1 PREFACE 1. URGENCY OF RESEARCH THEME: The banking system which is the life-line of the economy always plays an important role. Vietnam Banking system has attained encouraging achievements such as contribution to inflation stability and repression and effective implementation of national monetary policy for the last years. However, in the market economy, business risk is unavoidable, especially banking business risk because it is able to cause chain reaction, spread and represent more complexity. The collapse of bank affects the whole life – economy – politics – society in negative way and may spread out of a country even a region and global. In front of the integration trend, financial and banking institutions will always deal with competition and different risk types as well. In Vietnam, because the point of departure of domestic banks is rather low compared to the average of the region, focusing on development and taking interest in profit are firstly priority. This leads to which the risk management of Vietnam banks is almost left open and not invested in construction in satisfactory and professional manner. This is the reason why the bad debt ratio and many problems occurred due to uncontrollability that are becoming a question without answer in most of Vietnam banks and even in Vietnam Bank for Agriculture and Rural Development, a financial institution mainly operating in agriculture and rural field. The profits of Vietnam Bank for Agriculture and Rural Development are mainly from credit activities (account for 90% total income of the Bank). Therefore, the credit risk management plays the decisive role in existence and growth of Vietnam Bank for Agriculture and Rural Development. In order to restrict risks in credit activities, it is necessary to build up and promulgate a credit risk management strategy in accordance with principles and standards of modern bank. As practical requirements above, the writer chooses “Credit risk management of Vietnam Bank for Agriculture and Rural Development” as the research theme. 2. PURPOSE OF RESEARCH: - It is to interpret and systematize basic theory matters of risk management in general as well as bank credit risk in particular. 2 - It is to research contents regarding the credit risk management, experience of developed countries, international practices and referential lesson ability, applicable to Vietnam Commercial Banks in general and Vietnam Bank for Agriculture and Rural Development in particular. - On the basis of practical theory and situation and specificity analysis of operation of Vietnam Bank for Agriculture and Rural Development to build up an effective credit risk management strategy, and propose solutions and recommendations to perfect and improve the effectiveness of credit risk management of Vietnam Bank for Agriculture and Rural Development. 3. OBJECT AND SCOPE OF RESEARCH: - The object of research is the credit risk management in Vietnam Bank for Agriculture and Rural Development. - The scope of research is to focus on research into credit risk management in general and assess the credit risk management in Vietnam Bank for Agriculture and Rural Development. The data is concentrated in the period 2005-2010. 4. RESEARCH METHODS: The Thesis approaches the object of research on the basis of applying and collecting economic scientific research methods, from dialectical materialism, historical materialism, summary, analysis and comparison methods to practical summary survey, comparision of practice to theoretical frame on credit risk management of countries in the world and at home for argument, and then proposes the construction of credit risk management models for Vietnam Bank for Agriculture and Rural Development. 5. THESIS STRUCTURE: Apart from the preface, conclusion, references, list of tables and diagrams, the main contents of the Thesis include about 210 pages divided into 3 chapters as follows: Chapter 1: Credit risk management at Commercial Banks Chapter 2: Situation of risk management of Vietnam Bank for Agriculture and Rural Development Chapter 3: Credit risk management improvement of Vietnam Bank for Agriculture and Rural Development 3 CHAPTER 1: CREDIT RISK MANAGEMENT AT COMMERCIAL BANKS 1.1. BUSINESS RISK OF COMMERCIAL BANKS: 1.1.1. Business risk of Commercial Banks: 1.1.1.1. Definition of risk: Risk means the probability of uncertain events in future that makes the subject cannot reach its strategic and operating targets as well as opportunity cost of losing market opportunities. 1.1.1.2. Basic risks of Commercial Banks: 1.1.2. Credit activities and credit risks of Commercial Banks: 1.1.2.1. Overview of credit activities of Commercial Banks: “Credit activities mean that Commercial Banks use their equity capital and mobilized capital to grant credit for their customers using an amount with the principle of redemption through lending, discount, financial leasing, bank guarantee and other related operations”. 