IMPROVING CREDIT RISK MANAGEMENT AT BANK FOR INVESTMENT AND DEVELOPMENT OF VIETNAM, HAIDUONG BRANCH

BACHELOR’S THESIS IN FINANCETopic: IMPROVING CREDIT RISK MANAGEMENT AT BANK FOR INVESTMENT AND DEVELOPMENT OF VIETNAM, HAIDUONG BRANCH Student’s name : Tran Le Hoang ThaoStudent’s ID :

BACHELOR’S THESIS IN FINANCE

Topic:

IMPROVING CREDIT RISK MANAGEMENT AT BANK FOR INVESTMENT AND DEVELOPMENT

OF VIETNAM, HAIDUONG BRANCH

Student’s name : Tran Le Hoang ThaoStudent’s ID : 11123543

Class : Advanced Finance B

Internship guide : Dr Pham Long

Hanoi, 2016

The internship program is a golden opportunity for learning and development I myself believe that without the supporting as well asinstructing of so many wonderful people, this report would be impossible tocompletion

self-Firstly, I would like to sincerely thank for enthusiastic and supports of

Dr Pham Long during the process of doing this Internship’s thesis

I would like to thank all of lectures and tutors at National EconomicUniversity in general, and at Advanced Educational Program in particular,who not only have bestowed their valuable knowledge, hands-on experience

to me, but also have created the favorable opportunities for me to completethe thesis on time

Finally, I would like to thank Mr Nguyen Quy Thang – Deputy manager

of Individual Customer Management Division, and staffs of BIDV Hai Duongbranchfor supporting me during the process that I carried out this report

Cordially,

Tran Le Hoang Thao

TABLE OF CONTENTS

ACKNOWLEDGEMENT i

TABLE OF CONTENTS ii

ABSTRACT v

ABBREVIATION vi

LIST OF TABLES vii

LIST OF FIGURES vii

CHAPTER 1 : INTRODUCTION 1

1.1 Research background 1

1.1.1 Overview of the banking system of Vietnam in 2012-2015 period 1

1.1.2 Current background of BIDV Hai Duong Branch 2

1.2 Research purposes 2

1.3 Research scope 3

1.4 Research objectives and methodology 3

CHAPTER 2 : LITERATURE REVIEW 4

2.1 The national researches 4

2.2 An overall assessment of the previous theses and the orientation for my thesis 5

CHAPTER 3 : THEORETICAL BACKGROUND 7

3.1 Credit activities of commercial banks 7

3.1.1 The definition of a commercial bank 7

3.1.2 Definition and characteristics of bank credit 7

3.1.3 The process of credit 8

3.2 Credit risk in commercial banks 8

3.2.1 The definition of risk and credit risk 8

3.2.2 Credit risk classification 9

3.2.3 Characteristics of credit risk 10

3.2.4 Causes of credit risk 11

3.2.5 The consequences of the credit risk 13

3.3 Credit risk management at commercial banks 14

3.3.1 Definition of credit risk management at CBs 14

3.3.2 Contents of credit risk management 15

3.4 Factors affect to the credit risk management 16

3.4.1 Subjective factor 16

3.4.2 Objective factors 17

3.5 Experience of credit risk management at commercial banks in several countries around the world, lessons for banks in Vietnam 18

