The Research consists of Introduction, Conclusion and three main chapters as follows: Chapter I: Theoretical background Chapter II: Loan management activities in Vietcombank Chapter III: Recommendations to strengthen Loan management activities
RESEARCH DISSERTATION “STRENGTHENING LOAN MANAGEMENT IN VIETCOMBANK” Author : Hoang Thi Bich Ngoc Program : MBA 16th Intake : 2007 - 2009 Tutor : Dr Pham Hong Chuong Hanoi, October 2009 Subject: Strengthen Loan management in Vietcombank INTRODUCTION Rationale of the Research Vietnam is in the process of industrialization, modernization and aggressively integration into the world economy Over the past 10 years, the Country witnessed a relatively higher level of economic growth rate to almost the rest of the world, 7.3%/year on average To be able to achieve the goals of Vietnam economy’s entities in the coming years, there exists the demand for a huge capital In this context, a credit expansion rate of about 30% (suggested by State Bank) per year can hardly meet the need for capital of Vietnam’s businesses and individuals But high credit expansion rate does not mean less attention to debt quality as well as loan management For Vietnamese Credit Institutions, the matter of loan quality and loan management has become more important than ever before because they are undergoing such a high credit risks Moreover, the global financial depression 2008-2009 is hurting the world economy most seriously since the World War II The Financial sector is now facing much changes and challenges, especially the merger and acquisition of financial institutions in the world The crisis in real estate leads to the bankrupt of many giant banks in the world, such as: Lehman Brothers, Washington Mutual’s, and Fannie Mae, Freddie Mac, Chiffon Bank, Colonial Bank… The failure of the US financial bailout has had effect not only on American, European financial market but also in Asia and the whole world While Financial Institutions have faced difficulties over the recent period for a dozen of reasons, the major cause of serious banking problems continues to be directly related to lax credit standard for borrowers and counterparties, poor portfolio risk management… The global financial depression and the merger and acquisition trend have put Vietnam’s economy and financial market under pressure, which require new changes to overcome such difficulties, for example: the modernization of bank system’s infrastructure, credit risk management, and human resource training… As the oldest commercial bank for external affairs in Vietnam, Vietcombank has always been known as the most prestigious bank in trade finance, international payments, foreign exchange, guarantee and other banking and financial services, including credit cards: Visa, Master Card With the motto “ALWAYS FOR CUSTOMERS' SUCCESS", the Bank's dominant objective is to maintain the role of a leading commercial bank in Vietnam and to be an international bank in the region in the next decade For Vietcombank, lending represent the heart of the banking industry, loans are the dominant asset which generate the largest share of operating income and represent the Bank’s greatest risk exposure Departments joining in the credit/lending procedure as well as the whole bank have paid such a properly giant attention and effort to improve the loan quality and strengthening the loan management activities of Vietcombank Carrying out my consultancy project in the Loan Management Department and been assigned to study the current situation of Vietcombank’s Loan management operations; to find out the solutions to improve or overcome such weaknesses to be found, I chose the task “Strengthening loan management in Vietcombank” with the aim of having an overview of Vietcombank’s loan quality, loan management activities, hence be able to propose essential solutions to raise loan management quality in Vietcombank Problem statement Over the past two decades, the loan quality of many Financial Institutions’ lending and investment decision has attracted a great deal of attention In the 1980s, there were tremendous problems with bank loans to less developed countries as well as with thrift and bank residential and farm mortgage loans In the early 1990s, attention switched to the problems of commercial real estate loans (to which banks, thrifts and insurance companies were all exposed) as well as junk bonds More recently, concerns have been raised about the rapid growth in low-quality auto loans which lead to the financial crisis all over the world The exposure to credit risk continues to be the leading source of problems in banks worldwide, especially when global crisis is booming Loan repayment capacity of enterprises – borrowers is weakening, bad debt ratio rising Thus, the matter of Loan management is more important than ever before Working for Vietcombank, in Loan Management Department, I have a chance to get access and deeply understand the Loan management system, which has been paid much attention but still be in need of innovation That innovation may include: better IT system, helpful credit rating system, credit risk rating model, suitable strategy, better loan portfolio management, and better collection of related external or corporate information… After