NATIONAL
ECONOMICS UNIVERSITY
GROUP 2
CREDIT RISK
MANAGEMENT IN
VIETNAMESE
COMMERCIAL BANK
Class: Advanced Corporate Finance 62A
Instructor: Mrs. Phong Chau Le
Table Of Content
I/ Introduction
03
II/ Overview of credit risk & credit risk
management
06
III/ Current status of credit risk
management in Vietnamese
commercial
18
IV/ Recommendations for improvement
of credit risk management in
26
Vietnamese commercial banks
V/ Conclusion
29
Vietnam is in the process of
economic renovation, to gradually
develop and integrate with the
economies of countries in the
region and the world. In order for
the country's economy to succeed
and achieve encouraging results in
recent times, the banking industry
as an economic lever plays an
extremely important role through
credit activities.
Bank credit is a capital financing
tool for the economy, promoting
the balanced development of the
fields under the direction of the
State. However, banking credit
activities are activities that contain
many risks.
03
I- Introduction
Risks in credit activities not only affect commercial banks
themselves but also negatively affect the economy. This is
a hot issue which atracts the attention of many financial
experts in the banking sector. At the same time, we
realize that this is a topic closely related to our learning
content. Therefore, our group decided to choose the
topic: "Credit risk in Vietnamese commercial banks''.
This project is conducted to assess the current situation
of credit risk at Vietnamese commercial banks. From
there, we propose appropriate and effective solutions
that can contribute to perfecting and improving credit risk
management, and at the same time, ensuring safety and
efficiency in business activities of commercial banks in
our country.
Group 2 - Advanced
Corporate Finance 62A
NEWS
1. Domestic News:
a) 4 more banks are allowed to expand credit limits (Vietstock.vn):
According to the latest report from VNDirect, 4 joint stock commercial banks including VPBank (VPB),
HDBank (HDB), MB (MBB) and Vietcombank (VCB) have been adjusted more credit limits for 2022.
Notably, these are banks that have participated in restructuring weak financial institutions according
to the policy of the State Bank (SBV). These banks have been allowed to relax their credit limit on
September 7th and this is the second increase. Specifically, VPBank was increased by 11.5
percentage points, bringing the total credit growth limit in 2022 from the initial 15% to 27.2%.
HDBank is allowed to increase its credit limit by 5.1%. Thus, this year, HDBank is likely to increase its
credit by 23.5%. These are also the 4 banks with the highest credit limit in the system up to the
present time. Meanwhile, the remaining banks are only granted with a limit of 10-15%/year.
According to VNDirect's calculations, after this adjustment, about 83.5 trillion VND will be added to
the economy. VNDirect also updated the credit growth in 2022 of 18 banks (accounting for about
80% of system credit). Accordingly, after the adjustment, the total credit growth of this group will
reach about 13.6% at the end of the year. VNDirect believes that this is a move to reallocate credit
limits among commercial banks and the SBV's target of 14% is still maintained. Previously, a number
of other banks had been allowed to extend their credit limit, but due to the limit being too low, they
were almost in a state of credit limit expiration.
b) New regulations on bank guarantees:
The State Bank of Vietnam (SBV) promulgates Circular No. 11/2022/TT-NHNN stipulating bank
guarantees to replace Circular No. 07/2015/TT-NHNN dated October 3, 2012 and Circular No.
13/2017/TT-NHNN dated September 29, 2017 amending and supplementing a number of articles of
Circular No. 07/2015/TT-NHNN.
Circular No. 11/2022/TT-NHNN stipulates that a bank guarantee is a form of credit extension,
whereby the guarantor being a credit institution or foreign bank branch commit to the guarantee
recipient on shall perform financial obligations on behalf of the obligee when the obligee fails to
perform or fails to perform fully the obligations committed to the obligee; the guaranteed party
must accept the debt and return it to the guarantor according to the signed agreement.
Credit institutions, foreign bank branches shall agree on guarantee fees for customers and related
parties (if any). In the case of a counter-guarantee or confirmation of guarantee, the guarantee fee
shall be agreed upon by the parties. In case of co-guaranteeing, the parties participating in the coguarantee shall agree on the guarantee fee for each co-guarantor.
This Circular takes effect from April 1, 2023.
04
Group 2 - Advanced
Corporate Finance 62A
2. Foreign News:
a) Why foreign banks find the US a tough
market to crack?
The US has long proved irresistible to foreign
banks. Credit Suisse chose New York for its
first foreign representative office in 1870.
Deutsche Bank arrived two years later,
financing a railroad expansion from
Wisconsin to the state of Washington. Scores
have followed since.Yet foreign banks have
also long struggled to thrive in the US.
Inconveniently for them, American banks also
scent opportunity in the world’s richest
country. The grind has never looked tougher
than in the years since the 2008 financial
crisis. From Wall Street to Main Street,
foreign banks have found it hard to make
headway against their US rivals.
In retail banking, many are in the midst of a
retrenchment, selling or shrinking their US
operations as they cede ground to local
competitors and focus instead on markets
closer to home or growth opportunities in
Asia. The picture is just as tough in
investment banking. Few foreign lenders
appear to have the resources or the appetite
to go toe to toe with US banks to capture a
larger share of fees in the world’s most
lucrative banking market. Although banks
from Japan and China have sprouted up with
operations in the US, the primary
competition in recent decades has come
from European lenders. Their recent
struggles raise the question of what future
foreign banks have in the US.
05
b) What credit score do you need to get the
Capital One Venture Rewards Credit Card?
