CREDIT RISK MANAGEMENT IN AGRIBANK THAI NGUYEN PROVINCE, VIETNAM _ A DISSERTATION Presented to the Faculty of the Graduate School Southern Luzon State University, Lucban, Quezon, Philippines in Collaboration with Thai Nguyen University, Socialist Republic of Vietnam _ In Partial Fulfillment of the Requirements for the Degree Doctor of Business Administration _ By BUI VAN KHOA (Billy) December 2013 i APPROVAL SHEET The Dissertation of ii CERTIFICATE OF ORIGINALITY iii ACKNOWLEDGMENT The researcher wishes to convey his gratitude to the following persons who wholeheartedly devoted and helped make this piece of work a reality: DR WALBERTO A MACARAAN, for his invaluable support and supervision throughout my graduate study program; likewise, for his indefatigable effort in providing daily instructions during the duration of the study, thus, this dissertation is as much his work as mine; DR CECILIA N GASCON, President of the Southern Luzon State University in the Republic of the Philippines, for initiating the joint offering of the Doctor of Business Administration with TNU, through the ITC-TUAF; DR DANG KIM VUI, President of Thai Nguyen University, for his approval of the international collaboration with Southern Luzon State University, Republic of the Philippines and for the joint offering of the Doctor of Business Administration, through the ITC-TUAF; DR TRAN THANH VAN, dean of Graduate School of Thai Nguyen University, for his assistance and encouragement to pursue this study; DR DANG XUAN BINH, director of International Training Center, and DR NGUYEN THANH HAI, vice director of International Training Center, for their assistance and encouragement to pursue DBA; DR CONRADO L ABRAHAM, DR JOANNA PAULA A ELLAGA, DR EDWIN P BERNAL, and DR ALICE T VALERIO, panelists, for their support and constructive criticisms to improve this dissertation; iv SLSU and TNU Professors, for support and guidance extended throughout the graduate studies in Thai Nguyen University, Vietnam; Family and friends, for the love and support in one way or another; and to all who have contributed to make this study a success BVK v DEDICATION This piece of work is dedicated to my wife and my boy, all the staff of the Agribank in Thai Nguyen Province BVK vi TABLE OF CONTENTS PAGE TITLE PAGE ……………………………………………………………… i APPROVAL SHEET ……………………………………………………… ii CERTIFICATE OF ORIGINALITY ……………………………………… iii ACKNOWLEDGEMENT ………………………………………………… iv DEDICATION ……………………………………………………………… vi TABLE OF CONTENTS ………………………………………………… vii LIST OF TABLES ………………………………………………………… ix LIST OF FIGURES ……………………………………………………… xi LIST OF APPENDICES ………………………………………………… xii ABSTRACT ………………………………………………………………… xiii CHAPTER I II III INTRODUCTION …………………………………………… Background of the Study ………………………………… Objectives of the Study …………………………………… Hypothesis of the Study …………………………………… Significance of the Study ………………………………… Scope and Limitations of the Study ……………………… Definition of Terms ………………………………………… REVIEW OF LITERATURE ……………………………… 11 Conceptual Framework ………………………………….… 37 Research Paradigm ……………………………………… 38 METHODOLOGY ………………………………………… 40 Research Design …………………………………………… 40 Population and Sampling …………….…………………… 40 Instrumentation …….……………………………………… 42 Data Gathering Procedure ………………………………… 42 Statistical Treatment ……………………… …….…… 43 vii IV V RESULTS AND DISCUSSIONS ………………………… 45 Profile of the Respondents ………………… …………… 45 Assessment of Agribank Thai Nguyen Credit Risk …… 46 Assessment of the Current Status of Debts of Agribank Thai Nguyen ………………………………………………… 52 Factors Affecting Credit Risks Management of Agribank Thai Nguyen ………………………………………………… 62 Significant Difference in the Assessment of Two Groups of Respondents on Credit Risk Management ………… 65 Recommendations on Credit Risk Management of Agribank Thai Nguyen to Minimize Credit Risk ………… 70 SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS Summary …………………………………………………… 72 Findings …………………………………………………… 73 Conclusions ………………………………………………… 76 Recommendations ………………………………………… 76 REFERENCES ……………………… ………………………………… 78 APPENDICES …………………………………………………………… 81 CURRICULUM VITAE …………………………………………………… 89 viii LIST OF TABLES TABLE PAGE Frequency Distribution of the Respondents of the Study … 41 1.1 Frequency and Percentage of Respondent’s Profile …….… 45 2.1 Credit Risk of Agribank Thai Nguyen in terms of Segment Structure …………………………………………………….