LV Thạc sỹ_Improving credit rating system of BTMU for japanese companies in Vietnam

ACKNOWLEDGEMENT First and foremost, we would like to express our sincere gratitude to our supervisor, PhD …, Faculty of Banking and Finance of National Economic University for her guidance, stimulating recommendations and encouragement in order to complete our thesis Thanks to her patience, enthusiasm and constant support, we can complete our thesis timely and excellently Secondly, we would like to convey our thanks to Viet Belgum Master Programme with respectable professors, teachers for their meaningful lectures and kindly assistants to MBA students They have imparted valuable knowledge and experiences to us through many interesting projects, documents and case study Our next gratitude should be sent to the Bank of Tokyo-Mitsubishi UFJ, Ltd., Hanoi Branch where we have been working for about years for giving us not only working experience but also cooperation in supporting our pursue of master degree The Bank has provided us the ways to approach a research problem and the need to be persistent to accomplish any goal We wish to also acknowledge the contributions from officials of some of the commercial banks that we liaised with for sharing their time to support us the figures and information concerning our study Last but not least, we would like to thank my families for their support and encouragement as well as our dear colleagues and classmates who always keep contact and exchange ideas and documents to pursue our interest LIST OF ABBREVIATION BIDV Bank for Investment and Development of Vietnam BTMU The Bank of Tokyo-Mitsubishi UFJ, Ltd CFO Cash flow from operations CIB Corporate and Investment Banking CIC Credit Information Center CRAS Credit rating agencies CSR Corporate Social Responsibility EBITDA Earnings before interest, tax, depreciation, amortization EBITDAR Earnings before interest, tax, depreciation, amortization and rental or lease expenditure FCF Free cash flow FDI Foreign Direct Investment FFO Funds Flow from operations Fitch Fitch Ratings FOCF Free Operating Cash Flow G-CARS Global Credit Application & Rating System IAS International Accouting Standards IASB International Accouting Standards Board IFRS International Financial Reporting Standards JCR Japan Credit Rating Agency, Ltd L/C Letter of Credit M&A Merger and Acquisition Moody’s Moody’s Investor Service MPI Ministry of Planning and Investment MUFG Mitsubishi UFJ Financial Group ODA Official Development Assistance RCF Retained Cash Flow S&P Standard & Poor’s SBV State Bank of Vietnam VAS Vietnam Accouting Standards Vietcombank Joint Stock Commercial Bank for Foreign Trade of Vietnam TABLE OF CONTENTS LIST OF TABLE LIST OF FIGURES INTRODUCTION Rationale of the study Leafing through any local newspaper, one will see news of the national stock market or financial changes running the headlines Turning in any local TV channel, one will find economics and financial reviews dominating golden broadcasting hours Since Vietnam accelerated its development speed, the country’s swollen wounds of wars has no longer been a popular topic; instead, everyone has been talking about business and finance It can be evidenced that in recent years, Vietnam has been one of the fastest-growing economies in Asia in recent years, with GDP growth averaging 7.1% annually between 2000 and 2011 Vietnam banking industry, therefore has been developed rapidly and reformed substantially over the past few years in which credit activities – the core activity of commercial banks has booming with a lot of diversified type of products and contributed a major part of bank’s revenue However, the accumulation of revenues from credit activities always accompany with credit risks which must be taken by the bank Other than lending, banks are increasingly facing credit risks in various financial instruments including acceptances, interbank transactions, trade financing, issuance of guarantees, etc Credit risk therefore is one of great important factors must be seriously taken into account by the bank when grating credit limit to customers Hence, it is vital for any commercial banks to strengthen their own policies of credit risk management with the aim to earn profit correlative with accepted risk Present in Vietnam since 1993 with the first representative in Hochiminh city, The Bank of Tokyo-Mitsubishi UFJ, Ltd., (BTMU) since then has being approached and step by step captured Vietnamese finance market The main activity of BTMU in Vietnam is to financially support Japanese corporates’ subsidiaries established in Vietnam For the past 10 years, BTMU has been extending credit limits to hundreds of Japanese corporates and this number shall continue increasing in the time to come It is witnessed that BTMU has gain a lot of achievements on its business through the sound supply of financing to Vietnam market as well as strict compliance with Vietnamese and Japanese laws and regulations However, on the other hand, BTMU’s activities in Vietnam have been facing with many difficulties due to the instability of economy, especially the recent slowdown of global economy BTMU must be more cautious before making any credit decisions However, the number of applications for roll-over/restructuring loans to BTMU has increased so far Lack of an efficient and consistent system of credit risk evaluation is the main reason for these problems And gradually its credit rating system shows some existents which have been potentially hiding credit risks