Thai Nguyen University Socialist Republic of Vietnam Southern Luzon State University Republic of Philippines CREDIT RISK MANAGEMENT IN AGRIBANK – THAI NGUYEN PROVINCE A Dissertation Presented to the Faculty of Graduate School of Southern Luzon State University, Philippines and Thai Nguyen University, S.R Vietnam In Partial Fulfillment of the Requirements for the Degree Doctor in Business Administration BUI VAN KHOA (BILLY) August 2013 ii APPROVAL SHEET iii DEDICATION This piece of work is dedicated To my wife and my children, All the staffs of the Agribank in Thai Nguyen Province iv ACKNOWLEDGMENT The researcher wishes to extend him most since gratitude to the following people who made this piece of work a reality Dr Cecilia N Gascon, President of Southern Luzon State University, Republic of the Philippines, who made possible the linkage with Thai Nguyen University and the offering of Doctor of Business Administration, through the ITC-TUAF; Dr Dang Kim Vui, the President of Thai Nguyen University, who made the linkage with Southern Luzon State University, Republic of the Philippines and the offering of Doctor of Business Administration, through the ITC-TUAF; Dr Walberto A Macaraan, for his support and supervision throughout my graduate study program His kindness and daily instructions in the last three years are greatly appreciated and this dissertation is as much his work as mine; Prof Nordelina Ilano, Director, Office for International Affairs of URS for her support to the DBA1 students; Dr Tran Thanh Van, the Dean of the Graduate School of Thai Nguyen University, for his assistance and encouragement to pursue this study; Dr Dang Xuan Binh, the Director of International Training Center, for his assistance and encouragement to pursue this study; Dr Nguyen Thanh Hai, the Vice Director of International Training Center, for his assistance and encouragement to pursue this study as DBA Class Manager; To all the SLSU and TNU Professors, for their support and guidance extended throughout the graduate studies in Thai Nguyen University, Vietnam; To his ever dearest friends for their kindness and remarkable support; To his family, for their support, encouragement for being the sources of greatest inspiration, which made his career a success v ABSTRACT This study was conducted on the basis of practical reasoning combined with analysis of the status and operation characteristics of the Bank for Agriculture and Rural Development, Vietnam to build a strategy for credit risk management effectiveness, which proposed solutions and recommendations for improvement, improve credit risk management of the Bank for Agriculture and rural Development of Vietnam, contributing to the economic restructuring of agriculture and rural towards industrialization and modernization, promoting our country's economic integration and development The result will the present situation of credit risk in terms of bad debts, undue debts, overdue debts, debts requiring attention, under qualified debts, doubtful debts and frozen debts as perceived by managers and staff of the Agribank, and from that, the researcher recommended the appropriate solutions to limit credit risk in effective ways in bank The findings of the study shows that with respect to “segment structure which contain the big risks”, respondents evaluated it with mean of 3.5 corresponding to level More Risky The evaluated the item “Credits for industries” with highest mean of 3.6 corresponding to level More Risky and ranking first of all They evaluated the item “Credits for service sector” with lowest mean of 3.2 corresponding to level Risky and ranking last of all For overall assessment of both managers and staffs, they evaluated all items of ‘types of customers, which contain the big risks” with mean of 3.4 corresponding to level More Risky They evaluated the item “individuals” with mean of 3.6 corresponding to level More Risky and ranking first of all They evaluated the item “Big companies and organizations “ with lowest mean vi corresponding to level Risky and ranking last of all For overall assessment of two groups of respondents, they evaluated all items of “not have guarantee properties” with mean of 3.1 corresponding to level Risky They evaluated the item “Not have guarantee properties” highest mean of 3.6 corresponding to level More Risky and ranking first of all While, the item “Have guarantee properties’’ was evaluated with lower mean corresponding to level Less Risky With respect to “the account outstanding acc to time”, two groups of respondents evaluated short term credit with highest mean of 3.5 corresponding to level More Risky and ranking first While, the item “medium and long term credit” received lower mean of 3.2 corresponding to level Risky and ranking last With respect to overdue debts, both groups of managers and staffs evaluated all items of “overdue debt” with