… 47 Credit Risk of Agribank Thai Nguyen in terms of Types of Customers ……………………………………………………… 48 Credit Risk of Agribank Thai Nguyen as to Availability of Guarantee ……………………………………………………… 50 Credit Risk of Agribank Thai Nguyen in terms of Outstanding Account ………………………………………… 51 3.1 Current Status of Overdue Debt of Agribank Thai Nguyen 52 3.2 Current Status of Undue Debt of Agribank Thai Nguyen… 54 3.3 Current Status of Debt Requiring Attention of Agribank Thai Nguyen ………………………………………………………… 55 Current Status of Under Qualified Debt of Agribank Thai Nguyen ………………………………………………………… 57 3.5 Current Status of Doubtful Debt of Agribank Thai Nguyen 58 3.6 Current Status of Frozen Debt of Agribank Thai Nguyen… 59 3.7 Current Status of Bad Debt of Agribank Thai Nguyen …… 60 4.1 Assessment of Factors Affecting Credit Risk Management of Agribank Thai Nguyen in terms of Subjective Criteria … 62 Assessment of Factors Affecting Credit Risk Management of Agribank Thai Nguyen in terms of Objective Criteria …… 63 Significant Differences on Two Groups of Respondents’ Assessment of the Credit Risks in Agribank Thai Nguyen 65 Significant Differences on Two Groups of Respondents’ Assessment of the Current Status of Debts in Agribank Thai Nguyen …………………………………………………… 67 2.2 2.3 2.4 3.4 4.2 5.1 5.2 ix TABLE 5.3 PAGE Significant Differences on Two Groups of the Respondents’ Assessment of Factors Affecting Credit Risk Management in Agribank Thai Nguyen ……………………………………… x 68 75 The factors affecting the credit risk management of Agribank Thai Nguyen as to the following are: 4.1 In terms of subjective criteria is rated 3.60 or frequently (managers= 3.80; staff= 3.60) where credit process follows common regulations of State bank and capacity of credit staff is decisive factor (managers= 4.4; staff= 4.2); strict internal inspection and control (managers= 3.70; staff= 3.50); convenient bank credit policies for customers (managers= 3.4; staff= 3.1); and good information quality in the banking network and outside (managers= 3.1; staff= 2.8), and 4.2 Objective criteria which is evaluated by managers (3.90) while staff or creditors with 3.70 AWM as frequently with the highest mean for “stable political and legal environment” and lowest for “facilitating the economic environment for both the bank and customer.” There is significant difference in two groups of respondents’ assessment on credit risk management particularly on the status of the credit risks, segment structure (0.01), types of customers (0.02), availability of guarantee (.016) at 0.05 level of significance; current status of debts in Agribank Thai Nguyen wherein only undue (sig = 005), overdue (.014), and bad (.025) debts; and the subjective criteria on the factors affecting credit risk management as incurred in the managers’ (sig= 041) and staff’s ratings (.024) Recommendations on the credit risk management of Agribank Thai Nguyen to minimize the credit risk include developing and improving the policies and processes of credit, expanding guarantee loans, improving the appraisal of borrowers and their projects, developing and improving the information systems of risk prevention, and strengthening inspection and supervision of the debt management loan 76 Conclusions Based on the findings of the study, the following conclusions are drawn: Majority of the bank customers are women who have marital obligations, are relatively young, have graduated college and work for only few years in their respective jobs Main credits of the bank significantly serve the industries, while the service sector represents a smallest percentage of totals The segment structure in credit activities, individuals as types of customers, credit with no guarantee properties, and medium and long-term credits post big risks The biggest risk for bad debts is the difficulty to collect both the interest and capital, overdue and undue debts is that both principle and interest is hardly recovered fully, debt requiring attention is the absence of clear mechanism, qualified debt is the interest that is never made free for customers, doubtful credit is less careful appraisal of the borrowers, and frozen debt is that a lot of customers classified in frozen debt group The risk under subjective criteria is that the bad information quality in banking network and outside while for objective criteria is the economic environment facilities for both bank and customers The credit risk management and the factors affecting limitations of credit risks management of the bank are different among groups of respondents