Credit risk management a case study of BIDV

MI ISTRY OF EDUCATIO A D TRAI I G U IVERSITY OF ECO OMICS HOCHIMI H CITY MAI XUÂ VIỆT CREDIT RISK MA AGEME T: A CASE STUDY OF BIDV MASTER THESIS HoChiMinh City - 2011 MI ISTRY OF EDUCATIO A D TRAI I G U IVERSITY OF ECO OMICS HOCHIMI H CITY MAI XUÂ VIỆT CREDIT RISK MA AGEME T: A CASE STUDY OF BIDV MAJOR: BA KI G MAJOR CODE: 60.31.12 MASTER THESIS I STRUCTOR: DOCTOR HỒ VIẾT TIẾ HoChiMinh City - 2011 i ACK OWLEDGEME T I would like to express my deepest gratitude to my research Instructor, Dr Ho Viet Tien for his precious guidance, intensive support, ceaseless encouragement and highly valuable suggestions during the course of my research I would like to extend my sincere thanks to Dr Truong Tan Thanh for his instruction and advice during the course of my thesis I would like to express my sincere gratitude to all of my teachers at Faculty of banking and finance and Postgraduate Faculty, University of Economics Ho Chi Minh City for their teaching and guidance during my MBA course I would like to express my sincere thanks to all of my classmates, my friends for their support and encouragement I would also like to avail this opportunity to express my appreciation to Dr Nguyen Minh Kieu for his proposal of organizing the MBA program in English Finally, I would like to thank my boss and all of my colleagues for their help in knowledge, experience of banking practice and data collection during the course of my research ii ABSTRACT Along with the development of the economy, the Vietnam banking system has developed rapidly It brings about comfort to businesses with a lot of modern banking services, financing the economy, giving citizens and businesses a channel for investment Banking business brings about huge profit However, the banking business has a lot of potential risk, especially credit risk Credit risk may bring severe consequences to a bank and to the whole banking system, it increases expense of banks, causing loss to banks, or even worse, it may bring about a collapse in the banking system Many collapses in human history prove the bad consequences of poor credit risk management practices Vietnamese bankers now are paying much attention to risk management in general and credit risk management in particular This is a part of their business strategy Banks are trying to improve their credit risk management capacity and practice A case study of BIDV is performed to explore and evaluate the performance of credit risk management in banking sector and find out some solutions for credit risk management practice The result of this study will help the Vietnam banking system in the performance of its credit risk management policy and practice iii TABLE OF CO TE TS Acknowledgment i Abstract ii Table of contents iii List of tables viii List of abbreviations ix Chapter 1: Introduction 1.1 Introduction 1.2 Research background 1.3 Statement of the problem 1.4 Research objectives and questions 1.4.1 Research objectives 1.4.2 Research questions 1.5 Scope and limitation 1.6 Research methods 1.7 Structure of the study Chapter 2: Theoretical framework 2.1 Introduction iv 2.2 Risk and risk management in banks 2.3 Credit risk and credit risk management banks 10 2.3.1 Credit risk 10 2.3.2 Credit risk management 12 2.4 Standards of credit risk management of BCBS 17 2.4.1 Establishing an appropriate credit risk environment 17 2.4.2 Operating under a sound credit granting process 18 2.4.3 Maintaining an appropriate credit administration, measurement and monitoring process 19 2.4.4 Ensuring adequate controls over credit risk 19 2.5 Regulations of the State Bank of Vietnam on credit risk management 20 2.5.1 Regulations on classifications of debts and loss provisioning in banking operation of credit institutions 20 2.5.2 Credit rating for customers 23 2.6 Some knowledge on credit risk management 24 2.7 Conclusions 25 Chapter 3: Research Methods 26 3.1 Introduction 26 3.2 Business research 26 v 3.3 Research Design 27 3.4 Data collection 29 3.4.1 Document Collection 29 3.4.2 Depth Interviews 30 3.5 Reliability 32 3.6 Conclusions 33 Chapter 4: Introduction to BIDV 34 4.1 An overview of BIDV 34 4.2 Business performance of BIDV in the period 2006-2010 37 4.2.1 Business environment in the period 2006-2010 37 4.2.2 Total assets 37 4.2.3 Capital 39 4.2.4 Profitability 40 4.3 Credit activities in the period 2006-2010 41 4.3.1 Credit growth 41 4.3.2 Credit structure 42 4.3.3 Credit quality 44 4.4 Strategic objectives in the time to come 47 vi Chapter 5: Data analysis and findings 48 5.1 Introduction 48 5.2 Regulations on credit risk management of the bank 48 5.2.1 Documents related to credit risk 48 5.2.2 Credit risk management policy 50 5.2.3 Regulations on lending 51 5.2.4 Credit policies 54 5.2.5 Policies on security transactions 55 5.2.6 Credit risk management information system 56 5.2.7 Credit extension limits and credit restrictions 57 5.3 The credit risk management system and organization 58 5.4 Measurement of and controls over credit risk 59 5.5 Classification