mean of 3.3 corresponding to level Risky They gave highest mean of 4.3 for the item “Both principal and interest can be recovered partially” corresponding to level Most Risky and ranking first While, the item “Both principal and interest can be recovered fully” was evaluated with lowest mean of 2.4 corresponding to level Less Risky and ranking last of all With respect to undue debt, both groups of respondents evaluated “undue debt” with mean of 3.2 corresponding to level Risky They evaluated the item “Customers are traditional borrowers” with highest mean of 3.5 corresponding to level More Risky and ranking first of all They evaluated the item “It is easy to collect principle and interest” with lowest mean of 3.1 corresponding to level Risky and ranking last of all With respect to “debt requiring attention”, two groups of respondents evaluated “debt requiring attention” with mean of 3.6 corresponding to level More Risky They assessed the item “The interest rate is suitable for customers” with highest mean of 3.6 corresponding to level More Risky and ranking first While, the item “The mechanism for this debt is so clear” received lower mean of 3.5 corresponding to rank vii last With respect to qualified debt two groups of respondents evaluated “qualified debt” with mean of 2.9 corresponding to level Risky They evaluated the item “Able to pay the interest and principle at maturity” with highest mean of 3.6 corresponding to level More Risky and ranking first of all The item “The interest is made free for customers” was evaluated with lowest mean of 1.7 corresponding to level Least Risky and ranking last of all With respect to doubtful debt, all respondents evaluated the item “The bank controls closely this type of debt” with highest mean of 4.3 corresponding to level Most Risky and ranking first of all While, they evaluated the item “Creditors not carefully appraise the borrowers” with lowest mean of 3.5 corresponding to level More Risky and ranking last of all With respect to frozen debt, two groups of respondents evaluated frozen debt with mean of 3.3 corresponding to level Risky They evaluated the item “There are a lot of customers classified in frozen debt group” with highest mean of 3.6 corresponding to level More Risky and ranking first of all; and evaluated the item “The rate of frozen debt is too high” with lowest mean of 3.2 corresponding to level Risky and ranking last of all With respect to “bad debt”, both groups of respondents evaluated the item “It is difficult to collect both interest and capital” with highest mean of 3.7 corresponding to level More Risky and ranking first of all While, the item “The mortgage is hard to sell” was evaluated with lowest mean of 3.5 corresponding to level More Risky and ranking last Considering all items of “bad debt”, they evaluated them with mean of 3.6 corresponding to level More Risky With respect to items of subjective criteria, all respondents evaluated all items of subjective criteria with mean of 3.6 corresponding to level Frequent They evaluated the item “Credit process follows the common regulations of State bank” with highest mean of 4.3 corresponding to level Always and ranking first While, the item “The information quality in banking network and outside is good” was evaluated viii with lowest mean of 2.8 corresponding to level Often and ranking last With respect to objective criteria, both groups of respondents evaluated all items of objective criteria with mean of 3.7 corresponding to level Frequent They evaluated the item “The political and legal environment is stable” with highest mean of 4.5 corresponding to level Always and ranking first of all While, the item “The economic environment facilitates for both bank and customer” was evaluated with lowest mean of 3.1 corresponding to level Often and ranking last of all With respect to the Credit activities aspects of Agribank Thai Nguyen in term of four aspects, both groups of respondents evaluated the Credit activities aspects of Agribank Thai Nguyen term of four aspects with mean of 3.3 corresponding to level Risky They evaluated the item “Segment structure contain the big risks” with highest mean of 3.5 corresponding to level More Risky and ranking first of all They gave lowest mean for “Based on the guarantee level, types of guarantee contain the big risks” with mean of 3.1 corresponding to level Risky With respect to all items of Current status of debts, both groups of respondents, they evaluated all items with mean of 3.4 corresponding to level More Risky They evaluated the item ‘doubtful debt” with mean of 4.0 corresponding to level Risky and ranking first of all They evaluated the item “under qualified debt” with lowest mean of 2.9 corresponding to level Risky and ranking last of all With respect to two aspects affecting the risk management of credit, respondents evaluated them with mean of 