3.5.1 Experience of credit risk management at commercial banks in several countries around the world 18

3.5.2 Lessons for CBs in Vietnam 19

CHAPTER 4 : DATA COLLECTION AND ANALYSIS 20

4.1 The case bank 20

4.1.1 Introduction to Bank for Investment and Development of Vietnam (BIDV) 20

4.1.2 Introduction to BIDV Hai Duong branch 21

4.2 Operational status at BIDV Hai Duong branch from 2013 to 2016 24

4.3 Status of credit risk at BIDV- Hai Duong Branch 25

4.4 Current status of credit risk management at BIDV Hai Duong branch 27

4.4.1 Structure of credit risk management operations 27

4.4.2 Credit analysis system 27

4.4.3 Credit process at BIDV Hai Duong branch 30

4.4.4 Policy of credit classification and credit loss provision 31

4.5 Summary of limitations in credit risk management at BIDV - Hai Duong Branch 33

CHAPTER 5 : SOLUTIONS AND RECOMMENDATIONS 35

5.1 Development orientations of BIDV Hai Duong Branch for the 2016-2020 period 35

5.1.1 General development orientations of BIDV Hai Duong Branch 35

5.1.2 Development orientations of credit risk management of BIDV Hai Duong

Branch 36

5.2 Solutions for improving credit risk management 37

5.2.1 Solutions for improving Credit analysis 37

5.2.2 Suggestion for improving Risk dispersion 38

5.2.3 Suggestion for improving Credit inspection and monitoring 39

5.3 Recommendations to BIDV and related authority bodies 43

5.3.1 Proposals to BIDV 43

5.3.2 Proposals to the State Bank of Vietnam 44

5.3.3 Proposals to the government and other relevant sectors 46

CONCLUSION 48

APPENDIX 49

As a student of the Advanced Financial program, with the desire to learn and reach practical knowledge about commercial banks, I has come and practiced at BIDV Hai Duong branch in order to find out the problems that still exists

During two months of internship in BIDV Hai Duong branch, I have understood this branch in both organizational structure and its business activities Simultaneously, I have a chance to look through this branch’s collected data from various sources, especially its financial statement That brings me a huge support for my thesis analyzing the branch’s structure, business performance and situation

of credit risk management in the 2013-2015 period The purpose of this report is to examine the status of credit risk management at BIDV Hai Duong Branch After analyzing the problems, my study figures out the causes and the solutions to improve the efficiency of the risk management of credit activities at the branch

Decision QD-NHNN : Decision of the State Bank of Vietnam

ATM/POS : Automated teller machine/Point of sale

ISO : International Organization for StandardizationCIC : Credit Information Center

HSC : Ho Chi Minh City Securities Corporation

LIST OF TABLES

Table 1 : Operational status of BIDV Hai Duong branch 2013-2016 24

Table 2 Status of overdue debt at BIDV Hai Duong Branch 25

Table 3 Status of bad debt at BIDV - Hai Duong Branch 26

Table 4 Internal credit rating system at BIDV - Hai Duong Branch 28

Table 5 : Credit losses provision at BIDV Hai Duong Branch over the years 2013-2015 32

LIST OF FIGURES Figure 1 : Credit risk classification in commercial banks 10

Figure 2 : Model of credit risk management of BIDV Hai Duong branch 27

CHAPTER 1: INTRODUCTION 1.1 Research background

1.1.1 Overview of the banking system of Vietnam in 2012-2015 period

Bank credit is one of the most important tools to finance anation’seconomy, it contributes to the balanced development of nationalindustries and other sectors Bank credit also brings major source of incomefor commercial banks However, bank credit activity contains most of theserious risks and consequences

The operation of the banking sector is quite effective with a various ofefforts to upgrade the system and increase quality of management One of theimportant aspects to evaluate the performance of the banking sector is theability to control and prevent operational risk, especially risks in creditactivities Thanks to above efforts ; the credit risk control is now rathereffective with ideal NPL indicators in most of the commercial banks Thosefigures , nevertheless , may not reflect all of potential risks in bankingoperations yet Moreover , being a sensitive sector of the economy , positiveimpacts of effective activities of the banking sector on the economy are asmuch as negative impacts which occur in case the banking sector is in a poorperformance Therefore , control and prevention of risks in banking activities

in general and credit risks in particular is a regular , restless job, together withnon-ending research to work out the measures to control and prevent risksmore and more effectively for the local commercial banks that have not-muchexperience in the above job BIDV Hai Duong is among the branches havingquite high credit growth in the banking system During 2014 , its outstandingcredit grew by 7% and the first eight months of 2015 , this figure was 6% Concurrently , incurring of NPLs and overdue debts is also a matter of

concern ( BIDV Hai Duong Branch , 2015) So far, there have been manyresearches on credit risk of commercial banks, which are somehowmeaningful to the branch in terms of reference resources Yet, eachindividual bank is afftected by different factors determining its success Infact , there have been any studies particularly researching on the credit riskmanagement at BIDV Hai Duong Branch.

