Credit risk management for personal banking at vietnam prosperity joint stock commercial bank– ben thanh branch

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING UNIVERSITY OF HO CHI MINH CITY DOAN HOANG MINH CREDIT RISK MANAGEMENT FOR PERSONAL BANKING AT VIETNAM PROSPERITY JOINT STOCK COMMERCIAL BANK– BEN THANH BRANCH GRADUATION THESIS MAJOR: FINANCE AND BANKING CODE: 7340201 SUPERVISOR PH.D LE THI ANH DAO HO CHI MINH CITY, 2021 MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING UNIVERSITY OF HO CHI MINH CITY DOAN HOANG MINH CREDIT RISK MANAGEMENT FOR PERSONAL BANKING AT VIETNAM PROSPERITY JOINT STOCK COMMERCIAL BANK– BEN THANH BRANCH GRADUATION THESIS MAJOR: FINANCE AND BANKING CODE: 7340201 SUPERVISOR PH.D LE THI ANH DAO HO CHI MINH CITY, 2021 ABSTRACT Credit risk has always been a vicinity of concern not only to bankers but to all in the business world because the risks of a trading partner not fulfilling his obligations in full on the due date can seriously jeopardize the affairs of the other partner At the VPBank, credit risk management is always the top concern of the managers accompanying credit development Even though operational profit and credit development achieved numerous excellent outcomes from 2018 to 2020, overdue debt is high and continuously increases over time, which is a significant worry for the Bank The objective of this study is to have a clearer picture of VPBank's credit risk management, thereby making comments on the advantages and disadvantages of risk management at the Bank along with recommendations for the Bank, VPBank, the State Bank, and the Government In this light, the study undertook based on a combination of credit risk theory, credit activity analysis, and the current situation of credit risk management at VPBank Ben Thanh Branch from 2018 to 2020 As a result, solutions to reduce credit risks had offered to improve personal credit risk management at the Bank DECLARATION OF AUTHENTICITY This thesis is the author's research work, the research results are honest, in which there is no previously published content or content made by others except for source citations in the thesis Ho Chi Minh City, September 2021 Doan Hoang Minh ACKNOWLEDGE No one walks alone on the journey of life Apart from my efforts, the success of any report depends largely on the encouragement and guidelines of many others This study bears on the imprint of many people I take this opportunity to express my gratitude to the people who have has been instrumental in the completion of this study First and foremost, I would like to convey my heartfelt appreciation to my advisor, Ph.D Le Thi Anh Dao, for her unwavering support of my research, as well as her patience, inspiration, enthusiasm, and immense knowledge Her advice was invaluable throughout this study's research and writing I couldn't have asked for a better advisor and mentor for my studies Besides my advisor, I would like to give special thanks to all teachers at the Faculty of Finance and Banking - Banking University of Ho Chi Minh City, who have imparted extensive knowledge as well as hands-on experience for me during my studies at school, as well as creating conditions for me to develop my strengths I also appreciate and sincerely thank the managers and all staff at Vietnam Prosperity Commercial Joint Stock Bank - Ben Thanh Branch for welcoming me as an intern and for their assistance and guidance Thank you for your passionate assistance in facilitating practical interaction, gaining experience, and providing the required knowledge Last but not least, I would like to thank my family, who always have spiritual support, and friends who have always been a source of encouragement and support for me during the study TABLE OF CONTENTS INTRODUCTION .1 OVERVIEW OF RESEARCH SITUATION, THEORETICAL BASIS ON CREDIT RISK AND CREDIT RISK MANAGEMENT 1.1 Bank credit activities 1.1.1 The concept of bank credit 1.1.2 Credit classification 1.1.3 Concept of personal credit 1.1.4 Features of personal credit 1.2 Credit risks in banks 1.2.1 Concept of credit risks 1.2.2 Classification of personal credit risk 1.2.3 Factors of credit risk 1.2.4 Credit risk measurement 12 1.3 Credit risk management 15 1.3.1 Concept of credit risk management 15 1.3.2 Credit risk management procedure 15 CONCLUSION CHAPTER .22 CURRENT SITUATION OF personal CREDIT RISK MANAGEMENT AT VPBANK - BEN THANH BRANCH 23 2.1 Overview of VPBank - Ben Thanh Branch 23 2.1.1 General introduction about VPBank 23 2.1.2 General introduction about VPBank Ben Thanh Branch 24 2.1.3 Organizational structure, functions, and tasks of VPBank - Ben Thanh Branch .25 2.2 Business performance of VPBank - Ben Thanh Branch in the period of 2018 2020 .26 2.2.1 Overall assessment of VPBank's business results - Ben Thanh Branch 26 2.2.2 Loan mobilization of VPBank – Ben Thanh Branch .28 2.2.3 Credit activity at VPBank - Ben Thanh Branch .30 2.3 Current situation of credit risk management for personal customers of VPBank - Ben Thanh Branch Error! Bookmark not defined 2.3.1 