Precluding and reducing solutions to credit risk at Quang Trung branch of Vietnam Bank of Investment and Development.doc

Precluding and reducing solutions to credit risk at Quang Trung branch of Vietnam Bank of Investment and Development.

Falling in line with the common trend of the world economy, Vietnameconomy also gets positive achievements in recent years Whereas, the bankingindustry playing the role as vessel circulations in the economy, has beencontributing much in the process of renovation

Commercial banks are the important link in the operating process of theeconomy Commercial banks are a combined industry, are currency and creditcenter, and the level to encourage the development of the economy Therefore, thequality and the growth level of the capital and capital lending activities will havegreat impacts on the sustainable growth of the companies in particular, and on theoverall economy in general.

Vietnam economy starts integrating into the world economy and participatingin world and regional economic organizations such as ASEAN, WTO, and AFTA.These events have become the opportunities as well as the challenges for both theenterprises and the whole Vietnam economy Integration leads to the severecompetition among domestic and international companies Sharp rivalry also leadsto the risks in production process of the companies The companies’ risk is thebanks’ risk as well Nowadays, credit risk is becoming a bulging problem andbecome the worry of commercial banks As the result, “safe” must be the topprinciple in precluding risk Especially, preventing credit risk is one of theimportant tasks of commercial banks in Vietnam The bank that has efficiently riskprecluding methods will ensure capital security and has advantage in competition incredit market.

Risk preventing is also the urgent issues of banking industry in Vietnam Inthe past few years, activities of commercial banks must operate in accordance withmarket mechanism and innumerable credit risk, bringing about losses to the bankingindustry and the entire economy Many commercial banks and credit organizations

has very huge unprofitable debt ratio, even some banks must be bankrupt unlessthere is interference from the government.

Concerning about risks, particularly credit risk in banking industry and QuangTrung branch of Vietnam Bank of Investment and Development during myinternship, so I choose the below topic:

“Precluding and reducing solutions to credit risk at Quang Trung branch ofVietnam Bank of Investment and Development”

Beside the introduction and conclusion part, the special subject is presented inthree 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

Although having many efforts in studying and researching through books andnewspapers as well as gathering documents and figures during my internship at thebank, but limited time and narrow awareness cause unavoidable shortcomings I amlooking forward recommendation from the officers of the bank and the lecturers so Ican have a thorough grasp of knowledge serving my future job.

Chapter 1: Overview of risk, significance of precluding andreducing risk in credit relationships

1.1.Risk and risk classification in credit relationships1.1.1 Definition of risk

Risks are problems that accidentally damage people or assets of one or someobjects in the society.

In the economy, risks are considered the losses which enterprises have toaccept when doing business Trading in currency- credit field, the banks must admitthat too In reality, it has been proved that the risks of dealing in currency are theriskiest 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 tothe others, uses the signature like a guarantee, or a deposit to prove that money iscollected “.

1.1.2 Kinds of credit risks

Every industry has to cope with risks in the process of production andbusiness But no others must admit as big risks as the banking industry Risks ofcommercial banks are very diversified and complicated The reasons may comefrom the banks, from customers, from objective issues, or from the government’sadministrative mechanism In general, there are following risks: interest risk, capitalrisk, exchange risk, payment risk, and risk of unable to pay.

- Interest risks: “are the risks that the bank must bear when the marketinterest varies.” Consequently, when the interest changes the bank possiblydeals with risks When the interest is too low, enterprises tend to borrowmuch but it is difficult for the bank to mobilize capital Hence, their actionscope is narrowed, and the revenue will reduce In contrast, when the interestis 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 Thatleads to unavoidably losses for the bank.

- Capital risk: is represented in two aspects:

+ Redundant capital: commercial banks are the enterprises that earnrevenue by the method “borrow to lend” when the current capital is very little.The bank’s main capital is the capital mobilized from the inhabitants, fromeconomic organizations, and from other credit organizations Therefore, becauseof some reasons, the redundant capital is not lent or changed into otherprofitable assets As a result, the bank will suffer losses in charging borrowingfee whereas not receiving income.

+ Lack of usable capital: this risk happens when the bank does not satisfythe customers’ demand for borrowing and investing, even not meet thecustomers’ demand for liquidating This kind of risk arises from the exchangefunction of capital using period and the bank’s capital Besides, political issues,price variation, and the decreasing reputation promote people to withdraw theirmoney in the bank Hence, the bank’s liquidation is threatened If the bank hadchanged all their assets into money to pay but no result, then, the bankrupt risk isconsiderably high.