The Capital One Venture Rewards Credit Card
is one of several travel rewards credit cards
offered by the issuer. For this particular card,
the application page says you’ll need to have
an excellent credit score — according to
Capital One, that means applicants must meet
the following requirements:
-You have never declared bankruptcy or
defaulted on a loan
-You have not been 60 days late on any credit
card, medical bill, or loan within the last year
-You have maintained a loan or credit card
with with a credit limit above $5,000 for at
least three years
To qualify for the Capital One Venture
Rewards Credit Card, you’ll likely need to have
a good credit score of at least 670, although
having a higher credit score would only
improve your chances of approval.
Additional reporting by various personal
finance blogs and websites also suggests that
Capital One has strict rules regarding how
many Capital One personal credit cards an
individual can have — and how many credit
card applications you’re allowed to submit
within a six-month timeframe.
Group 2 - Advanced
Corporate Finance 62A
II- Overview of
credit risk & credit
risk management
1. Credit risk
a. Definition:
Credit risk is the possibility of a loss resulting
from a borrower's failure to repay a loan or meet
contractual obligations. Traditionally, it refers to
the risk that a lender may not receive the owed
principal and interest, which results in an
interruption of cash flows and increased costs for
collection. Excess cash flows may be written to
provide additional cover for credit risk. When a
lender faces heightened credit risk, it can be
mitigated via a higher coupon rate, which
provides for greater cash flows.
Although it's impossible to know exactly who will
default on obligations, properly assessing and
managing credit risk can lessen the severity of a
loss. Interest payments from the borrower or
issuer of a debt obligation are a lender's or
investor's reward for assuming credit risk.
Understanding Credit Risk.
When lenders offer mortgages, credit cards, or other types of loans, there is a risk that the borrower
may not repay the loan. Similarly, if a company offers credit to a customer, there is a risk that the
customer may not pay their invoices. Credit risk also describes the risk that a bond issuer may fail to
make payment when requested or that an insurance company will be unable to pay a claim.
Credit risk is the risk arising from the borrower's failure to properly comply with the terms of the
credit contract, with specific manifestations being the customer's late payment, incomplete or nonpayment of debt or when the principal and interest are due, causing financial losses and difficulties
in the commercial bank's business operations.
06
Group 2 - Advanced
Corporate Finance 62A
b. Cause & Consequences of credit risk:
Causes of credit risks in commercial bank:
Credit lending is one of the most popular services of commercial banks. This service will develop if
the credit risk management department monitors it well. Therefore, banks need to pay attention to
several causes of credit risk in order to take appropriate preventive measures. Causes are divided
into two types: external causes and internal causes.
External causes
+ Customer factor
The banks cannot control the intended use of customers so it will cause credit risk if someone
deliberately scams. Moreover, individual customers cannot payback on time due to health
situations, unemployment, moral hazard,... Besides, for corporate customers, if there is corruption
in the internal structure of enterprises or inefficient use of capital,... they cannot pay the debt and
lead to credit risk. Many customer borrows for the purpose of investing in portfolios that are
sensitive to market fluctuations; customers deliberately defraud to appropriate bank capital.
+ Market factor
Like the activities of other economic actors, commercial banks' credit activities are influenced by
many objective factors from the economic environment, political environment, socio-cultural
characteristics, legal environment, etc. and general regional and local impacts…
The fluctuation of prices, especially the prices of key commodities, input fuels such as iron, steel,
gasoline... directly affecting the implementation of the project, the efficiency of production and
business activities of enterprises and indirectly affecting bank credit activities and causing credit
risks. On the other hand, complicated developments of commodity markets, export markets, are
potential causes and contain risks to credit activities.
Internal causes
+) Credit concentration:
If the commercial banks focus on lending only specific borrowers or specific fields, it will
be easy to cause credit risk. For example, a bank lends only to borrowers in the real
estate sector. If the whole sector faces a slump, the bank would automatically be at a
loss as it cannot recover the monies lent.
Each bank's risk appetite reflects the attitude towards risk-taking within a certain
limit/level. Within that limit, the bank is able and willing to face and overcome the credit
risks.
This is one of the subjective causes leading to credit risks in commercial banks. In
addition, the excessive expansion of credit means poor customer selection, the ability of
credit officers to supervise the use of loans is reduced, and it also leads to strict
compliance to follow the loose credit process. Along with the weakness of the staff, bank
staff is a very high risk of credit risk.
07
Group 2 - Advanced
Corporate Finance 62A
Here are some examples to help you understand credit concentration better.
Example 1: A major bank focuses on lending only to Company A and its group entities. If the group
incurs major losses, the bank would also lose a major portion of its lending. Therefore, the bank
should not restrict its lending to a particular group of companies alone to minimize risk.
Example 2: A bank lends only to borrowers in the real estate sector. If the whole sector faces a
slump, the bank would automatically be at a loss as it cannot recover the monies lent. In this
scenario, although the lending is not restricted to one company or a related group of companies if
all the borrowers are from a specific sector, there still exists a high level of credit risk.
Therefore, to ensure that the credit risk is kept at a lower rate, lending practices must be
distributed amongst a wide range of borrowers and sectors.
+) Incomplete credit assessment:
To evaluate the creditworthiness of any borrower, the bank needs to check for the credit history of
the borrower, capacity to repay, capital, loan conditions, and collateral. The borrower’s
creditworthiness cannot be evaluated accurately without the above information. In such a case, the
bank must exercise caution while lending.
For instance: Company X wants to borrow $100,000, but it does not furnish sufficient information to
perform a thorough credit evaluation. Therefore, if a bank agrees to lend money to company X to
earn higher interest, the bank stands to lose both interests as well as the principal as company X
poses a higher credit risk, and it may default at any stage during repayment.
+) Subjective Decision Making:
This is a common practice in many banks and other institutions wherein the senior management is
given free rein in making decisions. Where the senior management is allowed to make decisions
independent of the company policies, which are not subject to any approvals, there could be
instances where loans are granted to related parties with no credit evaluations being done.
Accordingly, the risk of default also increases.
