Precluding and reducing solutions to credit risk at quang trung branch of vietnam bank of investment and development

FOREIGN TRADE UNIVERSITY BACHELOR PROGRAM IN BUSINESS ENGLISH * * * FIELD STUDY REPORT Precluding and reducing solutions to credit risk at Quang Trung branch of Vietnam Bank of Investment and Development Student: Tran Vu Class: 8B Supervisor: Luu Thuy Huong HANOI - 2012 INTRODUCTION Vietnam economy starts integrating into the world economy and participating in international and regional economic organizations such as ASEAN, WTO, and AFTA Integration leads to the severe competition among domestic and international companies Sharp rivalry also leads to the risks in production process of companies Nowadays, risk preventing is also the urgent issue of banking industry in Vietnam In the past few years, activities of commercial banks must operate in accordance with market mechanism and innumerable credit risk, bringing about losses to the banking industry and the entire economy Many commercial banks and credit organizations have very huge unprofitable debt ratio, even some banks must be bankrupt unless there is interference from the government Concerning about risks, particularly credit risk in banking industry and Quang Trung branch of Vietnam Bank of Investment and Development during my internship, I choose the below topic: “Precluding and reducing solutions to credit risk at Quang Trung branch of Vietnam Bank of Investment and Development” The special subject is presented in three main chapters: Chapter 1: Overview of risk, significance of precluding and reducing risk in credit relationships Chapter 2: Methods of precluding and reducing credit risk in Quang Trung branch of Vietnam Bank of Investment and Development Chapter 3: Solutions to precluding and reducing credit risks at Quang Trung branch, BIDV Chapter 1: Overview of risk, significance of precluding and reducing risk in credit relationships 1.1 Risk and risk classification in credit relationships 1.1.1 Definition of risk Risks are problems that accidentally damage people or assets of one or some objects in the society In the economy, risks are considered the losses which enterprises have to accept when doing business Trading in currency- credit field, the banks must admit that too In reality, it has been proved that the risks of dealing in currency are the riskiest ones Credit risks are the losses that the banks must approve of in lending activities The reason is stated that credit “is a person lends or promises to lend the capital to the others, uses the signature like a guarantee, or a deposit to prove that money is collected“ 1.1.2 Kinds of credit risks Risks of commercial banks are very diversified and complicated The reasons may come from the banks, from customers, from objective issues, or from the government’s administrative mechanism In general, there are following risks: interest risk, capital risk, exchange risk, payment risk, and risk of unable to pay - Interest risks: “are the risks that the bank must bear when the market interest varies.” Consequently, when the interest changes the bank possibly deals with risks When the interest is too low, enterprises tend to borrow much but it is difficult for the bank to mobilize capital Hence, their action scope is narrowed, and the revenue will reduce In contrast, when the interest is too high, the bank has more mobilized capital yet it is stagnant It is explained that the bank can not lend money at too high interest rate That leads to unavoidably losses for the bank - Capital risk: is represented in two aspects: + Redundant capital: commercial banks are the enterprises that earn revenue by the method “borrow to lend” when the current capital is very little The bank’s main capital is the mobilized from the inhabitants, from economic organizations, and from other credit organizations Therefore, the redundant capital is not lent or changed into other profitable assets As a result, the bank will suffer losses in charging borrowing fee whereas not receiving income + Lack of usable capital: this risk happens when the bank does not satisfy the customers’ demand for borrowing and investing, even not meet the customers’ demand for liquidating This kind of risk arises from the exchange function of capital using period and the bank’s capital Besides, political issues, price variation, and the decreasing reputation promote people to withdraw their money in the bank Hence, the bank’s liquidation is threatened If the bank had changed all their assets into money to pay but no result, then, the bankrupt risk is considerably high - Capital mobilizing risk: + Happens when the bank mobilizes much capital but they can not lend or slowly lend to customers - Credit investing risk: + The customers who have dealt with business risks can not pay the bank money + The economies that get difficulties also cause risk to the bank + The credit officers carelessly appraise the lending project 1.1.3 Definition of credit risk in banking activities Risks in credit trading of the bank are the financial losses because the customers borrowed capital from the bank not pay on time, and not keep their commitment Credit risk can be defined as the potential losses which the bank must bear when lending customers without being paid on schedule It means that when the bank provides credits to each customer, the forecasted income from the profitable assets may not be fullyreturned in both quantity and time- limit To sum up, credit risks are the problems that happen in credit trading process, causing the losses of capital and reputation (or brand name) for the commercial banks In central planning economy, risks in banking industry are generally ignored All the banks were the State-owned Commercial Banks So the losses were subsidized by the government by methods such as releasing more money and tight money management But when stepping into the market economy, competition is a vigorous catalyst Consequently, economic posting is mainly independent This originates the potential of losing liquidation and bankruptcy In changing business environment, the stability of the enterprises is only relatively Hence, when the customers get trouble, the same situation with the bank is easy to understand Realizing credit risks will help the banks to find out efficiently preventing methods, and then they have more efficient business result Credit risks are diversified and sophisticated It could be when the bank has stagnant capital, lacks of usable capital, unequal ratio of lent capital and mobilized capital, guaranteed asset risks or risk of not taking back debts In this paper, credit risks are examined in the situation that the bank can not recover debts, being called bad debts For principal and interest debts, credit risks may occur in four cases It is when the bank can not recover the interest on schedule Depending on each case, the bank enters in the accounts with different items such as hanging interests and overdue debts When not being paid on time, risks are at the low level and posted as arising hanging interests If the bank can not collect the interests, risks are posted as hanging interests, except the case that the bank remitted that item If the bank cannot reclaim the capital on time, it will cause bad debts Yet this item is not regarded as absolute loss of the bank Because for some reasons, enterprises slowly refund the principal but they still pay all after the contracted period If this debt can not be paid, the bank will highly deal with credit risks Credit risks Not recover interest on time Not recover principal on time Not collect enough interest Not collect enough lent interest Hanging interest arises Unrecoverable debts Or Forgiving Overdue debts arise Frozen hanging interest Or Interest remission Credit risks remain in many forms Those forms always vary The result is that the bank is unable to recover In the beginning, enterprises may slowly pay the interest and then slowly pay the principal It really makes the bank at risk But the credit risks are not always shown through all the above forms There is the situation that enterprises pay interests but not pay the principal So the bank only posted it as arising bad debt and then changed it into unrecoverable bad debts The above cases are only general ones When researching credit risks, people usually pay attention in the danger of risks such as hanging interest and arising bad debts Frozen hanging interests and actual debts are usually examined to solve the problem and to infer lessons 1.2 Criteria to determine credit risks Criteria of measuring include: • Overdue debts: Gross overdue debts Overdue debts rate = * 100 Gross debts Low overdue debts rate proves that the credit quality is high When absolute numeric value of the overdue debts goes down, if the gross debts increase then overdue debts rate has not reflected the nature of credit - Classification according to time period, there are arising risks: + Less than 180 days + Greater than 180 days + Greater than 360 days - Classification of unpaid debts and unrecovered debts - Classification of guaranteed and unguaranteed risks Number of customers having Overdue debts Ratio of customers = having bad debts * 100 Gross numbers of customers Having credit relationship • Losing capital situation: Losing capital Debts Ratio of losing capital = * 100 Gross debts • Bad debts situation: Bad debts Ratio of bad debts = * 100 Gross debts • Unrecoverable debts: Unrecoverable debts Ratio of unrecoverable debts = * 100 Gross overdue debts 1.3 Significance of precluding and reducing risks in credit relationships Precluding and reducing risks in credit relationships will help the bank avoid bad consequences Those kinds of credit risks not only affect on the bank itself but also on the economy Therefore, precluding and reducing credit risks has a very important significance • For the bank: Risks directly impact the revenue of the bank If the risk is at low level, the bank can use its profit or its capital to make up But if it is a big risk, the bank can not use its profit to compensate, it will be bankrupt For this reason, precluding and reducing credit risks helps the bank prevent and minimize damage, stabilize profit, maintain economic security, and maintain prestige and brand In doing credit business, prestige and brand is extremely important, directly affect customers’ behavior • For the customers: A bank that is good at preventing and reducing credit risks will positively influence on customers The bank has created its prestige and brand name The customers will consider the bank as a reliable address to deposit money as well as to borrow money For all business activities, the customers are always important ones The same situation is in the credit- banking activities When the bank is free from risk, customers will trust more and choose the bank as their partner more In the situation of integrating into world economy, there will be many international banks enter and compete A free- risk bank will leave the customers belief- it is very important • For the economy: Credit and banking are sensitive financial business activities So it directly influence on the social economy If the bank preclude and reduce risks then the cash flow will circulate normally It will not cause redundancy as well as deficiency The economic security will be ensured When the risk occurs, customers will be puzzled They will simultaneously withdraw money Thus, the bank will be lack of capital The reason is the bank chiefly mobilizes capital from customers Then organizations who want to borrow capital also get trouble In fact, economic organizations form an economy When those organizations that will have huge impacts on the social economy as a whole face crises Chapter 2: Real situation of credit risks at Quang Trung branch, BIDV 2.1 Bank for investment and development of VietNam, Quang Trung branch 2.1.1 Objectives Being one of the major State commercial bank of Viet Nam, with nearly half a century of operation and development, Bank for Investment and Development of Vietnam has had much higher effort, with very encouraging success, contributing actively to the cause of construction and development of the country’s economy With the purpose to improve, expand the operation network, increase prestige, the image of Bank for Investment and Development of Vietnam to customers and domestic and foreign credit organizations, the separation, improvement of Quang Trung transaction bureau into BIDV, Quang Trung Branch (Level branch) with the main function is to perform retail banking professions will contribute to overcome shortcomings in operation scale; improving the capabilities of finance, management, technology, and the staff qualifications Together with several Branches and Transaction bureaus which share the same function BIDV, Quang Trung Branch will become one of the nucleus to build a chain of “supermarkets” of banking, with full modern customer-oriented facilities and banking services, meeting the demand and needs of the market economy with the unceasing diversification and development in the demand to use finance-banking products, services of the customers, aiming to prepare sufficient conditions to improve the competitiveness of Bank for Investment and Development of Vietnam in the region and in the world, actively integrating and proceeding step by step following international customs and norms acknowledged in banking business operations Specifically: - BIDV, Quang Trung Branch will take the development of modern banking service as the operational background, pledging to bring about more and more facilities and added value for customers being civilians or enterprises of every economic element; - The operation of BIDV, Quang Trung Branch will help enhance the business operation of Bank for Investment and Development of Vietnam The upgradation of Quang Trung Transaction Bureau into BIDV, Quang Trung Branch (Level I branch) will expand the operational network of Bank for Investment and Development of Vietnam in Hanoi City, assisting Bank for Investment and Development of Vietnam to seize and take the opportunity to expand the customer objects, through which contributing an active part in the socio-economic development of the Capital and some adjacent areas under the satellite urban chain bordering Hanoi; - Expanding the operation of BIDV, Quang Trung Branch is a measure to improve the financial capability and increase the competitiveness of Bank for Investment and Development of Vietnam in the framework of globalization and integration; - Establishing and putting into operation the BIDV, Quang Trung Branch will help boost the exploitation, clearing the capital source, increasing the capability of supplying credit, banking services, therefore, increasing profits for the Bank, concurrently, contributing a remarkable part in the unceasing development of the system of Bank for Investment and Development of Vietnam; - The operation of BIDV, Quang Trung Branch will help publicizing the trademark, heightening the position, image about an advancing, modern Bank for Investment and Development of Vietnam in the perception of the customers and in the business market; 2.1.2 Scope of operation 2.1.2.1 Legal status: * Full name in Vietnamese: “CHI NHANH NGAN HANG DAU TU VA PHAT TRIEN QUANG TRUNG” * Acronymed: “Chi nhanh Ngan Hang DT & PT Quang Trung” * The international transaction name: “Bank for Investment and Development of Vietnam, Quang Trung Branch” * Abbreviated name: BIDV, Quang Trung Branch * Headquartered at: No 53 Quang Trung, Hai Ba Trung, and Hanoi Quang Trung Branch is an affiliated subsidies operating from 2003 but split from the Transaction headquarter and officially came into operation from 01/04/2005 At the time of establishment, the branch had a staff of 72 people, in which there were 65 trade union members At first, the activity of the branch mainly focused on stabilizing organization, establishing the order and strengthen professional skills beside the daily profession operation - BIDV, Quang Trung Branch is a Level I Branch, under Bank for Investment and Development of Vietnam, with its own stamp and financial balance sheet, has a task to operate the activities of Bank for Investment and Development of Vietnam according to the authorization of the General Director of Bank for Investment and Development of 10 Head of company of Traffic Project Construction Number and members, and some industrial customers, get matter because of inconvenient business environment For example, Company 889 incurs overdue debts because they did not have new projects Some of old projects such as QL2C- Tuyen Quang, Sai Gon- Trung Luong road, cross-asia road are still under construction They gains low revenue and has not paid the bank In case of Viet- Laos Company, they have completed projects such as QL54- Vinh Long, Vientiane road, QL57- Ben Tre The problem is that they have not been audited and liquidated This kind of lending is basically changeable In the time being, the bank should pay attention to this subject Some customers in industrial group such as Electrical Material and Mechanical Tools Company have equity capital/ total capital is very low (at %), so profit coefficient is too low The products which the company provides Electric Department are slowly paid Or Artificial Board Processing Company also gets loss For such customers, the bank had better have methods to overcome 2.2.3 Overdue debts classified according to period Table 3: Overdue debts classified according to period Unit: VND billion Year Target Bank loan turnover Total debts Overdue debts Overdue debts/ total debts Total debts Overdue debts Overdue debts/ total debts 2008 2009 2010 2011 1560 1790 1993 2080 919 1231 1250 1500 10 12 16 1.09 % 0.65 % 0.96 % 1.07 % 751 810 900 700 0 0 0% 0% 0% 0% (Source: Credit department of BIDV) In terms of period, short term loans account for higher rate compared to medium and long term loan Medium and long term overdue debts are virtually zero The reason is that every credit officers was fully aware of the leading spirit of the BIDV to raise the quality of credit The Office only focus on investing into customers who have sufficient conditions 17 such as healthy financial situation, for example: Tran Phu Mechanics and Electrics Company, Central Pharmacy Factory Number 1, etc… Overdue debts are mainly short term debts Medium and long term overdue debts are uncommon The main reason is short term debts are less risky than other kind of debts In 2008, the rate of short term overdue debts was 1.09%, reduced to 0.65% in 2009 It was a positive sign In 2010, this rate increased to 0.96%, 1.5 times higher than the previous year and overdue debts increased by VND billion It is not a good symbol for the bank But there are many events and difficulties for companies who borrow short term loans Facing difficulties in doing business and high inflation make them collect debts slowly leading to pay the bank slowly The rate continued to increase to 1.07%, in 2011 It demonstrated that the bank should consider and reorganize lending mission and risk preclusion 2.2.4 Debts collecting capability and overdue debts Table 4: Debts collecting situation Unit: VND billion Year 2008 2009 2010 2011 1763 2200 2243 2280 State- owned 1568 1800 1863 110 Private 195 400 380 1180 Debt collecting revenue 1583 1829 2134 2230 State- owned 1418 1772 1586 1476 Private 165 57 548 754 Target Lending revenue (Source: Credit department of BIDV) From the table, we can see that the debt collecting capability of the Office is pretty high, is always approximate to the lending revenue In detail, in 2008, the lending revenue was VND 1763 billion while debt collecting revenue was VND 1583 billion In 2009, the Office lent VND 2200 billion and collected VND 1829 billion, a sharply increase compared to the previous year Especially, in 2011, the Office lent VND 2280 billion and collection achieved VND 2230 billion Debt collecting revenue gets higher level than the lending revenue There is a fact that BIDV has outstanding debt collecting situation than other commercial banks in the area It is caused by considering quality of credit as the topranking objective, not the growth of total debts 18 According to the information of Credit department of BIDV, overdue debts collecting capability of the Office is above 80% of total overdue debts In general, overdue debts ratio is too small (< %), thus, it is acceptable In coming years, the Office will try to maximize the rate 2.3 Causes of risks 2.3.1 Causes from the bank The process of assessing projects The beneficiaries are still insufficient In order to lend a loan, credit officer is the one who almost every phase They have to gather information of the customers, analyze and evaluate customers, consider the possibility and liquidating capability of the projects, check the value and legality of guaranteed assets as well as tackle with those assets in necessary conditions After assessing customers and project- related issues, the credit officer forms a statement of assessing, and proposes whether to lend or not With such kind of process, the officer has much responsibility and mistakes are unavoidable Hence, the officer’s morality and intuition will decide the safety of the credit Lack of concrete information of customers Although they have used many information collecting methods, they still not get enough and exact information One reason is that the infrastructure used for collecting information is limited It prevents employees from gathering information sufficiently and timely Besides, the Office faces difficulties in checking exactitude of the information provided by customers But the companies usually send information to cope with the bank, not the exact one Inaccurate information easily causes risks The bank’s system of precluding and reducing risks has not met the requirements in approving, lending and managing capital for customers So it is not the main source of information The bank cannot shirk risks Recently, with more investment into infrastructure and technology, these centers progressively affirm its position In the previous year, CIC has gotten many improvements such as periodical warning information about customer list that have credit relationship in many credit organizations, and financial situation These are extremely useful information in approving and deploying customers- a channel which provides information effectively Irregular internal control The staff of checking department is still insufficient with large volume of work In addition, infrastructure and technology are still low- conscious The current Incas system will supervise more effectively if it is invested more supporting soft wares 19 Unequal professional skills and experiences Beside the senior employees, there are also newly- graduated employees Thus, they have little experiences in dealing with situations when they meet the leaders of enterprises Customers coming from many industries require very big effort of credit officers in self searching for related knowledge Therefore, management is difficult 2.3.2 Objective reasons These are reasons rising from customers as well as business environment that cause credit risks Customers lack of conditions to borrow It makes the customers make up reports of credit documents So they can satisfy all conditions about customers’ capital, collaterals, possibility of projects In medium and long term credit, customers’ capital must account for 30- 50 % of total capital The customers provide inexact, in sufficient and untimely information, to make difficulties in checking and controlling process of the bank Legal environment Law of State Bank and Law of Credit Organizations have created a legal corridor for the activities of commercial bank It steers legally and efficiently the business operations of the banks But it is not sufficient and scientifically enough There are still overlapped and not synchronous It makes contradiction among laws In fact, appropriate authorities who provide legal documents of assets have to deal with many difficulties Accounting and Statistic Ordinance and accounting standards of Ministry of Finance is low validity in forcing customers follow the law This leads to the case of not timely payment, spare documents, not obey compulsory audition system and inexact figures On the other hand, banking system today is not actually united in many fields such as interest rate, borrowing conditions Although competition is the motivator of development, in business, currency has it specialty Especially, interest competition made the banks heavily failed in the end of 2011 Whereas, other state- owned commercial banks has committed to adopt interest rate of Association of Vietnamese Banks Consequently, they could not carry out It made interest competition wave be continued If the State Bank does not interfere, the banking situation will have many changes All the above basic reasons alternately and inseparably influence on the banks’ activities The consequence may be caused by many reasons, which directly affects risk preclusion and reduction and increasing overdue debts and bad debts 20 Chapter 3: Solutions to precluding and reducing credit risks at Quang Trung branch, BIDV 3.1 Activity orientations of Quang Trung branch, BIDV in coming time Based on the objectives of BIDV, the branch has operated in the area for such a long time that they attract many customers including companies and big head of companies So the mobilized capital and debts is increasing However, the main source of mobilized capital is non- period type, hence, the branch is always defensive in lending and investing activities Starting from the general direction of BIDV “development- safenessefficiency”, in the future the branch will operate according to the following directions: • Continues to summarize lending situation and bring out credit policy, enhance customer analyzing methods and bring out proper credit managing method Maintain capital mobilization growth and lend at a logical level Simultaneously, the office establishes, reinforces, maintains regular relationships with big and loyal customers and look for potential customers • Diversify lending methods, because the current methods are mainly time by time and limited lending These methods are to meet maximum customer’s need who have healthy business situation The bank will contribute to the process of production and business of these enterprises Then it motivates the national economic growth Promote sponsoring method of lending to the customers who want to borrow a big amount of money for their big projects, have a part in transferring local economic structure The office has used this method but it is still not popular The reason is that the projects are not big enough The bank has co-ordinate with VCB Quang Ninh branch They sponsorally lent Dong Bac Coal Company in bridge and road constructing project • Grow credit and keep the business safe and effective Continue to solve overdue debts, restructure lending money and maintain overdue debts below % Attract more bank deposits and international liquidation service at the branch Increase rate of lending with guaranteed assets • Enhance banking technology modernization and provide officers professional skills as well as moral issues Improve internal control Detailed objectives to 31/12/2011: Gross mobilized capital: VND 3500 billion 21 Gross debts: VND 2200 billion Gross medium and long term debts : 38 % Ratio of overdue debts: < % Posting revenue: VND 80 billion From those objectives, the office safely lends and minimizes risks and upholds the role of the Office in the economy 3.2 Some solutions to risk preclusion and reduction at Quang Trung branch, BIDV 3.2.1 Solutions to risk preclusion The bank mainly does business in lending field Its capital is mobilized from citizens and other social organizations So precluding risks is extremely important It will help the bank minimize potential risks Therefore, the bank can make its credit activities really effective The bank should implement following steps: a Rank customers’ loyalty It is the general policy of BIDV, i.e the bank will provide limited rate of credit for each group of customers That rate must ensure not to exceed and may cause risk The bank has changed its lending structure to attract customers as well as maintain safe coefficient or minimize risks b Appraise lending projects Before lending, the branch needs to check borrowing conditions such as legal document, borrowing project, financial statements and balance sheet Then the bank considers lending and appraising This task is tightly conducted from the early phase When lending, the bank also has methods to control customers’ financial status The purpose is to prevent customers from using the capital ineffectively, even cheating the bank After lending, the bank must continue to check The bank can control by different information collecting methods without offending them They can send their officers to the companies or collect information from other sources c Guarantee borrowing money According to bank restructuring and credit activity cleaning up project period 2000- 2005 of BIDV, the branch must gradually improve the quality of credit One of the most important issues is to enhance density of loan with guaranteed assets Guaranteed assets create a second income (for mobilized capital), basic depreciation and profit (for fixed loan) It aids the bank preclude inconvenient changes in business With guaranteed assets, borrowers are committed in managing and using money and it creates tie between the bank and the customers d Effectively carry out credit process 22 - Improve the lending procedures: the bank need to simplify the lending procedures So the procedure is orderly but keep the bank safe - Try best in shortening the time confirming borrowing documents and ensure credit safeness The bank should consider this as a competitive advantage - Enhance the quality of appraising business methods and business projects This decides the safeness of the loan later Credit appraisal includes collecting information and handling information * About the quality of collected information The branch can collect customer information from different sources such as directly interview their customers, have a look at financial statements, information from service, information providers and from fellow traders However, this information is mostly not very exact and not very reliable The branch mainly collects information through directly interviewing customers, looking at financial statements and business outcome This source is easy to find and is not money consuming But the level of exactness and reliability is not high For this reason, the branch should expand scale of business, collect more information from other sources The bank should pay attention to the followings: + Information is directly got at the branch + Information is directly got at customers’ home + The branch also often catches economic situation, common producing situation, relationships with partnerships and surrounding activities + There are also information from other credit organizations and the customers’ rivals But it is difficult because of the bank’s secret + Information from Tax Branch and Auditing Companies The branch should have a professional team specializing in exploiting information and upgrading equipments Exploiting information is done at once with storing and securing customers’ information e Analyzing information After having necessary information, the bank analyzes information to decide whether to lend or not The branch should analyze basing on different customer’s financial and nonfinancial issues About customer’s financial capability, the bank must evaluate scale of operation, real financial capability, competition, future prospect and the ability to pay It helps the bank confirm the mobilization of the cash flow, minimize credit risks Nowadays, information handling process is still time consuming and inexact because of credit officers’ feelings It is easy to have potential risk of people If it is possible, in the 23 near future, the bank should apply automatic technology in classifying credits Many other countries have chosen it The most outstanding strengths of this method are quickness, low cost, and high honesty According to experts of ANZ Bank Hanoi, “the most different thing between manual and automatic system is risk managing technology For foreign banks, they have used it for a long time and they have many tools to carry out” Risks arising from mistakes and individual bias are rejected in maximum in the automatic system Therefore, evaluation criteria are selected from customer’s information in the past and then automatically classify the customers and group them properly Then the results will be directly sent back to the customers It is enclosed by a bank’s announcement of accepting or refusing customers’ requests, conditions and interest rate Using the automatic one makes the bank be professional, shorten time, increase loyalty It also makes the customers satisfied when being refused Besides, the credit officer’s responsibilities are very big And they cannot avoid mistakes The bank should establish risk department, or at least risk team to share the work with them in dealing with big loan in specific industries It will have a part in enhancing appraising quality, shortening time, enhancing lending effectiveness and minimizing credit risks 3.2.2 Solutions to risk reduction Precluding risk means that those risks have not occurred The thing that the bank must is not let the risk occur or rarely occur However, credit activity is sensitive so risks are unavoidable Sometimes, the enterprises ineffectively use the fund Then it is difficult for the bank to collect money back, even they cannot collect them Therefore, reducing risks is also important Steps to reduce risks: a Lending in the form of collective name It can be understood as a credit risk sharing method This form is usually applied for the enterprises that need much fund and have high risk Big lending projects means high level of risk The bank can invite other banks to share, in order to participate in those projects It will bring profit to the bank Because the final result of lending activities is the profitability of the capital b Classifying debts Properly classifying customers confirms correlative demands It will help customers find out the suitable investment direction for each enterprise in different periods It is also easy to manage and minimize mistakes The bank can classify based on criteria such as 24 financial situation, operating result, prestige and level of relationship between enterprises and the bank From that point, the bank will have different marketing policy If the customers have good relationship, good financial situation, the bank should have preferential policy to attract them, because of low risk level If the customers facing difficulties, the bank can counsel and support them in order to enhance its prestige and minimize risks When being helped, companies are aware of paying on schedule, and make profit for both sides c Business counseling: for the organizations and individuals who difficultly pay loan Due to be losing or use the fund mispurposingly, the enterprise can hardly pay interest or capital to the bank The branch should consult them business methods, help them doing business effectively and being credit- worthy 3.2.3 Improve quality of the bank’s officers and credit officers a Improve quality of human resources In any kind of doing business, human resources are always the top- ranking factors They decide the success as well as the failure of every activity Particularly the banking industry trades special goods and bear many risks So the role of people is more and more important Credit officers must express sufficient status of a person who deeply understand professional skills, are ready- witted, moral and have abundant social knowledge This is the top important thing that the bank should Business officers should self- upgrade their level of ability, to adapt to the age requirements The branch had better orient to train, select and recruit appropriately Detailed as: • For credit managing officers Beside the basic working knowledge, they need to have a deep understand legal documents about banking industry, regulations and institutions They must be able to analyze mistakes then to steer subordinates • For credit officers The bank gives their employees chances to learn and cultivate knowledge, accumulate experience as well as moral concern to finish their works excellently They are sent to classes about necessary characteristics that a credit officer should have They are also required level of ability, professional skills, style of works, and serving manners Especially, in 2010, the branch had obvious changes in training and upgrading task, contribute to avoid mistakes 25 In addition, the bank need have clear classification between rights and responsibilities The bank also gives good incentives to motivate their employees Simultaneously, they must be strict to the ones who have negative actions, cause loss to the bank The bank pays attention to pure and affectionate working environment This is such a positive method that lifts the bank up to new positions b Intensify internal control Safeness in currency and credit trading depends much on controlling In last few years, the branch has appreciated this task and the task is efficient Thus, breaking phenomenon is not very popular and serious But the bank must understand that internal control is created to support the business, not bother anyone, negative impacts on the bank’s activities In reality, control depends on each credit officer’s ability So the bank ought to strengthen the effect of controlling Controlling department is responsible for evaluating general operating situation, general quality of credit Intensifying internal control is meaningful for the existence of the bank All leading officers and employees are well- concerned and readily help inspectors finish their works 3.3 Recommendations 3.3.1 For the Government The Vietnam social economy is quickly developing and arises many new relationships It is vital to have methods to adjust all the relationships Thus, a synchronous legal system is necessarily the base for the bank, enterprises and other customers In treating overdue debts by guaranteed assets, the bank is getting trouble with legal environment The government should let the bank proactive in dealing with guaranteed assets to collect debts When the deadline comes, if the customer cannot pay the debts, the bank can sell the assets by order of the court immediately It is not essential to take each other to the court It is costly and possible to create loss The Government need to improve the ability to provide information of Credit Information Centre (CIC) and establish more information exploiting and providing centers The purpose is to help credit organizations and commercial bank minimize risks Among customers, state-owned enterprises should be more tightly managed and the Government should privatize ineffective enterprises Last but not least, the Government had better interfere into interest policy to ensure economic security 3.3.2 For BIDV 26 BIDV has affirmed their position like the main force of commercial bank system The bank has contributed much into the development of the entire economy As a manager, BIDV has achieved considerable success However, the bank needs to adjust to bring into play the self motivated and self control ability of the branch and other offices Detailed as: • Timely and concretely deploy documents and regulations of State Bank about banking activities in general and credit activities in particular • Concretely steer the process of lending to the offices, make these offices more proactive in expanding business Besides, BIDV should supplement mechanisms and detailed methods to intensify validity in executing credit regulations and processes at the foundations • In recent competitive situation, BIDV need to attract more long- term foreign currency Especially the bank pays attention to sources from abroad such as entrusted fund of international organizations, preferential borrowing source, and oversea national currency exchange From that point, the bank can meet customers whose need is importing and opening account at BIDV BIDV should support offices to expand credit by foreign currency 3.3.3 For local authorites • Quang Trung branch is located at Hai Ba Trung district The local government had better co-ordinate to collect debts or to process security assets such as land and other assets of organizations and individuals in the area • Local government need to provide the bank information when individuals and economic organizations in the area have abnormal changes CONCLUSION Along with the development of the economy, commercial banks progressively affirm their role in motivating all the industries and economic components Expanding lending scale potentially brings about increasing credit risks As an branch of BIDV, the Quang Trung bank is not an exception One of the most efficient solutions is studying difficulties in lending activities Then they find out remedies to minimize risks For doing this well, the bank need comprehensive measures of economic environment, law, mechanism, professional skills, organizing and training tasks and 27 principle of carrying out Thus, researches are necessary to discover the reasons, limitations and shortcomings And then the bank finds out suitable cure Based on that foundation, I had fearlessly pointed out the shortcomings as well as credit risks at Quang Trung branch I presumed to suggest some solutions, with a wish that the office can perfect precluding and reducing credit risks It helps the branch be wellmatched with other banks that have large scale and high quality services in the area and the whole city Yet, credit risk is a sensitive and sophisticated problem It needs investigating deeply and approaching realistically So during internship and writing this essay, mistakes are unavoidable I look forward precious care and contribution from the lecturers and other people They helped me much to improve the knowledge for my future job 28 REFERENCES Academy of Banking, ”Crediting- Banking” textbook, Statistics Publisher (2001) Peter S Rose, “Commercial Bank Management” textbook Financial statements of Quang Trung branch (2008-2011) Academy of Banking, “Theory of Banking Currency” textbook, Statistics Publisher Handbook of BIDV credit – Chapter – Pages 12 – 20 – Chapter – Pages 36 – 45 Lending regulations of BIDV – Chapter – Pages 30 - 35 Anonymous, [Online], available at URL: www.bidv.com Vietnam Economic Times, anonymous, [Online], available at URL: http://vneconomy.vn/20120213011649269P0C6/dich-vu-the-BIVD.htm Date of access: 11/11/2012 Credit Information Centre, [Online], available at URL: www.creditinfo.org.vn 10 Tien, V Nguyen, “Evaluation and Risk Prevention in Banking Business” textbook 29 TABLE OF CONTENT Chapter 1: Overview of risk, significance of precluding and reducing risk in credit relationships…………………………………………………………………… … 1.1 Risk and risk classification in credit relationships 1.1.1.Definition of risk .2 1.1.2.Kinds of credit risks………………………………………………………… 1.1.3.Definition of credit risk in banking activities…………………………… ……3 1.2 Criteria to determine credit risks…………………………………… 1.3 Significance of precluding and reducing risks in credit relationships……… ….6 Chapter 2: Real situation of credit risks at Quang Trung branch, BIDV 2.1 Bank for investment and development of VietNam, Quang Trung branch… 2.1.1 Objective…………………………………………………………………… … 2.1.2 Content and scope of operation…………………………………………… … 2.1.3 Organizational machine…………………………………………………… … 13 2.2 Real situation of credit risks at Quang Trung branch 14 2.2.1 Real situation of overdue debts… ………………………………………… 14 2.2.2 Overdue debts classified according to economic composition ………… 15 2.2.3 Overdue debts classified according to period .16 2.2.4 Debts collecting capability and overdue debts 17 30 2.3 Causes of risks 18 2.3.1 Causes from the bank 18 2.3.2 Objective reasons 19 Chapter 3: Solutions to precluding and reducing credit risks at Quang Trung branch, BIDV 20 3.1 Activity orientations of Quang Trung branch, BIDV in coming time .20 3.2 Some solutions to risk preclusion and reduction at Quang Trung branch, BIDV 21 3.2.1 Solutions to risk preclusion 21 3.2.2 Solutions to risk reduction 23 3.2.3 Improve quality of the bank’s officers and credit officers 24 3.3 Some suggestions .25 3.3.1 Suggestions to the Government 25 3.3.2 Suggestions to BIDV 26 3.3.3 Suggestions to local government 26 31 ... in credit relationships Chapter 2: Methods of precluding and reducing credit risk in Quang Trung branch of Vietnam Bank of Investment and Development Chapter 3: Solutions to precluding and reducing. .. in banking industry and Quang Trung branch of Vietnam Bank of Investment and Development during my internship, I choose the below topic: Precluding and reducing solutions to credit risk at Quang. .. reducing credit risks at Quang Trung branch, BIDV Chapter 1: Overview of risk, significance of precluding and reducing risk in credit relationships 1.1 Risk and risk classification in credit relationships