NATIONAL ECONOMICS UNIVERSITY CENTRE FOR ADVANCED EDUCATIONAL PROGRAMS ***************************** BACHELOR’S THESIS IN FINANCE CREDIT RISK MANAGEMENT OF MARITIME BANK VIETNAM: EVALUATIONS AND RECOMMENDATIONS Student’s name: Vu Ngoc Diep Student’s ID: 11120600 Class: Advanced Finance 54.B Intake: 54 Internship guide: Tran Thi Lan Anh Instructor: MSC.Prof Tran Minh Tuan Ha Noi, 2016 TABLE OF CONTENTS 2 [Type text] Tran Minh Tuan Finance54.B [Type text] [Type text]Supervisor: Prof Vu Ngoc Diep _ Advance ACKNOWLEDGEMENT Before starting my research, I would honored to express my grateful to my research supervisor, Associate Professor, MA Trần Minh Tuấn for his wise guidance and useful advices during my process of making this report Moreover I would like to thank my internship guider, Mrs Tran Thi Lan Anh, for completely supportive with my internship as well as giving me useful information with her experiences to conduct this research Last but not least, I would like to send my great thanks to Maritime Bank Operation Center’s staff for giving me the warm environment to work and also the team work spirit during my internship Thank you, Ngoc Diep [Type text] Minh Tuan [Type text] [Type text]Supervisor: Prof Tran Vu Ngoc Diep _ Advance Finance54.B ABBREVIATION MSB Maritime Bank Vietnam BOD Board of Director BOM Board of Manager CIC Credit Information Central NPL Non-performing Loan [Type text] Minh Tuan [Type text] [Type text]Supervisor: Prof Tran Vu Ngoc Diep _ Advance Finance54.B LIST OF TABLE LIST OF FIGURES [Type text] Minh Tuan [Type text] [Type text]Supervisor: Prof Tran Vu Ngoc Diep _ Advance Finance54.B [Type text] Minh Tuan [Type text] [Type text]Supervisor: Prof Tran Vu Ngoc Diep _ Advance Finance54.B INTRODUCTION Rationale The ruinous impact of global financial crisis has illustrated the vulnerability of business world follow the shift of the market This vulnerability was formed by different reasons; one of them was the circumstance of risks Risks could influence all parties in the financial market, ranging from financial institutions and enterprises to individual investors Moreover, the seriousness of managing risk has been notice of by most of financial market practitioners and the authority In our country, the recent recession has harmed the financial institution badly, exclusively in the case of commercial banks Subsequently, banks have to face with increasingly risk and credit risk is one of the most important risks that a bank meet Credit risk is the risk that a borrower will default on any type of debt by failing to make required payments Providing loan for new customers is one of the benefit sources to banks; however, business relationships are not always successful, especially in this era of economic crisis Thus, credit risk management becomes a crucial act to survive for commercial banks Banks use non-performing ratio to evaluate the effectiveness of their credit risk management The period of three years from 2009 to 2012 in Maritime Bank (MSB), the credit services were stopped follow the consulting result of Mckinsey – a global management consultant, as a result, after comeback to the retail credit service game in 2012, risk managing in MSB face many problems These reasons lead to the thesis topic: Credit Risk Management of Maritime Bank: Evaluations and recommendation Research objective and questions 2.1 Research objective At first, this research objective is getting a rooted understanding of the concept of credit risk and credit risk management By looking at those theoretical backgrounds, the research will help MSB RB to assess its credit risk management, discovering gaps and the reason of forming those gaps Lastly, the researcher will conduct some recommendations to improve credit risk management of MSB RB 2.2 Research questions What is the current situation of MSB RB’s credit risk management? [Type text] Minh Tuan [Type text] [Type text]Supervisor: Prof Tran Vu Ngoc Diep _ Advance Finance54.B What are the weaknesses of the bank’s credit risk management? Reasons? How can bank improve its credit risk management? Research methodology Method: This research applies 17 principles of Basel Committee on credit risk management to assess MSB RB’ management of credit risk Data source: This research learns on secondary data comprehensively Both qualitative and quantitative data conducted by the author from MSB’ annual reports, internal documents and paper on analyzing MSB’ financial status Massive media resources were carefully apply and so were the international past paper Personal observation during the internship period at MSB Head office was also sources for assessment Research scope The thesis will investigate the credit risk management of MSB RB, if the risk management policy is relevant enough, the competences of credit managers and staffs, collaboration between departments in bank To assess MSB RB credit risk, its credit quality is considered in the period of 2012 - 2014 Such a revolution period of retail credit system to reveal debt’s characteristics Research framework Together with Introduction and Summary, the thesis includes three chapters: • The first chapter describes the theoretical framework of credit risk, credit risk management and the principles of credit risk management in banking • The second chapter analyses