LV Thạc sỹ_Evaluation of credit risk management in ACB Bank duyen hai branch

1 NATIONAL ECONOMICS UNIVERSITY ADVANCED EDUCATIONAL PROGRAM ***************************** Bachelor thesis Evaluation of credit risk management in Asian Commercial Bank (ACB) Duyen Hai branch Table of Contents Chapter INTRODUCTION …………………………………… ………… 1.1 Objectives of the thesis 1.2 Overview of the subjected bank 1.2.1.Overview of Asian Commercial Bank (ACB) 1.2.2 Overview of ACB Duyen Hai branch 1.3 Data collection and methodology 1.3.1Data collection 1.3.2 Methodology Chapter LITERATURE REVIEW…………………………………………… 2.1 Bank and credit activities 2.2 Credit risk 10 2.2.1 Definition .10 2.2.2 Types of credit risk 11 2.2.3 Sources of credit risk .13 2.3 Credit risk management 16 2.3.1 Role of credit risk management .16 2.3.2 Principles of credit risk management .17 2.3.3 Credit risk measurement 20 2.3.4Risk mitigation and transfer techniques 24 Chapter EMPIRICAL FINDINGS………………………………………… 31 3.1 Performance of credit activities at Asian Commercial Bank (ACB) Duyen Hai branch in the last years .31 3.1.1 Overview of credit activities at the branch 31 3.1.2Credit risk at ACB Duyen Hai branch .33 3.2 Credit risk management at Asian Commercial Bank (ACB) Duyen Hai branch 38 3.2.1 External management .38 3.2.2 Internal management at the Asia commercial bank .44 Chapter RECOMMENDATION FOR CREDIT RISK MANAGEMENT IN ACB DUYEN HAI BRANCH…….………………………… ……………….59 4.1 Orientation of overall operation at Duyen Hai branch 59 4.2 Orientation for credit activity at Duyen Hai branch .60 4.3 Recommendation for credit risk management at Asian Commercial Bank Duyen Hai branch 61 4.3.1 Promote professional employee training and utilize rationally human resource 61 4.3.2 Disperse credit risk 62 4.3.3 Concentrating on borrower information collecting practice 63 Chapter CONCLUSION, LIMITATION AND RECOMMENDATION FOR FURTHER STUDY…………………………………………………………….65 5.1 Conclusion 65 5.2 Limitation 66 5.3 Recommendation for further study .67 ABSTRACT Banking industry is a crucial part in any economies It goes without saying that with the presence of banking firms, such developed countries as the United State can achieve their success today However, inherent in banking industries are a lot of uncertainty that can cause vast damage to their members The most noticeable and current example of this is the financial crisis 2008 stemmed from failure in banking system of the United State and the debt crisis in Europe from 2010 until now In a small country like Vietnam, banking industry also have to face similar risk and may encounter same problem as what banks in other developed country did Especially, when most of Vietnamese banks rely heavily on credit activities to generate profits, credit risk is the issue that matter the most The main concerns of this thesis is to find out what a typical Vietnamese commercial bank is doing with their credit risk management and recommend solution to improved their weaknesses How well a bank is doing with its credit risk management is first determined by the performance of its credit activities That means in order to evaluate credit risk management, the first task is to evaluate the performance of the bank’s credit activities Then, through various data, the reason for the performance of the bank will be revealed ABBREVIATION ACB: Asian Commercial Bank BIDV: Bank for investment and development of Vietnam CIC: Credit information center HNX: Hanoi Stock exchange SBV: State bank of Vietnam USD: United state dollars VND: Vietnam dong LIST OF FIGURES Figure 1: Composition of branch's credit in 2009 38 Figure 2: Composition of branch's credit in 2010 39 Figure 3: Composition of branch's credit in 2011 39 Figure 4: Division of jurisdiction in ACB 52 List of tables Table Credit performance at Duyen Hai branch 35 Table 2credit risk at Duyen Hai branch 37 Table 3: Quality structure of branch's credit 40 Table 4: Internal regulation on interest rate .50 Table 5: Criteria weight in corporate borrower rating .56 Table 6: Individual borrower information 57 Table 7: Ranking scale of individual borrower 58 Table 8: Collateral rating scale 59 Table 9: Individual borrower rating 59 Table 10: Corporate borrower rating criteria 68 Table 11: Corporate borrower rating scale .70 Chapter INTRODUCTION 1.1 Objectives of the thesis Financial institutions always plays important role in every economy No country can achieve its growth objectives without the support from commercial banks and other institutions that also provide banking services to the public With the main function of receiving money deposit from money supplier and lending it to money user, banks works as intermediaries in the money market Without banks, the process of transferring money from people with excess of money to people in need of money will be obstructed by many barriers such as the lack of information, geographical distance, etc However this industry is also very risky As intermediaries in money market, banks make loans to a large number of borrowers in