1.1.2 Current background of BIDV Hai Duong Branch

BIDV - Hai Duong Branch is one of the most potential banks in HaiDuong province in recent years As well as the other banks, its credit rategrows fastly but the ability of managing credit risk is not effective As aresult, bad debts were borned and this problem has fluctuated rapidly: in 2013, the branch’s bad debt ratio was 3% of total loans, then it increased to 7.2%

in 2014, finally in the year 2015 this figure declined to 5% (according to thefinal report of BIDV Hai Duong from 2013 to 2015)

Being aware of unforeseen dangers and consequences from the branch’sproblem, I chose the topic : "Improving credit risk management at BIDV HaiDuong Branch " as subject of my report thesis

1.2 Research purposes

The general purposes of this thesis are:

- Review the basic theories of credit risk and credit risk management ofcommercial banks

-The factors affecting credit management operations of the branch

- Analyze status of credit risk management activities at the branch

- Evaluate the achieved results and operational constraints in credit riskmanagement at the bank branch

- Recommend solutions in order to improve credit risk management at

1.3 Research scope

Scope of this research focuses on credit risk management of BIDV HaiDuong branch in the period 2013 – 2015 and the solutions for the 2016-2020period Due to some requirements from the bank about data security, theannual reports and credit risk documents cannot be publicized Thereforesome important information has been modified to retain the bank’sconfidentiality

1.4 Research objectives and methodology

This study focused on credit risk management as a major object and wasconducted using secondary data gathered from BIDV Hai Duong branch’sfinancial statements, banking documents and from the writer’s observationand information taken orally from asking banking officers These data wereorganized and analyzed by the writer, to achieve findings and give outrecommendations

CHAPTER 2 : LITERATURE REVIEW 2.1 The national researches

The problem of credit risk management has received attention frommany different studies Related to this issue have been some studies, such as:

- Topic: "Strengthening the management of individual credit risk atMilitary Commercial Joint Stock Bank", by PhD Nguyen Thanh Son, 2007.Here the author studies the narrow scope of credit risk management apply topersonal credit In this study, the author only focused on the study

"Strengthening the management of credit risk", not to mention the "improveefficiency" of credit risk management

- Topic: "A number of measures to improve the efficiency of creditrisk management standards and practices in accordance with internationalbanks", by PhD Tran Thi Bang Tam, 2007 In this thesis, the authorbasically focused on "improving the efficiency of credit risk management"for commercial banks, not the privately analyst at a specific bank We cansee from this thesis is that the solution is given for raising the efficiency ofcredit risk management in accordance with international standards, whichcan be applied to each individual commercial banks in each variouslocations However, each bank in each different area will has differentapproaches on population characteristics, economic, social and they willhave separately appliance

- Topic: "Managing credit risk at the Bank for Investment andDevelopment of Vietnam", by PhD Le Thi Hong Articles, 2008 Thedissertation studied the most common problem to manage credit risk at theBank for Investment and Development Vietnam but It did not come up witheffective solutions to improve operational efficiency of credit riskmanagement at banks

- Topic: "Improving graded scoring system to minimize customer creditrisk in the banking system of BIDV," Nguyen Phuc – a PhD of Germany, in

2008 The thesis has given the measures to improve the system gradingclassification system customers at BIDV, very practical significance in thework of credit risk mitigation However this is only one of many measuresthat can minimize credit risk at banks.