Credit risk management organizational structure at VPBank 31 2.3.2 Credit activities of personal customers at VPBank – Ben Thanh Branch 32 2.3.3 Overdue debt and risk provision for personal customers at VPBank – Ben Thanh Branch .35 2.4 Current situation of credit risk management for personal customers at VPBank - Ben Thanh Branch 38 2.4.1 Credit risk identification 38 2.4.2 Credit risk measurement 39 2.4.3 Credit risk monitoring and control 43 2.4.4 Credit risk financing 44 2.5 Assessing the current situation of credit risk management of personal customers at VPBank - Ben Thanh Branch 46 2.5.1 Achievements 46 2.5.2 Limitations 47 2.5.3 The cause of the limitations 48 CONCLUSION OF CHAPTER 52 SOLUTIONS TO IMPROVE PERSONAL CREDIT RISK MANAGEMENT AT VPBANK - BEN THANH BRANCH 53 3.1 General orientation on credit development at VPBank 53 3.2 Orientation to develop credit activities of personal customers at VPBank Ben Thanh Branch 54 3.3 Credit risk management solutions at VPBank - Ben Thanh Branch 54 3.3.1 Fully execute and review the credit procedure on a regular basis 54 3.3.2 Enhance exploitation of customer relationship management systems (CRM) .55 3.3.3 Improve the quality of staff 56 3.3.4 Strengthen appraisal and assessment for new loans 56 3.3.5 Set up risk provisions for bad debts, overdue debts and actively handle bad debts and overdue debts .57 3.4 Some other recommendations .57 3.4.1 Recommendations for VPBank 57 3.4.2 Recommendations to the State Bank of Vietnam 59 3.4.3 Recommendations to the Government .60 CONCLUSION OF CHAPTER 61 Conclusion .62 LIST OF ABBREVIATIONS No Abbreviations Definition VPBank SMEs Small and medium enterprises EAD Exposure at Default PD LGD EL Expected Loss CIC Credit information center CRM Customer relationship management eKYC Electronic know your customer 10 FATCA Vietnam Prosperity Joint-Stock Commercial Bank Probability of Default Loss Given Default Foreign Account Tax Compliance Act LIST OF TABLES Table 2-1 - Business performance of VPBank – Ben Thanh Branch in 2018 - 2020 26 Table 2-2 - Loan mobilization of VPBank – Ben Thanh Branch in 2018-2020 .28 Table 2-3 - Credit activity of VPBank – Ben Thanh Branch in 2018-2020 .30 Table 2-4 - Loan classification by term of VPBank – Ben Thanh Branch in 20182020 33 Table 2-5 - Loan classification by type of loans of VPBank – Ben Thanh Branch in 2018-2020 34 Table 2-6 - Debt classification for personal customers of VPBank – Ben Thanh Branch in 2018-2020 35 Table 2-7 - Bad debt and overdue debt ratio for personal customers of VPBank – Ben Thanh Branch in 2018-2020 36 Table 2-8 - Risk provision for personal customers of VPBank – Ben Thanh Branch in 2018-2020 .37 Table 2-9 - VPBank Internal Credit Rating System for Personal Customers 40 Table 2-10 - VPBank Internal Credit Rating System for Collaterals .41 Table 2-11 - VPBank Internal Credit Rating Result 42 Table 2-12 - Risk Provisioning Levels .44 LIST OF FIGURES Figure 2-1 - Organizational structure of VPBank – Ben Thanh Branch 25 50 (consumption, investment, export) is reduced, thereby reducing production activities and economic growth, disrupting the input supply chain The stagnation of commercial business caused many businesses to cut jobs or even declared bankruptcy due to their inability to cope with the epidemic Therefore, the unemployment rate has increased continuously Those effects have directly affected customers' ability to repay loans despite the Bank's policies to support interest rates as well as debt rescheduling Consequently, the ratio of overdue debt was in the upward trend causing difficulties in credit risk management ➢ The customer data information system is incomplete and synchronous between the Banks At present, commercial banks still limit exchanging information about customers' situations with other banks for competitive reasons In addition, the information in the credit information system (CIC) of the state bank has not yet met the Bank's demand for accuracy, timeliness, and completeness of the output information This data information is an essential basis in the process of assessing as well as measuring credit risk from customers ➢ Risks from borrowers Moral hazard can come from the Bank itself or the borrower, which causes negative consequences for depositors and the Bank itself Moral hazard comes from the customer may manifest through intentionally hide information or provide false information with reality These activities would hinder the process of customer authentication and appraisal In addition, customers' willingness to repay loans is considered an essential factor in the causes of credit risk from customers If customers don't want to make debt payments, the Bank will find difficulties approaching, persuading, and collecting overdue debts In addition, risks also arise when customers use loans for the wrong purposes For example, customers use ordinary business loans to invest in real estate, invest in securities, use short-term loans for medium and long-term investments 51 Furthermore, employment status, financial