studying the importance of loan management and the situation of Vietcombank, I realize the fact that VCB need lots of reform or innovation to improve the loan quality and loan management activity to meet the international standards and keep her safe from the global economic and financial crisis Objectives of the research The objectives of the Research are formulated as followed: To gain a full view on credit or loan quality and loan management activities: the features, importance, operation… To analyze the specific situation and shortcomings of loan quality and loan management activities in Vietcombank To draw out some recommendations to get a better loan quality and loan management system in Vietcombank Methodology and the Research design The Research will cover fact, concepts, techniques and approaches explored from loan management and controlling activities The Research uses general, analytical, comparative and statistical methods with using charts, tables and factual data for support From the collected information and data, the writer assesses and analyses the situation to draw conclusion and find out feasible solutions to improve Loan management in Vietcombank Structure of the Research: The Research consists of Introduction, Conclusion and three main chapters as follows: Chapter I: Theoretical background Chapter II: Loan management activities in Vietcombank Chapter III: Recommendations to strengthen Loan management activities Scope and limitation Credit outstanding balance in Vietcombank includes loans, trade finance, discount and rediscount commercial notes, payment for guarantee, overdraft and so on Among those, loan always takes the largest part which is managed in Loan Management Department In this thesis, the scope of Loan management in Vietcombank focuses on loans for company, especially for big firms in Head office The Research refers to theoretical frameworks on Loan management and related issues at commercial bank and actual loan management activities in Vietcombank After analysis, the Research states out problems that Loan management activity facing and recommend on solutions to improve Loan management quality in Vietcombank TABLE OF CONTENT LOAN MANAGEMENT ACTIVITIES .29 IN VIETCOMBANK 29 2.1 Introduction of Vietcombank 29 2.1.1 Historical development of Vietcombank 29 2.1.2 Organizational Structure 30 31 2.2 Lending Performance in Vietcombank during the period 2005-2008 .32 Indices .32 2.3.2 Function of Loan Management Department 39 2.3.3 Lending Approval Procedure 40 2.3.4 Loan Management Procedure 43 2.4 Applying Internal Credit Rating System 43 2.6.1 Achievements 48 2.6.2 SWOT analysis 49 2.6.2.1 Strengths .49 2.6.2.2 Weaknesses 49 CHAPTER III 52 RECOMMENDATIONS TO STRENGTHEN 52 LOAN MANAGEMENT ACTIVITIES .52 3.1 The Objectives and Tasks for Lending Activities in the Period 2009-2010 52 3.2 Solutions to Improve Loan Management Quality of Vietcombank in the Coming Years .53 3.2.1 Loan Repayment .53 3.2.2 Calculating the Return on a Loan .53 The contractually promised gross return on the loan, k, per dollar lent equals: 55 – {b(1-R)} 55 In which: 55 f: direct fee 55 (BR + m): loan interest rate .55 BR: base lending rate 55 m: margin 55 b: compensating balance requirement, held as noninterest-bearing deposit .55 R: Reserve requirement by State bank 55 Loans to the ith sector Total loans .61 Where α measures the loan loss rate for a sector that has no sensitivity to losses on the aggregate loan portfolio (i.e., its β = 0) and βi measures the systematic loss sensitivity of the ith sector loan total loan losses The implication of this model is that sectors with lower β could have higher concentration limits that high β sectors – since low β loan sector risks (loan losses) are less systematic, that is, are more diversifiable in a portfolio sense .61 3.2.5 Better Debt Classification and Provision 61 REFERENCES 66 ACKNOWLEDMENT The author would like to express her sincerest gratitude to Dr Pham Hong Chuong, the Research Advisor for his valuable guidance, constructive comments and encouragement throughout the Research study I would like to highly appreciate my supervisor, Mrs Tran Thi Thu Ha, Head of Loan Management Department, who has had valuable remarks on my Research Dissertation Outstanding acknowledgments are due to CFVG and CFVG management, faculty, staff and colleagues for their great support that enabled the author to achieve the degree of MBA at the CFVG The author would like to take this opportunity to express her deep appreciation to FTU group members (Vu Thi Dieu Linh, Nguyen Thang Vuong, Tran Huu Phuc), who have greatly supported her in study process and shared with her valuable ideas Last but not least, the author remains grateful to her family members for their continued moral support during her study of the MBA course at CFVG LIST OF TABLES AND CHARTS Chart 2.1 Vietcombank’s Organizational Structure Page 30 Table 2.1 Some Major Financial Highlights of Vietcombank in the period 2005 – 2008 Page 31 Chart 2.2 Outstanding Loans and Income from Lending from 20052008 Page 32 Table 2.2 Outstanding Loans by Type of Customers Page 34 Chart 2.3 Outstanding Loans by Industry Page 35 Table 2.3 Bank’s Loan Classification and Loan Loss Provision under Decision 493 Page 