In addition to that, in the recent few years, there has witnessed a lot of bankruptcy and M&A of giants in the financial market due to the impact of the global economic turmoil The main reason is that many financial institutions and Credit Rating Agency have failed in evaluating creditworthiness and assigning credit rating to their borrowers Under that circumstance, credit rating system has soon recognized as of great importance in the financial market BTMU’s credit rating system with many existing discrepancies, therefore need to be improved to have more accurate and efficient assessment on its borrower In order to strengthen the credit risk management, it is necessary to improve the current borrowers’ credit rating system of BTMU to adapt with new global trend of development as well as Vietnamese market condition Research objectives/Research questions The research has main objectives: - Access modern theoretical basis on borrower rating system, its application in commercial banks and experience in borrower rating system of some leading Credit Rating Agencies in the world as well as financial institutions in Vietnam - Evaluate borrower rating system of BTMU for Japanese companies in Vietnam; analyze its achievement and limitation in some actual situations - Based on the mentioned study and evaluation, in refer to the strategy of development, propose recommendation to improve credit rating system with a view to strengthening credit risk management for Japanese corporate at BTMU in Vietnam This research will answer the following questions: - What is credit rating system and how important is it to a bank’s activities? - Why does BTMU in Vietnam still fail to evaluate exactly and efficiently support to credit risk management policy for Japanese companies? - What is the strength and limitation of this system? - How can the bank improve the system in order to enhance effectively its policy of risk management whereas still make full use of strength? Research methodology This study is done based on the combination of some different types of methodology: - Literature review on credit rating system, credit risks, credit activities to summarize theoretical issues and the importance of this matter - Comparison of credit rating systems among famous credit rating agencies and commercial banks in Vietnam - Conducting case study research on some situations actually happening in BTMU in Vietnam’s business activities to find out some holes and inconsistency of this rating system - Using qualitative method with secondary data from BTMU’s database Research scope and structure This study targeted to the credit rating system of BTMU currently being applied in Vietnam for Japanese corporate customers only The information and figures were collected from 2007 to Jun 2012 This study is structured with three chapters as following: Chapter 1: Theorical background on credit rating system for companies in Commercial banks This chapter shall mention about the theoretical study on credit rating systems as well as experience of some international Credit Rating Agencies and Commercial Banks in Vietnam Chapter 2: Credit rating system in BTMU for Japanese companies in Vietnam - Introduction about BTMU in Vietnam - Introduction about BTMU’s credit rating system for Japanese customers - Research on some actual cases of rating assigning for corporate of BTMU - General assessment on BTMU’s rating system: achievements as well as existent issues Chapter 3: Recommendations to improve the credit rating system of BTMU for Japanese companies In this chapter, through BTMU’s development strategy, some recommendations to improve BTMU’s credit rating system are proposed CHAPTER I: THEORETICAL BACKGROUND ON CREDIT RATING SYSTEM FOR COMPANIES IN COMERCIAL BANKS 1.1 Credit rating system for companies 1.1.1 Definition of credit rating Credit rating is a process which estimates the credit worthiness of a debtor, especially a business (company) or a government It is an evaluation made by a credit rating agency or a commercial bank of the debtor's ability to pay back the debt and the likelihood of default In credit agencies, the credit rating represents the credit rating agency's evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating agencies analysts Credit ratings are not based on mathematical formulas Instead, credit rating agencies use their judgment and experience in determining what public and private information should be considered in giving a rating to a particular company or government In banks, the internal credit rating summarizes the risk properties of the bank loan portfolio and is used to manage their risk Internal ratings can also be considered to contain evidences of the private information that banks possess, and distinguishes them from public ratings of credit bureaus and bond rating agencies The internal ratings are explicitly meant to reflect borrower default risk, not facility risk, nor the expected loss rate Internal ratings are the outcomes of a judgmental process that, depending on the type of firm (quoted or not) and the size of the exposure, was supported by quantitative tools The credit rating system is a “system to objectively evaluate credit risk (i.e the probability of future credit losses for the Bank) of borrowers and facilities (transactions) to which banks extend credit 1.1.2 The purpose of credit rating As mentioned previously, a credit rating is a comprehensive tool for assessment of an obligor’s creditworthiness, of reliability of its debt obligations