1.1.2.2. Definition of banking credit risk: Credit risk means the risk and loss of finance (direct or indirect) stemming from a borrower’s failure to fulfill a loan repayment as agreed or insolvency. (See the diagram 1.3 overleaf) 1.1.2.3 Reasons for credit risk: In this part, the Thesis clearly analyzes objective reasons and reasons from the lending bank. 1.1.2.4. Some basic identification signs of credit risk: 1.1.2.5. Credit risk measurement: 1.1.2.6. Consequence of credit risk for banking: The Thesis analyzes it for the economy and the bank. 4 Diagram 1.3: Process of arising credit risks at Commercial Banks [17] 1.2. CREDIT RISK MANAGEMENT OF COMMERCIAL BANKS: 1.2.1 Definition of credit risk management: According to the Thesis, credit risk management means a process of building and implementing strategies, policies and methods relating to credit activities to prevent and limit banking credit risk. 1.2.2. Role of credit risk management for Commercial Banks: 1.2.3. Contents and standards of credit risk management in accordance with the Basel Committee: 1.2.3.1. Contents of credit risk management: The credit risk management includes the following contents: Credit policy; Credit procedure; Risk identification related to borrowing customers; Customer scoring; Debt classification; Credit control system; Provision and risk treatment policy; and Implementation of applying credit risk measurement tools. 1.2.3.2. Standards of credit risk management according to Basel Committee on Banking Supervision: Reduced solvency, reduced production and business efficiency, capital loss, bankruptcy Failure to receive interest Failure to receive capital Failure to receive enough interest Failure to receive enough lending capital Arising accrued interest Arising overdue debt Arising frozen accrued interest Arising bad debt Credit risks 5 a. Standards of credit risk management according to Basel I: The Thesis focuses on analyzing 4 standards regarding the credit risk management, including Credit grant standard and credit supervision procedure; Asset quality assessment and loan loss provision; risk concentration and big risks; and lending related customers. b. Standards of credit risk management according to Basel II: The Thesis analyzes two contents as following: Standardized approach to credit risk; and internal ratings based approach (according to Paragraph 18, 19 and 20 Basel II). 1.2.4. Factors influence the credit risk management: The Thesis analyzes factors of mechanism, policy and model of bank credit risk management; man factor including officials of Commercial Banks and borrowers; and technology factor. 1.2.5. Assessment indicators of credit risk management effectiveness of Commercial Banks: 1.2.5.1. Quantitative indicators: • General operating quality group: Indicator 1: Loan outstanding and the customer’s loan outstanding growth rate Indicator 2: Profitable loan outstanding ratio Indicator 3: Execution and implementation of lending policies and activities. • Capital-use safety indicator group: Indicator 1: Overdue debt ratio Indicator 2: Bed debt ratio. Substandard debt (Category 3); Doubtful debt (Category 4); Loss debt (Category 5) • Profit indicator group: Indicator 1: Gross lending profit; Indicator 2: Net profit before taxed; Indicator 3: Net profit after taxed; Indicator 4: Return on assets and return on equity; Indicator 5: Input and output interest rate spread in production household credit; Indicator 6: Loan interest receipt ratio. 6 1.2.3.2. Qualitative indicators for effectiveness assessment of credit risk management of Commercial Banks: The Thesis researches in the angle of influence on borrowers, economy and banks. 1.3 INTERNATIONAL EXPERIENCE IN CREDIT RISK MANAGEMENT AND EXPERIENCE LESSON FOR VIETNAM: 1.3.1 Experience in credit risk management of Thailand Banks 1.3.2 . Experience of ANZ Banking Group Ltd 1.3.3. Experience of other banks in the world 1.3.4. Experience lesson for Vietnam: 1.3.4.1. The experience lesson learnt from the experience of some international institutions and Commercial Banks in the world: Firstly, absolutely applying golden principles of credit risk management according to Basel Committee. Secondly, building up a system of key risk indicators (KRIs), quantifying credit risk according to AMA; combining qualitative indicators (self-assessment and self- inspection) and quantitative indicators, and calculating likelihood. Thirdly, building consciousness of credit risk management in the whole system, choosing priority fields to establish control points of credit risk. Fourthly, building a data bank on credit risk and using modern technology in analysis/treatment of credit risk. Fifthly, minimizing causes of credit risk made from internal factors of Commercial Banks such as people, procedures and system. Finally, minimizing causes of credit risk made from the external. 