of Debts, Loss Provisioning and using provisions to compensate for credit risk 60 5.5.1 Classification of debts and loan loss provisioning 60 5.5.2 Using provisions to compensate for credit risk 62 5.6 The compliance with standards of Basel Committee on Banking Supervision and regulations of the State Bank of Vietnam 63 5.7 The effectiveness of credit risk management policy of BIDV 64 vii 5.8 Conclusions 65 Chapter 6: Conclusions and Recommendations 66 6.1 Introduction 66 6.2 Conclusions related to research questions 66 6.3 Recommendations 67 6.3.1 Regulations on credit risk management 67 6.3.2 Credit staff 67 6.3.3 Credit policies 67 6.3.4 Technology 68 6.4 Limitations of the research 68 References 69 viii LIST OF TABLES Table 4.1: Total assets of BIDV in the period 2006-2010 Table 4.2: Total assets of BIDV in comparison with some big commercial banks in Vietnam in 2010 Table 4.3: Loans and advances to customers (net of allowance for impairment losses) Table 4.4: Owner’s equity over 2006-2010 period Table 4.5: Owner’s equity in 2010 compared to some Vietnamese commercial banks Table 4.6: CAR at the end of 2010 compared to some big Vietnamese commercial banks Table 4.7: BIDV’s profitability over the 2006-2010 period Table 4.8: BIDV’s profitability in 2010 compared to some other commercial banks Table 4.9: Credit growth of BIDV over the period 2006-2010 Table 4.10: Credit structure by types Table 4.11: Loan classification Table 4.12: The percentage of loan classes Table 4.13: NPLs of BIDV in 2010 in comparison with some other big commercial banks Table 5.1: Internal credit rating system of BIDV Table 5.2: Internal credit rating and debt classifications of BIDV 58 5.3 The credit risk management system and organization To ensure sound credit risk management, BIDV organizes a credit risk management system from the head office to branches - At the head office: + Credit Management Department is in charge of issuing credit policies; + Credit Risk Management Department is in charge of credit out of the authority of branches to submit for approval; + Head office Credit committee is in charge of credit approval out of the authority of the CEO - At branches: + Customer Relationship Department is in charge of receiving credit proposal of clients; + Risk Management Department is in charge of credit risk appraisal; + Credit Management Department is in charge of credit disbursement + Branch credit committee is in charge of credit approval out of the authority of branch director BIDV manages credit risk by using a system for credit approval authority At the branch level, a credit is granted in at least two steps by at least two departments First of all, if the credit is under authority of the Vice Director in charge of Customer Relationship, it must be proposed by Customer Relationship Department and approved by the Vice Director in charge of Customer Relationship, and then it is moved to Credit Management Department for disbursement after approved by the Vice Director in charge of Credit Management In case the credit is out of authority of the Vice Director in charge of Customer Relationship, it must be moved to Risk Management Department and approved by the Branch Director The higher level of the Branch Director is Branch Credit Committee, the Senior Executive Vice President, the CEO and the Head Office Credit Committee 59 Each branch is allowed a different level of credit approval based on credit scale, NPL rate, credit history and region This is to ensure an appropriate level of credit approval capacity 5.4 Measurement of and controls over credit risk Clients are classified based on their rates BIDV grants credit based on clients’ rates Thus internal credit rating is very important for BIDV in measuring and controlling credit risk BIDV rates a customer based of financial and nonfinancial data The financial data is collected from financial reports of the customer including balance sheet, income statement, cash flow statement, and nonfinancial data collected from credit history with BIDV and other banks, mass media, and communicating with the customer itself or other customers At the moment, BIDV has improved a credit rating program to generate needed information from data collected Financial information includes: - Liquidity ratios - Operating efficiency ratios - Leverage ratios - Operating profitability ratios Nonfinancial information includes: - Debt payment ability from cash flow - Ability of the management and internal environment - Relationship with BIDV and other banks - External factors - Other features 60 All of the above information are considered and evaluate seriously to generate the most accurate information about the customer’s creditworthiness Each indicator is given a weight and a score range between and 100 The total final scores will give the credit rating level of the customer Internal credit rating is performed by Customer Relationship Officers and approved by Customer Relationship Managers Customer Relationship Officers and Customer Relationship Managers are