and for establishing fee for relevant credit risk It allows the rating’s bearer to show potential investors and partners its creditworthiness without divulging any confidential information, and to make relations between obligor and investor highly transparent and efficient Assignment of credit rating enables quantification of credit risk, thus further realizing integrated control and management of the credit risk with other risks such as market risk, etc A high credit rating enables the obligor to get resources at lower rates, although a credit rating itself, whatever level it is, is a benefit for the obligor, since it exhibits information transparency of the entity rated 10 to control the credit risks on a group basis - MUFG Group will make efforts to smoothly provide funds by working on the appropriate control and management of equity capital, in light of the trends of international reformation of regulations on equity capital (3) Promotion of CSR management and strengthening the MUFG brand - MUFG Group aims to use finance to contribute to the realization of a sustainable society The MUFG Group works to reduce the environmental impacts and support biodiversity by applying its core business as a financial institution MUFG Group is supporting various activities under our CSR priority themes of "Addressing Global Environmental Issues" and "Nurturing Society's Next Generation" The employees of our many domestic and international branches also participate in charitable activities, as members of the international community and as good neighbors in their communities - MUFG Group will continue to leverage its unique capabilities as a comprehensive financial group to provide support so that necessary funds are supplied to companies and individuals that are passionate about social and environmental initiatives They will continue to offer products and services that directly lead to clients' social contributions and environmental projects - Based on the slogan "No in service, No in reliability, No in global coverage", the Group endeavors to maintain and strengthen the MUFG brand as one that is broadly supported and appreciated by people in society 3.1.2 Business strategy of BTMU in Vietnam It is seen that economic cooperation between Vietnam and Japan has gradually improved and broaden to higher level, create more attractive investment opportunities for Japanese investors in Vietnam Among bilateral donors of ODA, Japan stands out, with the biggest pledge of $1.64 billion to Vietnam for 2011 According to Ministry of Planning and Investment (MPI), Vietnam has attracted more than USD 11.57 billion in foreign direct investment (FDI) since the beginning of 2011 In terms of registered capital, Japan has just become the third biggest countries having FDI inflow in Vietnam (Source: http://www.mpi.gov.vn) Despite the slowdown of global economy recently, the number of Japanese corporation in Vietnam has been on the upward trend Currently, JCCI Association (Japan Chamber of Commerce and Industry) has totally 1000 members in Vietnam and this number is still being increased It is forecasted that in the coming time, 53 the number of Japanese companies will triple the current number To be in line this market trend and given the long-aged reputation of the No Bank in Japan, BTMU in Vietnam, in one hand, will continuously follow and contribute to the business target of MUFG group in order to be “No in service, No.1 in reliability, and No.1 in global coverage” and on the other hand, BTMU in Vietnam acknowledges the coming opportunities for expanding new products, establishing relationship with new customers, and developing current key banking activities 3.1.2.1 BTMU in Vietnam’s target to different type of customers BTMU in Vietnam will target the following type of customers: - Legal entities being diplomatic missions, representatives of international organization, foreign economic, social and charity organizations operating in Vietnam; - Legal entities being economic organizations with 100% foreign-owned capital in Vietnam; joint-venture enterprise between Vietnamese party(ies) and foreign one(s); Vietnamese economic organizations receiving foreign capital; - Legal entities Vietnamese economic organizations, especially focusing on State-owned enterprises; - Muti-national companies which BTMU has global relationship; - Foreign and local financial institutions operating in Vietnam 3.1.2.2 BTMU in Vietnam’s desire in providing diversified banking products and services In the time to come, in order to compete with both local and foreign banks, BTMU in Vietnam will focus on the following products and services: - Deposits (including non-term and term deposits, especially in local currency - Credit activities (including but not limited to lending (i.e commercial short/long term loans, project and structured finance); trade finance (i.e Issuance of Letter of Credit, Standby Letter of credit), Issuance of Letter of Guarantee - Factoring service - Payment/remittance services in both domestic and foreign remittance 54 - Foreign exchange transactions: Foreign currencies trading, Derivatives transactions (e.g SPOT, FORWARD, SWAP in currency and interest rate) - Dealing as treasury activities in domestic interbank market and participating in Open Market Operation held by SBV 3.1.2.3 BTMU in Vietnam’s plans in credit activities In order to improve credit activities’ quality, the Bank has following plans: - The Bank will diversify credit products to meet market demand, and