1.3.4.2. Experience lesson learnt from Vietnamese Commercial Banks for Vietnam Bank for Agriculture and Rural Development: Firstly, building credit procedure that specifies responsibilities of relating departments; Secondly, building the indicator system to score customers; Thirdly, using support measures; Fourthly, strengthening information collection and storage, and loan supervision; Fifthly, establishing a qualified, competent and professional ethic department of credit risk management; 7 CHAPTER 2: SITUATION OF CREDIT RISK MANAGEMENT OF VIETNAM BANK FOR AGRICULTURE AND RURAL DEVELOPMENT 2.1. OVERVIEW OF VIETNAM BANK FOR AGRICULTURE AND RURAL DEVELOPMENT 2.1.1. Formation and development of Vietnam Bank for Agriculture and Rural Development: [13] 2.1.2. Overview of Vietnam Bank for Agriculture and Rural Development: 2.1.3. Human resources: 2.1.4. Services and products of Vietnam Bank for Agriculture and Rural Development: 2.1.5. Main business result of Vietnam Bank for Agriculture and Rural Development: 2.1.5.1. Assessment of implementation result of business strategy in period 2001 – 2010 of Vietnam Bank for Agriculture and Rural Development: Table 2.1. Implementation result of some operating indicators of Vietnam Bank for Agriculture and Rural Development in the period 2005 - 2010 Unit: percentage and trillion dongs 2005 2010 Items Plan Implem entation Plan Implemen tation Equity capital 7 - 10 7,7 15 – 17 32,6 Capital safety ratio 8% 4,5% 8% 7,07% Service turnover ratio / total net turnover 20% - 30% 6,9% 30% - 40% 11,9% Return on capital 14% 4,79% 14% 12,9% Loan outstanding 170 -175 180 312-400 415 Loan outstanding of financial leasing 8 3,8 15 - 20 Loan growth rate 20% - 22% 15% 18% - 20% 17% Density of loan outstanding/ customer’s deposit 80% - 90% 88,8% 70% - 80% 96,5% Medium and long-term loan ratio 45% 43,6% < 40% 39% Bad debt and overdue debt ratio 4% 2,3% < 4% 3,7% Total capital 196 - 206 190 394 - 512 475 Capital growth rate 22% - 25% 20% 20% - 22% 9,4% Proportion of residential savings deposit and time deposit/Total capital 50% - 60% 41% 40% - 50% 44% Proportion of demand deposit, balance of clearing account/Total capital 15% - 20% 28% 20% - 25% 24% (Source: Business activities statement of Vietnam Bank for Agriculture and Rural Development in the period 2005 – 2010) [14] 8 2.1.5.2. Capital activities: Source: Report from the State Bank of Vietnam’s Credit Department Diagram 2.1: Capital market share of Vietnam Bank for Agriculture and Rural Development compared to other financial institutions 2.1.5.3. Credit activities: 27% 16.10% 15.80% 11.50% 29.60% Agribank VietinBank BIDV VCB Các NHTMCP khác Diagram 2.2: Lending market share of Vietnam Bank for Agriculture and Rural Development compared to other financial institutions Source: Report from the State Bank of Vietnam’s Credit Department 2.1.5.4. Debt restructuring, financial healthy making: 2.1.5.5. Guarantee activities: 2.2. SITUATION OF CREDIT RISK MANAGEMENT IN VIETNAM BANK FOR AGRICULTURE AND RURAL DEVELOPMENT FOR THE LAST TIME: 2.2.1. Model of credit risk management: (See diagram 2.3) 2.2.2. Credit mechanism and policy for customer: It is possible to say that credit procedure and other internal procedure directly related to credit activities are timely and fully issued by Vietnam Bank for 9 Agriculture and Rural Development suitable to its operation and based on Decisions of the State Bank Governor and other legal regulations. Diagram 2.3: Model of credit risk management at Vietnam Bank for Agriculture and Rural Development [14] 2.2.3. Credit operation procedure: Vietnam Bank for Agriculture and Rural Development authorizes branches to approve credit grant basing on credit rank of customers and each respective branch. Diagram 2.4: Credit grant procedure [14] Customer Credit Department – Operation Center General Director Director Leader of Credit Department Credit officer Branch Within decision- making right Beyond decision- making right OPERATION CENTER CREDIT DEPARTMENT INTERNAL INSPECTION AND SUPERVISION DEPARTMENT RISK PREVENTION & TREATMENT CENTER BRANCHES GRADE 1 10 2.2.4. Information of credit risk prevention: At Vietnam Bank for Agriculture and Rural Development, the Risk prevention and Treatment Center focuses on procession and supply of customer information of the whole system. 2.2.5. Customer scoring and ranking system: Today, customer scoring and ranking are implementing in accordance with the Dispatch No. 1406/NHNo-TD dated 23rd May, 2007 of the General Director. Until 31st December, 2010, Vietnam Bank for Agriculture and Rural Development has basically completed the customer scoring in accordance with regulations of the State Bank of Vietnam and approaching to the international practice. 2.2.6. Lending method and agricultural – rural credit mechanism: In addition to credit activities for enterprises, business households and urban households, credit for production household and agriculture – rural can be considered as the biggest credit market of Vietnam Bank for Agriculture and Rural Development. Therefore, in credit management, Vietnam Bank for Agriculture and Rural Development has specific method and implements separate mechanism for credit in such field. For agricultural and rural loans, Vietnam Bank for Agriculture and Rural Development effectively implements the Decision No. 67/TTg of the Prime Minister and other related legal documents. 