3.7 corresponding to level More Risky Two items were evaluated with a same mean of 3.7 It is recommended that the research and define the appropriate types of credit for individuals The bank should require guarantee properties for credits The bank should pay more attention more on long – term and medium credits Review procedure and conditions of them to manage and control in order to minimize risks of ix credit Review to define appropriate solutions to collect interest and capital Review and find suitable solutions to recovery both principle and interest fully Research to find suitable solutions to collect principle and interest Review to produce clear mechanism for “debt requiring attention” Review to decrease cost to improve the competitive ability of services Creditors should carefully appraise the borrowers Review to define exactly ability of borrowers before credits Review to establish a good information network Carefully manage segment structure; define exactly targeted customers The bank should pay attention on both subjective criteria and objective criteria affecting on risk management of credit x TABLE OF CONTENTS TITLE PAGE Page APPROVAL SHEET ii DEDICATION iii ACKNOWLEDGMENT iv ABSTRACT v TABLE OF CONTENTS .x LIST OF TABLES xii LIST OF FIGURES xiv CHAPTER INTRODUCTION………………………………………………………………1 Background of the Study .2 Statement of the Problem Hypothesis of the Study Significance of the Study Scope and Delimitation Definition of Terms .6 REVIEW OF LITERATURE AND RELATED STUDY ………………… …8 Review of Related Literature Review of Related Studies 31 Conceptual Framework .55 METHODOLOGY……… ………56 Research Design 56 Population and Sampling 56 BIBLIOGRAPHY Books and Articles Bui Thi Kim Ngan (2005), Improvement of abilities of risk credit management for trade banks in Viet nam, the article of banking (pp.29-33) Le Van Hung (2007), Credit risk of banks – moral point of view, the article of banking (No 16, pp 33 – 35); Phan Thi Thu Ha (2006), “Credit risks of the system of trade banks in Viet Nam”, the article of banking (No 24, pp 10-12); Duffee, G R and Zhou, C., (2001) Credit Derivatives in Banking: Useful Tools for Managing Risk? Journal of Monetary Economics, 28, pp 25-54 Tim Hornal J.C (2001) Managing Credit Risks, 05th edition, N.J Philadenphia, pp 214 Tim Powel (2005) Credit activities of Commercial Banks, Ranger: Roudledge Fringe Book Zikmund W.G (2003) Potential Risks of commercial banks, 6th edition, Zurich, the Dresden Press, pp 112- 114 Rose P.S (2004), Commercial bank management, Finance Publishing, Parliamentary republic socialist Vietnam (1998), Law on State Bank of Vietnam and Law on Credit Institutions, Legal Publishing House, Hanoi 10 The Bureau of Statistics (2000 -2011), Statistical Yearbook 11 Nguyen Van Tien (2010), Risk Management in Banking, Statistics Publishing House, Hanoi 12 Timothy W Koch (The Dryden Press, Hinsdale, Illinois, 1988 (first edition), 1992 (second edition), 1995, third edition and 2000, fourth edition) “ Bank Management”, University of South Carolina 100 13 Anthony Saunders(1999), “Financial Institutions Management – A Modern Perspective” The Mcgraw-Hill / Irwin Series in Finance, Insurance, and Real Estate, Hardcover 14 State bank Viet Nam (1996), Law of Central Bank, Commercial bank and credit organizations in the world”, References for building two draft laws state bank of Vietnam and Law on Credit Institutions, Ha Noi 15 Kim Thi Ngoc Diep (2008) Banking Credit, Hanoi: Financial Publishing House 16 Tran Van Viet (2004) Business in Commercial Banks, Hanoi: Banking Publishing House 17 Kim Thi Ngoc Diep (2008) Banking Credit, Hanoi: Financial Publishing House 18 Tran Van Viet (2004) Business in Commercial Banks, Hanoi: Banking Publishing House States decisions and decrees Decision No 90/QD-TTg dated on 07 March 1994 of Prime Minister of Vietnam, Hanoi Minister Council – Vietnam’s Government (1988) Decision of Establishment, Decree No 53/HDBT , Hanoi State Bank of Vietnam (1993) Decision No.67/QD-NH5 , Hanoi State Bank of Vietnam (2005) Decision No 493/QD- NHNN , Hanoi Others: Asner Group (2010) Credit Working in the intergration period, Available at: http://www.frbsf.org/econrsrch/working/wp99-06.pdf Casner (2010) What is overdue debts? Available at: http://www.pegint.biz/overdue_debt.htm 101 Coleen (2010) Definition of Under Qualified Debt, Available at: http://en.wikipedia.org/wiki/under_qualified_debt Dictionary online (2010) Definition of Undue debt, Available at: http://www.dictionary.net/undue_ debt HSBC Report (2011), Credir Risk Management, Available at: http://www.hsbc.com/ Credit – risk – management Muller, G (2010) Discussion about types of debts? Available at: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aIRZWmor4lek Toumo (2010) What is doubtful debt? Available at: http://www.fireworkszone.com/business/debt/doubtful_debts.html [March 30, 2010] Young, L (2010) What is bad debt? Available at: http://en.wikipedia.org/wiki/Bad_debt Wikipedia Online (2012) Definition of Credit risk, Available at: http://en.wikipedia.org/wiki/Credit_risk 10 www.agribank.com.vn 11 www.mof.gov.vn 102 APPENDICES 103 APPENDIX A SOCIALIST REPUBLIC OF VIETNAM Independence – Freedom – Happiness Thai Nguyen, October 11, 2012 REQUEST FOR APPROVAL Dear Sirs, The undersigned is a student of the Doctor in Business Administration Program offered by Southern Luzon State University, Republic of the Philippines in collaboration with Thai Nguyen University, Socialist Republic of Vietnam, who is currently conducting a research entitled “CREDIT RISK MANAGEMENT IN AGRIBANK – THAI NGUYEN PROVINCE” In this regards, may I seek for your approval to looks into the documentations and reports of Agribank Thai Nguyen at headquarter on credit risk management The findings will be treated in confidence and will be used in academic purposes Hoping for your approval Very truly yours, Bui Van Khoa Researcher APPROVED 104 APPENDIX B COVER LETTER To the Respondents, I am Bui Van Khoa, a Doctor of Business Administration student from the International Training Center of Southern Luzon State University in the Republic of the Philippines and Thai Nguyen University of the Socialist Republic of Vietnam Currently I am working on the Doctoral Dissertation entitled “CREDIT RISK MANAGEMENT IN AGRIBANK – THAI NGUYEN PROVINCE” In this regard, I am requesting for your invaluable help by accomplishing the attached questionnaire Please not leave any blank, and be rest assured that all your responses will be treated with confidentiality and use for academic purposes only Thank you very much for your help in attaining the objective of this research study Sincerely yours, 105 QUESTIONNAIRE Please accomplish this questionnaire carefully and objectively to represent your opinion and it is expected that your answer will be based solely on your conviction, observation and personal experience Rest assured that your answer will be treated with utmost confidentiality PART I: PROFILE OF RESPONDENTS Instruction: Kindly supply the data required at the space provided for: Age  Below 30  30 – 40 Married  41 - 50 Widowed  Above 50 Gender  Male  Female Civil status  Single  Married  Widowed  Divorced 106 Education  Bachelor  Master  Doctor Years in Services  less than years  6- 10 years  11- 15 years  15 years and above PART II: QUESTIONNAIRE SURVEY Please place a check ( ) mark on the box corresponding to your answer Please √ answer carefully and objectively, and not leave any item blank Assessing scale Descriptive interpretation Most Risky (MsR) More Risky (MrR) Risky (R) Less Risky (LR) Least Risky LsR) 107 What is the present status of credit risks in Agribank Thai Nguyen measured in terms of the following : 1.1 Credit activities aspects No A INDICATORS Assessing Scale According to you, which segment structure contain the big risks for Agribank? Credits for industries      Credits for trade and commerce      Credits for service sector      Credits for constructing infrastructures      Credits for personal expenditure      B Which types of customers contain the big risks? Big companies and organizations      Small and medium companies and organizations      Individuals      C Based on the guarantee level, which types of guarantee contain the big risks? Not have guarantee properties      Have guarantee properties      D Based on the account outstanding according to time, which term will contain the big risks? Short term      Medium and long term      108 1.2 Current status of debts No A Bad debt INDICATORS Assessing Scale 1 Commercial debts increase extraordinarily      It is difficult to collect both interest and capital      The mortgage is hard to sell      B Overdue debt Both principal and interest can be recovered fully      Both principal and interest can be recovered      partially Overdue debt is higher than permitted rate      Overdue debt affects to the paying capacity      C Undue debt It is easy to collect principle and interest      Customers are traditional borrowers      The principle and interest is always paid on time      D Debt requiring attention The mechanism for this debt is so clear      The interest rate is suitable for customers      E Under qualified debt The interest is made free for customers      The interest is decreased for customers      Able to pay the interest and principle at maturity      F Doubtful debt 109 This is ranked as “high potential for loss”      Creditors not carefully appraise the borrowers      The bank controls closely this type of debt      G Frozen debt There are a lot of customers classified in frozen debt      group The rate of frozen debt is too high      The restrictions of State bank on frozen debt are      strictly What are the factors affecting the limitation of Credit Risks