- Topic: "The solutions to control credit risk at the Bank for Investmentand Development of Vietnam - Hai Duong Branch" by PhD Nguyen Thi ThuTrang, 2010 The author provided basic solutions to control the level of creditrisk but without going into the study of factors affecting the operation ofcredit risk management at the bank to take action to improve the systemadministrator credit risk at banks

- Topic: "The solutions to limit credit risk at the Bank for Investment andDevelopment of Vietnam – Southern Ha Noi Branch" by PhD NguyenPhuong Thao 2011 In this essay, the author just focused in the introduction ofmeasures to limit credit risk occurs, did not pay attention to the reduction oflosses as well as handling the consequences of the credit risk caused On theother hand, the scope of research at BIDV – Southern Hanoi Branch, arelatively developed province of the capital, Hanoi The author offeredcomprehensive solutions including macro and micro solutions; the solutionswere based on the results of joint assessment on the status of credit risk inBIDV Southern Hanoi Branch This is a pretty well written essays, veryvaluable reference

2.2 An overall assessment of the previous theses and the orientation for my thesis

We can say that the topic of credit risk management is not a new subject,this subject has had several studies mentioned However the study that theauthor understand the choice of most research on credit risk and credit riskmanagement for the banking operations but have not come up with solutions

that could enhance credit risk management detailedly with the situation ofeach branch ; because each branch which operates on different areas will havedifferent problems that arise in the operation of credit risk management.

Through the surveyed period, to the present time, the author committhere has never been a research could complete issues credit risk management

at BIDV Hai Duong branch, especially on risk management credit in thecurrent period, when the economy is going through a difficult period, creditrisk management is the top concern of the leadership team as well asindividual officers of BIDV Hai Duong branch Therefore, with the theme

"Improving credit risk management at the Bank - Hai Duong Branch", theauthor hopes the succeed would come to this thesis , and it could providessome effective solutions consistent with the operations of BIDV Hai Duongbranch, which can help the bank to enhance credit risk management

CHAPTER 3 : THEORETICAL BACKGROUND

3.1 Credit activities of commercial banks

3.1.1 The definition of a commercial bank

In Vietnam , commercial banks (CB) is known as one of the mostimportant financial intermediary in the economy Commercial bank isfinancial institution that typically provide diversified financial services withbasic business which is taking deposits, lending and providing paymentservices In addition, CB also offer many other services to satisfy the needs

of the social services.(wiki1)

3.1.2 Definition and characteristics of bank credit

(1) The definition of bank credit

Bank credit is borrowing relation based on the principle of repayment,

in which bank transfers a certain amount of money for customer to use in acertain period of time according to the agreement,when the maturity comes,customer must be responsible to pay both capital and interest forthe bank.Credit activity is the most profitable activity for commercial banks (wiki2)

(2) Role of credit operations to commercial banks

Apart from the major role of the bank credit to the economy , creditoperation also plays a very important role to every CB Credit is the basicactivity ,which is crucial for the existence and development of the CB Thenature of a CB is trading currency Their activities are mainly ‘borrow tolend’ Capital that the bank has raised is used firstly for lending activity andthis is also the most profitable activity of the bank When the bank does notmaintain and expand credit, the capital the bank raised will be stagnant Thebank has to pay interest on this amount of capital in the absence of incomefrom interest This will lead the bank to incur losses and potentially bankrupt Moreover, the quality improvement and credit expansion will enable the bank

to develop more other diversified services Therefore, the maintenance andexpansion of credit is very important for CB (Le, 2005,2009)

3.1.3 The process of credit

The process of credit includes some steps which have closelyrelationship The main steps are :

Step 1: set up a request document to allocate credit The bank willprovide necessary information to establish completely loan applications

Step 2: analyze credit rating Based on the loan applications, bankstartsanalyzing and evaluating the customers and the loans, and then issues results

by a report

Step 3: make decision to allocate credit If the bank agrees to lend,it has

to set up a loan contract If the bank does not agree to lend ,it has to sendrefusal notice to customers

Step 4: Re-examineloan documents then move to Credit ManagementDepartment to check the legality of the entire record relating to the loans