actively provide financial consultation service to credit customers, especially Japanese credit customers who have relationship with Head Office/or other branches - BTMU Vietnam also target to Japanese-customer market segment, the Bank has planned to establish, maintain then expand credit relationship with non-Japanese customers, especially prestigious and reliable Vietnamese companies such as big SOEs, Vietnamese Group to provide structured finance/syndicated loans - Furthermore, the Bank will enthusiastically support potential Japanese investors by providing them with financial and economic information, as well as consultancy service on administration procedures in Vietnam These services are especially valuable to new investors who have intention to invest for the first time in Vietnam - The Bank will continue to develop business co-operation with local banks and other foreign banks via extending syndicated loans to highly feasible and big projects in Vietnam, especially governmental infrastructure projects - The Bank will also improve the quality and efficiency of credit granting together with other supporting services to meet promptly customers’ demand of payment and working capital The Bank will try to categorize its credit customers and focus on developing group of credit customers with rating over 5-2 By this way, the bank can enhance the quality and safety of credit activities 3.2 BTMU’s objectives in improving the bank’s credit rating system In fact, no single credit rating system is ideal for every bank BTMU, therefore, using its own criteria to build a “so-called perfect” rating system covering all below necessary attributes: - The system should be integrated into the bank’s overall portfolio risk management The system should take into account the foundation for credit risk measurement, monitoring and reporting, and support management’s decision making - The rating system should assign an adequate number of ratings to ensure that risks among normal customers are adequately differentiated The criteria for assigning each rating 55 should be clear and precisely defined using objective (e.g cash flow coverage) or subjective (e.g quality of management, willingness to repay) factors - Ratings must be accurate and timely Any update in customer’s business performance which might have negative effects to customer’s rating should be reported to management to re-evaluate its creditworthiness Management also can put some conditions/instructions before assigning credit rating to customer - Ratings should reflect the risks by both the borrower’s expected performance and the transaction’s structure Ratings should change when risk changes - The rating process should be independently validated in addition to regulatory examinations - The Bank should determine through back-testing whether the assumptions implicit in the rating definitions are valid or not, that is, whether they accurately anticipate outcomes or not If assumptions are not valid, rating definitions should be modified - The rating assigned to a credit should be well supported and documented in the credit file 3.3 Recommendations to improve credit rating system in order to strengthen credit risk management for Japanese corporate at BTMU in Vietnam 3.3.1 Recommendations to BTMU’s current assignment process of borrower rating in Vietnam 3.3.1.1 BTMU’s criteria for assignment of rating For quantitative criteria, a series of reasonable and consistent system of criteria has been built up Therefore, there’s no need to change or make any adjustment on these criteria For qualitative criteria, as mentioned in chapter II, there are still some illogical and incomprehensive issues that can affect the final rating result Non-financial analysis has not yet taken into account the impact of industry risk and credit relationship with the bank Therefore, some supplements of non- financial criteria are essential Firstly, in the stage of “adjustment for other risks”, the criteria of industry risk evaluation should be taken into account Each semester, BTMU Head Office will update and approve a negative list of industry based on various factors (i.e current situation, future development, growth potentiality etc.) This negative list is prepared and explained by the market research group of each area and each sector The industry which is considered as negative means that this industry is potentially in crisis or shall have no development expectation in short coming time Hence, it is obvious that the company which is operating in the sector which is listed in the negative list shall have some 56 potential risks From the above, it is suggested that if the company is operating in any of the negative list of industry, it will be downgraded by one (1) notch This conservative method shall protect BTMU from future risk such as default risk In case the company doesn’t work in negative industry, it will also be downgraded by one (1) rank if it applies both two below items: Table 3.3: Proposed checklist of adjustment of industry risk Items Market share Details of - The company accounts fordowngrade lower than 5% of the total market share, and - The company is the follower Prospect of industry development - The industry life cycle is matured and there's few potential chances for its further development - Market has no demand on this industry development Participants may withdraw and escape from the industry to find other new market Secondly, the author proposed to have some bonus factors for the borrower in rating