For Example: In the absence of strict guidelines, Mr. K, a director of a major bank, will be more likely
to advance a loan to a company headed by his relative or close associate without performing
adequate credit evaluations. If the loan had been advanced to a third-party company with no
associations with Mr. K, there would have been a thorough credit check, and the credit risk would
be lower. Therefore, senior management mustn’t be given free rein in lending decisions.
08
Group 2 - Advanced
Corporate Finance 62A
+) Inadequate monitoring:
Where the lending is for the long term, they are
almost always secured against assets. However, the
value of assets may deteriorate over time. Therefore,
it is not only important to monitor the performance
of the borrowers but also to monitor the value of
assets. If there is any deterioration in their value,
additional collateral may help reduce credit
problems for the bank. Also, another issue could be
the instances of fraud relating to collateral. Banks
need to verify the existence and value of collateral
before lending to minimize the risk of any fraud.
Example 1: Company P borrowed $250,000 from a
bank against the value of its offices. If the bank
regularly monitors the value of the asset, in the
event of any diminution in its value, it would be in a
position to ask for additional collateral from the
Company; however, if there is no regular monitoring
mechanism, where both the value of the asset
decreases and company P defaults in its loan, the
bank stands to lose, which could have been avoided
with a sound monitoring practice.
Example 2: Let us consider the same example –
Company P borrowed $250,000 from a bank against
the value of its offices. There could be instances of
fraud wherein loans are taken against fictitious
assets. Before lending, it is important that the bank
verifies the existence of the asset and its value and
not go simply by the paper work submitted.
Example 3: Company P borrows $100,000 with no
collateral based on its performance. Performing
credit evaluation before lending is not sufficient. The
Bank must regularly monitor the performance of
Company P to ensure that it is in a position to repay
the loan. In case of poor performance, the bank may
request that collateral be provided, reducing the
credit risk impact.
09
Group 2 - Advanced
Corporate Finance 62A
+) Cyclical Performances
Almost all industries go through a
depression and a boom period. During
the boom period, the evaluations may
result in the good creditworthiness of
the borrower. However, the cyclical
performance of the industry must also
be taken into account to arrive at the
results of credit evaluations more
accurately.
For example: Company Z obtains a loan
of $500,000 from a bank. It is engaged
in the business of real estate. The bank
must not always go by current trends
but must also provide for any future
slumps in the industry performance. If
it borrows during a boom period, the
bank
must
also
consider
its
performance during any subsequent
depression.
10
Group 2 - Advanced
Corporate Finance 62A
Consequences of credit risks:
For commercial banks:
If the bad debt ratio is too large, the commercial banks may be put under exceptional control by
the State Bank. At that time, the reputation of them will be reduced. Those who deposit at this
commercial banks will massively withdraw their money and terminate the contract. This is
extremely serious damage that cannot be measured in value.
When a bad debt arises, the commercial banks also have to spend a lot of expenses to handle
the debt such as staff costs, travel expenses, and meeting costs to handle debt... In addition, they
also incurs opportunity costs for new loans, slow credit turnover... All of these lead to cost
efficiency and lower profitability of them.
For customers:
Customers themselves cannot afford to pay the capital and interest borrowed from the bank,
they will be listed as bad debt. Their collateral have to be sold forever, and on the system, it is
difficult for them to get loans later.
For the country's economy:
Banking activities are closely related to many individuals and sectors in the economy, so
depositors will panic and withdraw massively when a bank encounters credit risk or goes
bankrupt. Money makes it difficult for the entire banking system. Since then, the liquidity in
economic activities has decreased sharply. In case the bank cannot handle credit risk, it will affect
the production and business situation of enterprises, and the society may be unstable and may
cause instability. lead to an economic recession. Credit risk can be the trigger to creating a
financial crisis affecting both the region and the world.
It can be seen that banks have a strong influence on monetary policy and on the state's macroregulatory tools. If credit risk cannot be controlled, it will cause a "chain reaction" that threatens
the development of the entire banking system and the country's economy.
11
Group 2 - Advanced
Corporate Finance 62A
c. Measurement indicators of Credit risks:
Measurement indicators of Credit risks at Commercial Banks
play a particularly important role because they directly
reflect the bank's credit risk. The following criteria are
considered the most relevant to assess credit risk:
Bad debts:
Bad debts are debts that are overdue for more than 90 days
and are doubted about the debtor's ability to repay and
recover capital due to the debtor's continuous loss of
business, declaration of bankruptcy or dispersal of assets,...
Bad debts will clearly reflect the credit quality of the bank,
based on the overdue time and repayment ability of
customers to classify bad debts into 3 groups: group 3
(substandard debts), group 4 (doubtful debts) and group 5
(possibly unrecoverable debts).
A bad debt refers to an account receivable that has been
specifically identified as uncollectible and, therefore, it is
written off. Bad debt occurs when a borrower or debtor
defaults fails to repay his or her loan or debt. Bad debt is
most clearly reflected in the following indicators:
12
Group 2 - Advanced
Corporate Finance 62A
The provision for loan/credit losses:
The provision for credit loss is an estimation of
potential losses that a company might experience
due to credit risk. The provision for loan/credit
losses is treated as an expense on the company's
financial statements. They are expected losses from
delinquent and bad debt or other credit that is likely
to default or become unrecoverable.
If, for example, the company calculates that
accounts over 90 days past due have a recovery
rate of 40%, it will make a provision for credit losses
based on 40% of the balance of these accounts.
Indicators showing the provision for credit losses:
13
Group 2 - Advanced
Corporate Finance 62A
II- Overview of
credit risk & credit
risk management
2. Credit risk management:
a. Definition:
Credit risk management is understood as the process of
identifying and analyzing risk factors, measuring the level of
risk, thereby selecting measures to manage credit activities
with a view to limit and eliminate risks in the credit process.