Step 5: Start disbursement under the terms agreed in the contract

Step 6 : Monitoring the loan, ensure that the loan is used for rightpurposes

3.2 Credit risk in commercial banks

3.2.1 The definition of risk and credit risk

Risk is thing that everyone wants to avoid it in all fields of social life.Risk always exists in business activity andit can be prevented, restricted butnot eliminated entirely

Credit risk always exists in the operation of commercial banks Creditrisk will cause serious consequences and financial losses to the bank, inserious cases,it can lead to bankruptcy Credit risk is also the most complex

and unavoidable risk management Therefore, establishing a method of creditrisk management efficiency is always a significant problem

3.2.2 Credit risk classification

Based on the cause of credit risk, it is divided into the followingcategories:

- Transaction risk : is a type of credit risk arising from limitations in theprocess of transaction , approving loans, assessing customers Transactionrisk includes selection risk (risks are related to the process of creditassessment and analysis , borroers’ plans to determine financing of the bank );guarantee risk (risk arise from guarantee standards such as lending level ,collateral , guarantee subjects…)

- Operational risk ( risks are related to management of loans andlending activities , including the use of risk rating systems and techniques

of processing problematic loans) Porfolio risk is the credit risk arisingfrom limitations in the loan portfolio management of the bank It isclassified into intrinsic risk (risks derive from the operationalcharacteristics and the capital use of borrowers ,economic sector) andcentralized risk (risks are because the bank lends too much a small number

of customers , an economic sector or within a certain geographical area or

in a samehigh-risk lending type)

Figure 1 : Credit risk classification in commercial banks

(Source : Nguyen , 2013)

If based on objectivity and subjectivity of the cause of the risk , creditrisk is divided into objective risk and subjective risk Objective risk is therisk resulting from objective causes such as natural disasters , diseases , thedeath and missing of borrowers , and other unexpected changes causing losseswhile borrowers have performed the policy seriously Subject risk is caused

by borrowers and lenders who accidentally or intentionally make loan losses

or by other subjective reasons

There are also many other kinds of classification such as classificationbased on structure of risk types , classification based on the source of risk,classification based on objects using the loan

3.2.3 Characteristics of credit risk

- Credit risk is necessary Credit risk has always existed and associated

with activities of commercial banks ,the bank can limit credit risk to thelowest level but can not remove it entirely

- Credit risk is indirect A bank is an intermediary financial institution

which has an important position in the market economy It is a currencytrading organization whose primary and regular activities are taking depositsfrom customers with accountability of repaying and using that money to lend.Therefore , when a borrower faces risks in their business such as fire,flood,war the partners’ collapse , the boycott of customers to the company’sproducts, etc which leads to a loss or bankruptcy , it will indirectly influence

on commercial banks So, credit risk is indirect

- Credit risk is diverse and complex The diversity of credit risk can be

characterized by several types : moral risk , mechanism risk , inspecton andcontrol risk , etc (Nguyen, 2013)

3.2.4 Causes of credit risk

There are many causes of credit risk,itcan be divided into two maincauses, they are subjective and objective causes Risks due to objectivereasons is credit risk comes from the business environment Risks due tosubjective reasons is the risk comes from the borrower and lender

(1) The subjective reasons

- Causes from the bank :

• Due to unprofessional skills and badly morality ofofficers The lowlevel of job performance will impact significantly on the quality of the loans,which leads to credit risk

• Due to credit policies of the banks are unclear A science-based creditpolicy is outlined in strategy of the bank Credit policy which is unclear andinconsistent with the strategies will lead to credit risk

• The untight inspection, internal controls and after-lending managementwill lead to credit risk Internal control system plays an important role in

determining the success or failure of a bank, but in fact it has not beenproperly concerned in many banks

• Bank do not concern risk management but run under its revenue Toexpand credit and increase revenue, many banks has eased regulations onlending It may lead to credit risk

- Causes from borrowers :