36 Table 2.4 Bad Debt Written off Page 37 Table 2.5 Credit Approval Body in Vietcombank Page 40 Table 2.6 Credit Approval Level for Branch Page 41 Chart 2.4 ICRS Process Page 43 Chart 2.5 Financial Marking Criteria Page 43 Chart 2.6 Non Financial Marking Criteria Page 44 Table 2.7 Loan Classification and Provision according to ICRS Page 44 Chart 2.7 Report Making Procedure under ICRS Page 46 Table 2.8 Solutions to Handle NPL in months 2009 Page 47 LIST OF ABBREVIATIONS FI Vietcombank Or VCB C&I Loans Decision 493 Financial Institution Bank for Foreign Trade of Vietnam Commercial and Industrial Loans Decision 493-2005-QD-NHNN of the State Bank dated 22 April 2005 on debt classification LPM Loan portfolio management MIS Management information system NPL Nonperforming loan ICRS Internal Credit Rating System ALCO Asset/liability management committee CHAPTER I: THEORITICAL BACKGROUND 1.1 Definition Loan is An arrangement in which a lender (usually the Bank) gives money or property to a borrower, and the borrower agrees to return the property or repay the money, usually along with interest, at some future point(s) in time Usually, there is a predetermined time for repaying a loan, and generally the lender has to bear the risk that the borrower may not repay a loan (though modern capital markets have developed many ways of managing this risk) Getting a bank loan has become a very popular means of acquiring something, which otherwise would not have been possible without getting a loan from a bank An individual can obtain a bank loan to own anything under the sun Bank loans make it possible for an individual to own a house, own a vehicle, and repair one's house Lending is the principal business activity for most commercial banks The loan portfolio is typically the largest asset and the predominate source of revenue As such, it is one of the greatest sources of risk to a bank’s safety and soundness Whether due to lax credit standards, poor portfolio risk management, or weakness in the economy, loan portfolio problems have historically been the major cause of bank losses and failures Effective management of the loan portfolio and the credit function is fundamental to a bank’s safety and soundness Loan portfolio management (LPM) is the process by which risks that are inherent in the credit process are managed and controlled Because review of the LPM process is so important, it is a primary supervisory activity Assessing LPM involves evaluating the steps bank management takes to identify and control risk throughout the credit process The assessment focuses on what management does to identify issues before they become problems Loan Management: Loan management’s overall objectives are to improve loan quality, recognizing and minimizing problem loans, identifying appropriate solutions and minimizing exposure to lender liability Loan management activities include but not limit to: withdrawing cash, monitoring loan performance, collecting principal and interest, storing credit documents, updating the network system information on credit facility, collateral assets, outstanding balance and execute internal credit rating, 10 CHAPTER III RECOMMENDATIONS TO STRENGTHEN LOAN MANAGEMENT ACTIVITIES 3.1 The Objectives and Tasks for Lending Activities in the Period 2009-2010 With the objective to gain total loan growth at about 30% and non performing loan ratio under 3%, the Bank has realized the importance of improving credit and loan management quality in the “credit expansion campaign” more clearly than ever before The goals set for the years to come also include specific tasks for credit as well as loan management activities: - To speed up project financing, to implement decisive and effective measures, to improve credit quality at the whole system and specially the braches with low credit quality - To continue focusing on the improvement of risk management and strengthening the internal supervision and auditing To promote the institutionalization, making detailed procedures for services provided and daily work of the Bank - Adjusting the basic customer structure towards better diversity with the targeted customer group being: small and medium – sized enterprises and retail customers This adjustment will be made through restructuring business models retail network expansion, development of tailor-made policy for each customer type, designing and marketing of new products and services to better meet the need of customers - To promote retail banking - Widely apply the internal credit rating in all Branches - Strengthening loan management activity, making it a useful tool for credit and credit risk management, helping improve credit/loan quality of Vietcombank 52 3.2 Solutions to Improve Loan Management Quality of Vietcombank in the Coming Years 3.2.1 Loan Repayment Every loan should be structured with at least actual and unrelated loan repayment sources The first source should be the customer cash flow while the second could be tangible collateral or some form of guarantee A short term loan is like an advance that is liquidated from sales when the current assets are financed is converted to cash Differently, capital financing (medium and long term loan) is repaid over several operating periods out of incremental