- Capital mobilizing risk:

+ Happens when the bank mobilizes much capital but they can not lend orslowly lend to customers.

- Credit investing risk:

+ The customers who have dealt with business risks can not pay the bankmoney.

+ 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 thecustomers borrowed capital from the bank do not pay on time, and not keep theircommitment.

Credit risk can be defined as the potential losses which the bank must bearwhen lending customers without being paid on schedule It means that when thebank provides credits to each customer, the forecasted income from the profitableassets may not be fully-returned 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 commercialbanks In central planning economy, risks in banking industry are generally ignored.All the banks were the State-owned Commercial Banks So the losses weresubsidized by the government by methods such as releasing more money and tightmoney management But when stepping into the market economy, competition is avigorous catalyst Consequently, economic posting is mainly independent Thisoriginates the potential of losing liquidation and bankruptcy In changing businessenvironment, the stability of the enterprises is only relatively Hence, when thecustomers 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 hasstagnant capital, lacks of usable capital, unequal ratio of lent capital and mobilizedcapital, guaranteed asset risks or risk of not taking back debts.

In this paper, credit risks are examined in the situation that the bank can notrecover debts, being called bad debts.

For principal and interest debts, credit risks may occur in four cases It is whenthe 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 overduedebts When not being paid on time, risks are at the low level and posted as arisinghanging interests If the bank can not collect the interests, risks are posted ashanging 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 regardedas absolute loss of the bank Because for some reasons, enterprises slowly refundthe principal but they still pay all after the contracted period If this debt can not bepaid, the bank will highly deal with credit risks.

Credit risks remain in many forms Those forms always vary The result isthat the bank is unable to recover In the beginning, enterprises may slowly pay theinterest and then slowly pay the principal It really makes the bank at risk But thecredit risks are not always shown through all the above forms There is the situationthat enterprises pay interests but do not pay the principal So the bank only posted itas arising bad debt and then changed it into unrecoverable bad debts

Credit risks

Not recover interest on time

Hanging interest arises

Not recover principal on time

Not collect enough interest

Not collect enough lent interest

Forgiving

Overdue debts arise

Frozen hanging interest

OrInterest remission

The above cases are only general ones When researching credit risks, peopleusually pay attention in the danger of risks such as hanging interest and arising baddebts Frozen hanging interests and actual debts are usually examined to solve theproblem and to infer lessons.

1.2.Expressions and criteria to determine credit risks.1.2.1.Expressions

Qualitative expressions of credit risks:+ The economy is receded

+ Customers rarely borrow + Customers slowly pay back

+ Bad debts when the economy is growing.

All the signs of credit risks can be arranged in the following groups:

Group 1: group of symbols related to managing methods of the customers.

- Regularly change the structure of managerial system or operatingboard

- Managerial system and operating board are always different aboutthe goal, manage and operate dogmatically or dispersedly

- Methods of customers’ formation have the following features:

+ Being formed by Board of Directors or Managing Director with a little orinexperienced.

+ Board of Directors or Managing Director of big enterprises extremelydeeply interfere into everyday problems

+ Lack of caring about the shareholders’ benefit and creditors’ benefits+ Regularly transferring employees

+ Bad goal defined planning leads to the appearance of temporary debts- Familial management

- Dispute over the managing process- Unreasonable managing costs

Group 2: Group of symbols related to priority in business

- Syndrome of big contracts: Customers are impressed by a famouscustomer who will be able to depend on: Board of Directors decide to cutdown their revenue, in order to get that big contracts

- Syndrome of beautiful products: not timely or being obsessed by oneproduct but not others.

- Unreasonable urgency such as not timely launching the products out,unrealistic period of business

Group 3: Group of symbols related to the technical and commercial issues

- Difficulties in developing the products

- Changes in the market: exchange rate, interest; changing tastes;update new technologies; loss of suppliers and many rivals

- Highly customers’ temporary products

- Traits of cutting down the repairing and replacing costs

Group 4: Group of symbols related to handling information of finance and

+ Decreasing cash capacity

+ Increasing in revenue but decreasing or no interest+ Improper charter capital

+ Quantity of goods grow faster than the revenue+ Losing activities

+ Planning to pay the debt but the capital is not enough+ Wrongly posting fixed assets

+ Beautify the balance sheet by creating intangible assets

Group 5: Other non- financial symbols that credit officers can easily realize

as the followings:

- Ethical issues, even business people’s appearance also expresses somesymbols

- Seriously degradation of customers’ business establishment- Stores contain many spoilt and obsolescent

1.2.2.Criteria of measuring credit risks

These are the problems that all the managers concern about Good riskmeasuring make the precluding and reducing risk process easier.

