Credit risk and credit risk management at Vietnam foreign trade bank - Vung Tau branch

Trang 1

6o) 6 Global Advanced Master of Business Administration

GRIGG UNIVERSITY al rang

CAPSTONE PROJECT REPORT

CREDIT RISK AND CREDIT RISK

MANAGEMENT AT VIETNAM |

FOREIGN TRADE BANK - VUNG

TAU BRANCH

Chau Thien Minh Tri

Pham Quoc Thai

Le Van Thuyet Le Quoc Bao

Nguyen Xuan Tien

Gemba01.E02

HA NOI 2009

Trang 2

GRIGGS UNIVERSITY

GLOBAL ADVANCED MASTER OF BUSINESS ADMINISTRATION PROGRAM

CAPSTONE PROJECT REPORT

CREDIT RISK AND CREDIT RISK MANAGEMENT AT VIETNAM FOREIGN TRADE BANK - VUNG

TAU BRANCH

Group No.: 04

Student’s name:

Chau Thien Minh Tri

Pham Quoc Thai Le Van Thuyet

Le Quoc Bao

Nguyen Xuan Tien

HA NOI, 2009

@ Global Ad anced Master of Business Administration 2

z

Trang 3

ACKNOWLEDGEMENTS

First, members of Group 4 want to express their heartfelt thanks to teachers who taught, instructed, encouraged, and helped Group 4 during study and research

Group 4 also wants to send their thanks to officers and the board of leaders of Vietcombank — VT for their help and assistance, particularly their provision of related data and documents for the purpose of researches done in the report

Due to constraints in time and research scope, certain mistakes are inevitable in the report Therefore, members of Group No.4 are looking forward to opinions of

teachers, partners, and friends

Members of Group No 04 Chau Thien Minh Tri Pham Quoc Thai Le Van Thuyet

Le Quoc Bao

Trang 4

PABLE OF CONTENTS

Page

Acknowledgements 3

List of Abbreviations 9

List of tables 10

List of figures, graphs 13

INTRODUCTION

1 Necessity 14

2 The objective of the subject 15

3 Object and scope of research 15

4 Methodological 15

5 Content structure research Lỗ

Chapter 1 General theory of credit risk and credit risk management

1.1 Credit 16

1.1.1 Concept 16

1.1.2 Classification 16

1.1.2.1 Pursuant to the purpose 16

1.1.2.2 Pursuant to the term loan 16

1.1.2.3 Pursuant to the level of trust with customers 17

1.1.2.4 Pursuant to a refund method 17

1.2 Credit risk and credit risk management process 17

1.2.1 Concept 17

1.2.2 Credit risk and Credit risk management process 17

1.2.2.1 Classification of Credit risk 17

1.2.2.2 Cause of credit risk 18

1.2.2.3 Damage caused by credit risk 19

1.2.2.4 Prevention and treatment of credit risk 20

1.3 Credit risk measurement 3l

Trang 5

1.3.1 Quantitative model of credit risk — Model 6C 1.3.2 Qualitative model of credit risk

1.3.3 Applying risk management patterns in Vietnam commercial banks

1.4 Strategic management 1.4.1 Concept

1.4.2 Duty of strategic management 1.4.3 Benefits of strategic management 1.4.4 Elements deciding the competitiveness

1.4.5 Identification of the bank’s missions and targets 1.4.6 SWOT analysis

1.5 Experience managing credit risk in Malaysia 1.5.1 Principle equilibrium (Pari passu) 1.5.2 proportionate stake

1.5.3 Principles protection 1.5.4 Principles control 1.5.5 Good first way out

1.5.6 Well spread lending portfolio 1.5.7 Appropriate tenor of financing 1.5.8 Reflective of national policy

Chapter 2 The issue of the credit activities and credit risk management at the bank for foreign trade of Viet Nam — Vung tau branch

2.1 About the Bank for Foreign Trade Viet Nam - Vung Tau Branch 2.2 Business situation of the bank from year 2006 to year 2008

2.2.1 Environmental business assessment in years 2004-2008 2.2.2 Identify Strengths, Weaknesses and Opportunities, Threats

of Vietcombank-VT 2.2.2.1 Strengths

G Global Advanced Master of Business Administration 5

Trang 6

Griccd)

2.2.2.2 Weaknesses 2.2.2.3 Opportunities 2.2.2.4 Threats

2.3 Business results

2.4 Structure and quality of the credit period from year 2006 to year 2008

2.4.1 Credit structure 2.4.2 Credit quality

2.4.3 Deduction for credit risk reserve

2.5 Causes incurred credit risk in Viet Nam foreign trade bank- Vung Tau Branch

2.5.1 Objective Causes

2.5.2 Causes of loans from customers 2.5.3 Bank causes

2.6 Status of credit risk management in bank

2.6.1.Structure of credit ogranization and credit risk management 2.6.2 Regulation documents, status, regulations, procedures for

credit

2.6.3 Assessing the quality of loans and provisions to limit credit risk

2.6.4 System of classifying internal credit according to international standard

2.7 Actual status of the trading competition of Vietcombank-VT 2.7.1 Actual status of the competition of service quality

2.7.2 Actual status of competition on interest rates of deposits, borrowings, banking fees

2.7.3 Actual status of competition on the distribution system:

2.7.4 Management of credit risk in Vietcombank- VT

2.7.4.1 Grading for enterprises

Trang 7

2.7.4.2 Grading for individuals

2.8 Actual status of competitive capacity in business of Vietcombank-VT

2.8.1 Actual status of financial capacity 2.8.1.1 Owner’s equity

2.8.1.2 Capacity of prevention and risk resistance 2.8.1.3 Profitability

2.8.2 Reality of credit capacity of the bank in business activities Chapter 3 Credit risk management at the bank for foreign trade of Viet Nam — Vung tau branch - Solulion and recommendation

3.1 Orientation of business operation in the period of 2009 — 2013 3.2 Business strategic orientation of the bank by 2013