remarkable amount of money while their own capital is relatively very small Certain incidents, hence, can cause trouble to the bank when the loss of their loan may exceed their capital and force them to go bankrupt In Vietnam, banking is a very flourishing industry but are facing many difficulties Currently, 25 years after the economic reform, there are about 40 Vietnamese commercial joint stock banks, state-owned commercial banks and many other foreign banks All of them are contributing to Vietnamese economic achievement in the recent years However, Vietnamese banking industry are confronting many challenges, one of which is how to ensure the lowest risk in credit activity When the impact of 2007-2009 global crisis is still present all over the world, credit quality is a tricky problem High inflation, the climbing of interest rate and input cost and fluctuation of USD and gold in global market 61 banks to come to an agreement in which each one takes care of one portion of the loan The loss that Duyen Hai branch may incur is then not too much to endanger the branch Credit insurance: this practice is still be a new concept in Vietnam and Vietnamese commercial banks as well as Vietnamese borrowers are still not very familiar with it Credit insurance is similar to normal insurance: value of loan will be insured by insurers, who insure many other loans of many different banks When loan loss occurs, the insurer will make payment to banks as a compensation for the loss In Vietnam, unfortunately credit insurance is not yet developed BIDV insurance company (BIC) is one of the pioneers started to offer credit insurance-like products: agreement among BIC, BIDV and TMT car producing company to insure BIDV’s loan for buying car of TMT However this is just a tiny piece of credit insurance when the number of types of loans that Vietnamese commercial banks are now offers is large In future, credit insurance will be very developed and will be a helpful tools in credit management of Duyen Hai branch 4.3.3 Concentrating on borrower information collecting practice When banks consider whether or not to lend their money to a borrower, they always have to ask the questions: who is borrowing, what they borrow for, and if they can pay back on time and in sufficient amount If borrowers can not answer these questions in a satisfactory way, then it means there is a good chance that banks could loose their money In fact, it will be not enough for banks to hear the answer from the borrowers themselves They have to implement better method to obtain the answers to ensure a healthy condition for their money For 62 Duyen Hai branch, there are some typical methods that they can utilize to obtain borrower information One of them is to collect information from specialists In Vietnam, Credit Information Center (CIC) is such a specialist founded by State Bank of Vietnam aiming to provide information of people who has been in credit relationship with registered banking firms in Vietnam Another method is to get the information from other banks Borrowers has probably been in credit contract with other banks before come to ACB Duyen Hai branch Getting access to information in other banks give the branch the opportunity to understand borrower’s situation and their willingness in meeting liability Besides external sources of information, the branch also have to concentrate on information collecting practice of their staff A standard set of required information needs to be built as a manual for credit officer when they investigate borrowers Information collecting shouldn’t be a one time work bit a regular obligation of credit employees, because keeping update to the situation of former borrower help the branch to know if negative incidents happen and make proper reaction 63 Chapter CONCLUSION, LIMITATION AND RECOMMENDATION FOR FURTHER STUDY 5.1 Conclusion Vietnamese economy in the recent years has been posing many problems Negative impacts of inflation stagnated operation of many domestic companies One such impact is the increase of input cost for manufacturing industries Many Vietnamese companies still depends on foreign sources for manufacturing input When inflation flies, operating cost for those companies also rise tremendously Another important impact is the government’s implementation of regulations aiming to stabilize economy Limiting credit and increasing interest rate are the most noticeable sign of this In fact, in 2011 a lot of industries had to slow down due to these policies The difficulties of domestic companies – the largest part of commercial banks’ borrowers – posed many threats to Vietnamese banking industries Banks’ dual objective of ensuring profitability and credit risk soundness is more tougher when credit limit is regulated to be low and economic factors seriously deteriorates paying ability of borrowers Despite facing many difficulties like the rest of their industry, Asian Commercial Bank (ACB) Duyen Hai branch has made some achievement in 64 their credit activity The bank still have