Criteria of measuring include:Overdue debts:

Gross overdue debts

Gross debts

Low overdue debts rate proves that the credit quality is high Whenabsolute numeric value of the overdue debts goes down, if the gross debtsincrease 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

having bad debts Gross numbers of customers Having credit relationship

Losing capital situation:

Losing capitalDebts

Ratio of losing capital = * 100 Gross debts

Bad debts situation:

Gross overdue debts

1.3.Significance of precluding and reducing risks in creditrelationships

Precluding and reducing risks in credit relationships will help the bank avoidbad consequences Those kinds of credit risks not only affect on the bank itself butalso on the economy Therefore, precluding and reducing credit risks has a veryimportant significance.

For the bank:

Risks directly impact the revenue of the bank If the risk is at low level, thebank can use its profit or its capital to make up But if it is a big risk, the bankcan not use its profit to compensate, it will be bankrupt For this reason,precluding and reducing credit risks helps the bank prevent and minimizedamage, stabilize profit, maintain economic security, and maintain prestige andbrand 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 positivelyinfluence on customers The bank has created its prestige and brand name Thecustomers will consider the bank as a reliable address to deposit money as wellas to borrow money For all business activities, the customers are alwaysimportant ones The same situation is in the credit- banking activities When thebank is free from risk, customers will trust more and choose the bank as theirpartner more In the situation of integrating into world economy, there will bemany international banks enter and compete A free- risk bank will leave thecustomers belief- it is very important.

For the economy:

Credit and banking are sensitive financial business activities So it directlyinfluence on the social economy If the bank preclude and reduce risks then thecash flow will circulate normally It will not cause redundancy as well asdeficiency The economic security will be ensured When the risk occurs,customers will be puzzled They will simultaneously withdraw money Thus, thebank will be lack of capital The reason is the bank chiefly mobilizes capitalfrom customers Then organizations who want to borrow capital also get trouble.In fact, economic organizations form an economy When those organizations arein trouble, it will have given impacts on the social economy.

Chapter 2: real situation of credit risks at Quang Trungbranch, BIDV.

2.1.1 Objective and necessity

2.1.1.1 Necessity

- BIDV, Quang Trung Branch was established on the basis of upgradation ofQuang Trung transaction bureau, under the Transaction center (I) Bank forInvestment and Development of Vietnam – the first unit of the system of Bank forInvestment and Development of Vietnam to deploy the Project of Modernization ofthe payment system and the modernization of the banking system, hence it has a lotof advantages and experience in supplying products, services and deployment ofretail banking profession, as well as in organizing operation according to the 1-doortransaction model, applying technology and business norms of a modern bank.However, according to the present regulation of the State bank and the Charter ofOrganization and Operation of Bank for Investment and Development of Vietnam,the transaction centers do not have underlying branches; meanwhile, inadministration, execution in the past few years, Bank for Investment andDevelopment of Vietnam always defines the activities of Transaction center (I) notonly bears the characteristic of a commercial bank but also perform the function ofa capital transfer center, payment center, the place to train source officers for thesystem, and this is also the place to deploy the pilot application of products, servicesand new technology of Bank for Investment and Development of Vietnam beforeapplying them to the whole system As a result, Quang trung Transaction Bureauwas upgraded and split a part of Transaction center (I) so that Transaction center (I)can continue to perform its above-mentioned characterized function, at the sametime, establishing Quang Trung Branch to pay deep professional attention todeveloping retail banking profession, becoming a glowing point, standard model forthe whole system is very urgent and necessary.

- The foundation of BIDV, Quang Trung Branch is suitable to the progress ofimplementing the Project for restructuring, connecting with the comprehensive

renovation process, aiming for sustainable development, ensuring the suitablegrowth rate to effectively serve the socio-economic development of the country; aswell as developing the tradition to serve investment and development, diversifyingcustomers of every economic level, developing to improve the quality of Bankingproducts and services, improving the system security efficiency, meeting thedemand of the market mechanism and the integration route, being key to theconstruction of multi-function, firm and strong financial corporation in the future.