The recommendations posed in the study for the credit risk management is ready for adoption Recommendations Based on the findings and conclusions, the following recommendations are offered thereafter: 77 The bank may require guarantee properties for credits, carefully manage the segment structure, define exactly targeted customers, pay attention more on long-term and medium credits and review the procedure and conditions to manage, control and minimize risks of credit The bank may conduct research to find suitable solutions to recover both principle and interest fully, produce clear mechanism for “debt requiring attention”, decrease cost to improve competitive ability of services, carefully appraise borrowers, and establish a good information network The bank may ensure that security documentation complies with the terms, manage insurance coverage to ensure appropriate coverage is in place over assets pledged as collateral, and is properly assigned to financial Institution, control facility disbursements after all terms and conditions of approval have been met, and all security documentation is in place, monitor compliance with loan terms, implement strict credit management in accordance with the laws and regulations of State Bank, and provide accurate and timely information on credit system The bank may set up the loan principle or the principle of credit, ensure that all customers understand credit portfolio, and that credits are paid on time, maintain control of credit institutions Banks may ensure accurate determination of the total characteristics of the credit portfolio, concentrations, problem credit and the adequacy of loan loss reverses, provide relevant information to persons responsible for assignment of internal risk assessment to credit, ensure credit information to relevant persons, monitor stringent collateral or guarantee, have necessary changes to streamline and manage contracts, and ensure the list in terms of the credit agreement REFERENCES Asner Group (2010) Credit Working in the integration period Retrieved July 2014 from http://www.frbsf.org/econrsrch/working/wp99-06.pdf Au Van Truong (2009) Applying technology of modern banking management and operations of the Bank for Agriculture and Rural Development of Vietnam in current period, University of national Economy Bucay, N and D Rosen (March-April 2000) Credit Risk of an International Bond Portfolio: A Case Study, Banque and Marchés, 45 (2) pp 36–45 Bui Thi Kim Ngan (2005), Improvement of abilities of risk credit management for trade banks in Vietnam Ho Chi Minh: The Article of Banking, pp.29-33 Casner, G (2010) What is overdue debts? Retrieved July 2014 from http://w ww.pegint.biz/overdue_debt.htm Chu Van Son (2008) Credit Risk Management at the Bank of the North Asia Commercial Joint Stock Ho Chi Minh: National Economics University Coleen, I (2010) Definition of Under Qualified Debt, Retrieved July 2014 from http://en.wikipedia.org/wiki/under_qualified_debt Decision No 90/QD-TTg on 07 Mar 1994 of Prime Minister of Vietnam, Hanoi Dictionary online (2010) Definition of Undue debt, Retrieved July 2014 from http://www.dictionary.net/undue_ debt Doan Van Thang (2003), Solutions to completed operations of the Bank for Agriculture and Rural Development of Vietnam serving industrialization, agricultural modernization and rural areas Ho Chi Minh: University of National Economy Duffee, G R and Zhou, C., (2001) Credit Derivatives in Banking: Useful Tools for Managing Risk? Journal of Monetary Economics, 28, pp 25-54 HSBC Report (2011) Credit Risk Management Retrieved July 2014 from http://www.hsbc.com/ Credit – risk – management Kim Thi Ngoc Diep (2008), Banking Credit, Hanoi: Financial Publishing House Koch, T W (2000), Bank Management (4th edition) Illinois: The Dryden Press Le Van Hung (2007) Credit risk of the bank’s moral point of view The article of banking, 16 (1), pp 33-35 Minister Council – Vietnam’s Government (1988) Decision of Establishment, Decree No 53/HDBT, Hanoi 79 Miu, P (2002), Risk Management of Credit Portfolio: An Alternative to Structural Approach Canada: University of Toronto Press Muller, G (2010) Discussion about types of debts? Retrieved July 2014 from http://www.bloomberg.com/apps/news Nguyen Huu Thuy (2006) The main solution is to limit credit risk of commercial banks in current period State Level Dissertation University of National Economy: Industrial and Commercial Bank of Vietnam Nguyen Quoc Trung (2004) Solutions to develop and improve leasing operation at the Bank for Agriculture and Rural Development in Vietnam Council of Evaluation of State, at the Banking Institute Nguyen Thi Phương Lan (2005), A number of bank risk in terms of market economy State Level Dissertation University of National Economy: The Institute of Banking and Protection Nguyen Van Chinh (2009) Credit Risk Management at Bank of Agriculture and Rural Development in Vietnam in Hanoi, Academy Bank, (10) pp 2-9 Nguyen Van Tien (2010), Credit Risk Management in Banking Hanoi: Statistics Publishing House Njanike, K (2009) The impact of the effective credit risk management on bank survival Annals of University of Petrosani Economics, 20 (9), pp 34-41 Parliamentary Socialist Republic of Vietnam (2008), Law on the State Bank of Vietnam and Law on Credit Institutions Hanoi: Legal Publishing House Phan Thi Thu Ha (2006) Credit risks of the system of trade banks in Viet Nam The article of banking, 24 (3) pp 10-12 Powel, T (2005) Credit activities of Commercial Banks, Ranger: Roudledge Fringe Book Rose P.S (2004) Commercial bank management Hanoi: Finance Publishing Saunders, A (2009) A Modern Perspective: Series in Finance, Insurance, and Real Estate, Hardcover Financial Institutions Management New York: The Mcgraw-Hill State Bank of Vietnam (1993) Decision No.67/QD-NH5, Hanoi State Bank of Vietnam (2005) Decision No 493/QD- NHNN, Hanoi 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 80 Tim, J.C (2001), Managing Credit Risks (5th ed.) N.J Philadelphia, p 214 Toumo, A (Mar 2010) What is doubtful debt? Retrieved July 2014 from http:// www.fireworkszone.com/business/debt/doubtful_debts.html Tran Van Viet (2004), Business in Commercial Banks Hanoi: Hanoi Banking Publishing House Wikipedia Online (2012) Definition of Credit risk Retrieved July 2014 from http://en.wikipedia.org/wiki/Credit_risk Young, L (2010) What is bad debt? Retrieved July 2014 from http://en.wikipe dia.org/wiki/Bad_debt Zikmund, W G (2003) Potential Risks of Commercial Banks, 6th ed., Zurich: The Dresden Press, pp 112- 114 81 APPENDICES 82 Appendix A Communications Request for Approval SOCIALIST REPUBLIC OF VIETNAM Independence – Freedom – Happiness Thai Nguyen October 11, 2012 Dear Sir, The undersigned is a student of Doctor in Business Administration offered by Southern Luzon State University, Republic of the Philippines in collaboration with Thai Nguyen University, Socialist Republic of Vietnam He is conducting a research on “CREDIT RISK MANAGEMENT IN AGRIBANK – THAI NGUYEN PROVINCE, VIETNAM” In this regards, may he seek for your approval to look into documents and reports of Agribank Thai Nguyen at quarter on credit risk management The findings will be treated with confidence and will be used for academic purposes only Hoping for your approval Very truly yours, (SGD.) Bui Van Khoa Researcher 83 Letter to the Respondents SOCIALIST REPUBLIC OF VIETNAM Independence – Freedom – Happiness Thai Nguyen October 11, 2012 To the Respondents: I am Bui Van Khoa, a Doctor of Business Administration student from the International Training Center of Southern Luzon State University, Republic of the Philippines and Thai Nguyen University of the Socialist Republic of Vietnam I am working on the Doctoral Dissertation entitled “CREDIT RISK MANAGEMENT IN AGRIBANK THAI NGUYEN PROVINCE, VIETNAM.” In this regard, I am requesting for your valuable help by accomplishing the attached questionnaire Please not leave any blank and rest assured that all your responses will be treated with confidentiality and will only be used for academic purposes Thank you very much for your help in attaining the objectives of this research study Sincerely yours, (SGD.) Bui Van Khoa Researcher 84 Appendix B Questionnaire Directions: Please accomplish this questionnaire carefully and objectively to represent your opinion and it is expected that your answer will be based on your conviction, observation and personal experience Rest assured that your answer will be treated with confidentiality PART I: PROFILE OF RESPONDENTS Instruction: Kindly supply the data required at the space provided for: Age Below 30 30 – 40Married 41 - 50Widowed Above 50 Gender Male Female Civil status Single Married Widowed Divorced Education Bachelor Master’s Doctoral 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) 85 What is the present status of credit risks in Agribank Thai Nguyen measured in terms of the following? 1.1 Credit activities aspects No INDICATORS A 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 Which types of customers contain big risks? Big companies and organizations Small and medium companies and organizations Individuals Based on guarantee level, which availability of guarantee contain the big risks? Not have guarantee properties Have guarantee properties Based on the account outstanding according to time, which term will contain the big risks? Short term Medium and long term B C D Assessing Scale 1.2 Current status of debts No INDICATORS A B Bad debt Commercial debts increase extraordinarily It is difficult to collect both interest and capital The mortgage is hard to sell 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 Undue debt It is easy to collect principle and interest Customers are traditional borrowers The principle and interest is always paid on time Debt requiring attention The mechanism for this debt is so clear The interest rate is suitable for customers Under qualified debt The interest is made free for customers C D E Assessing Scale 86 F G The interest is decreased for customers Able to pay the interest and principle at maturity Doubtful debt This is ranked as “high potential for loss” Creditors not carefully appraise the borrowers The bank controls closely this type of debt 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 limitations of the credit risks of the 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 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 for your cooperation 87 Appendix C 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 BacKan 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 DinhHoa district - Agribank Phu Luong branch; - Agribank branch Dai Tu district; - 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 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 88 - 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, advise and assist the Board of Directors has 02 rooms deputy director of operations and the trading room attached Operating results of Agribank Thai Nguyen 2011 No Item Mobilized capital Outstanding loans Outstanding loans Revenue arising bad debts % NPLs/ Total outstanding loans Profit before tax 2010 3,212 3,127 5,127 2012 2011/ 2010 (+); (-) % 3,618 406 12.6% 3,515 388 12.4% 5,622 495 9.7% Value 26 11 1,01 0,55 52 67 -15 -57.7% Value 4,757 4,124 7,054 -8 -72.7% 15 22.4% 0,51 15 28.8% 82 Summary of Agribank 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 Internet Banking products + Product Group Treasury and Cash Management + Group products and other services 2012/2011 (+); (-) % 1,139 31.5% 609 17.3% 1,432 25.5% 89 CURRICULUM VITAE Full Name : BUI VAN KHOA English Name : Billy Date of Birth : 12/09/1966 Place of Birth : Thai Nguyen Home Address : Phan Dinh Phung Ward, Thai Nguyen, Vietnam E-mail Address : khoavba@yahoo.com.vn Current Position : Director, Agribank Thai Nguyen Branch Areas of Expertise : Business Administration, Banking Educational Qualifications: Qualification Awarding Institution Date of Graduation BA in Economics Major in Bank Credit Banking Academy 1995 Master in Economics Major in Financial Banking Banking Academy 2005 National Political Institute in Ho Chi Minh City, Vietnam 2007 Senior Political Theory Previous Employment: Time From… To… Position Held Organization 1984- 1992 Staff Bank for Agriculture and Rural Development - Dai Tu ward branch 1992 – 1994 Transaction Manager Bank for Agriculture and Rural Development - Dai Tu ward branch 1995 - 2003 Deputy director 2004 - 2006 Head of department 2007 - 2010 Deputy director 2011 – đến Director Bank for Agriculture and Rural Development - Dai Tu ward branch Bank for Agriculture and Rural Development Thai Nguyen province Bank for Agriculture and Rural Development Thai Nguyen province Bank for Agriculture and Rural Development Thai Nguyen province ... the study on credit risk management in Agribank Thai Nguyen Province 4 Objectives of Study The study aimed to determine the credit risk management in the Agribank Thai Nguyen Province for the... Affecting Credit Risk Management in Agribank Thai Nguyen ……………………………………… x 68 LIST OF FIGURE FIGURE PAGE Input-Process-Output (IPO) Model on Credit Risk Management in Agribank Thai Nguyen, Vietnam ……………... of Agribank Thai Nguyen Credit Risk …… 46 Assessment of the Current Status of Debts of Agribank Thai Nguyen ………………………………………………… 52 Factors Affecting Credit Risks Management of Agribank Thai Nguyen