responsible for their rating For credit safety, BIDV rates its customers quarterly to evaluate customers more correctly in order to apply appropriate credit policies and deal timely with problem credit 5.5 Classification of Debts, Loss Provisioning and using provisions to compensate for credit risk 5.5.1 Classification of debts and loan loss provisioning For the classification of debts, loss provisioning, BIDV has issued Decision 9365/QD-HDQT dated 27th November, 2006 According to this Decision, there are two cases for classification of debts: Customers being rated and not rated under the internal credit rating system of BIDV For individuals and corporates not having enough information to rate under the Internal Credit Rating System, debts are classified as follows: - Category (standard) consists of debts that are not due and the borrower is able to pay the principal and interest of debts in full and in a timely manner; - Category (special-mention) consists of debts which are overdue less than 90 days and rescheduled debts that are not due; - Category (sub-standard) consists of debts that are overdue from 90 to 180 days and rescheduled debts that are overdue less than 90 days; 61 - Category (doubtful) consists of debts that are overdue from 181 to 360 days and rescheduled debts that are overdue from 90 to 180 days; and - Category (loss) consists of debts that are overdue more than 360 days, rescheduled debts that are overdue more than 180 days and debts that are subject to rescheduling arrangements as directed by the Government For corporates and credit institutions having enough information to rate under the Internal Credit Rating System, debts are classified based on the internal credit rating system of BIDV Based on the results of the internal credit rating system, debts are classified into categories as follows: Table 5.2: Internal credit rating and debt classifications of BIDV Grades under Internal Credit Rating System Classification of Debts otice AAA Category Standard Category Special mention Category Substandard C Category doubtful D Category Loss AA A BBB BB B CCC CC Source: BIDV’s internal credit rating system 62 Internal credit rating is performed quarterly Classification of debts in months not corresponding to internal credit rating period will apply the results of the previous rating period Based on the results of debt classification, BIDV sets up provisions to absorb credit risk in accordance with Decision 493/2005/QD-NHNN dated April 22, 2005 of the State Bank of Vietnam Those are specific and general provisions General provisions are equal to 0.75% of the total debt classified from category to category The ratios of specific provisions for debts of categories from to are 0%, 5%, 20%, 50% and 100%, respectively The formula for calculating specific provisions is as follows: R = max {0, (A-C)} x r In which: R: a specific amount for loss reserve A: the value of the loan C: the value of the collateral r: ratio for loss provisioning With the above formula, we can see that, if the value of collateral (C) is higher, the amount of specific provisions (R) will be lower This implies that, good collateral will help to mitigate credit risk 5.5.2 Using provisions to compensate for credit risk Loans considered to be uncollectible will be offset by provisions and moved to off-balance sheet Although the loans are moved to off-balance sheet, they continue to bear interest and the customers still have to repay the debt The offset loans include: - Loans of bankrupt corporate customers; 63 - Loans of individuals who are dead or missing; - Loans classified as loss (Category 5) under the policy on classification of debts and loss provisioning of BIDV Uncollectible loans are offset quarterly based on proposals of branch credit committees and must be approved by the Credit Risk Offset Committee BIDV will use sources for credit risk offsetting in the following orders: - Specific provisions of the loans; - Collateral selling; - General provisions The offset of credit risk helps to strengthen the balance sheet and accurately assess the business income of BIDV BIDV always sets up 100% provisions for debts of category 5, loss provisions of BIDV are sufficient for absorbing the NPLs, when the collaterals are sold, the amount will be considered turnover of the bank 5.6 The compliance with standards of Basel Committee on Banking Supervision and regulations of the State Bank of Vietnam All respondents agree that the regulations and policies of BIDV are in compliance with regulations of the State Bank of Vietnam BIDV is one of the first banks applies internal credit rating in Classification of debts and loan loss provisioning in conformity with article of Decision No.493/2005/QĐ-NHNN dated 22/04/2005 of the State Bank of Vietnam The internal credit rating system also helps the bank in assessing creditworthiness of customers to support credit granting activities However, at the moment, BIDV does not have an internal credit rating system for individuals The credit granting process to individuals