2.1.1.2 Objective

Being one of the major State commercial bank of Viet Nam, with nearly half acentury of operation and development, Bank for Investment and Development ofVietnam has had much higher effort, with very encouraging success, contributingactively to the cause of construction and development of the country’s economy.With the purpose to improve, expand the operation network, increase prestige, theimage of Bank for Investment and Development of Vietnam to customers anddomestic and foreign credit organizations, the separation, improvement of QuangTrung transaction bureau into BIDV, Quang Trung Branch (Level 1 branch) withthe main function is to perform retail banking professions will contribute toovercome shortcomings in operation scale; improving the capabilities of finance,management, technology, and the staff qualifications Together with severalBranches and Transaction bureaus available in Hanoi, Ho Chi Minh City and cities,large urban centers, industrial parks which share the same function BIDV, QuangTrung Branch will become one of the nucleus to build a chain of “supermarkets” ofbanking, contributing to form the network of Retail banking network, with fullmodern customer-oriented facilities and banking services, meeting the demand andneeds of the market economy with the unceasing diversification and development inthe demand to use finance-banking products, services of the customers, aiming toprepare sufficient conditions to improve the competitiveness of Bank for Investmentand Development of Vietnam in the region and in the world, actively integrating

and proceeding step by step following international customs and normsacknowledged in banking business operations Specifically:

- BIDV, Quang Trung Branch will take the development of modern bankingservice as the operational background, pledging to bring about more and morefacilities and added value for customers being civilians or enterprises of everyeconomic element;

- The operation of BIDV, Quang Trung Branch will help enhance the businessoperation of Bank for Investment and Development of Vietnam The upgradation ofQuang Trung Transaction Bureau into BIDV, Quang Trung Branch (Level I branch)will expand the operational network of Bank for Investment and Development ofVietnam in Hanoi City, assisting Bank for Investment and Development of Vietnamto seize and take the opportunity to expand the customer objects, through whichcontributing an active part in the socio-economic development of the Capital andsome adjacent areas under the satellite urban chain bordering Hanoi;

- Expanding the operation of BIDV, Quang Trung Branch is a measure toimprove the financial capability and increase the competitiveness of Bank forInvestment and Development of Vietnam in the framework of globalization andintegration;

- Establishing and putting into operation the BIDV, Quang Trung Branch willhelp boost the exploitation, clearing the capital source, increasing the capability ofsupplying credit, banking services, therefore, increasing profits for the Bank,concurrently, contributing a remarkable part in the unceasing development of thesystem of Bank for Investment and Development of Vietnam;

- The operation of BIDV, Quang Trung Branch will help publicizing thetrademark, heightening the position, image about an advancing, modern Bank forInvestment and Development of Vietnam in the perception of the customers and inthe business market;

2.1.1.3 With the strategy to develop until 2010, Bank for Investment andDevelopment of Vietnam defines the upgradation of Quang Trung Transaction

Bureau into BIDV, Quang Trung Branch (Level I branch) is a novel developmentstep in the model of Modern-oriented retail bank, creating an improving andbreakthrough step in the organization of profession and transaction process, helpingto build Bank for Investment and Development of Vietnam for sustainable andintegrated development.

2.1.2 Content and scope of operation1 Legal status:

* Full name in Vietnamese:

“CHI NHANH NGAN HANG DAU TU VA PHAT TRIEN QUANGTRUNG”

* Acronymed: “Chi nhanh Ngan Hang DT & PT Quang Trung”

* The international transaction name:

“Bank for Investment and Development of Vietnam, Quang Trung

* 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 splitfrom the Transaction headquarter and officially came into operation from01/04/2005 At the time of establishment, the branch had a staff of 72 people, inwhich there were 65 trade union members At first, the activity of the branch mainlyfocused on stabilizing organization, establishing the order and strengthenprofessional skills beside the daily profession operation.

- BIDV, Quang Trung Branch is a Level I Branch, under Bank for Investmentand Development of Vietnam, with its own stamp and financial balance sheet, has atask to operate the activities of Bank for Investment and Development of Vietnamaccording to the authorization of the General Director of Bank for Investment andDevelopment of Vietnam, being an accounting unit under the system of Bank forInvestment and Development of Vietnam;

- BIDV, Quang Trung Branch was established according to the decision of theManagement Board of Bank for Investment and Development of Vietnam on thebasis of the approval of the State Bank Governor;

2 The content of operation

BIDV, Quang Trung Branch is the organization to operate monetary businessand Banking service according to the Law of Credit Organization, suitable to the“Charter on organization and operation of Bank for Investment and Development ofVietnam”, operating according to the regulation of organization and activitiespromulgated by the Management Board of Bank for Investment and Developmentof Vietnam; and according to the authorization of the General Director of Bank forInvestment and Development of Vietnam, especially paying attention to developingthe advanced, modern Banking service and the Banking products, services with highrate of advanced technology, combining in harmony with the traditional bankingprofession, creating the stable customer background, ensuring reasonable profitmechanism, manage well risks, being efficient, safe in business operation.