Because individual and enterprise customers often lack of experience infinancial management ,lack of own capital , hence, when they meet thecompetition from other competitive enterprises , they will surfer losses As aresult, they will not be able to pay the debts for the lenders

If the customers use other funds for the purpose which was not given inthe credit agreement, it will lead to overdue loans

In the case that customers usethe loans as capital turnover for otherpurposes instead of repaying for the bank, credit risk will appear

(2) The objective reasons :

Due to impact of the economic environment If the economy is

deteriorated, enterprises can not make profit and they will not be able topayloans

Due to the regulatory environment The change in the economic

mechanisms and policies can put the enterprise in a difficult position ineconomic market,it leads to the bank’s damage in credit activity

Due to natural conditions: when some natural disasters such as

earthquakes, floods, storms come, it may cause seriously damage tooperation of enterprises and banks, it will have influence on the customers’ability of repayingloans

3.2.5 The consequences of the credit risk

Credit activity of CBs is related to many different sectors of theeconomy Therefore, the occurrence of credit risk will have consequences forcommercial banks, customers and the entire economy

* For commercial banks :

- Credit risks affect to the solvency of the bank Credit risk occurs willmake the bank can not collect the principal and interest on time as committed

in the credit agreement, and make the bank reduce the speed’s rotation ofcapital and its solvency Besides, the bank has to pay capital and interest ontime deposits, which makes the bank could fall into a loss of liquidity

- Credit risks affect to the bank's reputation A bank with a high creditrisk would stand in danger of losing credibility in the market, reducing thecompetitiveness of the bank Once customers lose the trust of businesspartners , the bank will lose market share in all aspects , banking operationswill fall into the predicament Be very dangerous especially if this casehappens: the depositors simultaneously withdraw money due to loseconfidence in the bank, this problem can make the bank bankrupt

- Credit risks can reduce the profitability of the bank If credit risks cannot collect principal and interest on time , the bank's income from creditactivity will decrease At the same time when the risks occur, it will rise tooverdue debts, bad debts ,and banks will have to spend the expenses formanaging, monitoring, collecting debts, processing costs of collateral On theother hand, credit risks occur also has impacts on other business activities ofthe banks, curbing the activities of the bank, reducing profits and affectingbank’s financial situation

* For customers :

- For depositors : when the bank faces to credit risks, and fails to recover

principal and interest on the loans, the bank’s reputation may decline,depositors may lose confidence in the bank, they will simultaneouslywithdraw all of their money from the bank, therefore, the bank will lose itsliquidity Meanwhile depositors will not be able to withdraw the funds whichwere sent to the bank anymore.

- For customers who borrow money: Due to declining fundsmobilized ,the bank will have to narrow down the outstanding credit.Borrowers will get more difficulties to getting a loan from the bank

- For customers caused bad debts and overdue debts to the bank : theywill be subject to higher interest rates in term of interest rates, causing hugefinancial pressure on the customers At the same time, due to lost credibility,customers will encounter more difficulties to accessing new capital

* For the economy :

Banking activities related to the operation of the entire economy Whencredit risk occurs,it leads to bankruptcy and affects many other banks in theeconomy The collapse of a bank can trigger the collapse of the entire bankingsystem, causing loss of confidence in the people, leading to stagnation ofproduction and business, economic crisis

3.3 Credit risk management at commercial banks

3.3.1 Definition of credit risk management at CBs

As mentioned above, in banking operations, credit activities account for

a major proportion The total loans outstanding accounts for more than half ofthe total assets of the bank ; income from credit accounts for about ½ to 2/3 ofthe bank earnings (Nguyen, 2006) Credit activities always hold potentialrisks resulting from the fact that the bank has a bad credit risk managementpolicy and loose management; and is not transparent in granting credits.Therefore, credit risk management is of the priorities and the most

important task in the bank management process It must be done regularly ,continuosly, seriously and thoroughly Generally, credit risk managementcan be seen as measuring the risk level , suggesting risk managementmethods, controlling and reporting risks , and performing risk preventionmeasures ( Phan & Dam, 2007).

