Credit risk management in agribank – thai nguyen province

PREFACE In this summary dissertation, all figures and tables are numbered as presented in the dissertation Activities of banks currently face many difficulties due to the economic crisis Specifically, these crises affect the business results of all economic sectors Before the integration trend, banks have been facing stiff competition as well as various types of risk Until now, the risk management of banks in Vietnam is almost left open and has not invested in contruction in a satisfactory and professional manner This is the reason why the bad debt ratio and many problems have occurred due to inability to control the occurrence of management problems that remained an urgent issue which has not been resolved The management of credit risk has become vital significance for the development of the banks, particularly Bank of Agriculture and Rural Development To minimize the risk of credit performance, managers must assess the risk of credit products and factors affecting credit risk Thus, the researcher has chosen the topic "Credit Risk Management at Bank of Agriculture and Rural Development - Branch of Thai Nguyen, Vietnam" The structure of dissertation includes 5chapters CHAPTER I: INTRODUCTION Background of study This dissertation assessed the status of the level of credit risk of the Bank for Agriculture and Rural Development, Thai Nguyen province through the risk assessment of the debts which were categorized by criteria: segment structure, type of borrowers, type of guarantee , and outstanding accounts Through survey results, the data were collected to determine the credit risk of debt through the use of Likert scale Thesis reviews are the factors affecting credit risk through two (2) groups of objectives and subjective factors Statement of problem Based on the objectives of the thesis, the research questions are as follows: What is the profile of the respondents in terms of: a) Age b) Gender c) Civil status d) Education e) Year in service What is the assessment of the managers and staffs of Agribank Thai Nguyen credit risk management in terms of: a) Segment structure b) Types of customers c) Types of guarantee d) Account outstanding What is the assessment of the managers and staffs of Agribank Thai Nguyen on the credit risk management in terms of: a) Overdue Debt b) Undue Debt c) Debt requiring attention d) Under qualified Debt e) Doubtful Debt f) Frozen Debt g) Bad Debt What is the assessment of managers and staff on the factors affecting credit risk management of Agribank Thai Nguyen in terms of: a) Subjective creteria b) Objective creteria What design improvement on the credit risk management of Agribank Thai Nguyen can be proposed to minimize credit risk? Is there a significant difference in assessment of two groups of respondents on credit risk management and factors affecting the limitation of credit risks of the bank? Significance of the Study The results of this research will benefit the following: To the Manager This will provide them with valued information concerning the credit risk management of the branch In this regard they will be able to adapt their development programs to help the bank reduce credit risk management To the Researcher The researchers as an employee of bank and as a candidate for Doctor of Business Administration Degree, this study will enhance his knowledge that he can use and apply to the bank in the future To Future Researchers This can serve as reference materials for future researches similar to this Scope and Delimitation This study chose the topic on the credit risk management at the Bank for Agriculture and Rural Development in Thai Nguyen province The researcher studied the present situation of credit risk in terms of bad debts, undue debts, overdue debts, debts requiring attention, under qualified debts, doubtful debts and frozen debts as perceived by managers and staff of the Agribank, and from that, the researcher recommended the appropriate solutions to limit credit risk in effective ways in bank The study was conducted at bank branches of Agriculture and Rural Development of Thai Nguyen The survey period was from 9/2012 to 3/2013 The data gathered about the operation of the bank covered the fiscal years 2011 and 2012 The study only focused on credit risk activities, not to mention the risk of other activities at the bank CHAPTER II REVIEW OF LITERATURE AND RELATED STUDY This section presents the basic concepts, the contents related to credit operations of banks sorted by the variables studied Conceptual Framework Research Framework describes briefly how to define the problem, to which the authors propose solutions to mitigate credit risk based on the selected variables CHAPTER III METHODOLOGY Research design The research design was chosen with the purpose of gathering data regarding the credit risk in Agribank and how to limit this Moreover, the researcher analyzed the remained issues, assessed them and founbd out the best way to handle these and how to limit the credit risk in the Agribank system The research used the descriptive