committed obligations

At present, credit services for lend of commercial banks in Vietnam also occupied the highest rate (60%) in Credit assets list Thus, besides of increasing credit, responsibilities of banks are to apply and improve solutions for strengthen credit risk management such as: build up credit grade system, risk standby policy, determine credit limit for customers, classification customers and development customers’ policy, interest rate management, convertible management aim to ensure effectively and develop stable in credit operations

In many years, credit operations of banks contribute a lot in general development of country economy Commercial banks were more interested

in controlling credit development rate, concentrate on effect of credit operations Credit process is implemented nearly similar with international standard List of customer loans continuously change positive followed trend decreased rate of lending state enterprises and increased rate of rest economic element (rate of balanced credit of state area occupied 39%/total balance and decrease to 34% in December, 2004) It is completely suitable for development trend of Vietnam and world economy because private economic area is dynamic, development rapidly and occupied significant rate

in GDP However, overdue debts rate, bad debts rate of commercial banks is still high level compared banks in area and world Supplying, exploiting and using credit information operations of many commercial banks is still weak, there is still one customer borrowed at many banks without controlling, assessing risk level Analyzing, assessing risks of customers still have inadequate, non support effectively for loan making decision and recover debts Reason of this situation is due to credit risk management did not implemented strictly; credit risks have not determined, measured, assessed and controlled closely, unsuitable for international practice and integration require

To ensure for credit development safety, effectively and stable as well as contribution on economic development, suitable for international practice, satisfy requirement of Basel committee about risk management in bank

operations, State-owned Bank promulgated some writings related credit risk management to prevent and limit risks, like:

- Instructions number 02/2005/Instruction-Stated-owned Bank date April

guarantee, financial hire, discount, payment, and loan guarantee to ensure for credit development suitable for mobilized capital ability, attach special importance to risk management, internal control;

Bank Governor reformed and supplemented Lend regulations of commercial bank for customer Reformed contents followed trend of making legal base for credit organizations implemented actively

- Decision number 457/2005/Decision-Stated-owned Bank date April

safety rate in operations of commercial banks

- Decision number 493/2005/Decision-Stated-owned Bank date April

classification debts, deducting and using standby to handle credit risks bank operations of commercial banks

Commercial banks is implementing to set up model of credit rank suitable for operation scale, real situation, business character of banks followed

up Decision 493 of Bank Governor It is the first step of approaching safe capital, not only aim to classify debts, but also assess loan risks, credit quality management

2.2.2 Status quo of foreign exchange risk

In two years, 2003 and 2004, four the largest Stated-owned commercial banks have opened foreign exchange state However, basically, this is still in stipulated limit of Stated-owned Bank (not over 30% of owned capital)

Position of each bank is not the same Some banks have strong foreign currency position; some ones have weak foreign currency position It means that although interest rate is changed follow any trend, it is still disadvantage for banks If rate increased, which banks had weak position of foreign currency will be lost and vice versa; if rate decreased, banks had strong position of foreign currency will be lost

In Vietnam practice, the change interest rate of VND and USD influence strongly to exchange rate between VND and USD From year 2000 to now, price of USD increase continuously compared with VND It fosters for customer to keep foreign currency and banks always consider maintaining positive net foreign exchange state will be useful However, because of large disproportion interest rate between VND and USD, who keeps USD get less profit than who keeps VND It means that, if banks mobilized USD with low

interest rate and sell foreign currency for loan in the market with high interest rate, maintained weak position of foreign currency, the loss due to weak position of foreign currency is less than profit banks received if increasing price speed of USD still lower than disproportion of average interest rate between VND interest rate and loan interest rate USD