3.3.2 Contents of credit risk management

(1) Identify credit risk

Banks should have methods to recognize signs of credit risk to refuselending (in the case before lending) or to prevent timely (in the case afterlending) Signs of credit risk can be divided into following groups :

- Group of signs related to the bank’s relationship :

• Over a period of time, customers’ accounts tend to be difficult inpayroll; decline in account balances; requestsfrequentlyfor assistance inliquid capital from various sources

• The loan operations: late payment of principal and interest; loanrequests exceed expected demand

-Group of signs related to technique and trade

• Customer has difficulty in product development

• Changes in the market: the exchange rate, interest rates, consumingtastes, new technologies, added competition

• Change from the state policy: tax policy, the conditions forestablishment and operation

• Customer's product is highly seasonal

- The non-financial signs: ethical issues and appearance of customer ;degradation of the enterprise’s infrastructure

(2) Methods to measure credit risks :

After indentifying credit risks,the banks should consider the level of risk

to help the Executive Board determine the risk which should be monitoredand controlled Credit risks can be measured by several methods:

- Determine the credit limit for each specific borrower : credit limitsshow the maximum quantitative of credit risks that the bank may accept Tolimit the potential risks, the banks should offer lower credit limits for newcustomer relationships, and must regularly review credit limits to customersduring establish the credit relations

- Apply the scoring method of credit risk: this is a relatively scientificmeasure when quantifying risks It bases on the operational status andcharacteristics of credits in the past, to predict credit operations which havesimilar characteristics in the future Credit officers can evaluate the level ofrisks and rate the borrower groups through the scoring system

- Make standby provision for credit risks: this method estimates creditlosses on total current loan portfolio Banks should have an appropriateinternal rating system to give the correct evaluation

In summary, depending on ability and the specific conditions of eachbank ,we will apply the suitable method

3.4 Factors affect to the credit risk management

3.4.1 Subjective factor

The subjective factor is the factor derived from the bank itself, it is themost important factor in determining the level of credit risk management.These factors include:

- Organizational structure of the bank The bank which has the scientific

organizational structure creates a reasonable wayto reach the highestefficiency in credit risk management

- Credit policy and creditprocess of the bank: Through credit policy , the

bank can achieve a diversified credit portfolio, increase profitability and

control potential risks If the credit policy is inefficiency,it will causedifficulties for the risk management and the possibility of credit risk will bemuch higher A bank has a reasonable credit process will contribute toimprove credit quality and minimize credit risk

3.4.2 Objective factors

Some objective factors which affect the operation of credit riskmanagement can be mentioned are : customer factor, informationenvironment factor, legal environment factor , natural environment and socialeconomy factor

- Customer factor : credit activity is offerred to serve customers, so thebank can not restrict credit by itself, but the bank needs cooperation from thecustomers The customer is a key factor affecting measures of credit riskmanagement The key factors are :

• Management capacity, production and business situation, financialsituation of the customers

• The customers’ behavior : If the customers have bad behavior or they

do not use credit for the right purpose, they can make the measures of creditrisk management become useless

- Information environment factor : due to the limitation of accuracy,transparency and reliability of information which are provided by legalagencies , it will be difficult to find out exactly information of customers forthe bank

-Legal environment factor : (economy, politic, culture, society)

• Banking activities are influenced by many legal environmental factors

A good legal environment will contribute positively to the effectiveness ofmeasures to manage credit risk

•The factors relates to financial disasters such asinflation, exchange

rates, recession, can affect directly and indirectly to payment ability of theborrowers,.

• The factors relates to the natural environment such as flood, fire,diseases, may affect to the production,it will make banks can not carry outthe measures of management credit risk

3.5 Experience of credit risk management at commercial banks in several countries around the world, lessons for banks in Vietnam.