evaluation in case credit customer has some positive in its performance The company will be up-graded by rank if it meets all following requirements: - The company submitted annual audited financial statement on time and this rating evaluation is prepared based on audited figure The audited figures shall be accurate and truly reflected as assessed by auditor No other auditor’s opinions mentioned in such financial statements - The company has maintained credit relationship with BTMU for over years - The company has never faced a default loan with any banks throughout its operation history - The average profitability earned from the company over USD 10,000 per month and the company gain profits for at least year consecutive - The company has standard collateral with the bank in credit activities The above mentioned suggestions are proposed in the primary evaluation only Overall, after revision, the borrower rating is gone through the following processes 57 3.3.1.2 Sources of information A complete credit rating evaluation needs a lot of information in different fields and aspects The more accurate the information is provided, the more accurate and efficient rating can be assigned Therefore, in order to improve the quality of rating system as well as strengthen credit risk management, the current rating system of BTMU should combine and take advantage of the following information: - Legal information When evaluating the credit worthiness of a company, it is very necessary for the bank to consider and update company profile Even before establishing any new credit relationship, KYC checking (“Know your customer”) has been conducted in order to classify the “purify” of the customer, when evaluating customer’s rating, BTMU should collect more detailed information about principal industry, history of establishment, legal status, board of its management, shareholders, legal capital, legal address, etc This information can be the essential supporting tools for the bank to give out exact and reasonable assessment to the company’s credit ability and position - Financial information Normally, annually audited financial statement of the company is the most reliable source for bank to evaluate credit rating In some cases, the bank fails to collect audited financial result from the company on time, the bank should try get projection or estimation of the financial statements or its latest figures A deadline shall be given then by credit division to apply the rating based on the unaudited figures for a short period of time The bank shall follow strictly to collect the audited financial statement at the soonest possible and prepare new rationale and adjustment for re-apply of rating For newly established companies, it is difficult to evaluate quantitative factors as the borrower rating normally is assigned based on the latest 3-5 year figures However, the bank can evaluate the quantitative factors by completing and carefully examining projections of the financial statements By this way, the bank can follow and keep track on the company’s business performance and how they can achieve such target - Information of credit relation with other financial institutions The bank has to consider the level of credit relation not only between the company and the bank but also between the company and other financial institutions For example, company who lost its payment capacity will be refused by other banks as cross-default Hence, exchanging information between banks is very important to update changes in market as well as company’s business performance However, this information is always considered to be secret of each bank, and will not be disclosed to others Therefore, BTMU can use another source to access to this information, which is CIC of SBV The 58 bank should subscribe to log in CIC website http://www.cicb.vn or www.creditinfo.org.vn to get credit information of a specific company - Information of industry, global and domestic market, and other macro-economic issues In addition to information directly related to the company, the bank also has to collect information of the company’s industry, its market share and targeted market both overseas and domestic, etc This information can give the bank an overview about customer’s position in the market as well as its potential in the future and it also has an indirect impact to the company’s business performance as well as its target achievement However, it’s not easy to update these kinds of information timely, exactly and effectively Therefore, credit analysis should collect and evaluate information from various types of sources like mass communication, knowledge, colleagues, specialist reports, BTMU global forum and seminar, etc 3.3.1.3 BTMU’s process of reviewing borrower rating Normally, BTMU in Hanoi just review credit rating annually one month prior to the expiry date of the current rating; for some special cases, the bank will carry out rating review irregularly under the instructions from Head Office However, this procedure in fact, can lead to some mistakes or problems when Head Office cannot cover and control every single customer closely and strictly Therefore, in this thesis, the following cases shall be proposed in case extraordinary rating review is required (1) A customer who not have submitted enough information for rating review (2) A customer who has just terminated a credit due to default loan (3) A customer where arrears for one month or more have occurred (4) A customer where arrears for over