3.2.1 General objectives 3.2.2 Orientation

3.2.2.1 Increase in capital size 3.2.2.2 Risk prevention

3.2.2.3 Enhancing credit quality

3.2.2.4 Developing services of payment, cards, retail banking 3.2.2.5 Target customers in respect of credit activities

3.3 Analyzing SWOT matrix of Vietcombank-VT and strategy selection

3.3.1 Analyzing SWOT matrix of Vietcombank-VT and strategy selection

3.3.2 Make use of Z point model to distinguish the customer 3.4 Risk protection methods

3.4.1 Raising quality in credit appraisal and analysis

3.4.2.Closed management, supervision, and control should be applied for disbursement and post-loans

3.4.3 Enhanced effectiveness of internal control

Trang 8

3.4.4 Deployment of three-division credit model 3.4.5 Diversification for loans

3.4.6 Raise management capacity of managing officers 3.5 Solutions to enhance credit risk management

3.5.1 Improving the credit operation organization structure and managing structure, supervising credit risk of the Bank

3.5.2 Making system text mode, regulations, processes and procedures for granting credit

3.5.3 Making suitable credit policy

3.5.4 Management and supervision of loan portfolio 3.5.5 Deduction for a reserve fund to cover risks 3.5.6 Credit risk managing information system

3.5.7 Technology, human resources in management of credit risk

3.6 Some proposals 3.6.1 For State 3.6.2 For State Bank CONCLUSION

REFERENCES APPENDICES

Trang 9

Vieicombank - VT: Agr bank — VT: Vietinbank — VT: BIDV - VT: Vietcombank: LIST OF ABBREVIATIONS

The bank for foreign trade of Viet Nam — Vung Tau branch

The bank for agriculture and rural development of Viet Nam — Vung Tau branch

The bank for industry and trade of Viet Nam — Vung Tau branch

The bank for investment and development of Viet Nam — Vung Tau branch

The bank for foreign trade of Viet Nam

Trang 10

Table No Table 1.1 Table 2.1 Table 2.2 Table 2.3 Table 2.4 Table 2.5 Table 2.6 Table 2.7 Table 2.8 Table 2.9 Table 2.10 Table 2.11 Table 2.12 LIST OF TABLES Content SWOT Matrix

Business Operation Result from Vietcombank - VT in the year of 2006, 2007, 2008

Total assets from year 2006 to year 2008

Some of Capital of Vietcombank-VT from year 2006 to year 2008

Equity from year 2006 to year 2008

Safety Tendency of Vietcombank — VT from year 2006 to year 2008

Operation effect of Vietcombank — VT from year 2006 to year 2008

Outstanding balance structure in purpose of loaning from year 2006 to year 2008

Structure of credit according to lending kinds from year 2006 to year 2008

Mobilized Capital Growth Situation in Vietcombank — VT

Comparison of average mobilized interest rate between

Vietcombank - VT (VCB-VT) and State-owned Bank in

Ba Ria- Vung Tau Province on the date of September 30, 2009

Comparison of mobilized capital share between Vietcombank — VT and the total mobilized capital in Ba Ria — Vung Tau province

Comparison between mobilized foreign currency capital

share (transferred to VND) of Vietcombank —VT and

total mobilized foreign currency in Ba Ria — Vung Tau

Trang 11

Table No Table 2.13 Table 2.14 Table 2.15 Table 2.16 Table 2.17 “able 2.18 Table 2.19 Table 2.20 Table 2.21 “able 2.22 lable 2.23 Cable 2.24 Cable 2.25 Cable 2.26 Table 2.27 Cable 2.28 Cable 2.29 Cable 2.30 Cable 2.31 Cable 2.32 able 2.33 Content

Comparison of term mobilized capital of Vietcombank -VT

The situation of credit outstanding balance according to kinds of currency in the period of year 2006-2008 Credit Growth Speed classified by the currency kinds Outstanding Structure according to term loan

Outstanding balance structure according to loan purpose Outstanding structure according to loan guarantee form Overdue debt rate and bad debt rate in years 2006-2008 Classification of debt according to the date

December 31, 2008

The

Vietcombank —VT

structure of using mobilized capital of

Comparison of using mobilized capital structure of Vietcombank-VT years 2006-2008

The structure of using mobilized capital (MC) of Vietcombank —VT

Credit Capital Circulation at Vietcombank -VT

Profit Target from credit operation at Vietcombank — VT

Deduction for credit risk reserve at Vietcombank - VT Bad debt rate

Lists of risks of enterprise

Credit policy subject to risk grade Enterprise size

Customer Classification Matrix of risks

Ranking individual customers

‘# Global Advanced Master of Business Administration 11

Trang 12

Gricos)

Table No Content Page

Table 2.34 Marking individual customers 113

Table 2.35 Owner’s equity 114

Table 2.36 Debt classification and appropriated provision for risk 116

as of 31/12/2008

Table 2.37 Return On Equity years 2006-2008 117

Table 2.38 Return On Assets years 2006-2008 117

Table 2.39 ROE and ROA of some banks at Vung Tau province 118

Table 2.40 Outstanding credit grows in years 2006-2008 119

Table 2.41 Credit quality years 2006-2008 119

Table 3.1 Specific financial objectives of Vietcombank-VT 2010- 123

2013

Table 3.2 Identification of index of bankruptcy risk of Company 134

A by the Z point model

Trang 13

No Figure 1.1 Figure 1.2 Figure 1.3 Figure 1.4 Figure 2.1 Figure 2.2 Graph 2.1 Graph 2.2 Graph 2.3 Graph 2.4 Graph 2.5 Graph 2.6 Graph 2.7 Graph 2.8

LIST OF FIGURES, GRAPHSS Content

Duties of strategic management Difference among strategies

Some common implications of strategies

The strategic administration structure in banking business

Diagram on credit risk management in Vietcombank and its branch

Procedure on grading credit enterprises GDP growth from year 2004 to year 2008 Total assets from year 2006 to year 2008

Structure of credit according to lending kinds from year 2006 to year 2008

Outstanding balance

Credit outstanding balance year 2006-2008 Owner’s equity from year 2006 -2008

Ratio of profit to owner’s equity in years 2006-2008 Ratio of profit to total assets in years 2006-2008