current situation of MSB RB ’s credit risk management, which aimed to find weaknesses • The last chapter offers some recommendations to improve credit risk management of Maritime Bank Retail Banking [Type text] Minh Tuan [Type text] [Type text]Supervisor: Prof Tran Vu Ngoc Diep _ Advance Finance54.B CHAPTER I THEORETICAL FRAMEWORK In pursuance of assess the efficiency of a bank’s credit risk management, understanding of the theory foundations is essential Wherefore this chapter will give general knowledge of commercial bank, credit risk, and credit risk management Credit risk at commercial banks 1.1 Fundamental understanding of commercial banks 1.1.1 Definition of commercial banks The word “bank” is one of the most used word in all languages all over the world; however, still, the obfuscation of defining bank is happen A bank stated by three aspects: how the economic function it serves, which services it offers for clients, or the legal basis of existence According to the functional performance, banks are financial intermediaries that involved in transferring funds from savers to borrowers and paying for goods and services (Rose and Hudgins, 2009, p 2) According to services offer to customers, banks have a great range of financial services - from checking and debit accounts, credit cards, saving plans to loan for business, consumers and government In addition, banks also provide investment banking, insurance protection, financial planning, advice for merge companies, the sale of risk management services and numerous other innovative services In summary, banks tend to become the general financial-service providers (Rose and Hudgins, 2009, p 2) According to Vietnam Legislation, a commercial bank is a credit institution that permitted to conduct all banking activities and other related business activities 1.1.2 Basis functions of commercial banks As approached above, commercial banks have two basic functions The primary purpose of commercial banks is to encourage individuals and institutions to save and transfer those saving to those individuals and institutions planning to invest in new projects (Rose and Hudgins, 2009, p 5) Bank emboldens customer’s act of saving by accepting deposit, including demand deposits, term deposits, saving deposits After that, based on the funded capital, banks grant credit to whom needing investment spending This process nursing the growth of economy, [Type text] Minh Tuan [Type text] [Type text]Supervisor: Prof Tran Vu Ngoc Diep _ Advance Finance54.B 10 creating new jobs, and upgrading living standard However, not only transform saving into investment, commercial bank also provides several supporting services for daily life They manage customers’ accounts, provide payment services such as checks, credit and debit cards , and perform collecting and spending for customers in payment transactions This helps speed up the payment process and ensures the safety and accuracy of payment Besides, banks provides risk protection services for those who save and venture to invest, including derivative contracts and insurance policies, liquidity services to make it possible to convert property into immediately available spending power, and credit services for those who need loans to supplement their income (Rose and Hudgins, 2009, p 5) 1.1.3 Credit activity of commercial banks Commercial banks’ business activities can be divided into three main aspects: capital mobilization activities, credit activities and other activities Capital mobilization helps the banks to ensure resource for operate its functions together with credit activities by transferring fund from banks to customers in specific period with specific cost, creating the income for the bank • Three main characteristics of credit activities: • The right to use the capital can be transfer from owners to users • The transfer has specific term • There are cost and risk going with the transfer th • In “Bank Management Financial Services ” (Rose and Hudgins, 2009), credit is classified by different criteria: By purpose of credit:  Real estate loans are secured by real property, such as land, building, • and other structures, and include short-term loans for construction and land development and longer-term loans to finance the purchase of farmland, homes, apartments, commercial structures, and foreign properties  Financial institution loans include credit to banks, insurance companies, finance companies, and other financial institutions  Agricultural loans are extended to farms and ranches to assist in planting and harvesting crops and supporting the feeding and care of livestock 10 [Type text] Minh Tuan [Type text] [Type text]Supervisor: Prof Tran Vu Ngoc Diep _ Advance Finance54.B 41 Table 2.4 Credit risk rating policy for retail customer of MSB Ran Credit Score Risk Level Credit Policy Aaa > = 401 Low Maximum meet demand for credit Aa 351 – 400 Low Maximum meet demand for credit A 301 – 350 Low Maximum meet demand for credit Bbb 251 – 300 Low k Grant credit with limits, depending on the loan-guarantee schemes May grant credit but must consider Bb 201 – 250 Medium options for financing and loan guarantees Credit expansion is not encouraged b 151 – 200 Medium Ccc 101 – 150 Medium Refuse to grant credit Cc 51 – 100 High Refuse to grant credit c – 50 High Refuse to grant credit d