ability, and business management capacity are also the causes of risk formation During the working and business progress, there are many events beyond the control and management capacity of the customer These events may affect the customer's ability to repay, especially in the current unstable economic context 52 CONCLUSION OF CHAPTER In Chapter 2, I had analyzed and assessed the current situation of credit risk management at VPBank - Ben Thanh Branch VPBank - Ben Thanh Branch has gained many achievements in credit activities and personal credit risk management, which has made an enormous contribution to profit growth and stable bad debts at the bank On the other hand, personal credit risk management at the bank also revealed many limitations Thus, the manager needed to seriously review to come up with measures to adjust and overcome to quickly reduce overdue debts, bad debts, and irrecoverable debts to improve credit quality, thereby increasing the efficiency of credit operations at the bank in the coming time 53 SOLUTIONS TO IMPROVE PERSONAL CREDIT RISK MANAGEMENT AT VPBANK - BEN THANH BRANCH 3.1 General orientation on credit development at VPBank In 2020, the global economy experienced a challenging year due to the advert effects of the Covid-19 pandemic The recovery of global economic growth will depend heavily on the successful implementation of vaccination programs against Covid-19, the spirit of cooperation, and mutual assistance between nations In addition, VPBank is entering the fourth year of drastic implementation of the 5-year strategy from 2018 - 2022 to become a consumer-friendly bank thanks to the application of technology To proactively respond to uncertainties and challenges of the business environment and grasp opportunities from the positive growth of the Vietnamese economy, VPBank's Board of Directors has set the following objectives Recognizing and taking full advantage of new business opportunities, in parallel with ensuring the safety of the system and sustainable development for the Bank, contributing to enhancing VPBank's position in the overall strategy to compete with other banks' rival banks Continuing to invest in important strategic technology initiatives to prepare for the Bank's strong integration in the digital era These are the foundation for VPBank's pioneering in technology applications that have a direct impact on growing the Bank's business and performance, improving customer experience, and expanding transactional banking ecosystems Continue to maintain reasonable growth in all business segments, strict management of potential risks, strictly control credit quality, accumulate resources to be ready for the next stage of development Capture market conditions to optimize loan, promote lending and sales activities to join customers in taking advantage of the economic recovery Continue to increase 54 the proportion of non-credit revenue sources, strengthen the profit structure for sustainable growth 3.2 Orientation to develop credit activities of personal customers at VPBank Ben Thanh Branch The lending business development orientation lies in the overall orientation and strategy of the entire VPBank system Persevering with the goals set out in the strategy, VPBank Ben Thanh Branch continues to adhere to the motto of qualitycentered development, focusing on selecting key and pervasive initiatives to achieve strategic and business objectives The main theme of the Bank's business development orientation is to continue efforts to maintain growth across all business divisions, especially in strategic segments In addition, growth in scale (lending, deposit, revenue, etc.) must go hand in hand with efficiency improvement (sales productivity, operational efficiency, risk management, etc.) During the difficult period of the Covid-19 epidemic, banks need to maintain core business activities and support customers in debt repayment Furthermore, personal loans need to be managed by portfolio and closely monitored to provide customer support measures and early detect potential risks to help VPBank - Ben Thanh Branch takes appropriate measures promptly remedied 3.3 Credit risk management solutions at VPBank - Ben Thanh Branch 3.3.1 Fully execute and review the credit procedure on a regular basis The credit procedure is critical for reducing errors and hazards in lending and enhancing loan quality As a result, the credit department employees must adhere to a precise credit process that includes receiving papers, evaluating customers, evaluating projects, disbursing loans, and maintaining and recovering debts The credit process plays an essential role in limiting errors and risks when lending and improving the quality of loans Therefore, it is required the credit department staff strictly implement the credit process from receiving documents, appraising customers, appraising projects, disbursing loans to managing and recovering loans 55 In terms of collecting information and appraising customers, credit officers should pay attention to verify the information