2.2.7. Debt classification and bad debt management: Branches of Vietnam Bank for Agriculture and Rural Development are making debt classification, provision and credit risk treatment in accordance with Decision No. 636/2007/QD-HDQT-XLRR dated 22nd June, 2007 of the Board of Directors of Vietnam Bank for Agriculture and Rural Development. [...]... MANAGEMENT IMPROVEMENT OF VIETNAM BANK FOR AGRICULTURE AND RURAL DEVELOPMENT 3.1 ANALYSIS OF STRENGTHS, WEAKNESSES, OPPORTUNITIES AND THREATS (SWOT) OF VIETNAM BANK FOR AGRICULTURE AND RURAL DEVELOPMENT: 3.1.1 Opportunities: - Vietnam’s integration is wider and deeper - Scientific and technological progress quickly develops - Vietnam’s economy always reaches high growth rate - Vietnam has stable and safe... commercial banks in Vietnam - Stating the overview of business in general and credit activities in particular of Vietnam Bank for Agriculture and Rural Development in recent years, a commercial bank which has the biggest credit market share but low bad debt ratio in the commercial bank system in Vietnam - Focusing on analyzing the situation of credit risk management of Vietnam Bank for Agriculture... CREDIT RISK MANAGEMENT AT VIETNAM BANK FOR AGRICULTURE AND RURAL DEVELOPMENT: 2.3.1 Achievements: - Credit risk management of Vietnam Bank for Agriculture and Rural Development is more and more effective, contributing to improve its stable business efficiency and promote socio-economic development especially agriculture – rural and farmers - Risk management model of Vietnam Bank for Agriculture and... 87.73 84.28 outstanding 4.12 Ratio of Provision/Non-profit 40.99 54.89 86.51 85.25 (Source: Annual report of Vietnam Bank for Agriculture and Rural Development in the period 2007 – 2010) [13] 2.2.8 Credit risk at Vietnam Bank for Agriculture and Rural Development: Table 2.10: Bad debt of Vietnam Bank for Agriculture and Rural Development in the period 2005 – 2010 Unit: billion dongs, % Items 2007 Loan... bank in Vietnam, doing multifunction business but play decisive and main role in rural financial market, complete privatization for subsidiary companies, and change into a leading multisectoral, multidisciplinary and multiple ownership financial group in Vietnam 3.2.2 General targets up to 2015 3.2.3 Operation principles: 3.3 BUSINESS ACTIVITIES’ ORIENTATION AND CREDIT RISK MANAGEMENT OF VIETNAM BANK... Vietnam Bank for Agriculture and Rural Development in the period 2007 - 2010) [13] 12 Table 2.11: Bad debt ratio of Vietnam Bank for Agriculture and Rural Development in the period 2005 -2010 Unit: billion dongs Items 2005 2006 2007 2008 2009 2010 Bad debt / Overdue debt 3.689 3.503 4.589 7.699 9.266 15.575 Ratio of Bad debt/ Total debt 2,3% 2,7% 2,6% 1,9% 1,9% 3,7% (Source: Annual report of Vietnam... 2005 – 2008) [14] 2.2.10 Recovery of debts treatd risk In 2008, total recoveries of debts after risk treatment of Vietnam Bank for Agriculture and Rural Development were 3,307 billion dongs In 2007, they were 2,821 billion dongs, exceeding 87% in comparison with the plan In 2009, Vietnam Bank for Agriculture and Rural Development specially succeeded in debt recovery after risk treatment with an amount... financial environment - The Government continues to confirm the reform policy - The population of Vietnam is crowded; however, the rate of people having bank account is low 3.1.2 Threats: - All economic, political and social changes in the world generally and in large countries particularly directly affect Vietnam - Operating requirements for foreign banks are loosened - There are many competitors, especially... and risk provision treatment of Vietnam Bank for Agriculture and Rural Development in the period 2007 - 2010 Unit: billion dongs Items 2007 2008 2009 2010 - Provisioning amount 6.291 7.410 4.055 6.500 - Risk treatment 4.226 6.609 4.110 473 2.842 3.306 4.012 2.834 - Debt collection after risk treatment (Source: Report on provisioning and credit risk treatment of Vietnam Bank for Agriculture and Rural... 3.3.1 Business activities’ orientations: With the guideline for prosperity and stable development of customers and itself, the target of Vietnam Bank for Agriculture and Rural Development is to continue to maitain its position as a leading commercial bank in Vietnam, advanced in the region and prestigious in the world 18 3.3.2 Credit risk management’s orientation: Its business subject is currency – . most of Vietnam banks and even in Vietnam Bank for Agriculture and Rural Development, a financial institution mainly operating in agriculture and rural field. The profits of Vietnam Bank for. MANAGEMENT OF VIETNAM BANK FOR AGRICULTURE AND RURAL DEVELOPMENT 2.1. OVERVIEW OF VIETNAM BANK FOR AGRICULTURE AND RURAL DEVELOPMENT 2.1.1. Formation and development of Vietnam Bank for Agriculture. Vietnam Bank for Agriculture and Rural Development in the period 2007 – 2010) [13] 2.2.8. Credit risk at Vietnam Bank for Agriculture and Rural Development: Table 2.10: Bad debt of Vietnam