3.5.1 Experience of credit risk management at commercial banks in several countries around the world

Foreign banks consider risk management as one of the long-termstrategy carried out at many levels To reduce risks in operations, these banksemploy the following methods: hiring consulting companies to support riskmanagement; establishing a council for handling risks, emphasizing onhuman and risk management system

Nguyen (2006) suggested that credit risk management in these banks

focuses on solving the following issues: Credit policy, three basic tasks of

The Risk Handling Council, and Managing risks Credit policy : This is a

most general rule governing all credit activities, guiding and directing the

overall credit operations The Risk Handling Council has three basic tasks:

Deciding common problems of risk and risk management; Controlling thecredit extension for large accounts, identifying investment portfolio; Updatingand modifying credit policies, customer policies in accordance with changes

in economic, political and social situations of a region, a sector, or a country

Managing risks is by giving a mechanism of self-controling, evaluating, then

measuring risks and determining the management mechanism for each unit.Concurrently, the Basel II program is implemented strictly with therecommended standards

3.5.2 Lessons for CBs in Vietnam

Through the experience of other CBs in some countries, we can inferseveral lessons for CBs in Vietnam :

- Experts in credit risk management should be often trained The bankshould organize training courses for staffs to improve their competence incredit risk management

- Enhance inspection and internal control to prevent risks

- Pay attention to develop information technology systems to serve theanalysis, evaluation and measurement of credit risk to warn about theunforeseen

- Establish relationships with the insurance organizations or loan tradingorganizations

- Diversify the portfolio and customer to disperse credit risks

CHAPTER 4 : DATA COLLECTION AND ANALYSIS

4.1 The case bank

4.1.1 Introduction to Bank for Investment and Development of Vietnam (BIDV)

Full name : Bank for Investment and Development of Vietnam

International name : Joint Stock Commercial Bank for Investment andDevelopment of Vietnam

Abbreviated name : BIDV

Address : BIDV Tower , 35 Hang Voi , Hoan Kiem District, Hanoi

SWIFT code : BIDVVNVX

27 April 2012, the bank has converted to Joint Stock Commercial Bank forInvestment and Development of Vietnam BIDV is the most longstandingcommercial bank in Vietnam , has gained the credibility of economicorganizations , enterprises and individuals in accessing financial and bankingservices The bank has 118 branches and more than 500 network points,thousands of ATM/POS in 63 provinces/cities nationwide

On 17 April 2015, the management board of BIDV announced its plan tomerge with the Mekong Housing Bank (MHB) , the merger was made official

May 5 BIDV would issue 336.9 million shares, with a combined value ofVND 3.369 trillion (US$160.43 million) to complete the merger, with everyshare of MHB converted into a share of the development bank.(Vneconomictimes 1)

Post merger with MHB, as at December 31, 2015, BIDV had total assets

of VND850.74 trillion ($37.97 billion) and charter capital of VND34.18trillion ($1.52 billion) Customer lending stood at VND598.46 trillion ($26.71billion) for the year, an increase of 34.2 per cent against 2014, and depositswere VND546.58 trillion ($24.33 billion), up 28 per cent compared to 2014.Non-performing loans were VND9.69 trillion ($432.56 million), 7 per centhigher than in 2014 and accounting for 1.62 per cent of total lending.(Vneconomictimes 2)

4.1.2 Introduction to BIDV Hai Duong branch

(1) Establishment history

History and Development of BIDV Hai Duong Branch associated withthe history and development of the Bank for Investment and Development ofVietnam

Bank for Investment and Development of Vietnam is a specialized bankestablished in Vietnam earliest, according to Decision No 177 / TTg dated04/26/1957 of the Prime Minister ,which called Bank of Vietnam is set underministry of finance It is responsible for managing the allocation ofinvestment capital - capital construction for the building of the country

As one member of the Bank for Investment and Development ofVietnam BIDV - Hai Duong Branch is one of 11 branches across thecountry , which was established from the very early days of the economicrecovery and development With the initial number of 9 staff members, therewere only two divisions at the beginning: Allocation and Accounting