earnings plus depreciation generated from the investment that was financed If the new investment cannot generated it own repayment, repayment must be funded from other sources, like collateral asset or/and guarantee Collateral asset consists of a security interest in assets owned by the borrower, which can be realized by the Bank in satisfaction of its loans in the event of financial distress Preferred common type of assets used as collateral include: account receivable, inventory, standing crop (with crop insurance) or live stock; land and building; machinery and equipment; share of stock, certificate of deposit and other negotiate instrument Guarantee may be granted by Corporation, individuals or banks and may be joint – where all guarantors are liable for the whole amount; or separate – where guarantor is liable only up to the individual amount Loans with collateral will reduce the risk that the Bank may expose as the bank can liquidate the collateral assets to ensure the repayment incase the borrowers fails to complete its timely repayment on interest and principal In addition, the loan loss provision for collateral loans will also lower than the unsecured loans as the collateral value will be deducted when counting the amount that has to be set provision 3.2.2 Calculating the Return on a Loan For most banks, loans are the largest and most obvious source of credit risk; however, other sources of credit risk exist throughout the activities of a bank, including in the banking book and in the trading book, and both on and off the 53 balance sheet Banks are increasingly facing credit risk (or counter party risk) in various financial instruments other than loans, including acceptances, inter bank transactions, trade financing, foreign exchange transactions, financial futures, swaps, bonds, equities, options, and in the extension of commitments and guarantees, and the settlement of transactions Though Vietcombank has been able to forecast, measure, monitor and report potential credit risk exposures across the entire organization, both on the counter party level and portfolio level But to some extends, it fails to link the credit risk found to the price system Vietcombank should constantly balance risks and rewards (earnings from fee, interest, charge…), except for special cases like preferential interest for traditional customers Too high a price on loan products, the Bank may lose customer; too low, and the Bank starve the profit margin or take a loss Too much capital on reserve, and Bank misses investment revenue; too little, and Bank risks regulatory noncompliance and financial instability An important element in the credit (debt) management process, once the decision to make a loan has been made, is its pricing This includes adjustments for the perceived credit risks or default risk of the borrower as well as any fees and collateral backing the loan The contractually promised return on a loan: there exists a number of factors impact the promised return that an FI achieves on any given loan amount These factors include the following: The interest rate on the loan Any fees relating to the loan The credit risk premium on the loan The collateral backing of the loan Other non-price terms (especially compensating balance and reserve requirements) While credit risk may be the most important factor ultimately affecting the return on a loan, these factors should not be ignored by FI in evaluating loan profitability and risk Indeed, FIs can compensate for high credit risk in a number of ways other than 54 charging a higher explicit interest rate or risk premium on a loan or restricting the amount of credit available In particular, higher fees, high compensating balances, and increased collateral backing all offer implicit and indirect methods of compensating an FI for lending risk The contractually promised gross return on the loan, k, per dollar lent equals: 1+k = + f + (BR + m) – {b(1-R)} In which: f: direct fee (BR + m): loan interest rate BR: base lending rate m: margin b: compensating balance requirement, held as noninterest-bearing deposit R: Reserve requirement by State bank The Expected return on a loan: The promised return on the loan (1 + k) that the borrower and the lender contractually agreed on includes both the loan interest rate and noninterest rate features such as fees The promised return on the loan, however, may well differ from the expected and, indeed, actual return on the loan because of default risk Default risk is the risk that the borrower is unable or unwilling to fulfill the terms promised under the loan contract Default risk is usually present to some degree in all loans Thus, at the time the loan is made, the expected return E(r) per dollar lent is related to the promised return as follows: E(r) = p(1 + k) In which p is the probability of repayment of the loan To the extent that p is less than 1, default risk is present This means FI must: - Set the risk premium (m) sufficiently high to compensate for the risk - Recognize that setting high risk premium as well as high fees and base rates may actually reduce the probability of repayment (r) 55 Indeed, k and p are not independent Over some range, as fees and loan rates increase the probability that the borrower pays the