three months due to inheritance have occurred (5) A customer newly designated as a “customer to be controlled” according to compliance department (6) A customer who is affected by fluctuations in the parent company’s rating (7) A customer whose rating by external credit agency has been changed (8) A customer to which an event that may be considered to change its creditworthiness has occurred (i.e changes in rating of borrower’s location, leak of window-dressing settlement, likely to report a net loss, identification of insolvency during the term…) 59 As soon as facing one of the above cases, the bank has to review and adjust credit rating of the company if necessary This method will help the bank follow closely the company’s business performance and accordingly, make the rating close to its company’s activities and prospect Also, the related branch can actively control its credit quality and efficiency because the branch is the one who knows and acquires all necessary information of its customers 3.3.1.4 Automated Scoring Systems Currently, BTMU in Vietnam is using excel file to make credit rating evaluation in which credit analysis has to input the data and calculate the ratios manually Until now, BTMU in Vietnam has not had any automated scoring system which can be used consistently in assigning credit rating It has been seen in many financial institutions that an automated system has been introduced for rating evaluation which can save time a lot Therefore, it is necessary for BTMU in Vietnam to launch a commercial credit risk model as statistical models that estimate borrower risk Thanks to the advancements in computer technology, the internal risk rating processes can rely considerably on credit rating models The bank can use models to general financial ratios and calculate scoring to assign final ratings within a wide range of categories In addition, most commercial credit scoring models can estimate an obligor’s payment capacity as well as probabilities of default and to assign a quantitative risk score based on those probabilities quickly and accurately Hence, it is highly recommended for BTMU to build an online automated ratingassignment system which can be used consistently not only in Vietnam but also in all BTMU’s rating system In addition to that, all branches when evaluating rating for a customer have to take into consideration rating of their customer’s parent companies According to BTMU’s current practice, the rating of customer’s parent company shall be updated by primary office and informed to overseas branches via email However, there are many cases that the the primary office forget to update the latest rating of parent companies to overseas office or the oversea branches forget to update it in their borrower’s rating application Accordingly, borrower rating result is not judged exactly to some extent For these reasons, an automated system to update the rating automatically is necessary for BTMU in rating assignment In conclusion, an automated scoring system serves as an initial and primary screen for applications The benefits of an automated screen of applicants can include lower acquisition costs, time-saving and high speed of decision making 60 3.3.2 Recommendations to BTMU’s structure and policy 3.3.2.1 Improve efficiency and effectiveness of rating assignment of both BTMU’s management and staff In order to make rating process efficiently and accurately, BTMU Head Office should pay more attention in making a clear procedure in controlling the rating systems Board of Directors and Management The Board and management must build a procedure to ensure that a suitable framework exists to identify measure, monitor and control credit risk The procedure must identify and allocate responsibility among various department and staffs in order to control the borrower rating strictly and timely Credit staff Staffs should be well-trained and well understand about the bank’s procedure Staffs who apply for credit rating should be skillful in BTMU’s rating system and in credit analysis techniques BTMU currently assigns responsibility for evaluation of credit rating to their credit staff Credit staffs are the ones who contact directly with customers to get information and make adjustment on customer’s credit worthiness by themselves After rating is assigned, credit staffs will inform their back office to register into system The control of rating’s expiry date as well as rating’s reviewing has to be controlled by those credit staffs Therefore, the banks need to separate functions of front office and back office in which back office’s responsibility shall be enhanced in controlling credit rating of borrowers Back office should implement the double-checking functions and remind credit staffs by deadline of reviewing BTMU also should give more chances to their staffs to improve their own awareness and build up experiences Trainings and seminar should be held in order to guide as well as update staffs’s understanding about the bank’s procedure, analysis skills and market situation and challenges, etc Rating knowledge therefore can be shared between colleagues from different branches with different case studies in reality Moreover, newcomers in credit department in branches should also be required to attend professional courses in credit rating 3.3.2.2 Strengthen the cooperation between overseas branches and primary offices in Japan 61 Primary offices are the branches in Japan who is directly in charge of maintaining and enhancing the