provided by the customer, compare this information with the original ones, and making an accurate and transparent assessment of customers' financial capacity and debt repayment ability Credit officers need to regularly review and re-evaluate customers' credits, employment status, business situation, and debt repayment ability, especially after disbursement Thus, the Bank has good preparation before changes to provide support solutions for customers while still ensuring safety and profit for the Bank To the above, managers must monitor, inspect, and urge their employees to comply with the Bank's credit procedure 3.3.2 Enhance exploitation of customer relationship management systems (CRM) VPBank is one of the pioneer banks in digital technology and digital transformation in the Banking industry Since many years ago, a series of projects to digitize operation processes, apply technology to develop products and services have been implemented by VPBank so far, including the customer relationship management system (CRM) Regularly, the system provides a list of potential customers for credit officers to exploit and sell products However, many credit officers are still not taking advantage of the technology system in finding new customers Through the CRM system, credit officers would save time in finding new customers, confirming their customers, increasing sales productivity, and minimizing risks from new customers Because the majority of customers on the list are existing customers, have been automatically assessed by the risk assessment system, and have a good credit history with VPBank and other banks In addition, for managers, reports that update customer information such as call schedules or meetings will assist them in controlling the work of credit officers and receiving warnings about customers' risks from the system Moreover, searching and continuously updating customer information into the CRM system will contribute to building a unified and highly accurate internal information system Because of these conveniences, credit 56 officers should be more active in finding potential customers through the CRM system 3.3.3 Improve the quality of staff Credit officers are the first line of defense in the credit risk management strategy at the Bank, taking on the role of daily risk management Therefore, it is necessary to build a team of credit officers with high professional qualifications, sharp intuition, and professional ethics to minimize credit risks at the Bank Through professional training classes, regular and direct seminars for employees, banks should promote and establish suitable conditions for academic staff to develop their professional qualifications, awareness of professional ethics, banking culture, and hazards in banking activities At the same time, it is necessary to periodically evaluate and check the knowledge of employees about product information, loan processes, regulations on credit risk, etc., so that credit officers can review the necessary expertise In addition, to improve the quality of staff, managers should organize an internal contest on product sales with appropriate prizes to stimulate the staff's working spirit Moreover, issuing internal regulations, reward and punishment policies must be transparent and clear The Bank needs to make a timely reward for the staff that works effectively and complies with the internal regulations On the other hand, the Bank must also conduct purification and remove the weak employees whose professional ethics are lacking 3.3.4 Strengthen appraisal and assessment for new loans As analyzed above, VPBank - Ben Thanh Branch’s home loans, in which the majority are project real estate and unsecured consumer loans with a high rate Currently, the apartment rental market still faces many difficulties as a result of the supply-demand gap is getting more and more severe due to the disappearance of affordable apartments and the oversupply of high-end apartment products, which is causing rental demand to fall Besides, the situation of local land prices surprisingly 57 increased in some projects and localities is still happening, requiring the intervention of the authorities Therefore, to avoid lending risks, banks need to be careful in appraising the value of collateral assets and real estate projects before making a lending decision, especially for those projects that have not yet been associated with VPBank In addition, for unsecured consumer loans, due to the epidemic situation, it will directly affect the employment and income of customers, causing difficulties in debt repayment and bad debt handling if any insolvency occurs Therefore, the Banks need to carefully assess the legal status, credit history, and repayment ability of borrowers when granting new loans In addition, banks should also choose credit growth in the direction of gradually reducing unsecured loans 3.3.5 Set up risk provisions for bad debts, overdue debts and actively handle bad debts and overdue debts The prolonged pandemic causes the economy to stagnate