PRNewswire says that 76% of traditional banks fear new
fintech platforms, however, implementing a credit risk
management strategy can result in increased financial
security for lenders and provide borrowers with loans they
can handle to build their credit. Understanding the credit
risk management process, best practices and techniques is
the first step in crafting a risk assessment solution.
For commercial banks, the good implementation of credit
risk management will not only ensure the bank's business
activities are always in a safe state, increase business profits,
improve reputation and banking service quality, but also
contribute to ensuring the stability and development of the
whole economy, especially capital-dependent countries on
the banking system, including Vietnam.
14
Group 2 - Advanced
Corporate Finance 62A
b. The need for credit risk management:
For any commercial bank, credit risk management is an essential task according to theses following
reasons:
Credit risk is one of the problems that all commercial banks face, credit risk causes capital loss
and reputational damage to the bank. Therefore, credit risk management to prevent and limit
credit risks is an inevitable issue that every bank must pay attention to.
Reduce costs, increase income from preserve capital for commercial banks, increase trust for
depositors, increase position and image in the financial market.
In addition to having a good impact on commercial banks, good credit risk control also has
positive implications for the economy. Institutions act as a chain, if one institution has
problems, it will lead to instability of the whole system of financial institutions. Good credit risk
management brings stability and safety to the market.
Banks usually have a much smaller equity than total assets, because commercial banks operate
on the principle of taking money from depositors and making a profit from the differential
interest. Because it is only a financial intermediary, if the commercial bank cannot collect the
loans, the risk of not being able to pay the depositors is very high. On the other hand, the
amount of loan capital of commercial banks is often very large, so credit risk management helps
banks quickly identify problems and offer effective solutions to minimize losses for the bank.
15
Group 2 - Advanced
Corporate Finance 62A
c. Credit risk management best
practices:
According to The Risk Management
Association, the first step to mitigate the
probability of default begins with
understanding the borrower. A common
approach is by evaluating them using the
“Five Cs of Credit” to obtain a profile of
their financial risks:
+ Character – the credit history of the
applicant
+ Capacity – how much debt-to-income
the applicant would have if the loan were
issued
+ Capital – the overall amount of money
the applicant has or has access to
+ Collateral – any asset the client has that
acts as a ‘security item for the loan
+ Conditions – the nitty-gritty, contract
details, and why the loan is being issued
This assessment runs on the belief that
past payment performance (as well as
current finances) can be an indicator of a
borrower’s future actions.
A borrower’s background is only one part
of credit risk management. To operate
with less risk and more profit, some of
the best credit risk management
techniques in banks are listed as follow:
+ Be transparent: No one likes fine print
or hidden details. Be clear with clients
from the beginning, and they are more
16
likely to trust you as a provider. In addition,
transparency also helps clients understand exactly
how much they need to repay and what they are
paying for. This makes them more likely to repay the
loan and less likely to rack up bad debt.
+ Validate the scorecard models consistently
and proactively monitor them: Scorecard models
naturally degrade as markets change, which is why it’s
vital to use third-party resources to measure the
degradation of your model. An independent, thirdparty auditor can evaluate your model to identify and
eliminate weaknesses, helping you maximize the
effectiveness of your credit rules.
+ Leverage dynamic data: Rather than relying on
month-old credit scores, use current bank
transaction data to identify pre-delinquency issues
and re-marketing opportunities.
+ Take advantage of artificial intelligence and
machine learning: It helps conduct championchallenger experiments to compare traditional
scorecard models against those created with newer
technologies.
+ Prepare for financial crimes: During uncertain
economic times, financial crimes such as fraud tend
to increase. Make sure you’re using the best tools
and data to fight fraud on all fronts.
+ Use today’s top software: Relying on older tools
leaves your business more vulnerable to credit risk.
One of the key elements of effective credit risk
management is constantly looking forward to the
latest technologies. It means that you will be on the
cutting edge of credit trends and more easily able to
adapt to a rapidly changing market. For example,
Decisioning tools like GDS Link manage the entire
borrower life cycle, helping you assess risk, protect
your portfolio, and approve only the best applicants.
Group 2 - Advanced
Corporate Finance 62A
d. The credit risk management process:
Credit risk management in commercial banks
is usually carried out according to a strict
process following the following 4 steps:
Identify credit risk
Credit risk identification is a continuous and
systematic process of identification. The
purpose of this process is to help the bank to
identify problems from loans early by
observing, monitoring, and analyzing the
operating environment and lending process
to make statistics and identification. and have
the most effective credit risk treatment
method. The usual method of risk
identification is to make a list of all types of
credit risks that have, are and will occur:
research
questionnaires,
investigation,
analysis of credit records, especially
problematic credit records to identify signs of
problem credit to issue warnings.
Measure credit risk
Credit risk measurement is the quantification
of the risk levels of customers to determine
the risk premium and maximum safe credit
limit through building appropriate credit risk
measurement models. Depending on the
financial capacity and taste of each bank to
make lending decisions and give appropriate
response measures when credit risks occur.
There are two models of credit risk
measurement:
+ Qualitative Model (also known as Five Cs
Model)
+ Credit risk quantification model
17
Credit risk assessment and control
Credit risk control: The use of tools, techniques,
measures and strategies to prevent, prevent and
handle credit risks of commercial banks. These
tools include: credit policy, credit process, credit
risk management apparatus, credit limits. Based on
the calculated risk level and risk tolerance, the bank
will set up different risk prevention solutions to
optimize the level of damage such as hedging,
selling debt, spread the risk…
Credit risk assessment: The basic criterion in
assessing credit risk in a bank's operations is credit
quality. A loan that is rated as having good credit
quality is a loan that the bank is able to recover
both capital and interest on time. To determine
credit quality, people will usually rely on two
indicators: the bad debt ratio and the ratio of
provision fund allocation to total outstanding loans.