promised return may decrease (i.e., k and p may be negatively related As a result, FI usually have to control for credit risk along two dimensions: the price or promised return dimension (1 + k) and the quantity or credit availability dimension 3.2.3 Evaluating and Managing Concentrations of Risk Ideally, the overall portfolio composition and the level of risk in the various pools will be consistent with the goals and guidelines established by the bank’s directors However, it is not unusual for one or more pools to raise concern, either because of the risks associated with the loans or because of the sheer volume of loans with similar characteristics Each pool should be evaluated individually — that is, as a discrete pool of risk — and as part of the whole — that is, by how it fits into the portfolio and supports loan portfolio goals A large exposure to one type of borrower or industry may well be less risky than a small exposure to another The goal is to achieve the desired balance of risk and return for the portfolio as a whole Management should have performance standards, risk tolerance levels, and business goals for each concentration, and it should be able to relate these to the overall loan portfolio management strategy In some cases, a pool of loans may represent a concentration of risk that is difficult to avoid (or remedy) Smaller banks may, for example, accumulate concentrations of risk because of their more limited geographic market and the nature of the local economy Larger banks may develop concentrations of risk through mergers, or to gain leverage or build industry expertise In any case, the bank must decide whether a particular pool of loans represents an undesirable concentration of risk that should be reduced Borrowers in a portfolio concentration exhibit similar financial characteristics such as capital sources, repayment sources, and balance sheet structure Management should identify the common characteristics that influence credit risk Focusing monitoring efforts on these characteristics simultaneously simplifies and strengthens the supervision of risk within the pool Stress testing using common financial indicators will determine which pools are most vulnerable to credit risk and require increased attention Concentration Management Techniques 56 Over the past decade, banks, especially large ones, has been adopting more active portfolio management practices They are expanding their MIS capabilities and strengthening their credit risk management practices There are a variety of techniques banks can use to manage portfolios and control concentration risk The most common tool is setting exposure limits, or ceilings, on concentrations Diversifying away from a limit can be accomplished by reducing certain exposures or increasing the borrower base The reduction of Loan Portfolio Management exposures begins with a reassessment of individual borrowers’ needs and requires considerable discipline Nonetheless, it can be a useful tool to Diversify risk over a larger customer base A bank can change the distribution of its assets by increasing the geographic diversification of borrowers; altering the bank’s product mix (for example, by reducing commercial lending and increasing consumer lending); or changing the risk profile of the bank’s target market (for example, by turning from middle-market, non-investment-grade customers to well-capitalized, investment-grade customers) Asset sales can also be used to manage concentrations Banks sell whole loans, sell a portion of a loan into syndication, sell participations in a loan, and securitize certain types of loans Each of these approaches entails risk/reward trade-offs that must be evaluated in light of the bank’s strategic objectives Recently, banks have begun using credit derivatives to reduce the risk posed by concentrations Although their usage is modest in all but the largest banks, credit derivatives are gaining acceptance If appropriately managed, derivatives may be useful as both a risk management tool and an investment opportunity, especially in times of weak loan demand Banks should strive to understand both the benefits and the risks associated with these instruments As more research is conducted and their behavior is analyzed in various economic scenarios, both the risks and benefits of credit derivatives will become clearer Stress Testing In stress testing, a bank alters assumptions about one or more financial, structural, or economic variables to determine the potential effect on the performance of a loan, concentration, or portfolio segment This can be accomplished with “back of the envelope” analysis or by using sophisticated financial models The method employed 57 is not the issue; rather the issue is asking that critical “what if” question and incorporating the resulting answers into the risk management process Stress testing is a risk management concept, and all banks will derive benefits, their methods, from applying this risk management concept to their loans and portfolios Banks commonly employ a form of stress testing when they subject various assets and liabilities to hypothetical “rate shock” scenarios to determine their exposure to changes in interest rates Similarly, consumer portfolios that are securitized (e.g., mortgages, credit cards, home equity loans) are heavily stress tested during the structuring process to better gauge their risk and to determine the level of credit enhancements While many banks use complex interest rate risk and consumer credit models that take into account the interrelationships between many variables simultaneously, less sophisticated testing methods can also be useful These same principles can also be used for evaluating commercial credit risk Stress testing for credit risk can be conducted on individual loans and concentrations or other portfolio segments Key underwriting assumptions or a critical factor common to a particular portfolio are good candidates for stress testing The MIS requirements for stress testing portfolios for credit risk can be significant (they vary depending on the individual circumstances and objectives of the institution) But because banks can evaluate the credit risk of individual loans using little technical support, they should so during their routine credit evaluations As part of the initial or ongoing credit analysis, the bank can alter financial variables and assess the impact These results can then be rolled up to the portfolio level to assess the impact on portfolio credit quality For example, office space rental rates can be altered, which affects the building’s cash flow and debt service repayment capacity Stress testing would allow bank management to determine at what rental rate the project could no longer service its debt The test results could then be used to identify what percentage of the portfolio is vulnerable to a hypothetical 10 percent decrease in rental rates As the bank’s knowledge of stress testing grows, it can alter a number of related variables at the same time Not only rental rates but also office vacancy rates can be altered (a correlated change because occupancy rates drive rental rates) Or the bank can analyze the response of a portfolio or portfolio segment to a variety of oil and gas prices or regulated utility rates However, as these examples make 58 clear, the usefulness of even simplified stress testing depends on the accuracy of the “model” used to quantify the sensitivity of loan performance to the selected variables The results of any such stress testing must always be interpreted with caution, because important additional variables, or interrelationships among variables, may have been omitted from the analysis Even if the bank cannot attach probabilities to the scenarios, stress tests can reveal the kinds of events that might present problems Banks should test the debt service coverage of credits whose coverage is thin Credits in significant loan pool concentrations should also be stress tested as indicators of the strength of those pools Based on the results of stress testing, management can develop contingency plans for the credits or pools that stress testing indicate are vulnerable These plans might include increasing supervision, limiting further advances, restricting portfolio growth, devising exit strategies, or hedging portfolio segments Credit portfolio stress testing is a relatively new analytical tool to develop or purchase computer models to perform such tests Bankers are encouraged, however, to expand their capabilities Banks of all sizes will benefit by supplementing stress testing of individual loans with portfolio stress testing They may also want to consider credit modeling software as it becomes more refined and readily available for stress testing 3.2.4 Loan Portfolio Diversification Loan portfolio objectives: Loan portfolio objectives establish specific, measurable goals for the portfolio They are an outgrowth of the credit culture and risk profile The Board of directors must ensure that loans are made with the following three basic objectives in mind: - To grant loans on a sound and collectible basis - To invest the bank’s fund profitably for the benefit of shareholders and the protection of depositors - To serve the legitimate credit needs of their communities Strategic Planning for the loan portfolio: For most banks, meeting these three objectives will require that senior management and the board of director develop medium and long-term strategic plans and objectives for the loan portfolio These 59 strategies should be consistent with the strategic direction and risk tolerance of the institution They should be developed with a clear understanding of their risk/reward consequences They also should be reviewed periodically and modified as appropriate In drawing up strategic objectives, management and the board should consider establishing: - What proportion of the balance sheet the loan portfolio should comprise - Goals for loan quality - Goals for portfolio diversification - How much the portfolio should contribute to the bank’s financial objectives - Loan product mix - Loan growth targets by product, market and portfolio segment - Product specialization - What the bank’s geographic markets should be - Targeted industries - Targeted market share - Community needs and services - General financial objectives It is essential for FI to diversify its loan portfolio to find the minimum risk portfolio It is the combination of assets that reduces the variance of portfolio returns to the