and make the job market unstable which causes the overdue debt to escalate Banks need to regularly classify debts and make provisions to deal with risks in their operations to proactively respond to possible risks and ensure banking business takes place safely Avoid the situation because of fear of decreasing business results due to the surge in provision expenses without strictly complying with the classification of debts and provisioning for risks The managers will monthly report about the credit quality, the credit-granting list based on customers, problem credits, and handling measures to the risk management division, regional director, debt settlement department, and others to consider and decide on the level of provisioning and handling of credit risks 3.4 Some other recommendations 3.4.1 Recommendations for VPBank Firstly, the Bank needs to strengthen the inspection and supervision of credit VPBank needs to monitor and control credit risk for each credit facility and the 58 entire credit portfolio, have a system to monitor and control the quality of the credit portfolio daily and implement handling measures when credit quality deteriorates In addition, credit risk control activities need to be implemented throughout the lending procedure It is necessary to have the State bank's inspection agency, the control department (including the control department, internal inspection, credit administration), and external monitoring mechanisms (such as independent auditing agencies, financial supervision committees, etc.) participate in this process In addition, monitoring and controlling risk management is an indispensable part of ensuring the quality of management credit risk management Therefore, it is necessary to strengthen the monitoring and controlling role of the risk management department Credit reviews should be conducted at least once a year or more frequently for problematic credits Based on that result, to issue warning reports, recommendations to improve the quality of credit risk management were developed and discussed with the risk manager and submitted to the Board of Directors, the Bank's Executive Board for the right decisions Second, VPBank needs to improve the professional ethics of its employees To that, the Bank needs to issue internal regulations on strict business management, not creating loopholes for employees to profit from dishonesty In addition, the Bank also needs to strengthen the internal audit process and create clear standards in the performance of official duties of leaders and employees Moreover, there should be strict sanctions for handling professional ethics risks These sanctions need to be strong and have a deterrent effect for cases with severe consequences Besides, it is necessary to promote a mechanism to receive information denouncing violations of professional ethics Also, the Bank should recruit new employees of good quality and closer to actual needs, arranging the right people for the right jobs Besides, increase job rotation, especially for senior management Furthermore, in training and retraining, the manager should foster and raise awareness for staff on professional ethics and banking culture Finally, effective communication measures are needed 59 Third, VPBank increased the ratio of secured loans The situation of unsecured loans of VPBank in recent years has led to difficulties in debt settlement Indeed, unsecured loans have incurred risks in the past, making debt collection extremely difficult; this is the reason for credit quality reduction by ensuring credit quality Thus, the bank must raise the proportion of secured loans to improve credit quality, as collaterals are the second source of client payback In addition, VPBank needs to regularly re-evaluate the value of the collateral to match the market value and require customers to buy insurance for the collateral Finally, the State Bank of Vietnam has issued a circular on debt rescheduling, exemption or reduction of interest and fees, retention of debt category to assist borrowers affected by the Covid-19 pandemic Therefore, throughout the debt rescheduling process, VPBank needs to provide all staff with consistent regulations and guidelines Avoid lengthy debt rescheduling document processing issues which raise the client debt group Furthermore, VPBank should tighten the monitoring of the debt rescheduling as well as enhance risk provisions in order to respond proactively to potential risks 3.4.2 Recommendations to the State Bank of Vietnam Firstly, the State Bank needs to improve the quality of credit information The State Bank of Vietnam needs to further improve the quality of credit information at the CIC (Credit Information Center) to meet the requirements of up-to-date and accurate information about customers In addition, it is necessary to have appropriate propaganda measures so that commercial banks can see their rights and obligations in the provision and use of credit information Furthermore, the State Bank should take harsher actions against banks who transmit