relationship with the parent company The co-operation between primary office and overseas branches must play an extremely important role in credit risk management Primary office should timely inform any updated information relating to the parent company as well as any changes in customer’s policy to overseas branches so that overseas branches can take appropriate actions and measures with the subsidiaries in Vietnam Moreover, in collaboration with Head Office, overseas branches like in Vietnam can access information related to business plan and policy of parent company; therefore can have an accurate evaluation on the outlook prospect of subsidiaries in Vietnam Hence, in order to improve the quality of borrower rating system, BTMU should immediately smoothen and strengthen the relationship between primary office and overseas branches 3.3.3 Proposals to State Authorities 3.3.3.1 Standardize legal regulations on accounting standard International Accounting Standards (IASs) and International Financial Reporting Standards (IFRSs) are composed and issued by the International Accounting Standards Board (IASB), based on a close and solid procedure to ensure the quality and practice of accounting standards IASs/IFRSs have been using popularly and widely all over the world Many other countries in Asia as well as in the world are adjusting their own accounting standards to make them more suitable with IFRS and minimize all differences and discrepancies if any In Vietnam, the Vietnamese Accounting Standards (VAS) was initially introduced and issued in 2001 by Ministry of Finance Since then, VAS has been revised and currently includes 26 accounting standards Although VAS is based on IFRS and has been adjusted to adapt with new market condition as well as international accounting practices, VAS still exists ambiguous issues The discrepancies inside VAS and even differences between VAS and IAS have led to lots of difficulties to companies’ accounting issues, especially Japanese companies Many companies have to make internal financial reports based on IAS/IFRS, and reports submitted to Vietnamese authorities based on VAS, meaning that there are two accounting systems simultaneously existing inside a company In some cases, the difference of those two accounting standard has led to different results in companies' business performance For example, according to VAS, the company made loss but according to IFRS, company's profit is still positive This may cause inaccuracy and difficulties for the bank when following up customers’ business performance, which indirectly impacts the final rating results Accordingly, it is very necessary to improve and amend the current VAS to make it more consistent and suitable with international accounting standards and 62 practices 3.3.3.2 Improve the quality and efficiency of inspection, control and supervision in companies’ legal compliance In Vietnam, there are a wide range of legal regulations and laws regulating company’s business activities However, there a fact that Vietnamese regulations and laws system is complicated, instable and ambiguous to follow Especially, the ambiguity of the law system has resulted may difficulties for local authorities to manage and control activities of legal entity Hence, the efficiency of legal regulation system should be improved on the basis of high consistence, solidity, reliability and coherence Authorities should implement strong measures of punishment to any entity that intentionally breaks the law for the sake of itself interest On the other hand, the responsible authorities are necessary to reinforce and strengthen the functions of control, supervision and inspection all business activities coverage such as tax, custom, accounting, statistics, etc Once the company complies with legal regulations, the bank's evaluation on company's business performance will also be more accurate and efficient 3.3.3.3 Establish and develop professional credit rating agencies in Vietnam In consideration of the development of global economy, Vietnamese Government should consider about the establishment and development of credit rating agencies under the type of private, state-owned or joint-venture Nowadays, in the modern economy, credit rating agencies (CRA) help provide risk measures for various entities and make it easier for financial market participants to assess and understand the credit risk of the parties involved in the investing process Therefore, the appearance of credit rating agencies is vital for the sustainable development of Vietnamese economy currently CRA provides an independent and objective credit measures to players in the capital market Rating provided by CRA can be used as a source of reference for commercial banks when granting rating to their own customers Many external prestigous CRAs such as Moody and Fitch have proved their great importance in assigning rating for companies Thanks to that, final borrower rating result inside BTMU will be much more precise and effective In addition, BTMU also takes into consideration rating assigned by these CRAs when adjusting its final result Hence, BTMU in Vietnam will have more information and reference basis for its final decisions when a professional credit rating agency is established in Vietnam 63 CONCLUSION With a view to improving the quality of credit activities as well as strengthening credit risk management of BTMU in Vietnam, the thesis “Improving credit rating system of BTMU for Japanese companies in Vietnam” has worked