Credit risk treatment
Credit risk treatment is the final step in the credit
risk management process. After the credit risk
management and control step, the problem was
not solved and credit risk still appeared. In this
step, the commercial bank will make decisions and
measures to overcome and minimize the risk costs
as well as the damage caused by credit risks.
=> The four steps in credit risk management have a
close relationship and play an extremely important
role in the process of credit risk management and
control. In particular, steps 1 and 3 have great
decisions to the effectiveness of credit risk
management, helping the bank to be proactive in
managing and controlling credit risk, thereby
minimizing the losses that the credit risk incurs.
Group 2 - Advanced
Corporate Finance 62A
III- Current status of credit risk
management in Vietnamese
commercial banks
1. Reality of credit risk situation in
Vietnamese commercial banks in the
period from 2019 to 2022:
Preventing and limiting credit risk is a complicated issue.
Credit risk is often difficult to control and leads to losses of
capital and income of the bank. In recent years, the issue
of risk and risk management in credit granting activities of
credit institutions in Vietnam has become urgent when
bad debt numbers are published. From 2019 to 2022,
although commercial banks have made great efforts in
dealing with bad debts, the bad debt ratio is still high.
We analyze data on bad debt situation and the amount of
provision for loan/credit losses at three large commercial
banks in Vietnam, namely Vietcombank, Vietinbank and
BIDV. From there, we will analyze and explain the current
situation of credit risk in the general ground of
commercial banks in Vietnam. Below is a summary of data
for the period from 2019 to 2022 of the three big
commercial banks according to their consolidated
financial statements:
Unit: VND Billion /%
2019
Indicators
Bad Provision
debt for loan
ratio
losses
2020
2021
Bad
debt
ratio
Provison
for loan
losses
Bad
debt
ratio
2nd quarter of 2022
Provision
Bad debt
for loan
ratio
losses
Provison for
loan losses
Vietinbank
0.94%
12,941
1.2%
12,148
1.3%
25,795
1.4%
31,621
BIDV
1.54%
14,632
1.58%
18,863
1.6%
29,055
0.83%
39,742
Vietcombank 0.62%
10,461
0.68%
19,242
0.74%
25,976
0.6%
33,861
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Group 2 - Advanced
Corporate Finance 62A
From the statistics above, we can easily see that the bad debt ratio of the three big
commercial banks has always fluctuated over the years. In the period of 2019 – 2020,
the bad debt ratio of banks tends to increase due to the impact of the Covid-19
pandemic compared to previous years. Credit growth of banks tends to decrease: Credit
institutions have conducted many lending programs with extra interest rates. Due to the
weakening credit demand due to the worsening impact of the Covid-19 pandemic, credit
growth was lower than in previous years. Due to the epidemic, many businesses could
not pay their debts, leading to an increase in the bad debt ratio, affecting the
operational safety of the commercial banking system. Therefore, not only affecting credit
demand, the Covid-19 epidemic also significantly affected credit quality. By the end of
2020, bad debt at 3 banks was at more than VND 45,383 billion, up 26% compared to
the end of 2019.
In the second year of COVID (2021), many banks' bad debts simultaneously increased
sharply, with three-digit growth in some places, the bad debt ratio if including debt
restructured under Circular 01 was up to 7.31%. According to the State Bank's report for
the first 6 months of 2021, under the impact of the COVID-19 epidemic, the on-balance
sheet bad debt ratio tends to increase in the first months of 2021, from 1.69% at the
end of the year 2020 to 1.78% by the end of April 2021. Financial experts said that in the
context of the negative and long-term impact of the COVID-19 pandemic, such a bad
debt situation is a positive, if not a miracle in credit quality control. However, along with
that, banks also sharply increased the amount of provision for loan losses, bringing the
bad debt coverage ratio to a record high. Non-performing loan ratio had gone up
sharply due to the increase in the provision for loan losses in commercial banks. At the
end of the third quarter, the bad debts of the two state-owned "big men" Vietcombank
and VietinBank also recorded growth rates of 108% and 90%, respectively. However, this
figure has adjusted to 49% and 17% by the end of 2021.
Currently, as of the second quarter of 2022, the bad debt ratio of the three large
commercial banks has decreased slightly compared to the previous year. Due to the
interest rate adjustment and monetary policies of the State Bank, the amount of bad
debt has been relatively controlled. At the same time, the provisioning for credit risks
tends to increase sharply, in order to be able to cope with and control the level of credit
risk more effectively.
So, based on the analysis of the data of the three leading commercial banks in Vietnam,
we have a more comprehensive view of the credit risk situation at Vietnamese
commercial banks in the period from 2019 to 2022.
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2. Reality of credit risks management in Vietnamese commercial banks:
Over the past time, credit risk management of commercial banks in Vietnam has been
gradually improved, in which, for example: Strategy and policy orientations for credit risk
management activities are increasingly clear and more practical; forming a centralized
organizational model for credit risk management; built a strong credit granting process,
creating conditions to control credit risk right from the moment it appeared. To help you
have a clear view about the current situation of credit risk management in Vietnam, here are
the bad debt management process of two largest Vietnamese commercial banks:
BIDV:
BIDV implements the bad debt management process according to 4 activities as follows:
+) Activity 1: Identify bad debt
BIDV's Board of Directors and Executive Board have issued many processes and regulations
on credit granting for each customer, including regulations and guidelines for customer
appraisal, contributing to support staff Credit Department in approaching, appraising
customers and identifying bad debts.