method which included quantitative and qualitative analysis of data And the main source of data was deetermined from the questionnaire The respondents were managers and staff of Agribank Thai Nguyen The Managers were chief of some departments and members of the management board in Agribank Apart from the questionnaire, the researcher also used the information and data from the Financial and Accounting Department, Investment and Planning Department, including data from financial statements, profit and loss statements, etc Population and Sampling Due to the large number of population, the Slovin’s formula was used to identify the sample size: n= N  Ne where n = A sample size N = Population size e = Probability of error committed due to the use of sample instead of population With the total population equal to 415 people If the confidence interval is 95%, e is 5%: n = (415/(1+ 415/ 0,052)) = 203.6 Given the population and sample size, and due to the limitation of time and resource, the sample of 203 is acceptable and recommended Research Instruments The research study made use of a questionnaire which is divided into two parts as follows: - Part I: Respondent’s profile as to age, gender, working position, working experiences - Part II: This part measures the assessment of the respondents on the risk management and factors affecting to credit risk management of Agribank Thai Nguyen The researcher also utilized the Likert Scale to present and interpret the responses based on their averages Scale Intervals Evaluating level 4.20– 5.00 Most Risky (MsR) 3.40– 4.19 More Risky (MrR) 2.60 – 3.39 Risky (R) 1.80 – 2.59 Less Risky (LR) 1.00 – 1.79 Least Risky (LsR) Statistical treatment To provide interpretation to the data gathered, the study applied statistical tools, including: - The qualitative and quantitative factors regarding the remaining problems on the limit of credit risk in Agribank Thai Nguyen were calculated by frequency distribution or percentage - The points questionnaire to assess the present conditions of the limit of credit risks in Agribank Thai Nguyen and the statistical data were calculated by frequency distribution or percentage - Using T - test analysis CHAPTER IV PRESENATION, ANALYSIS AND INTERPRETATION OF DATA In this chapter, the survey results are shown in the table are arranged in the order of the variables analyzed Through the data, the general level of risk of credit products as well as the factors affecting credit risk were assessed Profile of respondent Table Frequency and Percentage of respondent’s profile Frequency Percentage (%) Gender Male 73 36 Female 130 64 Total 203 Civil Status Single 71 35 Married 120 59,6 Widowed 2,7 Divorced 2,7 Frequency Percentage (%) Total 203 Age Below 30 86 42 30 – 40 66 32,7 41 – 50 32 15,5 Above 50 19 9,8 Total 203 Education Bachelor 167 82,2 Master 36 17,8 Doctor Total 203 Years in Services less than years 37 18,3 6- 10 years 107 52,7 11- 15 years 39 19,4 15 years and above 20 9,6 Total 203 Assessment of managers and staff on Credit risk management of Agribank Thai Nguyen From Table and Table showed that the survey data were at the average values The data on the table showed the evaluation of the respondents on the extent of the risk assessment of credits as follows: The credit is divided field of activities, the partners lend the borrowers personal loans for consumers with the highest level of risk (3.8) and business services sectors have the lowest risk level (3.2) Based on the type of customer, the business organization which were classified as large companies have strong economic potential, with low risk level (3.1) However, considering many factors such as the business results of each period, commodity products business, most businesses were evaluated by respondents at the lowest level of risk than the customers of the small and medium enterprises and individual customers Moreover, individual customers revealed that the managers have high risk assessment level than the assessor But the customer asserted that they have better personal financial capacity and business capability than most unprofessional business organizations, with highest risk level According to the type of guarantee, the loan secured with the property as collateral may bring lower-risk loans than without collateral Thus, although the procedure in facilitating the implementation of customer’s loans was easy, but the banks still need to have strict legislation for the evaluation of such new asset limit risks on loans Under the term of the loan, the term loans have a higher risk level of medium and longterm loans This can be understood by the term loans maturing rapidly, but if the object borrowing operations are not effective in the short term, the ratio of overdue loans short term showed high Banks should offer testing policy, often control the financial situation of the borrower, for an effective policy assessment of the capacity of partners to pay On that basis, reasonable recovery policies will be implemented to minimize the risk of losing money from the bank Assessment of managers and staffs on the