2.1 The advanced Banking service

With the orientation to form a system of retail Banking network of Bank forInvestment and Development of Vietnam, BIDV, Quang Trung Branch pledges tobring to the community the products and services of a modern retail bank, throughthe model and operational organization of a modern multi-function bank, on thebackground of advanced technology, specifically: the products and services of usingthe automated teller machines (ATMs), issuing and clearing credit cards, travelercheques, paying salaries, overseas exchange … and is the place to apply thedeployment of new products and services of Bank for Investment and Developmentof Vietnam.

The operational content and specifically oriented targets:

- Forming and developing wide and popular ATM network, creating the basisof crowded customers to use the products and services on ATM technology in astable and sustainable way Building the system to accept POS/EDC linked with the

bank to deploy many added facilities integrated in ATM-BIDV such as: payinginvoices of goods, services, recording debts … operating the link of card paymentwith VISA International, MasterCard International, and AMEX, etc, and thenissuing international credit cards of Bank for Investment and Development ofVietnam

- Applying the Home-banking service for the customers, helping customers tomanage and control their accounts closely, effectively, with such functions asaccount enquiries, banking information enquiries, next is to perform transactions viathe Internet and by electronic documents.

- Performing the purchase of traveler’s cheques and international cheques,building the network of collecting and exchanging traveler’s cheques to the Branchto ask for clearance;

- Supplying the service of authorized paying salaries (automatically) forindividuals, payment of overseas exchange, connecting with the profession ofcapital mobilization;

- Supplying the service of managing the customers’ personal accountsaccording to the norms of modern banking with high quality Performing counselingand managing investment portfolios as authorized by the account owners;

- Willing to organize Mobile banking when necessary, researching to deploynew products and services as requested by the customers and the market.

2.2 Clearance and budget services

- Supplying domestic and international clearance products and services;

- Performing the professions of purchasing-selling, converting foreigncurrencies to serve credit activities, international payment and aiming to serve thebusiness operation of the Branch Executing other foreign relations banking servicesas ruled, authorizing of the General Director of BIDV;

- Performing the service of authorized receivable and payable Supplying theservice of collecting and paying cash for customers;

Performing other payment services delegated by the General Director ofBIDV;

- Performing other capital mobilization forms allowed by law;

2.4 Loaning and securing

- Performing short-medium-long term loans in Vietnam dongs foreigncurrencies to entitled customers, BIDV;

- Discounting valuable documents;- Performing securing services;

- Performing credit professions after being approved by General Director ofBIDV;

+ Being the key or member capital contributors to be engaged in co-sponsor ofany investment projects exceeding the limit assigned and authorized by GeneralDirector of BIDV to the Branch Director;

+ Performing the profession of loaning, guaranteeing or re-guaranteeing forforeign organizations and individuals, except the case of responsive guaranteeingfor foreign customers taking part in bidding, performing the contract in Vietnamand other cases instructed by the General Director of BIDV and/or distributing thelevels; specifically delegated to the Branch Director;

2.5 Other activities

- Performing the service of agent bank, managing the investment capital forthe projects as requested by customers;

- Supplying the steel safe service (storing, preserving and managing valuablepapers, the precious documents and assets of customers);

- Performing the activities after being approved by the General Director ofBIDV;

+ Investing, repairing, improving and upgrading collaterals, mortgages whichhave been converted into the assets managed by BIDV for use or business.

+ Investing in the form of capital contribution, joint ventures, purchasingstakes and other forms of investing outside the BIDV system;

+ Dealing with gold, silver, precious stones (including imports and exports);- Performing other activities and tasks delegated, assigned by the GeneralDirector of BIDV;

3 The scope of operation

- Geographically: BIDV Quang Trung Branch operating on the location ofHanoi City;

- About the fields of operations: within the legal scope allowing BIDV toperform and regulations of BIDV;

4 Financial management

- BIDV Quang Trung Branch can receive capital from BIDV, beingresponsible for the efficiency of using, securing and developing the assignedcapital:

+ Performing rightly the regime to manage and use the capital according to theregulation of the State;