positive credit growth rate within the allowed limit from State Bank of Vietnam ACB Duyen Hai branch was also successful in control credit risk Data on structure of their credit portfolio proved that the branch is doing good in minimizing the probability and the scale of credit loss This is due to the strict implementation of credit risk management and borrowers rating practice 5.2 Limitation First of all, this study focuses mainly on the qualitative analysis of credit risk management in Asian Commercial Bank In fact, the quantitative aspect of this topic has been discussed widely by various researchers People have developed models to estimate risk of certain bank’s credit portfolio This method is superior to the qualitative analysis because it gives a numerical description of the current situation at the subject bank, which is important to analyzing and comparing However, those quantitative models are very complicated and require a lot of time and effort; hence, I can not include them in the scope of this thesis Second, this thesis is conducted in the context of one branch in the whole system of Asian Commercial Bank This makes the result of the analysis particularly significant to the subject branch That is, although the thesis point out a positive picture of the performance of credit activities and credit risk management at the branch, this may not tell the story of the whole system Maybe the success of the branch also depends on other externalities that not appear in other branches and not explain the success of the whole system 65 Third, this thesis doesn’t account for the full analysis of credit risk in commercial banks, again due to the lack of time and resources I mainly discussed the aspect of credit risk which is inherent in credit activities of a bank As the banking sector advances, the services and products they offer also advances and pose banks a significant deal of credit risk It is not complete if the other activities of banks are not taken in to consideration 5.3 Recommendation for further study For further study, quantitative analysis should be taken in to consideration The limited time and scope prevent this thesis from considering the credit risk management from a more advanced quantitative point of view with a lot of financial complex formulas, credit models and metrics Future research should really take this into consideration This research study, as well as a lot of books, focuses the credit risk management practices on the lending activity only while in reality, credit risk is exposed in other services like international payments through letter or credit or financing programs Further research on credit risk management in these services will be extremely valuable to the banks Another interesting aspect is the adoption of credit derivatives in managing credit risk This is a new concept in some areas of the world It would be great to see the analysis and applications of successful credit derivative cases, or the reasons behind the failures of other cases 66 REFERENCES Allens Arthur Robinson 2007 Vietnam Legal Update Available in www form , viewed 26.09.2010 Ardrey, William; Perryer, Chris; Keane, Michael & Stockport, Gary 2009 Prudential Supervision, Banking and Economic Progress: Implementation of Risk Management Procedures in Joint Stock Banks in Vietnam Available in www form , viewed 02.05.2010 Arora, Diksha & Agarwal, Ravi 2009 Banking Risk Management in India and RBI Supervision Social Science Research Network Available in www form , viewed 02.05.2010 Blundell-Wignall, Adrian; Atkinson, Paul & Lee, Se Hoon 2008 The Current Financial Crisis: Cause and Policy Issues OECD Available in www form , viewed 15.09.2010 67 Book Rags Available in www form , viewed 15.09.2010 Business Dictionary Available in www form , viewed 22.01.2010 Caouette, John B.; Altman, Edward I.; Narayanan, Paul & Nimmo, Robert 2008 Managing Credit Risk: The Great Challenge for the Global Financial Markets 2nd Edition John Wiley & Sons Inc New Jersey, USA Colquitt, Joetta 2007 Credit Risk Management: How to Avoid Lending Disasters & Maximize Earnings 3rd Edition McGraw-Hill USA Crouhy, Michel; Galai, Dan & Mark, Robert 2006 The Essentials of Risk Management McGraw-Hill USA 10 Culp, Christopher L 2001 The Risk Management Process: Business Strategy and Tactics John Wiley & Sons Inc USA 11 Eakins, Stanley G & Mishkin, Frederic S 2000 Financial Markets and Institutions Addison-Wesley USA 12 Ghauri, Pervez & Gronhaug, Kjell 2010 Research Methods in Business Studies 4th Edition Pearson Education Limited Essex, England 68 13 Greuning, Hennie van & Bratanovic, Sonja Brajovic 2009 Analyzing Banking Risk: A Framework for Assessing Corporate Governance and Risk Management 3rd Edition The World Bank Washington, USA 14 Hoang, Tien Loi 2006 An Update on Non-performing Loans Resolution and Banking Reform in Vietnam OECD Available in www form , viewed 26.09.2010 15 HSBC 2010 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Rating model and validation by the Oesterreichische Nationalbank (OeNB) in cooperation with the Financial Market Authority (FMA) 71 APPENDIX Table 10: Corporate borrower rating criteria - Financial criteria Liquidity criteria Current ratio Quick ratio Acid test ratio Interest coverage ratio Operating criteria Inventory turnover Receivables turnover Fixed asset turnover Current asset turnover Leverage criteria Total liabilities/equity Long term liabilities/equity Total liabilities/total assets Profitability criteria Return on sale Return on equity Return on asset Non-financial criteria Cash flow criteria Customers’ source of funds Ability of customers in meeting their ability with cash inflow Ability to meet short-term liabilities Ability to meet current capital needs of customers Managerial capacity and internal environment Biography of the owner/ accountant Owner’s professional experience Owner’s educational level Managerial capacity of owner Relationship of managers with the authorities Manager’s sensitivity activeness to change in market Internal control environment Human resource Business vision and objectives in short run Relationship with ACB Credit history in last 12 months Times of restructuring in last 12 months 72 Structured loan/total loan ratio Current unpaid value History of off-balance sheet activities Customer’s information disclosure in the last 12 months The length of time that customers have credit relationship with ACB Credit situation in other bank External criteria Industry potential Assessment of new entrance Substitute products Stability of input State’s protective policies Degree of reliance on natural factors Impact of policies in foreign market Other operating features Dependence on supplier Dependence on customers Average growth rate in last years Average growth rate of after tax income in last years Scale of market Business’ credibility Number of years in operation Potential for growth of business Table 11: Corporate borrower rating scale Sco re Cat ACB’s attitude egory 95 - 100 Members’ feature AA A High potential, good ACB set first managing practice, efficient priority for this operation, positive prospect category Borrowers growth, good will rated AAA can have Lowest riskiness access to abundant and low-cost capital and 73 90- AA 94 8589 7584 B Organization that operate efficiently, have optimistic prospect and show goodwill with their liabilities Low riskiness A Organization operating efficiently, having good financial position and goodwill to repay Low riskiness BB Operating efficiently, having potential prospect but showing weakness in financial management Medium riskiness 70- BB Low operating efficiency, having potential growth but showing weakness in financial management Medium riskiness 65- B Low and fluctuating efficiency, limited managerial control over operation Potential riskiness 60- CC Low efficiency, weak financial and managerial capacity, having debt currently unpaid High riskiness 74 69 64 C are treated preferably in term of fees and collateral Capital needs of these borrowers are treated preferably in term of interest rate, fees and collateral ACB satisfy capital needs of this category, especially medium term need ACB still extend credit to organization in this category, however preferable treatment is not exercised or exercised restrictively ACB restrain extensive credit to this category Loans to these organization focus on short term loan and should be pledged strictly ACB limits credit to this category and prioritizes collecting face value of debt to organization degraded to this category ACB restricts granting credit to this category Restructuring solution can be applied 74 55- CC Low efficiency, weak financial and managerial capacity, low repaying capacity High riskiness 35- C Low efficiency, weak financial and managerial capacity, no repaying capacity High riskiness Bel D Long-lasting loss, negative financial position, having overdue debt Highest riskiness 59 54 ow 35 if only the borrowers have feasible plan to improve ACB forbids credit relationship with organization falling in this category Restructuring solution can be applied if only the borrowers have feasible plan to improve ACB forbids credit relationship with organization in this category Loan should be reclaimed at all cost, even premature collateral liquidation ACB forbids credit relationship with organization in this category Loan should be reclaimed at all cost, even premature collateral liquidation 75 COMMENT ... Performance of credit activities at Asian Commercial Bank (ACB) Duyen Hai branch in the last years .31 3.1.1 Overview of credit activities at the branch 31 3.1. 2Credit risk at ACB Duyen Hai branch. .. fundamentals of credit risk measuring and the three categories of methods for bank credit risk measurement -credit rating, credit scoring and credit modeling will be explained a Credit rating A credit. .. lie in the credit risk management of the bank It is likely to be problem in each particular borrower 3.2 Credit risk management at Asian Commercial Bank (ACB) Duyen Hai branch 3.2.1 External management