Credit risk management at joint stock commercial bank for investment and development of vietnam, hong ha branch

ĐẠI HỌC QUỐC GIA HÀ NỘI KHOA QUẢN TRỊ VÀ KINH DOANH - HOÀNG LỆ THỦY CREDIT RISK MANAGEMENT AT JOINT STOCK COMMERCIAL BANK FOR INVESTMENT AND DEVELOPMENT OF VIETNAM, HONG HA BRANCH QUẢN TRỊ RỦI RO TÍN DỤNG TẠI NGÂN HÀNG TMCP ĐẦU TƯ VÀ PHÁT TRIỂN VIỆT NAM CHI NHÁNH HỒNG HÀ LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH HÀ NỘI - 2019 ĐẠI HỌC QUỐC GIA HÀ NỘI KHOA QUẢN TRỊ VÀ KINH DOANH - HOÀNG LỆ THỦY CREDIT RISK MANAGEMENT AT JOINT STOCK COMMERCIAL BANK FOR INVESTMENT AND DEVELOPMENT OF VIETNAM, HONG HA BRANCH QUẢN TRỊ RỦI RO TÍN DỤNG TẠI NGÂN HÀNG TMCP ĐẦU TƯ VÀ PHÁT TRIỂN VIỆT NAM CHI NHÁNH HỒNG HÀ Chuyên ngành: Quản trị kinh doanh Mã số: 60 34 01 02 LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH NGƯỜI HƯỚNG DẪN KHOA HỌC: TS TRẦN HUY PHƯƠNG HÀ NỘI - 2019 DECLARATION I pledge that the findings in the thesis are my own work results obtained primarily during study and research and have not published yet in any other research projects by others Research findings and other people’s materials (quotations, tables, figures, formulas, graphs, and other materials) used in this thesis have been agreed by the authors and cited I am fully responsible to the Board of Thesis Defense, School of Business and Management and the law for the above commitments Author Hoang Le Thuy i ACKNOWLEDGEMENTS I would like to express my deepest gratitude to all of the following people for helping me complete my thesis Firstly, I would like to express my special thanks to my company for giving favorable conditions for my study and my master thesis completion at Hanoi school of business and management (HSB) Secondly, I am extremely grateful to all of the lecturers from the Department of Business Administration - HSB for providing me with research methods and professional knowledge during the course, especially the active and creative research skills My appreciation also goes to the teachers in the thesis review committee for giving me valuable ideas during my thesis completion process My profound gratitude is also conveyed to my instructor for his helpful assistance and guidance This thesis could have never been completed without his enthusiastic counsel and support Despite the efforts during the research period, there are still many limitations in the thesis I would hope to receive valuable comments from the teachers and co-workers to make this essay more complete Thank you very much./ ii TABLE OF CONTENTS DECLARATION i ACKNOWLEDGEMENTS ii TABLE OF CONTENTS iii LIST OF ABBREVIATIONS vi LIST OF TABLES vii LIST OF FIGURE viii INTRODUCTION CHAPTER THEREOTICAL BASES OF CREDIT RISK MANAGEMENT AT COMMERCIAL BANKS 1.1 Concepts and classification of credit risk 1.1.1 Concepts of risk 1.1.2 Concepts of credit risk 1.1.3 Characteristics of credit risk 11 1.1.4 Classification of credit risks 11 1.1.5 Credit risk evaluation criteria 14 1.2 Necessity of ensuring the credit risk management efficiency in commercial banks 17 1.3 Credit risk management procedures at commercial banks 18 1.4 Credit risk management experience of some commercial banks in the world and in Vietnam 21 1.4.1 Experience of commercial banks in the world 21 1.4.2 Some risk management models being applied in Vietnam 26 1.4.3 Risk management model application orientation 28 CHAPTER CURRENT STATUS OF CREDIT RISK MANAGEMENT AT BIDV-HONG HA BRANCH 30 iii 2.1 Introduction of BIDV-Hong Ha Branch 30 2.1.1 Establishment and development history of BIDV- Hong Ha Branch 30 2.1.2 Organizational structure 30 2.1.3 Business results of BIDV- Hong Ha branch 34 2.2 Current status of Credit Risk Management at BIDV- Hong Ha Branch 36 2.2.1 Current status of Credit Risk Management at BIDV- Hong Ha Branch 36 2.2.2 Evaluation of the risk management process at Hong Ha branch 44 2.2.3 Survey results of credit risk management at BIDV- Hong Ha Branch 58 2.3 Evaluation of credit risk management at BIDV- Hong Ha Branch 66 2.3.1 Achievements 66 2.3.2 Weakness in credit risk management 68 CHAPTER SOLUTIONS TO IMPROVE CREDIT RISK MANAGEMENT AT JOINT STOCK COMMERCIAL BANK FOR INVESTMENT AND DEVELOPMENT OF VIETNAM- HONG HA BRANCH 74 3.1 Mission, vision, objectives of BIDV to 2020 74 3.2 Credit risk management orientation of BIDV-Hong Ha branch to 2020 74 3.2 Some solution to improve credit risk management at BIDV –Hong Ha Branch 77 3.2.1 Strict compliance with the lending procedures 77 3.2.2 Improvement of the credit appraisal and analysis quality 77 3.2.3 Development of an effective information network 78 3.2.4 Development of a policy to limit a large outstanding loan of one or several large customers 79 3.2.5 Perfection of the internal credit ranking system