+) Activity 2: Measuring bad debt
BIDV's internal credit rating system has met the conditions for building the SBV's internal
credit rating system. This is a new step, aiming to take a step-by-step approach to risk
measurement and calculation according to the Basel II Accord (according to the internal
rating approach)... In addition, BIDV is currently using the scoring results. Score is one of the
leading criteria to appraise and evaluate customers and is the basis for decentralizing credit
judgment authority and determining credit levels for customers. For each different customer
class, the branch has a different credit approval authorization level. At the same time, the
maximum credit level and ratio of credit to collateral for each customer are also determined
based on the credit rating of that customer.
+) Activity 3: Preventing bad debt
Building an appropriate credit risk environment and a healthy credit granting process. At the
same time, BIDV also implemented a centralized credit granting and credit risk management
model in accordance with the Basel II Accord. From the perspective of credit risk
management and cash flow management, it can be seen that BIDV's credit granting model
has made significant strides. From the distributed credit granting model on the basis of
authorizing credit judgments to branches at a relatively high level, BIDV has transformed the
model of organizing the credit apparatus in the whole system to a centralized credit granting
model, ensuring the principle of independent separation between the customer relations
department and the appraisal department and the credit approval and decision-making
department; unified management from the head office to the branch, reducing the level of
authority to judge for branches...
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Establishing and promoting the role of internal
inspection and control department: Currently,
BIDV's internal inspection and control model is set
up vertically. At the head office, the internal
inspection and control department advises and
assists the Board of Directors on the supervision,
inspection and control of the compliance with the
law and the system of internal regulations in order
to detect, prevent and promptly handle
shortcomings in all professional activities of the
headquarters and branches. Thus, the internal
inspection and control model at BIDV is quite strict,
with 3 rounds of control, from within the branch to
higher levels. This helps the credit risk management
to be implemented more comprehensively. In fact,
the operation of the inspection department in the
past time has been quite effective, has detected
many violations of the units that are likely to lose
capital, and potential risks. Thereby taking timely
measures to warn and handle to limit credit risk.
+) Activity 4: Dealing with bad debt
BIDV determines that debt recovery measures for
each
customer
must
be
implemented
expeditiously, synchronously, suitable for each
customer, and develop specific bad debt collection
measures for each unit. Assign bad debt collection
targets to members of the Branch's Board of
Directors, each department, each team, each credit
officer according to a specific time (month, quarter,
year). Specifically:
+ Actively increase the level of provision for bad
debts, accept to reduce immediate profits to
increase financial autonomy.
+ Implement debt restructuring for customers who
have the ability to recover and develop stably in the
long term but face temporary difficulties. Follow up
with customers, especially structured units to urge
debt collection in order to gradually reduce bad
debts.
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Coordinate to find solutions for customers to
overcome difficulties and recover. Find
incentives to encourage customers to actively
cooperate in resolving bad debts. Implement
effective policy on reward, collection and
processing, bringing benefits to BIDV.
+ Recover and actively handle collateral to
collect debt through specific solutions for each
unit with group 2 debt, bad debt and debt that
has been dealt with risks.
+ Sell debt to VAMC, Vietnam Debt Trading
Company Limited (DATC) and jointly study an
effective bad debt recovery plan.
+ In addition, in order to limit bad debts that
continue to arise, BIDV adopts the following
measures: Re-evaluate the quality and
recoverability of debts to take appropriate
measures to handle and restructure debts for
enterprises experiencing temporary difficulties
but having the ability to recover in the future;
Strengthen and improve the quality of
inspection and assessment of production and
business efficiency, financial situation, and use
of customer loans to promptly recover debts...
Group 2 - Advanced
Corporate Finance 62A
Vietcombank:
The bad debt management process at Vietcombank is carried out as follows:
+) Activity 1: Identify bad debt
Currently, Vietcombank often relies on information about the degree of doubt about its
ability to repay, based on the overdue time of the debt. Quarterly, Vietcombank reviews
and re-evaluates the classification of debts, makes and uses provisions, and monitors
debt quality to identify bad debts of the Bank.
+) Activity 2: Measuring bad debt
On the basis of the identification results, the Bank measures bad debts, that is: the level of
risk, the customer's inability to pay debts, the assessment of the impact of bad debts on
the operation, the result of business’s operation.
+) Activity 3: Preventing bad debt
After measuring bad debt to keep bad debt within the acceptable range of the Bank,
Vietcombank has implemented: (i) Building a centralized credit risk management model; (ii)
Developing a risk management strategy: setting up and using provisions to deal with risks in the
whole system; (iii) Implemented the credit management process well: including the stages of
appraisal, checking before, during and after lending... the strict implementation and
management of the process helped Vietcombank to detect, promptly correct, limit and prevent
bad debts, thereby building the most effective credit processes…
+) Activity 4: Dealing with bad debt
Quarterly, Vietcombank reviews and re-evaluates the debt classification, setting up and use of
provisions to deal with risks in the whole system. The setting up and use of provisions to deal
with risks falls under the competence of the Risk Management Council. The Risk Management
Council is established at two levels: the Central level (Central Risk Management Council) at the
Head Office chaired by the Chairman of the Board of Directors and the Branch level (Branch Risk
Management Council), chaired by the Branch Director. The Central Risk Management Council is
responsible for reviewing and approving the debt classification, setting up and use of provisions
to deal with risks in the entire Vietcombank system.
=> From the current situation of credit risk management at BIDV and Vietcombank, we can see
that the credit risk management activities of commercial banks in Vietnam are going quite stably,
with detailed and strict bad debt management processes. However, there are still some
limitations that exist in the way commercial banks control the credit risk which can adversely
affect the banks’ business activities.
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At the present, Vietnam has implemented the Resolution
42 of the National Assembly on piloting bad debt
settlement of credit institutions. Since Resolution 42, the
consciousness of people and businesses, their
responsibility for their debts has been significantly
increased and they voluntarily hand over assets and
voluntarily dispose of assets. In addition, the drastic
involvement of local authorities at all levels has created
favorable conditions for credit institutions to handle bad
debts.
Resolution 42, together with guiding documents, created a legal framework to handle bad debts,
contributed to solving difficulties and problems, and supported credit institutions in maintaining the
bad debt ratio on the balance sheet below 2%. Step by step ensure the rights of creditors;
demonstrating the correctness of orientations and policies of the Party, National Assembly and
Government for the handling of bad debts of the system of credit institutions. Positive impact on the
process of restructuring and development of the system of credit institutions. As a result, credit
institutions have the conditions to lower lending interest rates, supporting businesses and people,
especially during the period affected by the COVID-19 epidemic. In fact, during the implementation of
Resolution 42, after 2 years of being affected by the epidemic, bad debt including potential bad debt
decreased from 17.2% to 6.3%.
Resolution 42 plays a very important role in the process of handling bad debts over the past time.
Therefore, the Government has proposed to the National Assembly to extend Resolution 42. The
Economic Committee believes that in the event that Resolution No. 42 expires and cannot be
extended, it may lead to difficulties in dealing with bad debts. Therefore, the extension of the
application period of the Resolution will continue to promote the effectiveness of current policies,
improve the efficiency of bad debt handling; support businesses and people; minimize conflicts and
disputes caused by stopping existing mechanisms;...
The Economic Committee agreed with the Government's proposal, thereby extending the application
period for all provisions of Resolution 42 to the end of December 31, 2023 and including this content
in the joint resolution of the third meeting, the XV National Assembly with the aims to continue
promoting the effectiveness of the policies brought by the Resolution, avoid disruptions and lack of
mechanisms, continue to encourage and support credit institutions and VAMC to speed up the
managing bad debts, especially bad debts identified under Resolution No. 42, which have not been
handled yet, are still high and are expected to increase in the near future.
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3. Limitations & difficulties in credit risk management of Vietnamese commercial
banks:
Causes of high ratio of bad debts in Vietnamese commercial banks from 2019 to 2022:
In the context of the impact of COVID-19, the economic situation was difficult, the demand for
credit was not as high as in previous years, so the relative ratio of bad debt / outstanding
balance also increased. In the coming time, the situation of the COVID-19 epidemic is still
complicated and it is not clear when the end will be. If the epidemic continues to cause
difficulties for businesses, international trade and services, it is likely to cause bad debt in the
commercial banking system to increase.
The control capacity of some banks is still inadequate compared to the size: Some commercial
banks often use short-term deposits for medium and long-term loans leading to large maturities
between assets and liabilities, loss of liquidity and potential hidden huge payment risk. Besides,
banks compete with each other by increasing total assets. And in order to do that, banks must
increase capital by increasing deposit interest rates and inevitably the lending interest rates will
also increase, making borrowers falling into a situation of paying high interest, customers will
gradually lose their ability to pay bank debt, leading to a sharp increase in bad debt.
Due to the poor professional ethics of some bankers and customers, it led to collusion with the
bank. In fact, many bank officials have collided with customers, making short loans, leading to
serious consequences. Therefore, a branch had to deal with dozens of employees due to
collusion with the bank. In addition, bad debt is also in the form of “converting loan capital into
contributed capital”. This debt is not only “very bad” but also dangerous in that it sometimes only
exists on the books of the debtor and creditor.
Due to cross-ownership. In Vietnam, it shows that the banking system has formed a complex
network of cross-ownership and lending relationships, aiming to acquire banks and arrange
capital for investment projects that are not transparent. According to the National Assembly
Economic Committee, up to now, nearly 40 state-owned and private enterprises own more than
5% of joint-stock commercial banks, and these enterprises own financial investment companies.
Cross-ownership will lead to the situation that banks will create conditions for businesses that
own one bank to easily borrow capital from the other bank. The easy lending, lack of control
plus careless loan appraisal will inevitably lead to bad debt. Therefore, cross-ownership is
considered one of the reasons for the recent increase in bad debt.
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Difficulties in credit risk management activities at
Vietnamese commercial bank:
Legal regulations to limit and resolve existing bad debts are
not transparent and unreasonable. Regulations on
classification of bad debts are not clear, making bad debt
settlement difficult. Regulations on debt settlement through
court proceedings for unsecured debts are complicated,
difficult and time consuming for credit institutions in the
debt collection process. The legal framework for debt
trading has existed but has not been completed and
effective in resolving bad debts.
The credit risk management environment has not yet
provided the needs of the Basel Committee and
international practices: First of all, it must be mentioned
that the planning is still quite simple, most of which only
carry the content of the general growth trend and has not
yet given a credit category, a single plan; in which the
proportion of outstanding loans for each industry, each
region, and each type of consumer has not been designed
and built, for example, to limit credit risk.
Maintaining the organizational scale of deploying
distributed management, not separating the features that
easily lead to conflicts of authority in credit risk
management: In a few banks, the use of the risk
management department has not yet been understood
appropriately. The status of the risk management
department participating in credit appraisal and
assessment/re-evaluation is not only found in small banks,
but even in large banks such as BIDV or Vietinbank still
survive. That shows that there is not really a separation
between the risk creation function (operation) and the risk
management feature, the independence of risk
management has not been protected, leading to low
management efficiency.
There is not yet a network of statistical monitoring systems
for credit risk that is compatible with international
practices: Each risk component has its own monitoring
method. The Basel Committee in the Basel II Treaty
encouraged banks to use their internal size to monitor their
own, unrelated risks. Many banks in developed countries
have used different scales to measure and quantify risk,
thereby deploying reserves or calculating corresponding
capital levels to compensate for losses. However, these
scales have not been applied in our country.