credit information to the CIC center, which is delayed and erroneous because there are numerous credit bureaus in reality publishes credit reports irregularly and not ensure the timeliness or correction with its figures In addition, it is also necessary to improve CIC's website so that the website always works well, regularly updates the Bank's credit information, ensuring that banks always get accurate and timely information 60 Second, the State Bank should promote its role as a focal point for information exchange between banks The State Bank should organize regular training courses and invite banks to send their staff to participate Through these training courses, credit officers will have the opportunity to meet and exchange experiences with each other In addition, periodic seminars organized by the state bank with the participation of commercial banks will help banks boldly present their opinions on the inadequacies of regulations Moreover, this is also a place for state-owned bank leaders to explain and guide the implementation of new regulations and policies for banks 3.4.3 Recommendations to the Government The Government needs to give guidelines to stabilize the socio-economic situation The COVID-19 outbreak has brought unprecedented challenges and is predicted to have significant impacts on the development of Vietnam's economy shortly Economic stability is a precondition for the stabilization of company activities, and it is the foundation for commercial banks to resolve bad debts more rapidly and stabilize the firm Therefore, the Government needs to come up with policies to limit the spread of the disease and support businesses and people Specifically, the Government needs to quickly localize and restrict activities with large interactions, test on a large scale, and deploy vaccines for the entire population to limit the spread of the disease In addition, the Government also needs to come up with social security policies such as paying unemployment insurance, supporting people who are temporarily suspended from work, subsidizing the poor, etc 61 CONCLUSION OF CHAPTER Based on the assessment of the current situation of Chapter 2, Chapter has outlined the development orientations of VPBank shortly and proposed solutions to improve the personal credit risk management at VPBank - Ben Thanh Branch In addition, I also made some recommendations to state banks and the government to create favorable conditions for the bank's business operations and risk management 62 CONCLUSION Credit risk is the basic risk for most commercial banks because credit transactions are generally based on trust Therefore, credit activities always have potential risks that banks cannot control The research and application of measures to limit, prevent and minimize risks in credit activities is a top task at VPBank Success in limiting credit risk is about controlling risk to a loss rate lower than or equal to the expected loss The thesis has outlined the concepts of banking business, credit risk, and credit risk management at banks From there, analyze and evaluate the status of business operations and personal credit risk management at the Bank On that basis, the thesis has pointed out the weaknesses, strengths, and causes of weaknesses in the personal credit risk management of the Bank Thereby, propose solutions to improve personal credit risk management for the Bank, VPBank, the State Bank, and the Government However, due to limited knowledge and research time, the research topic cannot avoid errors and defects I sincerely welcome your comments and suggestions to complete the study Sincere thanks to the Faculty of Banking, Banking University of Ho Chi Minh City Especially, Dr Le Thi Anh Dao, who has spent a lot of time and effort to guide and help me to complete this study 63 REFERENCES Joel Bessis (2010), Risk management in banking, John Wiley & Son Ltd Barbara Casu, Claudia Girardone and Philip Molyneux (2006), Instruction to banking, Pearson Education Limited The Hong Kong Institute of Bankers (The HKIB) (2012), Bank Lending, John Wiley & Sons Singapore Pte Ltd Amalendu Ghosh (2012), Management risk of commercial and retail banking, John Wiley & Sons Singapore Pte Ltd Basel Committee (2000), Principles for the Management of Credit Risk Basel Committee on Banking Supervision (2006), Sound credit risk Assessment and Valuation for Loans MAS (2013), Guidelines on risk management practices - credit risk KPMG (2011), Credit risk under Basel Bui Dieu Anh (2020), Bank credit, Ho Chi Minh City Economic Publishing House 10 Nguyen Minh Kieu (2009), Banking Risk 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RESEARCH SITUATION,... Ben Thanh Branch 26 2.2.2 Loan mobilization of VPBank – Ben Thanh Branch .28 2.2.3 Credit activity at VPBank - Ben Thanh Branch .30 2.3 Current situation of credit risk management for personal. .. debt and risk provision for personal customers at VPBank – Ben Thanh Branch .35 2.4 Current situation of credit risk management for personal customers at VPBank - Ben Thanh Branch