G Global Advanced Master of Business Administratior 13

Trang 14

INTRODUCTION

1 Necessity

A credit activity is one of the business's main sources of revenue for major commercial banks However, along with the significant revenue for banking sector credit is also a field with the largest risk Consequences of the credit risk for banks

bring losses to increase as additional costs, lost interest with the loan losses, as

worsening financial situation and ultimately harm the reputation and position of the bank

Practice of operation about credit the Vietcombank - VT also found credit risks of the whole system that is not effectively controlled and tend to have increased curing the past time until now Therefore, the urgent setting of credit risk must be nanaged and controlled with a method and effective credit guarantee activities

within acceptable risk, assist in the distribution capital more effectively in the

credit activities, minimizing the damage arising from credit risk and increase business profits of the bank Contribute to improving the prestige and create an idvantage in competing bank

Credit risk is always along with credit activities, cannot eliminate credit risk, vhich can only apply measures to prevent or minimize damage up to the risks erspective on managing the entire banking in general and credit activities in particular, an expected loss ratio for credit activities must always be defined in seneral strategies When banking business with a loss rate lower than or equal to he rate of loss is expected that success in the field of risk management Banks lave In many measures affecting credit activities to minimize credit risk in order 0 contribute to achieving operational objectives of credit safety, efficiency of

crowth

\ banking business efficiently, with strong financial capacity and management of isk within the limits allowed creating customer trust and improving the position ind prestige to the economic organizations, credit institutions in domestic and

(oS Global Advanced Master of Business Administration 14

Trang 15

oversea This is extremely important to help banks achieve growth and sustainable dvelopment and successful implementation of cooperative activities, joint verture in the integration trend

This is the reason why Group 4 selected topics "Credit Risk and the preventive measures credit risk in the Vietcombank - VT

2 The objective of the subject In erder to clarify the issues:

Claify and improve theoretical contribution of credit risk management Anilysis of state credit activities, cause and risk measures for credit risk maiagement at the Vietcombank - VT

Based on theoretical analysis of the situation and credit risk, thereby giving a nunber of measures to manage credit risk in the Vietcombank - VT

3 Object and scope of research

Obect research topics: cause of credit risk, the risk management measures Netd to identify collateral that can be sold or converted into cash immediately witiout affecting serious business of the debtor

Scq@e of research: research between theory and actual cause of credit risk, the reaity of credit risk management in recent years at the Vietcombank - VT, and thei finding out solutions to manage credit risk

4 Methodological

Usng methods: statistical, synthesis, comparison

The secondary data is collected from annual reports and those on business result of the 3ank

5 Content structure research Intoduction

Chpter 1: General Theory of credit and credit risk management

Chpter 2: The issue of the credit activities and credit risk management at the Viecombank - VT

Ch?ter 3: Solutions and recommendations for managing credit risk

'& Global Advanced Master of Business Administration 15

Trang 16

CHAPTER I

GENERAL THEORY CREDIT RISK AND CREDIT RISK MANAGEMENT

1.1 Credit

1.1.1 Concept

(Credit is a transaction of assets (money and goods) between the lender (banks and

other financial institutions) and the borrowers (individuals, businesses and other entities), in which the loan transfer assets to the borrower use a certain period

under the agreement, the borrower is responsible for reimbursement unconditional principal and interest for the loan payment when due

Credit activities mean the credit institutions use own capital, capital mobilized to provide credit

Credit is a credit institution negotiates customers to make agreement to use an amount to be repaid by the principles of professional loan, discount, lease financing, bank guarantees and other services

Lending is a form of issuing credit, whereby credit institution assigned to customers using the funds to be used for the purpose and time period as agreed with the principle of repayment of both principal and interest

1.1.2 Classification

1.1.2.1 Pursuant to the purpose For industrial and commercial loans Loans for agriculture

Loans for individuals For real estate loans

Lending to financial institutions Rent

1.1.2.2 Pursuant to the term loan

Short-term loans

Trang 17

Grigcd)

For medium-term loans For long-term loans

1.1.2.3 Pursuant to the level of trust with customers Loan not guaranteed

Loan secured

1.1.2.4 Pursuant to a refund method Lending directly

Indirect Lending, including: + Discount trade

+ Buy coupons sale and consumption of agricultural machinery installment + Profession factoring

Besides the above loans, the bank also made the professional competences guarantee for customers with their reputation

1.2 Credit risk and credit risk management process 1.2.1 Concept

Credit risk is the loss arising from the customers do not pay the full principal and interest on the loan or the customer pays principal and interest after the due date is 10t granted credits

-redit risk is not limited to lending activity, but also include many activities

1ature of credit by banks such as guarantees, commitments, approved trade

‘inancing, loans at market related banks, Swaps, credit lease purchase, co- sponsored

-redit risk management is the process of bank affects credit activities through the ipparatus and the management tools to prevent, warn, offer measures to limit the naximum failure to obtain the full principal and interest of the loan principal and

nterest collected or not the due date

|.2.2 Credit risk and credit risk management process |.2.2.1 Classification of credit risk

-redit risk includes portfolio risk and transaction risk

f Global Advanced Master of Business Administration 17

Trang 18

Risk portfolio assigned to two types of internal risks and risk concentration + Risk concentration is the outstanding loans are accrued for some customers, some economic sectors or certain types of loans or a geographic area

+ Internal risk starts from factors that bring separately of each subject borrower or economic sectors

Risk transactions have three components: risk selection, risk guarantees and risk professional competence

+ Risk selection is been related to assessment and credit analysis + Risk competence is the risk that related to lending activity + Risk guarantees start from the standard guarantees

1.2.2.2 Cause of credit risk

Banking business is the business with risks In other words, the banking activities

always face with risks Therefore, the identification of the causes of risks is so

important to point out effective prevention methods to minimize losses and damages There are 3 basic groups of causes as follows:

* Reasons on the Bank’s management ability:

[mproper credit policies, too much focus on profitable targets leading the loan with high risk, concentrating much of its loan into only one enterprise or in an economy Because of being far from market knowledge and information, insufficient information causing the improper investment and loan

