Academy of finance Graduation Thesis TABLE OF CONTENTS Secondary source of information is collected from available information in reference books, company’s annually reports, SBV regulations, and official documents of CCF, Internet and newspapers, thesis, and specially the results of financial performance at CCF Hatay branch 34 11.The People's Credit Funds of Vietnam: A prudentially regulated credit cooperative movement : Seibel, Hans Dieter; Tam, Nguyen Thac Volume 21, Number 2, June 2010 , pp 137-153(17) .66 INTRODUCTION Rationale of the study Concerns about unsafe credit activities and vulnerable credit risk management system have been climbing these years, from the United States‟ troubled mortgage lending (2008) to the European debt crisis (2010) It urges the significance of a sound credit risk management in lending organizations Credit risk is a popular type of risk that credit institutions must deal with In banking business, credit risk happens when “payments can either be delayed or not made at all, which can cause cash flow problems and affect a bank’s liquidity Hence, credit risk management in a bank basically involves its practices to “manage”, or in other words, to minimize the risk exposure and occurrence For a bank, lending activities form a critical part of its products and services In fact, more than 70% of a bank’s balance sheet generally relates to this aspect of risk management Therefore, credit risk management is crucial to any bank’s success In a small country like Vietnam, the financial sector is still in the development Nguyen Thi Thu Trang k45/51.02 Academy of finance Graduation Thesis phase and many credit institutions have not been able to establish a firm risk management framework, particularly credit risk management, in order to prevent unfavorable events This is dangerous when Vietnamese banks’ customer services are still in their infancy and banks’ revenue depends heavily on lending activities and credit growth is central to any bank’s profit In addition, the control work from the central bank, though playing a growing role, has not been protective enough Access to credit information and history is very limited Thus, small banks and credit funds are facing the big question of establishing a strong credit risk management framework in order to maximize their profits and to gain competitive advantage over their rivalries Central people credit fund (CCF) - a joint stock credit institution which is supervised by SBV is not an exception CFF provides financial services to LCFs and the general public, including SMEs, farmers and CCF staff Thus, its operation has all specific characteristics of an commercial bank, especially in potential credit risk This is where the research problem for this thesis arises Instead of analyzing other credit institutions that have quite more comprehensive risk management framework, the researcher is far more worried about the practices in central people’s credit fund Hatay branch which are still weak and less competitive in banking market What could they have done in order to prevent or at least lessen the bad impact of credit risks happening? In brief, all of the facts mentioned above have encouraged me to direct my study on: “Credit risks at Central people’s credit fund Hatay branch and some solutions to minimize that” Aims of the study The biggest objective of this research is studying the current situation of credit activities, analyzing credit risks at CCF Hatay branch during the 2008-2010 period and then giving some suggestions to minimize these risks This thesis also explains to the readers the significance of credit risk management in banking in general and CCF Hatay branch in particular Nguyen Thi Thu Trang k45/51.02 Academy of finance Graduation Thesis Methods of the study Research methodology is a philosophical framework for any research It contains the data used and the research data collection techniques For this thesis, both primary and secondary data are used Secondary data are collected from the literature (books, journals, previous research papers, electronic sites, etc.), the SBV regulation database, the CCF, PCFs annual reports and published internal policies Primary data are gathered by the researcher through both qualitative and quantitative methods An in-depth interview was conducted with three credit staffs in the branch to gain insight into the office’s daily credit operations A questionnaire was also designed and handed to 30 peoples to find out more about the staffs’ characteristics and practices Scope of the study Because of the limitation of the writer’s knowledge, experience and time, this study only focuses on the management of credit risks in short, medium and long term loans at CCF Hatay branch from 2008 to 2010 Organization of the study Besides an Introduction giving a brief description of the research including the reason for choosing topic, scope, aims and methods of the study and a Conclusion which summarizes the main points of the study and gives suggestion for further study, this thesis was divided into three main chapters: Chapter : Literature review providing a theoretical background of credit risks in financial institutions’ activities Chapter : Method methodology showing the method used to evaluate the practice of managing credit risk at CCF Hatay branch Chapter : Implication/ Recommendations suggesting some solutions to minimize credit risks at the CCF Hatay branch Nguyen Thi Thu Trang k45/51.02 Academy of finance Graduation Thesis CHAPTER : LITERATURE REVIEW THEORETICAL BACKGROUND OF CREDIT RISKS IN CERDIT INSTITUTIONS’ ACTIVITIES 1.1 THE CREDIT ACTIVITIES OF CREDIT INSTITUTIONS 1.1.1 The concept of credit We are living in a world of credit Everyday, in every way, we become more and more involved in various aspects of this credit world As consumers, business people, and bankers, we are experiencing continued growth in using credit Therefore, all of us need to understand what credit is, and how it is used Some concepts such as a credit transaction, credit activity and credit line are often mentioned in everyday life, however, many people may not understand the exact meaning of these IN fact, it is hardly to give a clear definition of credit because of its large scale Traditionally, credit may be defined as “ a transaction between two parties in which one ( the creditor or lender) supplies money, goods, services or securities Nguyen Thi Thu Trang k45/51.02 Academy of finance Graduation Thesis in return for a promise of future payment by the other ( the debtor or borrower)” Such transactions normally include the payment of interest to the lender In the case of a credit institution, credit means lending or advances made by it The bank itself is the lender, and the borrower from an credit institution is the interest or commission charge that they have to pay through the life of the lending In terms of language, a credit has the similar meaning as a loan to some extent For example, a short-term and long-term credit is often understood as a short-term and long-term loan respectively 1.1.2 Types of credit In order to manage and control a large scale of credit, credit is often classified into different groups according to various criteria 1.1.2.1 Time of credit a Short-term credit: is a type of credit which is advanced for a year or less with an agreement that they will be repaired in one payment at the end of the period b Medium and long-term credits: are those with maturities longer than one year Evidence of the transaction is the promissory note, either secured or unsecured Usually, such credits are repaid at specified intervals mutually agreed on by the lender and borrower 1.1.2.2 Subjects involving in credit activities a Private credit: is credit used by individuals and businesses in order to carry on exchanges in the private sector of the economy Private credit includes: - Consumer credit: is the use of credit as a medium of exchange for the purchase of finished goods and services by the ultimate user - Business credit: describes the credit relationship involved in purchasing goods, raw materials, and inventory for resale, or obtaining funds to start, maintain, and operate business activities, using credit as a medium of exchange Nguyen Thi Thu Trang k45/51.02 Academy of finance Graduation Thesis b Public credit: is credit extended or used directly by a government agency to finance the goods, services, and welfare programs it offers to citizens Governments borrow money primarily through the sale of bonds and other securities if tax revenues are not sufficient to cover current spending needs 1.1.3.3 Security a Unsecured credit: is a credit that bases solely on the creditworthiness of the borrower, and on which no collateral is pledged The evidence of this type of credit is usually the borrower’s signed promissory note b Secured credit: is a credit that relies not only on the borrower’s promise to pay but also on a pledge of some specified property The bank can exercise its lien on the collateral in the event the borrower defaults 1.1.3.4 Borrowing purposes a Real estate credit: which is secured by real property- land, buildings, and other structures It includes short-term loans for construction and land development and longer-term loans to finance the purchase of houses, apartments, or foreign properties b Financial institution credit: contains credit to banks, insurance companies and other financial institutions c Agriculture credit: which is extended to farm and ranch operations to assist in planning and harvesting crops and to support the feeding and care of livestock d Commercial and industrial credits: which are granted to business to cover such expenses as purchasing inventories, paying taxes, and meeting payrolls e Credits to individuals: include credit to finance the purchase of automobiles, appliances, and other retail goods to repair or modernize homes, cover the cost of medical care and other personal expenses, either extended directly to individuals or indirectly through retailed dealers 1.2 CREDIT RISKS IN CREDIT INSTITUTIONS’ ACTIVITIES 1.2.1 What is risk? 1.2.1.1 Definition Nguyen Thi Thu Trang k45/51.02 Academy of finance Graduation Thesis The economists define risk in many different ways, but all agreed that risk is uncertainty or unreliability about the result in the future IN the financial world, credit institutions have to face a various range of risks Indeed, it is believed that the main business of each banking institution is to manage these risks Some of the major risks that bankers are concerned with are credit risk, operational risk, liquidity risk and legal risk, which are discussed below 1.2.1.2 Types of risks of credit institutions a Credit risk “Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with specified terms in a credit agreement” (Wikipedia) b Operational risk Operational risk is the risk of loss resulting from non-financial problems, such as technology ( e.g., technological failure and deteriorating systems), employees ( e.g., human error), customer relationships (e.g., contractual disputes), capital assets ( e.g., destruction by fire and other catastrophes) and external events(e.g., external fraud) In other words, operational risk is associated with a bank’s overall organization and can arise whenever existing technology malfunctions or back-office support systems break down c Liquidity risk “Liquidity risk is the risk that a sudden in liability withdrawals may leave a financial institution in a position of having to liquidate assets in a very short period of time and at low prices.” (Wikipedia) Faced with liquidity risk, a bank may be forced to borrow emergency funds at excessive cost to cover its immediate cash needs, thus reducing its earnings d Legal risk Nguyen Thi Thu Trang k45/51.02 Academy of finance Graduation Thesis “Legal risk is the risk from uncertainty due to legal actions or uncertainty in applicability or interpretation of contracts, laws or regulations” (Wikipedia) Legal risk may also occur when there are contradictions in the legal system Sometimes, commercial banks are confused by various regulations and they face difficulties in following one rule which may go against another Despite innovation in the financial service sector, credit risk is still the major single cause of bank failures due to the fact that nearly 90% of a bank’s revenue generally brought by credit activities Thus, the effective management of this risk is central to a commercial bank’s performance That is the reason why the thesis will mainly focus on credit risk and its management approach 1.2.2 Viewpoints on credit risk Financial institutions’ credit capital often involves in all economic periods, therefore, danger that are exposed to the economy as a whole are believed to be the dangers to credit institutions as well Although each bank has different considerations for credit risk management, it is hardly denied that credit risk is an inherent part of banking activities In addition to the above mentioned definition, credit risk also refers to the risk of financial losses due to unexpected changes in the credit standard of debtors and counterparty in a financial agreement It occurs as an obstacle that prevents businesses from increasing profits Heffernan ( 2005) has shown that “ credit risk comprises the possibility which as asset or a loan is irrecoverable in the case of default, or the risk of delay in repayment of the loan: It is often the case in the business of lending that a borrower knows more about its solvency than the lender, therefore, the financial institution is being at an informational disadvantage The lender may seek out its solution by setting a credit line, rather than permitting the borrowers to access their own loan size without any restriction However, the quantitative exposure limits company’s competitiveness in the market For example, reducing a credit line might make the volume of clients decrease and thereby gains lower profit Contrary to it, extended credit may lead to higher risk Nguyen Thi Thu Trang k45/51.02 Academy of finance Graduation Thesis Some bankers argued that credit risk is mainly associated with the risk in assessment process For example, if a customer is unwilling to provide the bank with adequate and accurate information on his/her business activities, it will run the risk of making wrong decision on offering a credit Thus, the most important step for bank is to focus on evaluating the borrower’s business condition 1.2.3 Types of credit risk Credit risk often occurs in the daily activities of a credit institution in various types • Overdue-debt risk: Overdue-debt are soundness examples of credit activities which show a sign of threats to either banks or customers A bank takes overdue-debt risk when its borrowers can not pay back their debts at maturity date • Default risk: Default risk occurs when a borrower fail to pay the interest and principle a loan on time It is also understood as the uncertainty surrounding a firm’s ability to service its debts and its obligations If a borrower has a questionable reputation or is having financial difficulties, the lender faces the risk that the borrower will default Moreover, the default of borrower will downgrade the current value of the assets Prior to default, however, there is actually no way to discriminate clearly between firms that will default and those that will not At best, a credit institution can only bank probabilistic assessments of the likelihood of default The loss suffered by a credit institution in the event of a customer; default is usually significant and is determined largely by the details of the particular contract or obligation • Excessive capital risk: Excessive capital risk arises when a bank is able to mobilize a large amount of capital from the public but there is not enough demand for loans from its customers In this case, there will probably be a growing imbalance between the amount of capital and capital utilization As a result, earnings from the loans’ Nguyen Thi Thu Trang k45/51.02 Academy of finance Graduation Thesis interest can not compensate for bank’s operational costs and payments for interest of customers’ deposits • Capital shortage risk: Contrary to the excessive capital risk, capital shortage risk occurs when a bank is undercapitalized, which may lead to the loss of making payment ability On the one hand, the bank can not offer a wide range of credits On the other hand, it has to ask for capital from external sources with such a higher interest rate than that of its own loans 1.2.4 Causes of credit risks Commercial banks are still aware of their shortcomings and mismatches in the credit activities which lead to the above mentioned risks 1.2.4.1 Objective causes Credit activities probably have direct and massive impacts on the economy, and in return, they are influenced by the objective factors from the society Thus, every commercial bank should realize the potential of credit risks Firstly, risks in a commercial bank’s activities may result from several factors associated with the economic environment such as economic cycle, inflation, foreign exchange rate, interest rate, monetary policy and unemployment rate When the economy witnesses an enormous growth, industries in general and enterprises will positively thrive as well as generate high earnings Therefore, the debt collections of commercial banks are probably easier, and customers’ bad debts are mitigated, apart from the case of maturity risk In contrast, in the period of economic recession, high inflation and unemployment rate accompanied by strict monetary policy will pose considerable threats to the production and profits of individuals and business as a whole In this situation, credit risks in commercial banks’ activity are unavoidable Secondly, political issues and the legal system are also likely to affect greatly business activities in general and credit activities in particular of a bank A country with stable politic environment is surely an ideal place for both domestic and foreign investors Besides, without having to worry about political conflicts, Nguyen Thi Thu Trang 10 k45/51.02 Academy of finance Graduation Thesis The banking credit relationship is mainly based on mutual trust and confidence in each other, which requires counterparties to have adequate information on their partners Information fact, however, this credit relationship is sometimes destroyed due to several reasons, such as bank does not carry out detailed research on customers’ status and borrowers with bad morals supply untrue information on purpose By conducting information-depth investigations, bankers can have a clear understanding on customers’ present financial capability, their potential and their ability to pay off debts Information other words, researchers and analysis of customers are extremely important because they will lay the ground for right lending decisions Customer analysis is often conducted by five criteria: • Prestige: the bank should research for the company’s prestige, its manager’s reputation and qualifications, and its business fields • Legal capacity: by considering decision of establishment, registration certificate, the company’s charter and organization structure, the bank will be aware of the borrower’s ability to pay promised interest and principle payments • Financial condition: after considering the firm’s latest financial statements ( often information three-year period) including income statement, balance sheet, and statement of cash flows, the bank will assess the level of risk for a loan • Profitability and business capability: contain judgment on the company’s product and its status on the market, the consumers’ buying behavior toward its product, production resource, as well as the enterprise’s management expertise • Business conditions: the bank will evaluate changes information the economy If there is a dramatic economic growth, it will expand the credit scale and vice versa Moreover, it is also crucial to analyzing a customer’s business project because it directly relates to his/her payment ability The main purpose is to examine whether the plan is feasible or not information order to be granted a credit 3.2.2 Collecting adequate information on customers Nguyen Thi Thu Trang 56 k45/51.02 Academy of finance Graduation Thesis Whenever a bank extends credit, there is always a risk that the borrower may not repay the loan With the purpose of enhancing the quality of customer assessment information on the bank’s customers for each credit request After that, the bank must analyze them, and make a decision about the creditworthiness of the customer However, the amount of information required for each loan contingent on the loan size and the cost of collecting it The bank usually needs to get two groups of customer information: One group of financial information includes financial situation, earnings, and the value of mortgaged properties This type of information can be provided by the customers themselves or can be achieved from different sources as governing body, the Credit Information Center (CIC) of the state Bank of Vietnam or information center of credit institution Besides, several other financial ratios are also calculated to define the payment ability of the borrower The other is non-financial information group comprising of the customer’s morals, social relationship In term ò business, it is concerning about competitiveness and reputation of the company on the market, as well as management skill of its board of directors This type of information is often achieved by personal meetings or interviews with the client, and research visits to the borrower’s place However, non-financial information depends a lot on the loan officers’ subjective judgment Consequently, credit staffs must be those with great ability to observe and assess carefully the customer’s place, conduct in-depth interview and process obtained information These two groups are very important in credit activity, they strongly support each other Thus, they can not be separated but simultaneously used so that the bank can have a clear understanding of the borrower’s status before making lending decisions 3.2.3 Improving lending policy at CCF Hatay branch Like other credit institution, establishing and adjusting lending policy is becoming urgent tasks Establishing policy could be understood as specifying regulations about lending activities pertain to business goals Adjusting policy aims to ensure the balance of between maximizing profit and minimizing risks and Nguyen Thi Thu Trang 57 k45/51.02 Academy of finance Graduation Thesis the effective sustainable development of credit activities that gradually adapt to international standard Lending policy must be required to contain transparency rules and informed to all related departments under the following specific documents: Establishing an effective customer policy: It is necessary to pay attention to customer care so that The Branch can timely update customer’s business information As well as provide the best service for them - Improving lending procedures : + creating a simple automatic lending procedures + Tightening supervision over credits The bank must remain in contact with the customers (borrowers) during the whole time of credit agreements to ensure that its customers receive the funds as directed on the loan agreement The bank should closely watch the customer’s financial condition Delayed payments, information from trade sources of other late payments, or requests for additional short-term financing may indicate that the borrower is having difficulties It is important to recognize problems and address them as soon as possible - Strengthening branch control and supervision of credit unit and other related department Improving lending quality must be carefully conducted from to loan approval, assessment and supervision phase of loans At all phase, loan’s officer as well as other related department must be required to implement and strictly obey steps of lending procedure - Establishing and conducting effective and periodic supervision program planning Utilizing and classifying debts in accordance with SBV regulations It is necessary to supervise the compliance of lending policy and loan insurance Credit staff neccessitate to be deeply aware of debt classification, credit risk management and loan loss provision in accordance with SBV regulation and international standard Nguyen Thi Thu Trang 58 k45/51.02 Academy of finance Graduation Thesis 3.2.4 Enhancing the quality of human resource People are always the most important and decisive factor in all activities, particularly in risky business as banking sector One of the reason causing credit risks is the carelessness of staffs in conducting business, such as immorality and disobedience the regulations, which caused serious consequences to CCF Hatay branch Thus, paying much attention to the take of personnel, training and retraining human resources are very necessary An excellent credit staff is required to have qualifications, such as specialist knowledge of economics, accounting and banking; ability to process and analyze financial information; and good morals and communication skill Besides, he/ she also must understand the practice of supply-demand on the market, as well as both domestic and international business activity In order to develop the bank’s network and expand its business scale, Hatay branch is speeding up the recruitment process There have been 41 employees working for the bank Together with an increase in the number of staffs, the bank also pays attention to improving the quality of its staffs, performance The following suggestions have been made in order to enhance the quality of personnel in credit activity - Recruiting the qualified officers who have comprehensive knowledge and professional ethnics - Regularly providing credit staffs with helpful training courses on banking operations and lending principles Especially, focusing on improving skills to value collateral assets, assess business projects, etc - Encouraging young staffs to self-study out of working hours, and learn from experienced ones - Improving staffs’ level of foreign language, especially English, in order to deal with international transactions and foreign customers Nguyen Thi Thu Trang 59 k45/51.02 Academy of finance Graduation Thesis - Imposing strict requirements for recruitment of new loan officers, avoiding nepotism - Creating a good working environment where staffs can develop their best; ensuring legitimate rights, improving physical and spiritual life for its employees to make them feel comfortable and inspired working in CCF Hatay branch - Establishing preferable regulations on wages, and rewards to encourage and promote staffs, as well as imposing penalties for disobedience to the bank’s principles These positive suggestions is expected to help the bank to attract more qualified credit staffs which constitute an enormous resource for the bank’s sustainable development 3.2.5 Developing internal control and information system and modernizing banking technology In credit activity, information play a decisive factor in determinants of investment Up to now, internal control and information system at PCFs network has not yet developed As mentioned in chapter 2, a large number of information is taken from CIC of SBV However, this source have some shortcomings because of long response time and inedequate information Hence, it is high time for CCF Hatay branch develop internal information system and modernize banking technology through some solutions: - Promoting the development of internal information system - Applying computer software aims to collecting and using information to determine a ranking of customer creditworthiness It provides a basic for more accurate evaluation of borrower’s financial capacity and improves credit analysis, assessment and approval ability and speed - Upgrading machine : Modern technology helps credit staffs updating, collecting and analyzing information more quickly and accurately It leads to improve the effectiveness of banking operation in general and credit activity in particular 3.2.6 Using appropriate credit assessment models Nguyen Thi Thu Trang 60 k45/51.02 Academy of finance Graduation Thesis As mentioned in Chapter 1, credit scoring models such as linear discriminant model can help bankers partly assess borrowers’ probability of default The first chapter also discussed in detail how to establish the analysis model and calculate E I Altman’s formula This model has already been widely used in many successful foreign commercial banks, especially in the United States Thus, the thesis suggests that Vietnam banks in general and CCF Hatay branch in particular should take this credit scoring model into consideration and apply it in the bank’s credit activity However, this model still has its own limitations, for example, it only discriminates between two extreme cases of borrower behavior: default and no default Therefore, the bank needs to instruct its staffs to use the model wisely in order to maximize the model’s advantages and minimize its problems It is also necessary to consider other factors such as the borrower’s reputation in the local market and non-financial information before assessing his/her creditworthiness Moreover, Tay branch should continue developing its policy on customer ratio which classifies the bank’s customers into ten groups from AAA-rated to Drated After “ scoring” its clients carefully, the bank can adopt suitable policies on attracting reliable borrowers as well as avoiding those with high default risk 3.3 IMPLICATIONS 3.3.1 Implications to the Government and related sectors With the purpose of making banking system’s credit activity faster, firstly the Government needs to create a fairly soundness business environment by boosting the reform process especially the SMEs At present, the performance of many SMEs which are believed to play a key role in the economic development seems to be vulnerable Government need to support and create favorable investment climate for enhancing the growth of medium and small businesses in the agriculture and rural sector so as to promote the competitiveness of enterprises.; Moreover, the Government should issue documents which have specific instructions about how to establish, dissolve, emerge and equitize enterprises Such movements will encourage businesses to operate more effectively Nguyen Thi Thu Trang 61 k45/51.02 Academy of finance Graduation Thesis In addition, The Government need to reform legal framework, particularly in land law and financial transaction policy through a consistent and synchronized set of policy interventions to make easier for credit institutions applying in practices Relevant authorities need to carefully supervise and make the process of issuing property using right certificate in the right order This aims to prevent some poor morals customer’s from using only one property as mortgage to borrow from many banks at the same time, leading to banks’ losses in capital In addition, it is also essential to have a coherent legal framework of notarizing mortgage agreements so that in the case of the borrower’s default risk, the bank ( the lender) will have a full right to deal with the property Besides, The Government could encourage the expansion of agricultural insurance products through a variety of government-supported agriculture-related insurance services In fact, the risks faced by farmers are many, including weatherrelated shocks; volatile commodity prices; financial shocks, such as devaluation; and negative policy changes The lack of efficient risk-mitigation mechanisms exposes farmers to the possibility of incidents where loss of income is subtantial In addition because of problems related to moral hazard and adverse selection resulting from asymmetric information., insurance firms are often reluctant to provide their services in this area In other sides, farmers are lack of financial capacity when buying this service Hence, It is necessary to setting price support policies used by the government to benefit agricultural firms that promoting the development of agricultural services 3.3.2 Implications to the Sate Bank of Vietnam Firstly, the State Bank needs to perfect the system of legal documents and regulations on banking operations, particularly credit activity It is also essential to impose an appropriate policy on interest rate and exchange rate which is institution conformity with actual situation of the economy Moreover, the State Bank should strengthen its role institution the inter-banking market For example, it may become either a buyer or a seller to help commercial banks maintain security of Nguyen Thi Thu Trang 62 k45/51.02 Academy of finance Graduation Thesis the balance of foreign exchange Institution the common trend of economic integration, the State Bank should avoid interfering too much institution each CCF’s activity, but it still has to keep closely supervision on them in order to ensure the safety and soundness of the sector Secondly, the State Bank needs to improve the performance quality of its Credit information Center ( CIC) The main function of CIC is to collect and analyze information about financial institutions, credit relationships, currency market, and legal status of enterprises Over the past years, CIC has assisted banks by providing timely financial reports on enterprises, and analysis of changes on the market, but those still might not satisfy the increasing demand for information Therefore, it is necessary to enhance the performance of this centre For example, CIC should be equipped with advanced technology as well as Internet application institution order to collect accurate and comprehensive credit information If CIC an strongly support commercial banks institution researching market and borrowing partners, risks institution credit activity will be probably minimized 3.3.3 Implications to Central people’s credit Fund Ha Tay branch plays an important role in the development of the whole system of CCF Therefore, the head office should maintain both constant support and close supervision on Ha Tay branch’s operation institution order to remedy timely its shortcomings Moreover, CCF should regularly exchange information among branches institution its network in order to help those takes good lessons from each other or avoid systematic errors However, CCF should not dominate the operations of the branch, instead giving Tay branch the right to actively run its business By doing that, the bank will be more responsible for its own activities, Thus, it will devote its best effort for the development of itself and of the whole system Nguyen Thi Thu Trang 63 k45/51.02 Academy of finance Graduation Thesis CONCLUSION The preceding 70 pages introduced credit risk occurrence The paper begins with some background information that triggers the author’s interest in this specific field Climbing concerns about the banking credit risk occurrence are main reasons behind this interesting topic selection What the researcher wants to figure out after the research has been clearly defined with three research questions relevant to three research objectives In brief, it is clear from the thesis that credit activity is an inherent part of the banking sector Every credit institution often offers a wide range of credits such as for individuals or enterprises, and for investment or production purposes, all of which help generate most of the banks’ earnings A credit transaction not only benefits counterparties including individuals, businesses and credit informations but also take part in speeding up the process of capital exchange in an economy However, everyone who is concerned about this field probably realizes that it is a challenging and unpredictable business, and risks in credit activity are unavoidable There are a variety of dangerous sign of credit risk that banking managers should be deeply aware of, such as overduedebts, bad debts and borrowers’ defaults Instead of ignoring this lending problem, credit staff must know how to deal with it by concerning about all of the bank’s criteria as well as processing carefuly borrowers’ information before granting crdits Once credit risk arises, it will not only reduce the bank’s profit but also threaten its prestige and the whole operation Therefore, it is crucial to carry out an effective management measures to minimize risk in credit activity Introducing theories to the audience, however, is not the final aim of this thesis What the research truly cares about is to use those theories as the foundation for the evaluation of situation of the credit risk actual incurred based on the established benchmarks The thesis has gone through those theoretical concepts to lead the readers to a much more practical section of the factual practices in the credit institution, especially at CCF Hatay branch The thesis presents the branch’s performance in credit activity throughout the period from 2008 to 2010 CCF Hatay branch has contributed a significant part in the healthy development of Nguyen Thi Thu Trang 64 k45/51.02 Academy of finance Graduation Thesis CCF as a whole and is expected to transformed into a commercial bank in near time Over the period, the branch has achieved positive results in managing and collecting debts, yet credit risk is still a barrier posed to the bank in its subtainable development Both objective and subjective causes have been clearly examined, therefore, from which Hatay branch can draw useful lessons so as to overcome its weakness and improve the bank’s credit activity in the coming years Thus, the analysis part has given the readers a deep assessment of the CCF Hatay branch’s credit risk context practices Finally, there are both good points that are appreciated and areas that need improvements This paper conclude with some constructive suggestions to minimize the level of risk at CCF Hatay branch These measures are mostly relevant to enhancing the quality of the bank’s personnel, credit procedures, and collecting accurate information Besides, policy implications are also given to the Government, the State Bank of Vietnam and other related sectors to create advantageous conditions for credit activity With the purposed measures, the paper hopes to contribute just a small part in the development of credit activity at CCF Hatay branch Nguyen Thi Thu Trang 65 k45/51.02 Academy of finance Graduation Thesis REFERENCES ‘A note on credit’ ( 1994), The ABC guide to credit Hanoi: scientific and social Publisher Anthony Saunders and Marcia Million Corneett ( 2003), Financial Institutions Management – a risk management approach (Fourth edition) Irwin McGraw-Hill banks for International Settlements ( 2006), Sound credit risk assessment and valuation for loans Retrieved June 2006 from BIS online database on the World Wide Web: http://www.bis.org/pub/bcbs126.htm Credit risk definition, downloaded at the World Wide Web: http://en.wikipedia.org/wiki/Credit_risk Law of State Bank of Vietnam( 2003) Hanoi: National Politics Publisher Nguyen van Thanh ( 2003), Money and banking theory Hanoi: Finance Publisher Nguyen Van tien( 2003) Assessment and Prevention of credit risks in banking activity Hanoi: Statistics Publisher State bank of Vietnam( 2005), Decision No.493/2005/QD-NHNN dated 22/4/2005 Stephen G Cecchetti ( 2006), Money, banking and Financial markets Irwin McGraw-Hill 10 World Wide Web: http://www.vapcf.org.vn/index.php?newlang=english 11 The People's Credit Funds of Vietnam: A prudentially regulated credit cooperative movement : Seibel, Hans Dieter; Tam, Nguyen Thac Volume 21, Number 2, June 2010 , pp 137-153(17) Nguyen Thi Thu Trang 66 k45/51.02 Academy of finance Graduation Thesis APPENDIX INTERVIEW This interview’s content is confidential and serves the purpose of collecting data for the final thesis The researcher guarantees not to disclose the bank’s and the respondents’ identities in the work General Questions Credit service is a traditional and key service in every bank What are the credit services that your credit fund is offering? At CCF Hatay branch, what kind of credit services that the customers have access to? In your opinion, what types of risks exist in those services? Questions related to credit risk management in the CCF Hatay branch What are the formal documents related to credit and credit risk management that the bank has published? - Lending Activity - Other credit activities In practice, you strictly follow procedures stated in the documents? How is the authority of your branch? What is the general processing time (from credit application to disbursement)? Is there any client categorization? What are the criteria for that categorization? Are there any limits to certain group of clients? (industry, loyalty, etc.) Could you please tell in details about the branch’s internal credit rating system? In your opinion, is it helpful to your branch’s credit risk management? What you think of the role of internal control in credit risk management in your bank? Is internal control conducted on a timely basis? Are the policies and procedures constantly reviewed to adjust to the new conditions? Usually on what basis? Please give an example of the most recent change? How are the credit staffs in the branch notified of new policies or any modifications? Are the notifications timely and complete? Was there any loss resulting from inaccurate notification? How frequently are update reports made to the management persons? In what form are the reports? Is the report content much related to risks or risk management? Questions on the transaction office’s business performance Did you ever have to loosen credit approval standards due to profit pressure? Is there any group of customers that are more favored than others? Who are they? How is bad debt and loan loss provision in the transaction office? What type of customers is most likely to generate bad debts? How often the business results are critically reviewed? Thank you for your great contribution! Nguyen Thi Thu Trang 67 k45/51.02 Academy of finance Graduation Thesis QUESTIONNAIRE This questionnaire’s content is confidential and serves the purpose of collecting data for the final thesis The researcher guarantees not to disclose the respondents’ identities in the work Instruction: Please fill in the blank or circle your answers Your current position at the transaction office is …………………………… Your main duties are ………………………………………………………… Your major at university is: Banking, with Credit specialty Banking in general Finance Others (Please specify………………………………………………) Your experience in credit field: Under year 1 – years Over years – 10 years How you evaluate your understanding of risk management policies towards the bank’s credit products and services? Grade 1: I don’t know any Grade 2: I know very little Grade 3: I quite understand Grade 4: I understand clearly What you think of the importance of credit risk management in your bank? Grade 1: Not important Grade 2: Not so important Grade 3: Quite important Grade 4: Very important What grade you give for the relation between your job and credit risk management? (1: least related, 4: most related) 1234 How often you participate in credit-related staff training? Under months Over months – months Nguyen Thi Thu Trang 68 k45/51.02 Academy of finance Graduation Thesis Over months – year Over year How you evaluate the effectiveness of the training courses? Grade 1: Not effective at all Grade 2: Little effective Grade 3: Effective Grade 4: Very effective 10 Does the branch call for your opinions whenever there is an adjustment to the policies associated to credit or credit risk management? Never Seldom Sometimes Regularly 11 Do you hope for more opportunities to raise your voice? Yes No 12 When there is a change or new policy, are you notified on time and accurately? Seldom Sometimes Regularly Thank you for your participation! Nguyen Thi Thu Trang 69 k45/51.02 ... situation of credit risk at CCF – Hatay Branch as well as offer solutions to help to minimize credit risks 2.5 DATA ANALYSIS AND FINDINGS MANAGEMENT OF CREDIT RISKS AT CENTRAL PEOPLE’S CREDIT FUND. .. facts mentioned above have encouraged me to direct my study on: ? ?Credit risks at Central people’s credit fund Hatay branch and some solutions to minimize that? ?? Aims of the study The biggest objective... Local credit funds (LCF), the Central People’s credit fund (CCF) and Vietnam Association of People’s Credit Funds (VAPCF) ( See Figure 1) Central people’s credit fund (CCF) is a cooperative credit