of Agribank Thai Nguyen? Assessing scale Descriptive interpretation Always Frequent Sometimes Rarely Never No Indicators A Subjective criteria Credit policies of bank is convenient for all customers      Credit process follows the common regulations of           State bank The capacity of credit staff is a decisive factor 110       The information quality in banking network and          outside is good The internal inspection and control is strictly B Objective criteria The financial, business capacity of customers satisfies all requirements of bank The prestige in customers’ business is good      The economic environment facilitates for both bank           and customer The political and legal environment is stable Your input is highly appreciated! Thank you very much for your cooperation Sincerely yours 111 Appendix Profile of Agribank Thai Nguyen Bank of Agriculture and Rural Development, Vietnam was established on 26.03.1988 by 53/HDBT Decree of the President of the Council of Ministers Bank of Agriculture and Rural Development of Bac Thai Province was established by decision of the Decision dated 30.06.1988 54/NH- CEO of the State Bank of Vietnam (now Governor) Bank of Agriculture and Rural Development of Bac Thai at birth with model organizational structure including the Headquarters Office has rooms and 11 business districts and 11 branches under the savings table Bank of Agriculture and Rural Development Branch of Thai Nguyen (Thai Agribank) was established in 1997 following the separation of the Bank for Agriculture and Rural Development of Bac Thai Bank for Agriculture and Rural Development Thai Nguyen and the Bank for Agriculture and rural Development in Bac Kan province 198/QD- NHNN5 decision dated 06/6/1998 of the Governor State Bank of Vietnam Bank of Agriculture and Rural Development of Thai Nguyen is a branch of the Bank for Agriculture and Rural Development (Agribank) is 415 personnel operating in the field of credit in local currency the Thai Nguyen the organization: About the model: Agribank's branch in Thai Nguyen province branch of type 1, with an office located at the address 279 Ward Street Gia Sang Thong Thai Nguyen City, has 10 branches under category include: - Agribank branch in Dinh Hoa district - Agribank Phu Luong branch; - Agribank branch Dai Tu district; 112 - Agribank branch Dong Hy district; - Agribank Phu Binh district branches; - Agribank branch Vo Nhai district; - Agribank branch Pho Yen district; - Agribank branch Thai NguyenCity; - Agribank branches of Song Cong; - Agribank branch Song Cau; There are 19 rooms and transactions under Category branches Regarding the organizational structure: - At the Office: + Board of Directors, division are: Administration and Human Resources Department, Planning department, Credit Department, Assessment Office, Office Services & Marketing, Computing Department, Accounting Department of Treasury, Office check - internal Audit + The administration and legal representation before the Director Assisting the Deputy Director has 03 directors and professional managers to steer business to affiliates of and done business in office - At the branch under category are: + Board of Director, Business Planning, Accounting Department - Treasury, under the trading room + Board of Directors, to advise the Deputy Director Director, advise and assist the Board of Directors has 02 rooms deputy director of operations and the trading room attached 113 Operating results of Agribank Thai Nguyen No Item Mobilized capital 2010 Value 2011 2011/ 2010 (+); (-) % Value 2012 2012/2011 (+); (-) % 3,618 406 12.6% 4,757 1,139 31.5% 3,127 3,515 388 12.4% 4,124 609 17.3% 5,127 outstanding loans 3,212 5,622 495 9.7% 7,054 1,432 25.5% 26 11 -15 -57.7% -8 72.7% 1,01 0,55 52 67 15 22.4% outstanding loans Revenue arising bad debts % NPLs / Total outstanding loans Profit before tax 0,51 15 28.8% Summary of Agribank SPDV group of products includes: + Financing Products Group + Credit Products Group + Group Payment domestic product + Products International Settlements + Group Treasury products + Investment Products + Card Products + Group E-banking products + Group InternetBanking products + Product Group Treasury and Cash Management + Group products and other services 82 ... Respondents on Credit risk management of Agribank Thai Nguyen in Under qualified debt 10 69 Mean Distribution of Respondents on Credit risk management of Agribank Thai Nguyen in Debt requiring attention... Respondents on Credit risk management of Agribank Thai Nguyen in terms of account outstanding 64 Mean Distribution of Respondents on Credit risk management of Agribank Thai Nguyen in types of guarantee... Distribution of Respondents on Credit risk management of Agribank Thai Nguyen in Frozen debt 12 72 Mean Distribution of Respondents on Credit risk management of Agribank Thai Nguyen in Doubful debt 11 71