out some key issues Firstly, the thesis systematized and consolidated literature theories on credit activities, credit risk and credit risk management through credit rating system Secondly, BTMU’s business activities especially credit activities in Vietnam were evaluated and analyzed in details to find out achievement together with problems existing in the current rating system Based on actual banking activities, the thesis chose some specific situation to illustrate the holes in BTMU’s rating system in Vietnam Finally, in order to improve this rating system, the thesis gave out lots of recommendations such as supplement in non-financial analysis, cases of borrower rating review, strengthening relationship between overseas branches and Head Office, improving qualification of staff, standardizing legal regulations, etc These recommendations are proposed to not only the bank but also responsible State Authorities so that it will be more effective to change In fact, in order to increase the precision and effectiveness of credit risk measurement and management, the development path of credit rating system in commercial banks will never stop Banks will develop more robust internal risk rating processes by implementing advanced portfolio risk management practices and improving the processes for measuring and allocating economic capital to credit risk In addition, expanded risk rating system requirements will also be anticipated for banks that assign regulatory capital for credit risk in accordance with the Basel Committee on Bank Supervision’s proposed internal-ratings-based approach to capital Therefore, in order to have a complete credit rating system, it is necessary to continue researching, improving and upgrading the internal credit rating system for the Bank to adapt with the outside context of challenging banking industry, big progress in information technology, complex and demanding customers Due to the author’s own difficulties in time arrangement, information collection and limited knowledge to complete this study, shortcomings in this paper is unavoidable Thus, the author highly appreciates all value comments, advices and proposals to improve the thesis’s quality 64 LIST OF REFERENCES Ministry of Finance, Circular 117/2005/TT-BTC on guidance of determining market price in transactions among associated parties, 19th December 2005 Governor of State Bank of Vietnam, Decision 493/2005/QD-NHNN on debt classification, provisioning and use of provisions against credit risks in operation of financial institutions, 22 nd April 2005 Supervision group, Risk and information technology examination department, Credit risk examination manual, The foreign bank’s association, 2002, page 4 Alain Laurin and Giovanni Majnoni, Bank Loan Classification and Provisioning Practices in Selected Developed and Emerging countries, The World Bank, March 2003 United Nations Conference on Trade and Development, Credit Rating Agencies and their potential impact on developing countries, United Nations, Discussion papers No 186, January 2008 William F.Treacy, Credit Risk Rating at Large U.S Banks, Federal Reserve Bulletin, November 1998 Andrew McDonald and Guy Eastwood, Credit Rating at Australian Banks, Australia Prudential Regulation Authority, Working paper 7, December 2000 Asian Development Bank, Handbook on International Best Practices in Credit Rating, December 2008 Comptroller of the Currency Administrator of National Banks, Rating Credit Risk – Comptroller’s Handbook, April 2001 10 Tran Xuan Nam, So sánh chuẩn mực kế toán Việt Nam kế toán quốc tế, “tinnhanhchungkhoan” magazine, June 2010 11 Lawrence J White, the credit rating industry: an industrial organization analysis, New York University, 20 April 2001 12 Bina Lehmann, Is it worth the While? The Relevance of Qualitative Information in Credit Rating, 17 April 2003 13 Jens Grunert and Lars Norden and Martin Weber, The Role of Non-financial Factors in Internal Credit Ratings, 28 February 2002 14 Business Monitor International, Vietnam Business Forecast report, 3Q of 2012 15 Liliana Rojas-Suarez, Rating Banks in emerging markets: What Credit Rating Agencies should learn from Financial Indicators, March 2008 16 Mitsubishi UFJ Financial Group, Audited Financial Statement year ended 31st March 2011, 65 April 2011 17 Internal credit rating documents of BTMU and BTMU in Vietnam 18 Internal credit rating documents of Vietcombank 19 Internal credit rating documents of BIDV 66 20 Websites http://en.wikipedia.org/wiki/Credit_rat in g http://www.credit info.org.vn http://www.jcr.co.jp/english/ http://www.standardandpoors.com/ho me/en/us/ http://v3 moodys.co m/Pages/default.aspx http://www.fitchratings.com/index_fitchrat ings.c fm http://www.sbv.gov.vn/ http://www.mo f.gov.vn/portal/page/portal/mo f_vn http://www.mpi.gov.vn/portal/page/portal/bkhdt http://www.cic.com vn/ http://www.vfr.vn http://www.mufg jp/english/ 67 ... of some international Credit Rating Agencies and Commercial Banks in Vietnam Chapter 2: Credit rating system in BTMU for Japanese companies in Vietnam - Introduction about BTMU in Vietnam - Introduction... ON CREDIT RATING SYSTEM FOR COMPANIES IN COMERCIAL BANKS 1.1 Credit rating system for companies 1.1.1 Definition of credit rating Credit rating is a process which estimates the credit worthiness... primary rating score Regarding borrower’s location risk, ceiling rating for Japanese companies in Vietnam is while ceiling for Non – Japanese companies in Vietnam is – Because rating of Japanese companies