lowest feasible level This is an efficient portfolio in that FI has selected loan proportion to produce a portfolio risk level that is a minimum for that higher expected return level The following paragraph will introduce the example model namely Loan Loss Ratio-Based Model, one of the most popular and easy-applying models which may be suitable for Vietcombank The Loan Loss Ratio-Based Model involves estimating the systematic loan loss risk of a particular sector or industry relative to the loan loss risk of an FI’s total loan portfolio This systematic loan loss can be estimate by running a time-series 60 regression of quarterly losses of the ith sector’s loss rate on the quarterly loss rate of an FI’s total loans: Sectoral losses in the ith sector = α + βi xTotal loan losses Loans to the ith sector Total loans Where α measures the loan loss rate for a sector that has no sensitivity to losses on the aggregate loan portfolio (i.e., its β = 0) and β i measures the systematic loss sensitivity of the ith sector loan total loan losses The implication of this model is that sectors with lower β could have higher concentration limits that high β sectors – since low β loan sector risks (loan losses) are less systematic, that is, are more diversifiable in a portfolio sense 3.2.5 Better Debt Classification and Provision The purpose of a loan classification system is to enable financial institutions to prudently value loans and to act as a guide to appropriate provisions Under Decision 493, loans and advances are to be classified into the following categories: Current, Special Mention, Substandard, Doubtful, and Loss Each loan categories corresponds to an individual level of specific provision rate: 0%, 5%, 20%, 50% and 100%, respectively General provision rate is 0.75% of total outstanding loans The classification of individual loans in Vietcombank is now based on the first instance on an assessment of the repayment capacity of the borrower If one or more loans to the same borrower have been classified in a particular category, the total outstanding balance of the borrower will be automatically in the same category However, this does not necessarily all other outstanding loans to that borrower or to other related companies should be treated in the same manner In particular, whether individual loans should be treated separately or collectively for classification purposes will depend on how they are collateralized or guaranteed If it is clear that there is sufficient security dedicated to a particular loan to cover payments of principal and interest on that loan, it need not be classified in the same way as other loans to the same borrower which are not similarly secured It will however usually be appropriate to classify the loan as at least “special mention” to reflect the known financial difficulties of the borrower Where a number of loans are supported by a 61 pool of collateral or are cross-collateralized, they should all be classified in the same category In addition, it is suggested that the Bank should also use the qualitative indicators in the loan classifying procedure, including: - Early signs of liquidity problems such as delay in servicing loans; - Inadequate loan information such as annual audited financial statements not obtained or available; - The condition of and control over collateral is questionable; - Failure to obtain proper documentation or non-cooperation by the borrower or difficulty in keeping contact with him; - Slowdown in business or adverse trend in the borrower's operations that signals a potential weakness in the financial strength of the borrower but which has not reached a point where servicing of the loan is jeopardized; - Volatility in economic or market conditions which may in the future affect the borrower negatively; - Poor performance in the industry in which the borrower operates; - The borrower or in the case of corporate borrowers, a key executive, is in ill health; - Borrower is the subject of litigation which may have a significant impact on his financial position; and/or - Even if the loan in question is current, the borrower is having difficulty in servicing other loans (either from the institution concerned or from other institutions) For loans classified as non-performing, two main strategies are suggested: Maintaining strategy and Full stop strategy Maintaining strategy is applied for customers who has difficulty in cash but has the ability to exist and develop Those customers will be given the opportunities to restructure, reschedule their loans, depending on their ability to repay debt While Full stop strategy is applied to loans which are insolvent and need to be liquidated and/or written off 62 3.2.6 Strengthen the Capacity of Loan Management Department As the Loan Management Department of Vietcombank has only been established for years, the Department needs lots of effort and improvement to enhance its operations, including: Technical assistance: The current technology not help much in Loan management at the time being with reporting, loan classification as well as provision The above fact results in inefficiency because the Loan management staffs have to spend much time and work to produce an exact report monthly, quarterly and yearly from a huge