factors affecting the limitation of Credit Risks of Agribank Thai Nguyen in terms of subjective criteria and objective criteria Tables 13 and 14 shows the subjective and objective factors affecting the management of credit risk For the group of subjective factors, the survey showed that subjects The credit policy can significantly affect the level of credit risk On the Assessment process, lenders comply with the provisions of the State Bank which may affect the implementation of procedures for the loan However, compliance has a positive impact on the management of credit risk in the Bank Regarding the evaluation factors, the quality of information about the bank is only rated moderate at best This means that the financial appraisal should be given due attention to help ensure that the elements of credits meet the requirements of the loan, as well as helping banks recover debts, considering the time and place that the losses occurred For the internal control, the object being investigated on the internal control system showed that the operation management unit has to meet the necessary requirements However, the level of evaluation 3.7 / by managers, and 3.5 / of the staff, the internal control system has to enhance the control and tighter management of lending activities Always ensure that the loan amount is consistent with the capacity to pay of the loan, a collateral loan only once There is so new mitigate credit risk for the bank further Design Improvement on the Credit Risk Management of Agribank Thai Nguyen Proposal to Minimize Credit Risk Develop, improve the policies and processes of credit Concerning the improvement of the mechanism on decentralization and delegation of powers in the system of banks, the objectives are as follows: the decentralization and delegation of powers have to ensure the compliance with the provisions of law and policies of the bank of credit operations which ensure safety, quality and effectiveness; must define self-responsibility of all levels operating in credit activities, and must conform to the characteristics of each unit, in accordance with the capacity of the decentralized authorization To achieve the above objectives, Agribank Thai Nguyen system followed the criteria based on the capacity of the Branch (Board of Directors, Credit personnel, outstanding, overdue loan ratio of the branch ) of the level of risk project (loan amount, loan duration, location, industry ) decided to split the lending authority of the grant (General Director, Deputy General Director, Council of Credit, Branch Manager) Expand guarantee loans To ensure minimum risks, especially risks and ethical limit losses when the risk occurs, Agribank system needs to step up expansion of loans However, Agribank should not make similar / or follow all loan projects with same conditions of a loan Agribank should require customers for additional loan security assets if necessary Improve the appraisal of borrowers and their projects To be able to improve the appraisal of borrowers and their projects, the evaluation work should have radical changes based on the credit management by customers, not just project management To improve the quality of evaluation, credit staff should have enough quality, capability, experience in the evaluation of works, holding regular seminars and courses in project evaluation to update information and method of evaluation Concurrently, Agribank Thai Nguyen should focus on collecting and handling information on projects, loans; applying the evaluation criteria such as NPV, IRR, sensitivity analysis and need special attention to evaluation ability, reputation, financial capability of client / owner… Develop and improve the information systems of risk prevention To be able to implement effective measures to limit the risks, Agribank should build up and improve the information systems of risk prevention through the strengthening of collecting information about customers, projects, information of socio – economic conditions through various information sources At the same time, Agribank Thai Nguyen should refine, handle and store scientific information and increase investment to upgrade the system of information technology, professional software to expeditiously implement the payments to customers Strengthen inspection and supervision, debt management loan The enhancement of inspection, supervision and debt management are important measures to limit risks processing for banks, especially the ethical risks when customers use the loan for wrong purposes To strenthen this task, the requirement is that the loan must be transferred directly to beneficiaries The disbursement must be made through payment systems of Agribank Thai Nguyen; Agribank Thai Nguyen should analyze and assess the financial situation of enterprises, strengthen inspection of using loans, cash assets guaranteed loans and production status of customers especially delinquency and suspension interest Testing hypothesis Ho about the difference in assessment of two groups of respondents about risk management of credit of the bank Table 18 T-test Results for