is based mainly the C’s technique 64 According to respondents, regulations of the State Bank of Vietnam are the guidance for BIDV in establishing its regulations and policies The regulations of the State Bank of Vietnam are legal framework for credit policies and practice of BIDV At the moment, regulations and policies of BIDV on credit activities conform to all regulations of the State bank of Vietnam Eighty three percent of respondents suppose the credit risk management practice of BIDV corresponds with standards of Basel Committee on Banking Supervision Credit risk management activities of BIDV virtually meet the principles of BCBS Seventeen percent of respondents suppose BIDV need strengthen control over credit activities at branches and limit authority of branches 5.7 The effectiveness of credit risk management policy of BIDV Those interviewed state that the credit risk management system of BIDV operates quite well, the credit risk management policy is complete and practical, it covers all aspects of credit and credit risk management activities The completeness of credit risk management policy of BIDV is that it covers all of the issues of credit activities including the following aspects: - Organizational structure of credit activities; - Credit risk management and monitoring; - Regulations, documents, procedures for credit granting; - Credit policies; - Credit extension limits and credit restrictions; - Credit risk measurement and rating; - Controls over credit portfolio; - Loan loss provisioning to compensate for credit risk; - Credit risk administration information system; - Managing risk arising from new products 65 Credit risk management policy of BIDV is the guidance for all of credit activities All respondents agree that in the proceeding years, with credit risk management policy, credit activities of BIDV went smoothly and favorably All credit officers and managers of BIDV based mainly on guidance of credit risk management policies and related regulations to grant credit and deal with arising problems in credit activities 5.8 Conclusions By analyzing the credit risk management policy, system of regulations on credit and interviews with credit officers and managers of BIDV, the research has explored the way BIDV manages credit risk and the effectiveness of credit risk management policy of BIDV The findings show that BIDV has a good system of legitimate regulations covering all aspects of credit risk management, a good management information system for management of all levels to make decisions, a good internal credit rating to assess credit risk of clients All regulations of BIDV on credit and credit risk management are in accordance with regulations of the State Bank of Vietnam BIDV is adjusting its activity in accordance with standards of Basel Committee on Banking Supervision However, the authority of branches is too high; the roles of Departments in Head Office are not obvious in credit granting The findings also have an important implication for credit risk management practice of other banks The study shows how a typical bank manages its credit risk, what limits and restrictions should be observed This may help strengthen the ability to manage credit risk in banking and avoid collapses in banking system 66 CHAPTER CO LUSIO S A D RECOMME DATIO S 6.1 Introduction Chapter two and chapter five have already provided the theoretical framework and credit risk management practice of BIDV In this chapter, the researcher will provide some recommendations for BIDV to improve their credit risk management practice Finally, the limitations of the research will be discussed 6.2 Conclusions related to research questions In chapter 1, we have discussed the two research questions of this thesis The purpose of this thesis is to find answers to those questions The research questions presented in chapter of this study are as follows: - How does BIDV manage credit risk? - How effective is credit risk management policy of the bank? All the research questions have been answered in chapter five The credit risk management structure and organisation of BIDV has been introduced The system of regulations on credit risk management of BIDV has established a sound legitimate basis for credit granting process, distinguished authorities and duties of functional sections of BIDV It has created a good environment for credit risk management, a sound granting process, a good mechanism for administration, measurement and monitoring of credit risk However, BIDV needs to strengthen its controls over credit risk, and supervisors in branches have very important role in credit risk management Thus, BIDV need to train and educate credit personnel more and more in order that they can meet the requirement of the Board of Directors and they can implement effectively the credit risk management policies and strategy of BIDV 67 6.3 Recommendations 6.3.1 Regulations on credit risk management The credit environment changes regularly, so credit risk management policies and strategy must be changed in