Because of the higher competitiveness among the desired banks with higher market shares in the comparison with others

The credit staff does not comply with the credit policies, or loan procedures Those ire weak at competent, and violating business ethnic regulations

Asset appraisal is inaccurate, or insufficient legal procedures are far from complied ully or such regulations on the secured assets are not guaranteed as easy appraisal, 2asy transfer in the respect of ownership right, and easy consumption

“ Causes due to the customers

3ecause of the shortage of legal ability of the borrowers

Trang 19

Using the loan in other purposes, with worst effectiveness Due to continual losses in business and unconsumed goods Improper capital management causes the lackage in liquidity The borrowers are incompetent, misappropriated, and defaulted

Because of the disunity in the Board of Directors and the Management * Objective causes relating to internal environment

Acts of Gods, epidemic disease, fire Disorder security in the country and region

Economic recession, or crisis, inflation, or imbalance in international payment, exchange rate with extraordinary changes

Inconvenient legal environment, and unstrictly sufficient macro-management

In short, the causes of credit risks are varied, objective and subjective Subjective causes of credit risks impact more significantly on the quality of the credit and the bank, which may be controlled with proper manners

1.2.2.3 Damage caused by credit risk - For the social economy

Derived from the nature and function of banks which is an organization specialized financial intermediaries to mobilize idle capital in the economy to organizations and individuals wishing to borrow again So, essentially ownership of the loans is the ownership of the deposit to the bank Therefore, the credit risk occurs not only banks, but subject to damage the interests of the depositors also affected Losses of the banks increase financial concerns such as the possibility of a rush to withdraw bank "bank runs"

Besides, today's activities of the bank have high socialized therefore a credit risk for banks happens, it will affect the economy greatly to society If there is a loss in credit activities, even at a bank without the rescue in time can cause a domino effect threatening the security and stability of the banking system That will cause economic instability society

Trang 20

Clearly, credit risk may cause great damage, not to anticipate the social economy

of a country

- For banks

Credit risk will cause damage to the bank because the bank lost the opportunity to receive interest income, loss first affects profits and then the bank's own capital Besides, which used to lend mainly to mobilize capital from deposits of customers, so in case of too much bad debt banks to use their capital to pay depositors, to a extent the bank did not have enough capital to pay depositors, the bank will fall into the state of inability to pay, can lead to bankruptcy Thus, credit risk has a strong influence on the activities of the bank

1.2.2.4 Prevention and treatment of credit risk * The warning signs of problematic credit

Business is hard to defeat a night, so that failure is usually a few warning signs There are faint signs of expression, a sign of expression is clear Banks need to recognize the early signs of problem loans and take action necessary to prevent or handle them Noting these signs are sometimes recognized through a process that is not necessarily at a time, so credit officers must know how to identify them systematically Signs of credit problems can be classified into the following groups:

Group 1: Group signs that related to the relationship with the bank

- During the accounting of customers, the trend of the customer's account through a process that will provide some important signs are:

+ Release in whole security checks or denied + Difficulties in wage payments

+ Fluctuations of the account that especially declining balance deposit accounts + Increase the average use in the account

+ Frequently asked support working capital from various sources + Not able to perform operations to cut costs

+ Increase in trade debts or inability to pay debts when due

Trang 21

- The lending activities:

+ The level of loans often increases

+ Slow payment of principal and interest debts + Frequently asked banks to maturity

+ Request loans expected to exceed demand - Mode of Finance:

+ Use multiple funding accounts of short-term for long-term development activities

+ Accept use of the most expensive source of funding, such as regular use of your professional discount to pay

+ Decrease in accounts payable and receivables increase

+ The number of payment systems development with the bad direction + The expression decreases the charter capital

Group 2: Group signs related to the method of client management

- Change regular structure of the system administrator or management board - The system administrator or management board always disagreement about the z0al of management, autocratic executive vice versa too scattered

How to manage customers have expressed:

+ Board of management or chief executive less or no experience

+ Board of Directors or CEO of large enterprises involved too deeply into the issue daily

+ Lack of attention to the interests of shareholders, the creditors

+ Transfer staff occurred frequently + Planning poorly defined goals

- The planning for surrounding people does not reach full - Management bring the family nature

- There are disputes in the management process - The management costs unreasonable

Group3: Group signs related to the business priorities

Trang 22

Griced)

- Signs syndrome big contract: customers were impressed by a client name which later may become dependent; director board cut profits to achieve big contracts - Signs syndrome beauty products: not a timely or obsessed with a product that does not pay attention to other factors

- The imperative is not appropriate: due to the internal pressure led to the launch products and services too soon; the time limit does not give business reality; create expectations in the market is not timely

Group 4: The signs of technology and commerce - Difficulty in product development

- Changes in the market: exchange rates, interest rates, changing tastes, new technology update, the loss of suppliers or valuable customers, more competitors - The policy varies from state: special attention to the impact of tax policy,

conditions for establishment and operation, the environment

- Products customers with high casual nature - The expression to cut repair replacing costs

Group 5: The signs on the handling of information on finance, accounting - Preparing incomplete financial data, or delays, delayed filing financial reports - The conclusion of financial analysis shows:

+ The increase does not balance the debt ratio often + The ability to reduce the cash

+ Increase sales volume but lower or no interest

+ Accounts accounting of capital charter which do not match + Changes in interest gross and interest accrued on net sales + The amount of goods increasing faster than sales

+ Customer debt increased rapidly and time for payment of the debt is extended + Activities do not bring profit

+ Planning repay but capital is not enough + No proper accounting of fixed assets

+ Make a beauty balance sheet by creating intangible assets

Trang 23

+ Frequently does not meet the planned production and sales + Increase the value too high through the calculation of assets + Distribution debt irrelevant

+ Dependent on products to make extraordinary profits - The signs of other non-financial:

+ The problem of ethics, even look of the business also manifested signs of something

+ Can feel the degradation of the business is a sign

+ The place of storing goods is too much, damage, out of date * Method of ratings and monitoring credit risk portfolio