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IV- Recommendations for
improvement of credit risk
management in commercial
banks of Vietnam
From the reality of credit risk management activities at Vietnamese commercial banks and
according to our group’s research, here are some measures that we think can be effective and
useful for the commercial banks to implement in managing and control the credit risks:
1. Improving the management of credit risk
Risk identification and classification: Carrying out a strict loan appraisal
and strictly complying with the regulations in credit risk management
is the most effective and least expensive prerequisite and risk
barrier, especially for loan applications, collateral property records,
disbursement and inspection records. Besides, building an early risk
warning system and perfecting the risk warning system.
Risk assessment of internal credit rating system: Improve methods of
credit risk identification, analysis and measurement applied at
banking units but have not yet brought high efficiency. Rebuild
Regulation on customer scoring and credit rating to match the
current situation. Building a software program for customer scoring
and credit rating in the system to serve as a basis for exploiting
customer information at the unit.
Risk prevention: Improve and apply credit risk prevention solutions at
the banking unit, and at the same time, promote communication
and training on credit risk management. Performing debt
classification and provision for risks accurately reflecting the debt
status of each commercial bank. Improve the control system as well
as the effectiveness of credit risk management.
Monitoring, evaluating and adjusting risk prevention methods:
Improving the credit granting apparatus according to the centralized
credit granting model: Completing the organizational structure of
commercial banks in the direction of focusing on credit risk
management. Therefore, the requirement for Vietnamese
commercial banks in the upcoming time is to perfect the
organizational structure according to modern banking governance
trends, based on the Basel Committee's regulations.
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2. Supporting for credit risk management operations:
Training: Regularly organize seminars and exchange on credit situations that have happened to
draw common experiences; organize seminars, discuss credit risk control, highlight mistakes
and consequences encountered throughout the system to prevent. Raise awareness for credit
officers about the meaning of control, and train them with the necessary knowledge and skills to
serve this activity.
Organizing personnel: It is necessary to have clear and resolute sanctions and policies for
disciplinary review and compensation for cases of intentional misconduct causing loss of assets
for the bank in order to deter and reduce ethical risks virtue that can happen.
Organization of departments: Departments should establish for macroeconomic research,
analysis and forecasting. Currently, the monthly market risk report is still general in nature and
has not yet analyzed the causes and forecasted industry risks. The operational risk report is
mainly compiled from the reports of the Internal Control Department, so it is not diversified and
still passive. Collecting industry information is sometimes difficult, as the analysis relies heavily
on the credit officer's subjective judgment, perception, and understanding.
3. Perfecting the factors to implement the content of credit risk management:
Commercial banks need to build a network of good risk management systems based on risk
management plans appropriate to the nature and commercial business environment. The risk
management system must be allowed to agree on the level of risk in general and the level of
nod to credit risk in particular to facilitate commercial business, as well as in risk management.
Accordingly, the content of credit risk management must be designed and built based on a
comprehensive and overall view of the commercial business situation of commercial banks, the
natural environment of macro-economics, and expectations of future growth of the bank and
protect both in terms of monitoring credit transaction settlement risk and credit portfolio risk.
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4. Strengthen the management and supervision before and after disbursement,
improve the qualifications of the bank's staff:
This will help the steps of the credit risk management process to be implemented more
effectively and closely. Commercial banks also need to determine the risk management strategy
towards the bank. Bank credit risk needs to be considered on both sides - opportunities and
challenges and not only on its impact on quantitative aspects such as economic capital, volatility
of income. Choosing a modern risk management method, using a quantitative method in risk
assessment in each specific period.
5. Improve the quality of credit appraisal:
Besides traditional methods, commercial banks should apply credit analysis and appraisal using
cash flow simulation. At the same time, develop separate policies for specific industries and key
industries; Strengthen management and supervision before and after disbursement… This
method is very suitable for credit appraisal for transactions where the creditworthiness of the
customer is based mainly on the future cash flows that the financed asset brings.
6. Debt sales to VAMC and DATC
Bad debts sold to VAMC, DATC actually only handled accounting techniques and extended the
provisioning period, but did not solve the nature of bad debts. On the other hand, after buying
debt, almost all subsequent processes such as debt collection, asset handling... are still
authorized by VAMC for the bank to perform.
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Risks are always hidden in all
activities of human life, are situations
that occur that people cannot
predict, leading to losses. And in
credit activities, the risk of not being
able to recover debts, the probability
of customers not paying the principal
and paying interest when they are
due is an objective necessity that
commercial banks have to face.
Along with the significant fluctuations
of the global economy and changes
in the Vietnamese economy to keep
pace with the innovations of the
world banking and finance industry,
the credit risk management system
of commercial banks in our country
is
also
affected
significantly.
Therefore, improving credit quality
through perfecting credit risk
management is the top task of
Commercial Bank of Vietnam in the
current period.
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V-Conclusion
Through the process of research and reference from
many different sources, our group has presented
theoretical issues on credit risk, the current situation of
credit risk management of banks in our country. On that
basis, to propose reasonable methods to contribute to
improving and enhancing the quality of credit risk
management.
In short, credit risk management is always the top
concern of financial experts in the development of
commercial banks. We hope that this study can give you
an overview as well as details about the credit risk
management activities of commercial banks in Vietnam
and help you gain more useful knowledge about credit
risk at commercial banks in general.
Group 2 - Advanced
Corporate Finance 62A
Meet Our
Team Members
Đậu Thị Mai An
Nguyễn Thị Hoàng Anh
Phạm Trí Dũng
Trịnh Minh Dương
Nguyễn Quang Hà
Nguyễn Khánh Huyền
Đặng Khánh Lâm
Nguyễn Phương Mai
Lê Bảo Ngọc
Trần Minh Phương
Nguyễn Thị Minh Tâm
Phạm Thanh Thảo
Trần Thị Minh Thy
Trần Thế Trung
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Group 2 - Advanced
Corporate Finance 62A