and the risk reserve policy 80 3.2.6 Establishment of the information system for the analysis, assessment, identification, monitoring and prevention of credit risks 81 iv 3.2.7 Solutions to deal with non-performing loans, enhance credit quality control, establish sufficient risk reserves and ensure the system safety 82 3.2.8 Solutions to apply Basel II at BIDV 83 REFERENCES 87 v LIST OF ABBREVIATIONS No Abbreviations Meaning NHTM Commercial Bank QTRR Risk Management QTRRTD Credit Risk Management CBTD Credit Officer NH TMCP DT&PT Viet Nam NHNN Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) State Bank of Vietnam vi LIST OF TABLES Table 2.1 Business results in the 2015-2017 period 34 Table 2.2 Capital mobilization scale of BIDV –Hong Ha Branch in the 2015 2017 period 35 Table 2.3 Credit scale of BIDV –Hong Ha Branch in the 2015 -2017 period 37 Table 2.4 Credit quality of BIDV- Hong Ha Branch in the 2015 – 2017 period 38 Table 2.5: Non-performing loan ratio of some commercial banks 43 Table 2.6 Characteristics of respondents 59 Table 2.7 Officers’ assessment of the causes of credit risks from BIDV-Main Operation Center 62 Table 2.8 Officers’ assessment of the causes of credit risks from BIDV-Hong Ha Branch 64 vii LIST OF FIGURE Figure 1.1 Classification of risks by the causes 12 Figure 1.2 Credit risk management process at commercial banks 20 Figure 2.1 Organizational structure of BIDV- Hong Ha Branch 32 Figure 2.2 Organizational structure of BIDV 33 Figure 2.3 Internal credit ranking model for corporate customers 52 Figure 2.4 Internal Credit Ranking Scoring Model 54 viii CHAPTER SOLUTIONS TO IMPROVE CREDIT RISK MANAGEMENT AT JOINT STOCK COMMERCIAL BANK FOR INVESTMENT AND DEVELOPMENT OF VIETNAM- HONG HA BRANCH 3.1 Mission, vision, objectives of BIDV to 2020  Mission: BIDV brings the best benefits to customers, shareholders, employees and the community  Vision to 2020: BIDV strives to become one of the 100 largest banks in Asia and the leading bank in Southeast Asia  The overall objective of the 2017-2020 period: BIDV continues to be the commercial bank playing the key role in terms of scale, market share and ability to regulate the market; improve the financial situation, strengthen institutional reform, enhance governance capacity in accordance with the and the international practices; pioneer the application of modern banking technology, improve international credit rating; increase brand value; improve productivity and income of employees, perform well obligations to shareholders and responsibility to the social community 3.2 Credit risk management orientation of BIDV-Hong Ha branch to 2020 To further improve the credit risk management model, BIDV -Hong Ha Branch develops the risk management orientation based on the operational orientation of BIDV –Main Operation Center as follows:  Firstly, credit risk management is implemented in a comprehensive, consistent and uniform manner Comprehensive and complete identification of the causes of credit risk, especially the root causes is the basis to take effective preventive and mitigate measures, thereby 74 improving the credit risk management quality Comprehensive identification of credit risks is not an easy task because of the variety of causes of credit risk as well as the bank’s business nature which always contains asymmetrical information Credit risk management should be understood consistently as an effective tool for credit investment expansion and credit quality improvement rather than a cause of shrinking credit investment, unfounded fear of credit limitation, fear of liability, affecting business activities of BIDV  Secondly, credit risk management is aimed at ensuring safety in credit operations In recent years, the growth rate of outstanding loans of BIDV- Hong Ha Branch has a tendency to increase drastically This growth poses a real challenge in the prevention and mitigation of credit risk with the requirement of improving credit quality, ensuring a proper balance between growth and safety in credit investment To so, it is necessary to have the proper awareness of the importance of credit risk management as a key solution for developing credit safely, balancing between the quantity (Growth need) and quality of credit activities  Thirdly, credit risk management orients towards the international standards BIDV-Hong Ha Branch needs to research and select the principles, experience and technology on credit risk prevention and mitigation, especially credit risk management, which is an objective requirement in the economic integration process to meet the requirements in a diversified and potentially risky business environment Selective learning from world banks is the shortest way to reach out to the international standards The deepening integration of the global economy requires the standardization of international norms and practices, otherwise Vietnamese banks will find it hard to compete and be at risk of losing their safe credit market and being forced to 75 make investment in risky market segment With the development orientation of a multi-functional financial group, the operations are not only limited to the national scope but also to the region and the world Development according to the International Standards is a requirement of integration and competition in the marketplace  Fourthly, particular factors should be paid attention in the development of a credit risk management model The Basel Principles on nonperforming loan management also take the particularity into account in the organizational structure as well as the loan approval process to ensure the suitability of individual banks A good credit risk management model is a well-functioning model in its own operating environment (people, culture, personal characteristics in the organization, etc.) Credit risk can be effectively prevented and mitigated while meeting the growth requirements An inadequacy in risk management model may undermine any innovation effort to improve the quality of credit  Fifthly, the human resources should be paid attention to in developing solutions to improve the credit risk management efficiency Human resources are the central factor and the foundation for detecting, evaluating as well as timely limiting credit risks but also the cause of credit losses when officers’ ethics and capacity is weak Risk prevention and control from natural disasters, epidemics, systemic hazards that cannot be diversified and intrinsically linked to a certain business line is very limited, so the credit risk management efficiency is only improved by high-quality human resources, which is a prerequisite for credit risk management In a perfect credit risk management model and a tight credit process, if people in charge of operating the model have limited capacity or could not meet the ethnics 76 requirements, the credit damages and losses still occur, even very heavy 3.2 Some solution to improve credit risk management at BIDV –Hong Ha Branch 3.2.1 Strict compliance with the lending procedures Lending procedures at BIDV- Hong Ha Branch is generally built quite closely, from the reception, appraisal of the loan applications and debt recovery However, implementation has not been highly effective due to the low sense of compliance To minimize credit risks, it is essential to strictly implement the lending procedures, carry out assignment or cross-inspection of credit officers in compliance with the lending procedures It is required to prevent some people from not follow the lending procedures, leading to risks 3.2.2 Improvement of the credit appraisal and analysis quality Credit risk usually origins from careless and inaccurate credit analysis and appraisal that leads to erroneous loan decisions The appraisal process should meet the requirements of analytical quality and decision-making time, ensuring reasonable care based on profit and risk analysis as well as meeting the customer service quality requirements These requirements should be meet:  Performing a complete and accurate assessment of the overall risk of customers and customer groups by defining the credit limits every months or year based on the newly built credit ranking system This task will give the Bank an overall view of the financial and business situation and development prospects of the customer to find out the potential risks  On the basis of the approved credit limit, focusing on only the analysis of the risk of each loan option during the credit granting process In this analysis, the customer department needs to focus on the legality of the loan option, supply source, market and potential consumption, etc At 77 the same time, it is required to point out expected risks, the bank’s ability to control and handle the bad scenarios  In appraisal of an investment project, accurately analyzing and evaluating its total investment capital because many customers often declare their higher investment capital than that they have to get a bigger loan As a result, risks arise because the borrowers’ real capital is low, leading to their low sense of responsibility and the low possibility of debt recovery Thorough assessment of inputs, outputs and machinery technology of the project as well as the legal basis of the project is also required  Analyzing, assessing the customers adequately and accurately determining their demand for loans, the correct time of their capital turnover, cash inflows – cash outflows to recover debts on time 3.2.3 Development of an effective information network Information collection and processing is one of the important steps in the loan appraisal process To ensure completeness, accuracy and objectivity, information should be collected from a variety of sources:  Source of information provided by the State Bank of Vietnam’s Credit Information Center (CIC) that indicates past and current loans of customers  Source of information obtained from the business partners of the enterprise (in the case of a corporate borrower) or other enterprises operating in the same sector that is considered objective and reliable  Sources of warning information from State agencies: State Bank of Vietnam, tax authorities (often late tax payment, tax evasion, etc.), Customs Authority, District Divisions of Natural Resources and Environment in the area (warning of fake papers in issuing certificates, 78 etc.), People’s Committees of wards/communes (learning about personal identity of customers), Discussion with credit officers who have experience or have been appraised customers operating in the same field is also a good way to collect information and save time Besides, it is necessary to improve and enhance the quality of software to better serve the collection, processing, storage, exploitation and exchange of information It is also required to quickly deploy the internal network information management system and apply to the whole banking system in the country, ensuring quick sharing and accurate and effective access and processing of information 3.2.4 Development of a policy to limit a large outstanding loan of one or several large customers With the good business capacity of BIDV in general and BIDV-Hong Ha Branch in particular, it can meet capital requirements for many large corporate customers, leading to the fact that a customer can have outstanding loans accounting for a high proportion of the total outstanding loans of the Branch As a result, business activities and capital balancing is significantly dependent on some large customers, which leads to potential liquidity risks because the risk of failure of a customer decides the survival of the branch and BIDV To limit this issue, BIDV needs to strengthen the development and improvement of the following contents:  Currently, BIDV has developed many policies to encourage the development of small and medium-sized enterprises (SMEs); however, because the specific characteristic of these customers in Vietnam is still a lack of transparency, it is very difficult to apply the general lending policies and regulations to these enterprises To develop the SME 79 Division, BIDV needs to develop a specific mechanism and a system of risk management procedures, etc for this custom group  Besides, the coordination mechanism among BIDV branches and between BIDV branches and other commercial banks should be improved to create a more transparent mechanism for syndicated loans 3.2.5 Perfection of the internal credit ranking system and the risk reserve policy The ranking of enterprises on the internal credit rating system is of great importance in the credit risk management through analysis, monitoring, estimation and prevention of credit risk of each customer The ranking result of enterprises is related to the application of the Bank’ preferential policies of interest rates, charges, credit granting conditions, collateral asset ratio, etc At present, BIDV-Hong Ha Branch always complies and well performs the collection and selection of information and scoring according to the quite complete internal credit rating system, which is a risk measurement of each enterprise However, the scoring of enterprises is too much dependent on the subjective assessment of credit officers and branches, so the enterprise ranking results are not objective and honest and not reflect the actual operation situation of the enterprises The scoring was not close to the actual situation of the enterprise in order to improve the credit ranking results, thereby reducing the bad debt and the provision for credit risk and increase the profits Therefore, it is necessary to amend the credit ranking regulations as follows: The units must be aware of the importance of the internal credit ranking system, improve the information collection, analysis and evaluation of customers in a full and accurate manner so that the scoring results may reflect the honesty and level of risk of the customers in a timely manner 80 3.2.6 Establishment of the information system for the analysis, assessment, identification, monitoring and prevention of credit risks In order to have the basis for reviewing and making proper credit decisions, identifying, monitoring and preventing credit risks in the credit activities, the information used for analyzing and assessing customers is very important Currently, the analysis, assessment, identification, prevention of credit risk of BIDV- Hong Ha Branch is limited due in part to the lack of information or bad information quality or unreliable information In addition, BIDV’s ineffective credit information system is also a cause Therefore, BIDV should carry out the following solutions:  Establish a research, analysis and macroeconomic forecasting department This department will seek and collect information from such channels as statistic offices, industry associations, economic analysis organizations, etc and carry out archival work and the systematic exploitation Then, it will also analyze and evaluate the current status and prospects of the economic sector, economic components and investment areas to support the lending orientation  Make an economic sector analysis report which specifies sectors with a high outstanding loan ratio in total outstanding loans, high-risk sectors and specific information that is vulnerable to industry risks, then issuing the standard conditions for credit granting and regularly updating information on economic sectors according to economic and social changes  Enhance modernization, speeding up the application of information technology, set up customer management software, conduct statistics, research and information archives to support the future analysis and evaluation of customers, at the same time, serve the customer information exploitation for the independent evaluation 81  Establish the criteria for identifying the relevant customer group (The customer groups with large outstanding loans) and the automated management program on safety limits of these customer groups in order to ensure the safety ratios in accordance with the Law on Credit Institution as well as implement the Bank’s credit risk control limits  Strengthen cooperation, exchange and sharing of information between commercial banks in providing customer information, especially loan prestige information for each other  Develop a mechanism for cooperation with economic experts in order to obtain consultancy on the evaluation of investment projects/options of enterprises, especially in complicated sectors, requiring the credit appraisers to have the specialized knowledge of such sectors Besides, to have the good and reliable sector reports, it is essential to order them from reputable industry analysts  Periodically evaluate incurred bad debts of corporate customers and individual customers, synthesizing the issues to be drawn experience in loan assessment and approval, non-performing loan management and settlement as the possible risks of customers to take remedial measures in time Moreover, a list of “high risk” customers with a bad loan history is also required 3.2.7 Solutions to deal with non-performing loans, enhance credit quality control, establish sufficient risk reserves and ensure the system safety  Review, re-evaluate the whole list of bad debts, reassessing the collaterals of the loans, loan recoverability Strengthen credit quality supervision in the system on a regular basis to review and assess the level of difficulty in each customer’s operation to find out solutions 82  Establish a specialized unit with practical experience in debt settlement with the participation of legal experts  Closely coordinate Trading Corporation (DATC) with and Vietnam’s Debt and Vietnam Asset Asset Management Company (VAMC) to strengthen cooperation in dealing with bad debts  Continue to consider supporting enterprises to transfer, trade and merge M & A enterprises to create financial sources for loan repayment Considering the financing for enterprises/ partners who are capable of acquiring projects/ mortgaged assets of enterprises that are difficult to repay the outstanding loans  Closely follow the Ministry of Finance’s non-performing loan settlement plan for State-owned enterprises during the SOE restructuring process under the project of “Restructuring state-owned enterprises, focusing on state-owned economic groups and corporations in the 2011-2015 period” approved by the Prime Minister in Decision No 929/QD-TTCP dated July 17, 2012 to take timely measures to deal with non-performing loans of state-owned enterprises at BIDV 3.2.8 Solutions to apply Basel II at BIDV In order to apply the credit risk management principles under Basel II at BIDV, the following specific conditions should be prepared:  Building an internal credit rating model BIDV is now step by step improving the internal credit rating model in line with the scope of activities, the actual situation and business characteristics of commercial banks under the Circular No 02 and Circular No 09 by the State Bank of Vietnam This is a new step