Bank during loan must continually monitor the credit portfolio in order to have action promptly when any problems arise with the loan

Step 1: Classification of portfolio credit risk

- The purpose of ranking the level of customer credit risk to:

+ Allow to have the general evaluation of loan portfolio in the balance sheets of banks

+ Early detection of loans likely to be deflected or losses from the credit policy was Set out by the bank

+ There is a policy of pricing accuracy

+ Determine whether you should increase the supervision or work adjustment loans or vice versa

+ How to determine the basic risk reserve + How to determine the basis risk reserve

The purpose of this will be achieved if the ranking accuracy and consistency in a bank

- A system of classifying risks is a system of recording estimates of the level of potential risk in each credit of a credit portfolio

- Based on the data we have and the importance of each data, the system will have

a table classifying the risk level for each credit (can be different for each bank)

Trang 24

Griccs)

- The level of this risk is assessed based on the parameters and data such as: + The accounting balance sheet (at least 3 years) and the basic financial ratios + Experience, character and reliability of the operating business

+ History of the business loan

+ The business depends on customers' purchase and supply mainly + The level of business risk that customers are doing

+ The fluctuations in the business of customers + Qualifications of key staff

+ The quality of strategic average and long-term business

- After determining the risk level of each client as above (the goodwill and the ibility to repay), the bank assess the quality of loan collateral to get loans to -omplete orientation and direction handled later

step 2: Monitoring the ranking risk

- The risk has been evaluated, in principle should reflect the status of risk at all imes Therefore, any fluctuations affecting the rate must be evaluated mmediately The monitoring is done by many different methods, depending on

‘ach bank or the methods used at the same time, that is:

~ The method of using comparison - The method of using graph - Method of inspection on the spot

° The approach to credit risk under Basel 1, Basel 2 -Managing credit risk in Basel 1

- Credit standards and credit monitoring process

:ssential part of the inspection system is the evaluation of policies, practices and wrocedures related to credit, investment execution as well as management and ‘urrent portfolio

‘unction of credit and investment in banks is objective and based on healthy inciples Maintain the policy loans, loan purpose and procedures of prudent ending with loan documents is reasonably necessary for the management

Ki Global Advanced Master of Business Administration 24

Trang 25

functions of the bank loan Bank should have monitoring process credit relations existing customers Databases are important components of information systems management; need to be more detail for loan portfolio

+ Quality Assessment of assets and reserve risk losing credit

Banking supervision should be aware that banks establish and maintain policies, routines and procedures appropriate to assess the quality of assets reserve risk losing credit

Bank to build a process observed problematic debts and selection of outstanding bills

When making or receiving guarantees bank collateral; evaluation methods must be the prestige of the sponsor and collateral valuation

When the debts have problem; banks increased lending activity based on the guarantee credit and financial strength overall

+ The concentration of risks and big risks

Banks have information management systems, for identifying the noticeable points of interest in the portfolio and set limits and safety tend to limit the bank to focus on individual customers or client group have relationship

+ Loan to customer’s relationship

To prevent abuse arising from the lending client relationships, the relationship must been based on the loan principle "in control" like the expansion of credit is

monitored effectively, control and reduce risk

Loan transaction to customers have a relationship often creates special risks for banks, so there should be acceptance of the Board of Directors

- Access to credit risk under Basel 2

There are two approaches to calculate the credit risk of banks:

The first way: to measure the credit risk standardized approach is been supported by the external evaluation of credit

The second way: the banks use their internal evaluation system + Approach standardized credit risk

Trang 26

The standardized method is banks must classify credit risk based on observed characteristics of risk (e.g risk from a loan company or a loan mortgage properties s house) Standardized method of classifying risks will be fixed for each type of ‘isk is based monitoring and evaluation of the confidence of the outside to

mprove the sensitivity of the risk

Standardized methods have manual for inspectors, monitoring to determine the source of the classified assessment is appropriate to also apply to banks or not? An mportant innovation of the method is standardized loans must be considered »verdue folds classified their risk is 150%, except the extract bank risk reserve for oan

When banks extend a range of products arising as mortgage credit guarantee, 3asel 2 see these tools are the factors that reduce credit risk Standardized nethods to expand the scope of collateral legitimize beyond national issues and ilso give some methods of assessing the reduction of capital based on market risk »f tool mortgage

standardized method also includes the handling of specific risks for retailers Jraded risk other risks in mortgage lending houses will be reduced along with other risky types of credits for companies not classified trust Besides some loans o small and medium companies can be put into treatment as risk if retailers to neet certain criteria

‘o help banks and supervisors in case there is not much choice, Basel Committee

1as developed "a simple standardized method" includes easiest option to calculate he asset is classified risk Banks apply the simple standardized method need to ‘comply with inspection requirements, supervision and market discipline :Orresponding to the new treaty of Basel

- Approach way based on internal ratings:

“he banks must have the units control credit risk independently, be responsible for lesigning, implementing and operating system of their internal ranking These

Global Advanced Master of Business Administration 26

Trang 27

units have independent functions for managing departments, are responsible for creating potential risks account Control areas must include:

- Check and monitor internal ranking

Preparation and analysis of summary reports from the classified system of banks, including historical data about the case of repayment is classified at the time of repayment does not happen and a year before the, analysis of risk mitigation measures, monitoring trends in the classified key criteria

- Implement procedures to verify the definitions have been classified using the unique among departments, units and the geographic area or not

- Rate and set records all changes in the ranking process, the reason for change - Consider the ranking criteria for assessing the effects they predict the risk or not The changes of the process of ranking, the criteria or parameters must be made in Classified documents and store in order that supervisor review

Unit control credit risks to actively participate in the development, selection, implementation and valuation of the validity of the classified models, is responsible to control and monitor all models are used during application and is responsible for ranking highest; regular review and change the model classified * Measures to prevent, remedy and treatment for signs of risk groups: - Measures to prevent:

When customer enterprise appear to be warning signs of risk incurred by any risk causes, to prevent risks may occur, first bank to implement measures to control monitoring and supervision required In principle, all signs loan risk ratings after being relegated review must be placed in special status tracking

In all cases if the loan were relegated, banks must review and selection of preventive measures

+ Management monitoring loans

Immediately implement the monitoring and collection of the latest financial statements of clients as well as information on financial status and other pertinent

Trang 28

information relevant to the customer can monitor the loan closely; the situation of the borrower signs better or not

It that disadvantage trend of customers, banks must require customers to provide regular financial reports and to check more detailed reports to monitor the situation firmly, even when marked with adverse effect is unclear but must require research and analysis

When determine adverse trends in the business of customers, banks must determine emergency its strict, should consider evaluating the causes of this instability is temporary or due to weak poor finance, by the market or by the weakness of the management

+ Review and review collateral of loans of customers

In the case of loans being relegated assessment, the bank must review and evaluate collateral from customers, to evaluate the property to ensure realistic and prudent Bank need to consider and assess whether the property in normal business conditions and how do they sold and what is it like on the condition of not normal business?

+ Complete the legal documents

Bank should review the legal documents for loan, in case of legal documents should not clear or need to supplement, banks need to supplement the fullest - Measures to treatment

When the loans were relegated 4, class 5 is the following measures can be applied: + Request additional collateral for loan

As soon as problematic loan risks, banks must find ways to increase collateral, the financial statements and other information of the enterprise must be checked carefully to determine and supplement for the additional collateral Need to identify collateral that can be sold or converted into cash immediately without affecting serious business of the debtor

+ Determine the plan for debt structure

Trang 29

[his measure applies to a customer who is determined to maintain credit relationships When the bank decided to maintain credit relationships with customers by measures to restructure debt, the debt must be closely monitored Borrowers must demonstrate ability to repay the interest and the original amount when due After debt restructuring, the bank may apply to the plan for this Bank must be analyzed to decide the direction of adjustment term debt; extending loans ‘0 customers apply the plan for debt structure Banks are only allowed to ‘estructure debt has researched on the below issues:

Having the ability to repay from cash flow as usual

Having the ability to pay debts from the sale of assets or ability to pay debts from he revenues in the future

in all cases require the debt restructuring; the borrower shall have application for ‘estructuring debts with banks, including:

?roposed debt restructuring, including the proposed duration and interest rate, the yriginal payment

*lanning and repayment methods

“orecasting earnings, profits or cash flow to make debt repayment according to a ichedule is structured again

Jetailed reports on loans property and assets of the borrower including the market value of each property, the names and addresses of creditors, a number of debts

ind collateral, respectively

(he mortgaged property is proposed as collateral or additional collateral for the ‘epayment of debt

he debt restructuring is still to be stored in the list of bad debts until the account s paid according to schedule If the minimum payment is made, this debt will be eview and increase correlative class

- Debt Recovery

Ince the review and concluded the loan can not be recovered, the bank decided to trategy recover of the debt aimed at achieving the following goals:

Trang 30

Capital recovery

Reduce costs incurred in the recovery of debts Minimize the reaction of customers

- Measures to handle debt

When loans were classified loans to high-risk group, the bank may apply measures ‘0 handle as following:

+ Business Development assets: Bank should try to convince customers voluntarily sell their properties If customers are not willing, then the bank will onduct the sale of assets pledged, mortgaged under the supervision of law agency + Repayment help: Requesting the guarantor of our customers repay loans

+ Suing procedure: in case need to be petition, the bank must expeditiously -omplete the necessary legal procedures to sue customers

+ Sell Debt: Sell all or part of business enterprises, one important decision is vhether there may be the new owner can convert business break even or make a wofit or additional capital to operate business to it can survive in the future Depending on each specific case, may apply to sell the entire business or a part of yusiness

- The incentive measures of repayment: exemption and a rate reduction, calculating interest, no interest penalty These measures apply to customers villing to pay the original debt

~ Solving with the reserve fund risk: in principle, this measure only applies to bad lebts: the banks have applied all measures to apply and handle, but still not

ecovered debt, or debt has all asset sales but still negative difference (both

yrincipal and interest), or the loan risk by objective reasons that can not be ›Vercome

Jsing reserve funds to offset the credit risk accounts happen to healthy financial ositlon of banks that is not entirely clear debt to the consumer For the debt is reated with reserve funds, to transfer risk monitoring foreign table after The debt

Trang 31

was Offset by the risk reserve fund will be tracked to recovery Banks still need to use the remedies and treatment for debt

Currently the way of solving risk, banks must comply with the decision of 493/2005/QD-NHNN on April 22, 2005 and on April 25, 2007 decision of the 18/2007/QD-NHNN Governor State Bank on promulgating regulations classify ‘oans, deductions for setting up and using backup to handle credit risk in banking activities of credit institutions

* Measures to bank officials, the departments involved in the bank:

Besides, the remedies and treatment outlined above, based on the level of risk and ymissions from the bank staff; then selecting the level of suitable treatment (the reatment must be into the provision of the bank staff organization)

- Access liability

- Material compensation

1.3 Credit risk measurement

JIne of basic properties of modern finance is risk; therefore, all modern financial nodels are put in a risky environment As a result, it is required to introduce a -oncept of risk based on quantity viewpoint and build a tool to measure it There ire a wide range of such models, including quantitative model and qualitative nodel Some of models are as follows:

(1.3.1 Quantitative model of credit risk — Model 6C

“or each borrowing, the first question of a bank is such that whether a customer has

1 goodwill and solvency when a borrowing is due This is concerned with the letailed study about six aspects — 6Cs of a customer, including:

- Character: A credit officer must be sure that the credit purpose of a borrower is specified and he/she has a serious goodwill of solvency when the borrowing is due - Capacity: A Borrower must have legal capacity and civil act capacity; a borrower may be a legal representative of an enterprise

- Cash flow: It defines the payment source of borrower

- Collateral: It serves as secondary source to repay loan to the bank

Trang 32

- Conditions: The bank lays down conditions in accordance to phase-based credit policies

- Control: This is used to assess effects resulting from legal changes, operation regulations, and capacity of customer meeting requirements of the bank

The use of this model is rather simple; however, its drawback is such that it depends yn the exactness of collected information, forecasting ability, analysis and assessment skills of credit officer

{.3.2 Qualitative model of credit risk:

Qualitative model is regarded as classical model to assess credit risk Now, most of yanks access modern risk assessment method to quantize credit risk Some of the nost common credit risk qualitative models are shown below:

+ Z point model:

[his model depends on: (i) financial indices of borrower — X; (ii) importance of hese indices in defining insolvency probability of borrower in the post The model s described as below:

Z =1.2X: + 1.4X;†3.3X;+0.6X¿+1.0X;

(Joetta Colquitt, credit risk management, page 232, 2007) ncluding:

<,: Ratio of net working capital to total asset <>: Ratio of accumulated profit to total asset

<3: Ratio of before-tax profit and interest to total asset

<4: Ratio of stock price to book value of non-current liability

<5: Ratio of revenue to total asset

“he greater Z value is, the lower insolvency probability of borrower is As a result, vhen Z value is low or minus, it acts as foundation to rank a customer among the ligh risk-exposed group

“< 1.8: High risk-exposed customer 8<Z<3: Undefined

“>3: Insolvency-unexposed customer

Trang 33

Galas)

Any customer who has point Z<1.81 shall be ranked among the high risk-exposed group

Advantage: Credit risk measuring techniques is quite simple

Disadvantage: This model allows classification of risk-exposed customer group and risk-unexposed customer group Nevertheless, in fact, the possible credit risk of each customer is different from low levels such as late interest payment, interest non-payment to complete loss of principal and interest of a borrowing There is no convincing reason to prove that parameters reflect importance of indices available in the formula is constant, particularly when business conditions and financial market conditions are subject to continuous changes The model excludes several factors, which are hard to be quantized, but they may play key roles affecting levels of loans (reputation of customer, long-term relationship between the bank and customer, or macro factors such as movement of economic cycle)

+ Model of some consumer credit points:

Beside the model of Z point, many banks also apply the point model to handle the application for loan of the consumer such as: purchase automobile, domestic furniture, real estates, etc The key factors of a model using consumer credit points include: credit coefficient, age, assets situation, number of dependants, house ownership, income, individual account, etc

This model is often used from 7 to 12 items; each item is marked with 1 to 10 point Advantage: The model removes of the subjective judgments in loan process and reduces remarkably the time of making a credit decision

Disadvantage: the model cannot be self-adjusted quickly to adapt with the changes of the economy and the family life

(Nguyen Van Tien, risk management in banking business, Statistical Publishing House, page 334, 2005)

+ Ranking model of Moody and Standard & Poor:

Credit risk in granting a loan and investment is often expressed by ranking the bond and credit, in which Moody and Standard &Poor are those companies that can

Trang 34

provide these services well Moody and Standard & Poor rank the bond and credit according to 9 items with regressive quality, in which there are 4 items that a bank should grant a loan while, should not invest or grant a loan for the rest of items 1.3.3 Applying risk management patterns in Vietnam commercial banks

[he application of risk management patterns owns both advantages and jisadvantages On the other hand they are not mutually exclusive so the banks »ften combine the patterns to analyze the credit risk level Actually, the banks in Vietnam often use the qualitative patterns to evaluate the loans from appraisal to nanagement, control, test, and supervision

=lement 1: loan appraisal, generally, the banks often agree with the loan appraisal srocedure with the basic elements as follows:

-egality appraisal: testing legal personality and legal capacity of the borrowers, oan applicant, and legality in the borrowing purpose

nspecting the prestige, management capacity of the borrower or the borrower’s oard of management, internal control system,

nspecting financial capacity, performance via the indexes of payment capacity, ivailable share, inventory turnover, efficiency in asset use, rate of return

nspecting the effectiveness of loan plan: the feasibility of business plan, material ‘upply, consumption market, fund and the appropriateness of the loan from the lank

nspecting the debt payment: Which incomes are the borrowers expected to pay the

jrinciple and interest, and how stable are they,

hspecting the mortgaged assets: Are the mortgaged assets in the legal ownership of Hement 2: Credit test, each bank possess its own credit procedure in the most common principles such as

“esting all credits periodically

“he tests are carried out prudentially and in detail to ensure to test all key aspects in ach credit, including:

2 Global Advanced Master of Business Administration 34

Trang 35

+ Return plan of the borrowers to ensure their prompt payment

+ Quality and conditions of guaranteed assets

+ The sufficiency, and legality of credit contracts, to ensure legal ownership of the assets by the bank if the borrower fails to pay the loan

+ Evaluating financial conditions and business plan the borrowers in the basis of credit demand review

+ Considering whether the credit complies with the loan policies of the Bank

+ Regularly testing significant credits because of its significant impact on financial situation of the bank

+ Regularly and strictly the question in problem, intensifying the test and supervision as identifying the bad symbols relating to the loan

+ Intensifying the test in credit as the economy tends to be down or the borrowers doing the businesses which may impact seriously on the growth

In short, the loan function of the banks should be carryout strictly so that its policies and practices are performed strictly to control credit risks In addition, to control credit risks, the banks should construct their credit policies and procedures on credit issuance

Finally, as there is problem for a credit, it needs the professional treatment by a bank staff He or she shall find out the cause of problem faced by the credit and cooperate with his or her customer to give out the best solution so that the bank enables to return its loan

1.4 Strategic management 1.4.1 Concept:

The strategic management is a set of administrative decisions and actions determining the long-termed efficiency of company The strategic management comprises continuous actions: environmental check (both internal and external factors); strategy formulation; strategy implementation and strategy control evaluation Therefore, the strategy research highlights following and assessing external opportunities and threats in the context of strength and internal weaknesses

Trang 36

(Le The Gioi, Nguyen Thanh Liem, Tran Huu Hai, Strategic management, Statistical Publishing House, 2009)

1.4.2 Duty of strategic management:

The strategic management consists of five duties that are closely related Figure 1.1:

; Assessment Strategies £ \ Developme formulation to 8 nt of obtain performance,

strategy objectives observation,

prospect & repair,

mission adjustment Enforcement and operation of selected strategies (/ \ Obj cctiveN establishment

Figure 1.1 Duties of strategic management

Creating a strategy prospect describes the bank future image, specifying where the bank wants to direct towards and how it becomes? This provides the long-termed orientations, indicating the image that the bank desires to become and that transmits the look and feel of aimed actions to the bank

Establishing objectives, and conversing the strategy prospect into specific performance results obtained by the bank

The strategy formulation is performed to achieve desired objectives

Strategies implementation and operation have been selected validly and effectively The adjustments performance and conduction in regards of prospects, long-termed orientation, objectives, strategies or performance are evaluated on the basis of experience, changes conditions, ideas and new opportunities

(Le The Gioi, Nguyen Thanh Liem, Tran Huu Hai, Strategic management, Statistical Publishing House, 2009)

Trang 37

1.4.3 Benefits of strategic management

[he benefits of strategic management have been tested in many various sectors, with many kinds of companies, banks on different scales, which can be summarized nto the most basic points, including:

- Further clarifying the strategy prospect for the bank

- Concentrating on the significant points of strategy more properly - Improving the knowledge of environmental quick change

Le The Gioi, Nguyen Thanh Liem, Tran Huu Hai, Strategic management, Statistical Publishing House, 2009)

1.4.4 Elements deciding the competitiveness, and competition strategies

The competition in an industry will continually mobilize to decrease dividend rates yer investment capitals up to a floor dividend rate or an achievable dividend rate in in industry having “perfect competition” of economists

The five competition factors, including: accession, threat of alternatives, bargain strength from customer, bargain strength from providers and competition between -xisting competitors, reflect a fact that the competition in an industry not only omprises the existing actors in the industry Customers, providers, alternatives and »otential entry competitors are competitors of banks and play various roles lepending on each specific circumstance

All five competition factors jointly define the intensive competition and the profit legree in the industry, among which the strongest factor will play a dominant role ind become significant for strategies planning

n order to deal with the above five competition factors, there are three strategy ipproaches with successful prospects that help a bank overcome other competitors n the industry, including:

Total low cost strategy

Difference characterization strategy Core strategy

Global Advanced Master of Business Administration 37

Trang 38

Griccd

The total low cost strategy: the low expenses will help the bank get higher profits than average in the industry regardless of strong competition The low expense helps the bank defend in the competition context of competitors, by reason of its implication that the bank can still obtain profits when its competitors have fully lost their profits due to the competition The low cost also helps protecting the bank against powerful customers because the customers can only squeeze prices down to the extent that the most powerful competitors can incur

In order to achieve the overall cost, it is usually required to have a relatively high market share or other advantages, for example, the advantageous approach to loan sources A leading expense strategy can sometimes revolutionize the whole industry with competition history that is based on other elements and that competitors are not well prepared for knowledge or economy in performing necessary steps so as to minimize costs

If the difference characterization strategy is successful, this will be a sustainable strategy to receive profits over the average in the industry because it will establish a firm position in facing five competition factors, in spite of being conducted in a different manner with low cost The characterization gives protection against competition thanks to the customer’s loyalty to trademark, resulting in sensitiveness decrease to prices It also increases profits, so it can help avoiding the necessity of pursuing the low cost strategy

Furthermore, the characterization process somehow obstructs high market share obtainment The characterization usually requires the look and feel of uniqueness that is not compatible with the high market share However, one outstanding feature is that the characterization implies the barter with costs if the actions are necessary to create difference characteristics which are very expensive, such as requirements of many researches conduction, high-quality products and materials design or good

customer support

In terms of the core strategy, this is based the assumption that the bank is capable of performing a narrow strategic objective more efficiently as compared to existing

Trang 39

competitors with its broader aims As a result, the bank can acquire the particular characteristics thanks to better meeting requirements of one specific objective, or having the lower cost as serving those objectives, or both reasons

Although the core strategy does not aim at obtaining the low cost or characterization under the viewpoints in the whole market, it also achieves either or both positions in its narrow target market The core strategy always implies some limitations of market share, and the concentration on the core strategy requires the barter between profit rates and sales figures Also as the same as the characterization strategy, the core strategy can or does not require the barter of total expenses

The difference among these strategies is illustrated in the below Figure 1.2 ADVANTAGES OF STRATEGY Uniqueness by

customer’s look and feel Low cost

G The whole CHARACTERIZATION TOTAL LOW COST

< industry STRATEGY STRATEGY

Figure 1.2 Difference among strategies

These strategies even differ in some aspects other than functional differences mentioned above In order to successfully perform these strategies, it is required to get various resources and skills They also cover various methods of organization, control procedure, and encouragement system As a result, it is usually required to have long-term commitment with one of these strategies so as to achieve success Some common implications of strategies in these aspects are presented as follows Figure 1.3

Trang 40

Strategy Skills and resources in common

use Requirements of

popularization organization

The low cost The continuous capital investment Closely controlling costs

strategy and capability of capital sources | Regularly providing detailed

approaches reports of control

Owning skills of manufacture | Organizing and appointing

techniques responsibilities in accordance

Closely supervising labors with structure

Designing products are easily | Encouragement is based on

manufacture-driven strict quantitative objectives

The distribution system is

conducted at low costs

The Having powerful marketing Well regulating between

characterizati | competence research and development,

on strategy Owning sharp-wittedness, products development and

creativeness

Research competence is basically strong

Company reputation of quality or technology ranks the leading Having a long-standing tradition in the industry or having a collection of special skills received from other business sectors

Having a close cooperation from

distribution channels

marketing divisions

Reviewing and encouraging on the subjective basis instead of the quantification evaluation Involving high-skilled labor

force, scientists, and creative staffs

The

strategy

core Combining the above policies

towards a specific strategic aim Combining the above policies

towards a specific strategic aim

Figure 1.3 Some common implications of strategies

(Michael E.Porter, Competitive strategy, Tre Publishing House, 2009)

G Prograr

Định dạng
Số trang	173
Dung lượng	98,89 MB