+ Purchasing insurance for the asset;

+ Accounting into the expense of risk reserves;

- Performing rightly the Decree on Accounting and Statistics, accounting - andauditing regime;

- Establishing the Quarterly, Annual financial reports according to the form,sending BIDV according to the present regulations;

- Being responsible for the preciseness, honesty of the reported statistics;

- Being active in business, ensuring growth to secure and develop the capital;- Enjoying privileges according to the State regulations;

2.3 Organizational machineI Organizational model

The organizational model of BIDV, Quang Trung Branch was built accordingto the model of modernized banking, in the orientation of renovation andadvancement, suitable to the scale and operational characteristics of the Branch(details are as Appendix 1).

1 Directing the operations of the BIDV, Quang Trung Branch is the BranchDirector.

2 Assisting the Branch Executive Director is one or several Deputy Directors,working as being assigned and delegated by the Branch Director;

3 The organizational model of the BIDV, Quang Trung Branch up to the endof 2006 is supposed as follows:

3.1 At the Branch headquarter includes:+ Credit Department

+ Customer service department (including enterprise and individualcustomers)

+ International Payment Department;+ Monetary – Budgeting Department;+ Planning – Capital Source Department;

+ Assessment and Credit Management Department;+ Finance-Accounting Department;

+ Personnel-administration Department;+ Interior Supervising Department;+ Computing Department;

3.2 The underlying unit: Nguyen Dinh Chieu Transaction Bureau.

During the operational process, the organizational machine will be adjusted tocorrespond to the business operation situation of the Branch;

4 The BIDV, Quang Trung Branch is allowed to launch second levelbranches, Transaction bureau, Saving funds; Foreign exchange desk at necessarylocations within Hanoi City area; being allowed to establish assistant counselingcouncil if necessary such as: Credit council; Risk control council; scientific council,the Competition – Rewarding – Punishment Council …

5 The specific functions, tasks of the Departments, units under BIDV, QuangTrung Branch are instructed by the Director of BIDV, Quang Trung Branch; beingsuitable to the regulations of BIDV and operational requirement of the Branch.

2.2 Real situation of credit risks at Quang Trung branch2.2.1 Real situation of overdue debts

Situation of overdue debts at the branch has been cared by both the leadingboard and staff in recent years From 2003- 2006, some main activities inprecluding and managing risks has been done and achieved certain results such asclassifying, evaluating risk of credit and overdue debts.

The quality of credit is considered as the top objective of the bank Therefore,the branch has broadened their market share, enhanced quality of bank loan Thebranch also perfects the credit process, upgrades professional skills, dignifies theprocess of appraising projects, and ensures the effectiveness of projects From thatpoint, the credit capital of the branch has high coefficient of safety.

Table 1: general situation of overdue debtsUnit: VND billion

Overdue debts/ total debts

(Source: Credit department of BIDV)

From the above table, we can see that the branch has positively activities incollecting bad debts as well as dealing with overdue debts Overdue debts ratio isalways lower than 1 % compared to the total debts In detail, overdue debts overtotal debts are 0.60 % in 2003, 0.39 % in 2004 reduces in comparison with 2003.Itmeans that the bank had certain methods and achievements in precluding andreducing risks In 2005, the rate of overdue debts increased to 0.56 % While thetotal debts grew to VND 109 billion, the overdue debts increased to VND 4 billion.Until 2006, the overdue debts ratio sharply increased to 0.73 %, an outstandinggrowth against three previous years It demonstrated that there may be someunavoidable mistakes and risks.

2.2.2 Overdue debts classified according to economic composition

Table 2.2: Overdue debts classified according to economic composition

Unit: VND billion Year

Target

Loan turnover to state- owned enterprises

0.26 %

0.39 %

0.83 %

Loan turnover to private enterprises

0.77 %

1.43 %

0.61 %

(Source: Credit department of BIDV)Overdue debts of private enterprises accounts of large priority in comparisonwith state- owned enterprises About total debts, total debts in state- owned field is5 to 8 times of private ones Thus, in terms of the bank’s benefit, the quality ofcredit provided to state- run enterprises is still low At present, state- run enterprisesoperate not very effectively due to many factors, such as small financial potential,and not very high management ability Some enterprises do not have clear businessproject, hence, they can not allocate the capital properly, work ineffectively, and arelack of responsibilities This is one of the main reasons that leads to the case that thebank is afraid of lending private enterprises Therefore, it creates drawback for themin expanding their production and business.