Causes for risk

- Knowledge on professional competence to implement transactions and measure risk quite weak, skill for computed handling data not high, not have division for research and predict the change of market exchange rate

o At present, although banks attended some of derivative operations but almost commercial banks only still notice to buy/sell foreign currency for payment, foreign currency loan; banks forget insurance exchange rate factor Therefore, in monetary trading, banks are only intermediary in transaction, not to be a market builder As this result, generally, banks are weak in analyzing exchange rate

o Another disadvantage of commercial banks in Vietnam compared with banks of developed countries like: Singapore, HongKong is not had EBS (Electronic Brokerage System) So

price supplied by Reuters or other ones is only reference price, not exchange rate of real transaction in the market Because only through EBS, dealers can know orders in the market bought/sold at any rate, then they can know where resistance, support, and stop loss order are put

- Legal stipulation for determine foreign currency state is not improve caused foreign exchange risk

Although State-owned Bank changed method of determine foreign currency state followed Decision 1081/2002/Decision-State-owned Bank suitable for practice situation of Vietnam, calculating foreign currency in the end of month based on the balance of the end day time only consider foreign currency state set up by transaction of buy/sell foreign currency

of banks, not calculate to collected and paid interest expense raised from profit of Credit assets and Debit assets This will affect to real and report foreign currency state and caused large risk

- Exchange rate mechanism at present did not reflect law of supply and demand in the market

During the past time, banks erase for impose objectively in setting up exchange rate, the gap between official rate and market rate is small step

by step However, there is still complicate happening of exchange rate

2.3 Risk management policy of commercial banks in Vietnam (period 2005-2010)

It is very important for managers on general, in particular managers of banks to manage risks in operations Risk not only effected seriously to develop stable, but also can devastate whole monetary-financial system all over the world In Vietnam, there is some improvement of this operation, but in general, banks only overcome happened risks and not have prevented risks solutions initially

Credit risk management:

Credit supply operations have to ensure the safety ratio and stable development as well as suitable for customer strategy, products industry, risk and capital management policy Complying with industry stipulates about supplying and non-supplying credit for special subjects in each time The objective of risk management is to protect bank from one or group customers lend over-limit and show who can or can not borrow Accordingly, banks must supervise each credit loan to protect depositors’ interest rate and circumstances from risks banks have to face with

+ Geographic limit: branch of banks should supply credit for customers which their head offices are in area of geographic limit suitable for managing and controlling capacity of branch staff In the case which customers head offices are in the other geography determined by other

branches but their dependent offices have investment projects operated or deployed at branch geography, branch of banks can supply credit for them

+ Professional limit: bank concentrated investment projects which bank had specialty in appreciating and controlling ability the best It is not well for bank to supply credit for projects bank been unprofessional

+ Improving quality standard of guarantee assets: besides observing general regulations of legal and bank about guarantee assets conditions, bank notes to select kinds and assess price of guarantee assets which adapt the following requirements:

Guarantee assets have high convertible (easy for buying/selling, selling by order of the court on the market)

When selling the guarantee assets by order of the court, the amount

of collecting money are enough to cover the original loan and interests

+ Managing time-limit to loan suitable for general development strategy

of bank

Time for loan and deadline for payment are determined based on appropriate principles to financial flow of loan projects, income sources for payment, capital capacity and risk management strategy of bank To

concentrates to loan time under 7 years projects, especially, limit to supply credit for projects had time loan over 10 years

+ Loan forms: concretizing loan forms and credit tools bank intended to offer for customers and provide guider books for each particular loan Which form is decided to lend based on experiences of creditors, deposit structures and forecasting credit demands Unusual credit forms will be handled by Credit Conference

+ Classification assets: assets are classified at the beginning time Then, bank considered and classified them again some times every year including the evaluating reliable loans and financial conditions of borrowers The assets classification should be considered twice a year If the loans have doubtful sign, bank should consider them once a quarter

Interest rate risk

Bank applied actively flexible interest rate had benefit for trading operations by balancing money sources to satisfy credit demands, adjusting interest rate to attract deposits suitable for outside market as well as profit target in loan operations To minimize risk of changing interest rate, bank tried to find new financial tools and carry out prevention solutions

Foreign exchange risk: