Precluding and reducing solutions to credit risk at Quang Trung branch of Vietnam Bank of Investment and Development.doc

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Precluding and reducing solutions to credit risk at Quang Trung branch of Vietnam Bank of Investment and Development.doc

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Precluding and reducing solutions to credit risk at Quang Trung branch of Vietnam Bank of Investment and Development.

INTRODUCTION Falling in line with the common trend of the world economy, Vietnam economy also gets positive achievements in recent years Whereas, the banking industry playing the role as vessel circulations in the economy, has been contributing much in the process of renovation Commercial banks are the important link in the operating process of the economy Commercial banks are a combined industry, are currency and credit center, and the level to encourage the development of the economy Therefore, the quality and the growth level of the capital and capital lending activities will have great impacts on the sustainable growth of the companies in particular, and on the overall economy in general Vietnam economy starts integrating into the world economy and participating in world and regional economic organizations such as ASEAN, WTO, and AFTA These events have become the opportunities as well as the challenges for both the enterprises and the whole Vietnam economy Integration leads to the severe competition among domestic and international companies Sharp rivalry also leads to the risks in production process of the companies The companies’ risk is the banks’ risk as well Nowadays, credit risk is becoming a bulging problem and become the worry of commercial banks As the result, “safe” must be the top principle in precluding risk Especially, preventing credit risk is one of the important tasks of commercial banks in Vietnam The bank that has efficiently risk precluding methods will ensure capital security and has advantage in competition in credit market Risk preventing is also the urgent issues of banking industry in Vietnam In the past few years, activities of commercial banks must operate in accordance with market mechanism and innumerable credit risk, bringing about losses to the banking industry and the entire economy Many commercial banks and credit organizations has very huge unprofitable debt ratio, even some banks must be bankrupt unless there is interference from the government Concerning about risks, particularly credit risk in banking industry and Quang Trung branch of Vietnam Bank of Investment and Development during my internship, so I choose the below topic: “Precluding and reducing solutions to credit risk at Quang Trung branch of Vietnam Bank of Investment and Development” Beside the introduction and conclusion part, the special subject is presented in three main chapters: Chapter 1: Overview of risk, significance of precluding and reducing risk in credit relationships Chapter 2: Methods of precluding and reducing credit risk in Quang Trung branch of Vietnam Bank of Investment and Development Chapter 3: Solutions to precluding and reducing credit risks at Quang Trung branch, BIDV Although having many efforts in studying and researching through books and newspapers as well as gathering documents and figures during my internship at the bank, but limited time and narrow awareness cause unavoidable shortcomings I am looking forward recommendation from the officers of the bank and the lecturers so I can have a thorough grasp of knowledge serving my future job Chapter 1: Overview of risk, significance of precluding and reducing risk in credit relationships 1.1 Risk and risk classification in credit relationships 1.1.1 Definition of risk Risks are problems that accidentally damage people or assets of one or some objects in the society In the economy, risks are considered the losses which enterprises have to accept when doing business Trading in currency- credit field, the banks must admit that too In reality, it has been proved that the risks of dealing in currency are the riskiest ones Credit risks are the losses that the banks must approve of in lending activities The reason is stated that credit “is a person lends or promises to lend the capital to the others, uses the signature like a guarantee, or a deposit to prove that money is collected “ 1.1.2 Kinds of credit risks Every industry has to cope with risks in the process of production and business But no others must admit as big risks as the banking industry Risks of commercial banks are very diversified and complicated The reasons may come from the banks, from customers, from objective issues, or from the government’s administrative mechanism In general, there are following risks: interest risk, capital risk, exchange risk, payment risk, and risk of unable to pay - Interest risks: “are the risks that the bank must bear when the market interest varies.” Consequently, when the interest changes the bank possibly deals with risks When the interest is too low, enterprises tend to borrow much but it is difficult for the bank to mobilize capital Hence, their action scope is narrowed, and the revenue will reduce In contrast, when the interest is too high, the bank has more mobilized capital yet it is stagnant It is explained that the bank can not lend money at too high interest rate That leads to unavoidably losses for the bank - Capital risk: is represented in two aspects: + Redundant capital: commercial banks are the enterprises that earn revenue by the method “borrow to lend” when the current capital is very little The bank’s main capital is the capital mobilized from the inhabitants, from economic organizations, and from other credit organizations Therefore, because of some reasons, the redundant capital is not lent or changed into other profitable assets As a result, the bank will suffer losses in charging borrowing fee whereas not receiving income + Lack of usable capital: this risk happens when the bank does not satisfy the customers’ demand for borrowing and investing, even not meet the customers’ demand for liquidating This kind of risk arises from the exchange function of capital using period and the bank’s capital Besides, political issues, price variation, and the decreasing reputation promote people to withdraw their money in the bank Hence, the bank’s liquidation is threatened If the bank had changed all their assets into money to pay but no result, then, the bankrupt risk is considerably high - Capital mobilizing risk: + Happens when the bank mobilizes much capital but they can not lend or slowly lend to customers - Credit investing risk: + The customers who have dealt with business risks can not pay the bank money + The economies that get difficulties also cause risk to the bank + The credit officers carelessly appraise the lending project 1.1.3 Definition of credit risk in banking activities Risks in credit trading of the bank are the financial losses because the customers borrowed capital from the bank not pay on time, and not keep their commitment Credit risk can be defined as the potential losses which the bank must bear when lending customers without being paid on schedule It means that when the bank provides credits to each customer, the forecasted income from the profitable assets may not be fully-returned in both quantity and time- limit To sum up, credit risks are the problems that happen in credit trading process, causing the losses of capital and reputation (or brand name) for the commercial banks In central planning economy, risks in banking industry are generally ignored All the banks were the State-owned Commercial Banks So the losses were subsidized by the government by methods such as releasing more money and tight money management But when stepping into the market economy, competition is a vigorous catalyst Consequently, economic posting is mainly independent This originates the potential of losing liquidation and bankruptcy In changing business environment, the stability of the enterprises is only relatively Hence, when the customers get trouble, the same situation with the bank is easy to understand Realizing credit risks will help the banks to find out efficiently preventing methods, and then they have more efficient business result Credit risks are diversified and sophisticated It could be when the bank has stagnant capital, lacks of usable capital, unequal ratio of lent capital and mobilized capital, guaranteed asset risks or risk of not taking back debts In this paper, credit risks are examined in the situation that the bank can not recover debts, being called bad debts For principal and interest debts, credit risks may occur in four cases It is when the bank can not recover the interest on schedule Depending on each case, the bank enters in the accounts with different items such as hanging interests and overdue debts When not being paid on time, risks are at the low level and posted as arising hanging interests If the bank can not collect the interests, risks are posted as hanging interests, except the case that the bank remitted that item If the bank can not reclaim the capital on time, it will cause bad debts Yet this item is not regarded as absolute loss of the bank Because for some reasons, enterprises slowly refund the principal but they still pay all after the contracted period If this debt can not be paid, the bank will highly deal with credit risks Credit risks Not recover interest on time Hanging interest arises Not recover principal on time Not collect enough interest Not collect enough lent interest Unrecoverable debts Or Forgiving Overdue debts arise Frozen hanging interest Or Interest remission Credit risks remain in many forms Those forms always vary The result is that the bank is unable to recover In the beginning, enterprises may slowly pay the interest and then slowly pay the principal It really makes the bank at risk But the credit risks are not always shown through all the above forms There is the situation that enterprises pay interests but not pay the principal So the bank only posted it as arising bad debt and then changed it into unrecoverable bad debts The above cases are only general ones When researching credit risks, people usually pay attention in the danger of risks such as hanging interest and arising bad debts Frozen hanging interests and actual debts are usually examined to solve the problem and to infer lessons 1.2 Expressions and criteria to determine credit risks 1.2.1 Expressions Qualitative expressions of credit risks: + The economy is receded + Customers rarely borrow + Customers slowly pay back + Bad debts when the economy is growing All the signs of credit risks can be arranged in the following groups: Group 1: group of symbols related to managing methods of the customers - Regularly change the structure of managerial system or operating board - Managerial system and operating board are always different about the goal, manage and operate dogmatically or dispersedly - Methods of customers’ formation have the following features: + Being formed by Board of Directors or Managing Director with a little or inexperienced + Board of Directors or Managing Director of big enterprises extremely deeply interfere into everyday problems + Lack of caring about the shareholders’ benefit and creditors’ benefits + Regularly transferring employees + Bad goal defined planning leads to the appearance of temporary debts - Familial management - Dispute over the managing process - Unreasonable managing costs Group 2: Group of symbols related to priority in business - Syndrome of big contracts: Customers are impressed by a famous customer who will be able to depend on: Board of Directors decide to cut down their revenue, in order to get that big contracts - Syndrome of beautiful products: not timely or being obsessed by one product but not others - Unreasonable urgency such as not timely launching the products out, unrealistic period of business Group 3: Group of symbols related to the technical and commercial issues - Difficulties in developing the products - Changes in the market: exchange rate, interest; changing tastes; update new technologies; loss of suppliers and many rivals - Highly customers’ temporary products - Traits of cutting down the repairing and replacing costs Group 4: Group of symbols related to handling information of finance and accounting - Insufficiently prepare financial data or slowly submit financial statements - Conclusions of financial analyzing show that: + Unbalanced growth of regular debt rate + Decreasing cash capacity + Increasing in revenue but decreasing or no interest + Improper charter capital + Quantity of goods grow faster than the revenue + Losing activities + Planning to pay the debt but the capital is not enough + Wrongly posting fixed assets + Beautify the balance sheet by creating intangible assets Group 5: Other non- financial symbols that credit officers can easily realize as the followings: - Ethical issues, even business people’s appearance also expresses some symbols - Seriously degradation of customers’ business establishment - Stores contain many spoilt and obsolescent 1.2.2 Criteria of measuring credit risks These are the problems that all the managers concern about Good risk measuring make the precluding and reducing risk process easier Criteria of measuring include:  Overdue debts: Gross overdue debts Overdue debts rate= * 100 Gross debts Low overdue debts rate proves that the credit quality is high When absolute numeric value of the overdue debts goes down, if the gross debts increase then overdue debts rate has not reflected the nature of credit - Classification according to time period, there are arising risks: + Less than 180 days + Greater than 180 days + Greater than 360 days - Classification of unpaid debts and unrecovered debts - Classification of guaranteed and unguaranteed risks Number of customers having Overdue debts Ratio of customers = having bad debts * 100 Gross numbers of customers Having credit relationship  Losing capital situation: Losing capital Debts Ratio of losing capital = * 100 Gross debts  Bad debts situation: Bad debts Ratio of bad debts = * 100 Gross debts  Unrecoverable debts: Unrecoverable debts Ratio of unrecoverable debts = * 100 Gross overdue debts 1.3 Significance of precluding and reducing risks in credit relationships Precluding and reducing risks in credit relationships will help the bank avoid bad consequences Those kinds of credit risks not only affect on the bank itself but also on the economy Therefore, precluding and reducing credit risks has a very important significance ... branch of Vietnam Bank of Investment and Development during my internship, so I choose the below topic: ? ?Precluding and reducing solutions to credit risk at Quang Trung branch of Vietnam Bank of Investment. .. in credit relationships Chapter 2: Methods of precluding and reducing credit risk in Quang Trung branch of Vietnam Bank of Investment and Development Chapter 3: Solutions to precluding and reducing. .. ? ?Bank for Investment and Development of Vietnam, Quang Trung Branch? ?? * Abbreviated name: BIDV, Quang Trung Branch * Headquartered at: No 53 Quang Trung, Hai Ba Trung, and Hanoi Quang Trung Branch

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