the Differences on the Assessment of Two Groups of Respondents on the Agribank Thai Nguyen Item Segment structure will contain the big risks Based on the Respondents Mean Managers 3.8 Staffs 3.4 Managers 3.7 Staffs 3.3 Managers 3.4 customer’s scope, types of customers will contain the big risks Based on the guarantee level, types of guarantee will contain the big risks Based on the account Staffs 3.0 Managers 3.5 outstanding acc to time, term will contain the big risks Staffs 3.3 T_test df Sig Ho VI 3.549 98 001 Reject significance 3.162 98 002 Reject significance 2.459 98 016 Reject significance 913 98 363 Accept Ns Table 19 T-test Results for the Differences on the Assessment of Two Groups of Respondents on the Current status of debts Agribank Thai Nguyen Item Overdue debt Undue debt Debt requiring Respondents Average Managers 3.5125 Staffs 3.2625 Managers 3.5333 debt Doubful debt Frozen debt Bad debt Staffs 3.1417 Managers 3.7500 Staffs 3.5125 Managers 3.1000 Staffs 2.8833 Managers 4.2167 Staffs 4.0000 Managers 3.3833 Staffs 3.3042 Managers 3.8333 Staffs df Sig Ho 2.501 98 014 Reject 2.895 attention Under qualified t-test 3.5083 98 005 Reject VI Signifi cance Signifi cance 1.541 98 127 Accept NS 1.809 98 073 Accept NS 1.782 98 078 Accept NS 663 98 509 Accept NS 2.271 98 025 Reject Signifi cance Table 20 T-test Results for the Differences on the Assessment of Two Groups of Respondents on the factors affecting the limitation of Credit Risks of Agribank Thai Nguyen in Vietnam Items Subjective Respondent Average df Sig (2-tailed) Ho Managers 3.8 2.073 98 041 Reject Staffs 3.6 2.367 35.397 024 Reject Managers 3.9 1.611 98 110 Accept Staffs 3.7 1.895 37.240 066 Accept criteria Objective criteria T CHAPTER V SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS Based on the data gathered, the variables were discussed in detailed including the findings The following conclusions were made: Conclusion The main credits of the bank are served for industries, while service sector represents a smallest percentage of the total Review to determine exactly targeted customers; deeply research characteristics of industrial customers to define appropriate types of credits and minimize risks of credit for these types of customers 2 With respect to “types of customers, with big risks”, respondents considered “individuals” to be biggest risks of all Credit of not having guarantee properties will have more risks than credit of having them With regard to “the account outstanding acc to time”, based on assessment of two groups of respondents, they thought that “short term credit” will have less risks compared to medium and long-term credits In terms of bad debts, the biggest risk is that it is difficult to collect both interest and capital In terms of overdue debts, the disadvantage is that both principal amount of loans and interest can be rarely recovered fully In terms of undue debt, the risk is that it is not easy to collect principal amount of loans and interest In terms of debt requiring attention, the threat of risk is that the mechanism for this debt is not so clear In terms of qualified debt, the interest is never made free for customers 10 Doubtful credit is potential for loss or risks; the disadvantage is that creditors not carefully appraise the borrowers 11 In terms of frozen debt, the disadvantage is that there are a lot of customers classified in frozen debt group 12 In terms of subjective criteria, the threat of risk is that the information quality in banking network and outside is not good 13 With respect to objective criteria, the disadvantage belongs to the economic environment facilities for both bank and customers 14 In terms of credit activities aspects, the segment structure has the biggest risk 15 Doubtful debt has the biggest risk of all items of current status of credit 16 In terms of two aspects affecting the risk management of credit, based on evaluation of two groups of respondents, they considered subjective criteria and objective criteria have the same level of effect on risk management of the bank Recommendation Conduct further study and define the appropriate types of credit for individuals The bank should require guarantee properties for credits The bank should pay more attention on long – term and medium credits Conduct a review procedure and conditions to manage and control in order to minimize risks of credit Review to define appropriate solutions to collect interest and capital Review and find suitable solutions to recovery both principle and interest fully Research to find suitable solutions to collect principle and interest Review to produce clear mechanism for “debt requiring attention” Review to decrease cost to improve the competitive ability of services 9 Creditors should carefully appraise the borrowers 10 Review to define exactly ability of borrowers before credits 11 Review to establish a good information network 12 Carefully manage segment structure; define exactly targeted customers 13 The bank should pay attention on both subjective criteria and objective criteria affecting on risk management of credit