in accessing capital adequacy, for not only debt classification but also loan risk assessment and credit quality management 83  Debt classification, risk reserve establishment to deal with credit risk in compliance with the regulations of the SBV and BIDV  Building a new organizational model With the determination to successfully deploy Basel II, on September 15, 2014, BIDV’s Chairman Tran Bac Ha signed the decision to set up the Basel II Project Management Office (PMO) led by General Director Phan Duc Tu at BIDV Other 85 members of the PMO came from different professional units On March 26, 2015, BIDV established the GAP&MP Basel II Project Management Office This is the initial project in the series of projects for implementing Basel II, playing a pivotal role in the Basel II application process at BIDV in 5-7 next years  Training human resources One of the difficulties in the application of Basel II to the risk management in Vietnamese commercial banks is the shortage of high-quality human resources, which is a common problem for all commercial banks and even for the commercial bank supervision agency-the State Bank of Vietnam By learning about Basel II principles, it can be seen that in order to master and apply these principles, professionals in the management, banking supervision and staff in charge must have a certain knowledge of foreign languages as well as mathematics and management Besides, the analytical and forecasting skills are indispensable All are really high requirements for Vietnamese banking experts at this point of time BIDV also has training programs for staff to improve their professional skills, professional knowledge as well as management ability at all levels However, the biggest limitation is the salary and bonus mechanism that still follows the regulations of state-owned enterprises, partly losing a part of its high-quality human resources 84  Building a database Meanwhile Basel I only focuses on credit risk, Basel II is a big forward step with rigorous standards on not only credit risk, operational risk, market risk management but also the internal control system as well as market principles and information disclosure in banking operations In Vietnam, the development of a risk management system under Basel II is in line with international standards and requires a big investment in finance, human resources, information technology and especially the database Thus, it can be said that one of the first and most important factors in applying Basel II is that a bank must have a good and accurate historic database of 5-7 years regularly updated as well as a professional and scientific information management system Understanding the challenges of data, BIDV has made initial plans for the preparation of databases in line with Basel II’s risk management requirements as well as other international practices typically such as Management Information System project (MIS) After the implementation of phase – “Building infrastructure to exploit the centralized statistical reporting system”, MIS has created a revolution in the data exploitation to support management and serve businesses at BIDV, helping BIDV become the pioneer in Vietnam in successfully deploying the synchronous data warehouse solution of IBM - A solution that is highly appreciated in synchronization for the data warehouse model reporting system by leading organizations BIDV’s Board of Directors has directed the MIS Project Management Unit in coordination with the Basel II Project Management Office (PMO) to implement the MIS Project-Phase in order to establish a complete MIS and identify one of the most important aspects of MIS for the purpose of developing a Risk Management System (RMS) to supplement the data source 85 for application of Basel II, which is also a prerequisite for deploying Basel II in the next phase With the correct decisions and policies of the Board of Management and the efforts of the PMU staff, MIS project-Phase will bring about breakthrough solutions and remove data barriers for the Basel II problem At the same time, with the complete and synchronous MIS database on the whole system, BIDV can confidently apply Basel II 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Credit Risk Management at BIDV- Hong Ha Branch 36 2.2.2 Evaluation of the risk management process at Hong Ha. ..  Chapter 2: Current status of Credit Risk Management at Joint Stock Commercial Bank for Investment and Development of Vietnam- Hong Ha Branch  Chapter 3: Solutions to improve Credit Risk Management. .. Management at Joint Stock Commercial Bank for Investment and Development of VietnamHong Ha Branch CHAPTER THEREOTICAL BASES OF CREDIT RISK MANAGEMENT AT COMMERCIAL BANKS 1.1 Concepts and classification