database However, the situation can be solved quickly by upgrading and purchasing the full version of the core banking system being in use The upgraded system can record and classify the input data in the database and help make automatically the timely and ad-hoc reports without much effort from staffs Improve capacity of loan management staffs: All staffs of Vietcombank’s Loan Management Department are from other Departments joining in the credit procedure They not have sound training background or experience in loan management before Therefore, training course and conference to exchange experience for the Loan management staffs in head office and branches are very essential to supply them basic knowledge and skills Loan management strategy: The Department should develop in an open and transparent manner a loan management strategy which is based on longer-term loan management objectives and set within the context of Vietcombank lending policy and budget framework The strategy document should preferably include: description of the market risks being managed (currency, interest rate and refinancing/rollover risks) and the historical context for the loan portfolio; description of the analysis undertaken to support the recommended loan management strategy, clarifying the assumptions used and limitations of the analysis; specification of the targets and ranges for key risk indicators of the portfolio… Evaluation of Loan management performance: There should be a publication report covering loan management activities, evaluation of outcomes against stated objectives and compliance with the Bank’s loan management strategy 63 3.2.7 Improve NPL Management - The ability of Vietcombank’s officers to deal with NPL like lidiquate the collateral assets, sell the loan and take legal proceedings against the borrower is limited due to the lack of related regulations, rules and procedures It requires time and effort studying and issuing such regulations and procedures to curve with the embarrassment and inefficient in applying solutions to NPL - Pay more attention to the written-off of bad debts using credit risk provision In fact, using the credit risk provision to written-off the Loss loans are among the effective method to reduce bad debts which should be laid off balance for further collection Thus, it is necessary to built the Policy of credit risk provision usage to ensure the uniform in the handling process (preventing=> Handling => Bad debts written off => Collecting) - Ensure the loan restructuring based on the actual solvency of the borrower - Gather the information on collateral asset that have to be lidiquated to collect the loan and public on the Vietcombank’s website Vietcombank to improve the chance to find potential partners - To have policy to encourage the Bad Debts Handling Officers, free them from the reluctant attitude on NPL handling mission In fact, the mission is very complicated; it requires a lot of efforts and experiences, especially when the customer is facing difficulty in its business operation, lack of cooperation goodwill… - Reinforce the usage of professional consultant service to hasten and improve the proficiency of bad debts handling process 64 CONCLUSION Vietnam has become the official member of WTO for nearly years and is going to fully integrate in to the global economy Every industry in Vietnam, include banking sector is not only enjoying uncountable opportunities but also facing many challenges Realizing the need to improve the loan management activities in the new context, Vietcombank is paying more and more attention to loan quality and loan management while expanding its credit operations Based on determining research methods, research fields and targets, the Dissertation Thesis has met the requirement of: overall study about loan quality and loan management, find out the weaknesses that need improvements and then, suggest applicable solutions for the Bank to improve its loan and loan management quality The writing, however, may not avoid shortcomings or mistakes in the size of a Research Dissertation of a year-MBA student The writer hope that Professors and readers concerning may contribute ideas or opinions to make the Research successfully complete 65 REFERENCES Management of banking of Scott MacDonald Timothy W.koch, 6th edition Financial Institution Management of McGraw-Hill, 4th edition Commercial bank financial management of Joseph F.Sinkey, JR, 6th edition http://en.wikipedia.org Guideline on loan classification system – HKMK Bank Vietcombank internal and financial report, Vietcombank’s guideline for loan classification and provision http://www.vneconomy.com 66 ... become problems Loan Management: Loan management s overall objectives are to improve loan quality, recognizing and minimizing problem loans, identifying appropriate solutions and minimizing exposure... liability Loan management activities include but not limit to: withdrawing cash, monitoring loan performance, collecting principal and interest, storing credit documents, updating the network system information... problems that Loan management activity facing and recommend on solutions to improve Loan management quality in Vietcombank TABLE OF CONTENT LOAN MANAGEMENT ACTIVITIES .29 IN VIETCOMBANK