order to meet the requirement in the new situations As a result, regulations on credit risk management of BIDV should be reviewed periodically and appropriately revised Regulations on credit risk management should be revised focusing on some main points as follows: - To improve and bring into effect key risk indicators to periodically supervise - To improve regulations on related groups of customers - To strengthen credit risk management after credit granting 6.3.2 Credit staff Human resources play an important role in the success credit risk management of BIDV As a result, credit staff of BIDV should be trained and educated regularly and continuously to improve their skills and strengthen their performance Internal control should be strengthened and supervisors should be paid attention to 6.3.3 Credit policies At present, credit policies of BIDV focus only on credit granting and collaterals, while credit price is very important Credit should be priced based on its risk BIDV will be ready to grant credit to customers with A rank or above, but the interest rates between customers with AAA rank and those of A rank is almost the same, while customers with A rank are of much more risks than those of AAA rank Thus, BIDV have to establish credit price policy based on credit risk 68 6.3.4 Technology Credit is granted based on credit rating, but the internal credit rating program is for businesses only There is policy on individual credit granting issued with Decision 353/QD-HDQT dated 21st April, 2010 In that policy, credit granting is based on credit rating, but there is no computer program for individual credit rating Credit officers must rate customers based on a simple table of indicators This is not very accurate As a result of that, BIDV should build up a computer program for individual credit rating to improve its credit risk management practice 6.4 Limitations of the research Although the researcher has spent a lot of time and efforts conducting this research, the study still has many limitations or weaknesses Firstly, credit risk management is a complex issue; it requires a research covering all aspects of credit risk and credit risk management This research is only the start of the process, it only discovers how a bank manage its credit risk, what tools are used to control over credit risk and what the sources of credit risk are, it does not show how other factors affect the effectiveness of credit risk management Secondly, this research discusses credit risk management process and system only However, credit risk may arise due to ethical issue and operational risk management is important for credit risk management Thirdly, the research discusses credit risk and credit risk management of BIDV only, the recommendation may be appropriate for and applied to BIDV only, it may not suitable for other banks With the above limitations, further studies can be carried out in the future in 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định tỷ lệ bảo đảm an toàn hoạt động tổ chức tín dụng Ngân Hàng Nhà nước Việt Nam, Thông tư 19/2010/TT- H ngày 27/09/2010 sửa đổi, bổ sung số điều Thông tư số 13/2010/TT- H ngày 20/05/2010 Thống đốc gân hàng hà nước quy định tỷ lệ bảo đảm an tồn hoạt động tổ chức tín dụng Luật tổ chức tín dụng số 47/2010/QH12 ngày 16/06/2010 Nước Cộng Hòa Xã Hội Chủ Nghĩa Việt Nam Các quy định BIDV hoạt động tín dụng, bao gồm: Quy chế cho vay, Chính sách quản lý rủi ro tín dụng, Quy định xếp hạng tín dụng nội bộ, Chính sách phân loại nợ trích dự phòng rủi ro, Quy định tài trợ nhập kh u đảm bảo lô hàng nhập, Quy định Giao dịch đảm bảo cho vay, Quy định ủy quyền ký kết hợp đồng tín dụng, Quy trình cấp tín dụng khách hàng doanh nghiệp, Quy trình cấp tín dụng bán lẻ, Quy định ủy quyền phán tín dụng, Chính sách cấp tín dụng khách hàng doanh nghiệp, Quy chế sử dụng dự phòng để xử lý rủi ro tín dụng, Quy định cho vay phục vụ nhu cầu nhà cá nhân, hộ gia đình, Chính sách cấp tín dụng bán lẻ, Quy định cho vay nhóm khách hàng liên quan, Quy định thẻ tín dụng quốc tế văn khác có liên quan Trần Đình Định (2007), hững chu n mực thơng lệ quốc tế Quản lý hoạt động tín dụng gân hàng thương mại, Nhà xuất tư pháp, Hà Nội 72 Trần Đình Định (2008), Quản trị rủi ro hoạt động ngân hàng theo chu n mực, thông lệ quốc tế quy định Việt am, Nhà xuất tư pháp, Hà Nội Lê Thị Hồng Điều (2008), Quản lý rủi ro tín dụng gân hàng Đầu tư Phát triển Việt am, Luận văn Thạc sĩ kinh tế, Trường Đại học Kinh tế TPHCM ... Credit risk management is always an activity of great concerns of Board of Management, Board of Directors and every credit officer of BIDV BIDV has established a credit risk management Department... general and credit risk management in particular This is a part of their business strategy Banks are trying to improve their credit risk management capacity and practice A case study of BIDV is... Chapter 5: Data analysis and findings This chapter analyzes credit and credit risk policies, credit organization and practice of BIDV, the way BIDV manage credit activities and credit risk arising