TOPIC CREDIT RATING TO CUSTOMERS IN COMMERCIAL BANKS RATIONALITY AND ISSUES

THE OVERVIEW OF CREDIT RATING

Credit risk

Credit risk is a significant concern for commercial banks, as it represents a major portion of their operations When borrowers face challenges that prevent them from repaying their loans, it directly impacts the bank's capital and financial stability.

The State Bank defined credit risk in Decision No 493/2005/QD-NHNN on April 22, 2005, stating that it refers to the potential losses faced by credit institutions in their banking activities when customers fail to fulfill or are unable to meet their obligations as agreed.

Credit risk refers to the maximum potential loss a bank faces when borrowers fail to meet their financial obligations Essentially, it is the risk that a bank will be unable to recover the loan amount when it becomes due.

Credit risk in commercial banks can stem from various factors, categorized as either objective or subjective Objective causes are external factors that are challenging for banks to mitigate, while subjective causes are internal and can be addressed through various strategies implemented by the banks themselves.

To mitigate risks in credit activities, commercial banks can implement various strategies, with a common approach being the segregation of appraisal and analysis from the lending process This separation enhances objectivity in credit operations, bolsters the expertise of bank personnel, and reinforces post-lending inspection and supervision.

Commercial banks increasingly rely on credit ratings of borrowers to inform their lending decisions, assess loan risks, and develop customer policies This approach enhances the quality of lending practices and helps mitigate credit risk effectively.

Credit rating

Credit rating is a term derived from English introduced by John Moody in

In 1909, the "Railway Securities Handbook" introduced a groundbreaking system for analyzing and publicly rating credit, evaluating 1,500 types of bonds from 250 companies This system utilized a three-letter symbol classification, ranging from Aaa to C, which has since become the international standard for credit ratings.

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Credit ratings gained significant traction in the US following the economic crisis of 1929-1933, which saw numerous debt companies go bankrupt or default In response, the US government implemented regulations that prohibited investment institutions, such as retirement and insurance funds, from purchasing bonds deemed unreliable and below safe investment levels These regulations bolstered the credibility of credit rating agencies However, it wasn't until the 1970s that credit rating services began to expand and flourish in various countries, marking a shift in their global prominence.

We can go through some definitions of credit rating as follows:

In "Risk Analysis in Transitioning Markets," John A Bohn defines credit rating as an evaluation of an issuer's capacity to make prompt payments of both principal and interest throughout the duration of a security.

A credit rating, as defined by Merrill Lynch Securities, is an evaluation by a rating agency that reflects the current credit quality of a debt issuer for a specific amount of debt This assessment considers the issuer's capacity and willingness to timely repay principal and interest, while also incorporating the subjective opinions of credit rating experts.

- According to Moody's, “A credit rating is an opinion on an issuer's ability and willingness to make timely payments on a given debt over the life of the debt.”

A credit rating is an official assessment of an individual or company's creditworthiness, reflecting their ability to repay debts This evaluation is based on comprehensive data, including analyses and historical records that indicate financial reliability.

In numerous countries, large corporations and lending institutions have implemented credit ratings for their existing and prospective clients A credit rating evaluates a company's financial strength, current operational status, and future growth potential, allowing for an assessment of default risk and repayment capability.

3 Credit rating in Viet Nam

Credit rating is a well-established concept globally, with many developed Southeast Asian countries having active organizations in this sector In contrast, Vietnam's credit rating industry is still in its infancy, marking a significant opportunity for growth and development.

In Vietnam, there are organizations implementing credit rating, such as the Credit Information Center of the State Bank, credit information businesses, and commercial banks.

- Credit Information Center of the State Bank (CIC):

The State Bank of Vietnam established the Credit Information Center (CIC) to provide commercial banks with essential information about borrowers Initially, the CIC offered limited and outdated data regarding the number of related credit institutions and outstanding balances, which diminished its effectiveness in mitigating credit risk However, the CIC has since improved its services, now supplying comprehensive information that includes financial analyses, the number of associated banks, outstanding balances, and debt status, thereby better meeting the needs of credit institutions.

In Vietnam, alongside the State Bank's credit information center and commercial banks' internal credit rating systems, there are two key players in the credit information sector: the Corporate Information and Rating Company (C&V), established in 2004 from Vietnam Solution Company, and the Central Vietnam Credit Assessment Center (CRV), which began operations on June 4, 2006.

C&R specializes in delivering essential services such as credit information, corporate credit ratings, and sector-specific market surveys In contrast, CRV, despite being a new player, aims to offer a comprehensive range of services, including information collection, business norm assessment, and ratings Both C&R and CRV target investors, businesses, and the banking systems, both domestic and international.

- Credit rating of commercial banks:

All Vietnamese commercial banks have established a Credit Rating System (CRS) for internal credit risk management and customer policy, although there is a lack of standardization, particularly among joint-stock banks While the financial criteria across these rating systems are largely similar, the non-financial criteria vary significantly Additionally, the CRS is referred to by different names at various banks, as it represents just one aspect of the broader customer analysis and evaluation process.

4 Credit rating of Vietnam commercial banks

4.1 Overview of credit activities in commercial banks

Bank credit is a relationship of transferring capital ownership from a bank to a customer for a certain period of time with a certain cost.

Credit relationships hinge on the mutual trust between borrowers and lenders, which is essential for forming a solid credit connection Borrowers must also have confidence in the lender's ability to enhance the effectiveness of the loan.

4.1.2 Classification of credit: a According to time to maturity:

- Short-term credit: From 12 months or less.

- Medium-term credit: From over 1 year to 5 years (or 7 years).

- Long-term credit: Over 5 years (or 7 years). b According to the debt payer:

- Indirect credit: is a form of credit where the borrower and the borrower are two different subjects.

- Direct credit: is a form of credit where the borrower is also the person who directly pays the debt. c According to the essence of guarantee:

- Secured credit: All loans have equivalent collateral: mortgage, discount, pledge, guarantee.

Unsecured credit refers to loans that do not necessitate collateral, relying instead on the borrower's financial reputation To secure such loans, customers must demonstrate a strong and trustworthy financial standing, which is crucial for gaining approval from credible organizations and individuals willing to provide credit capital.

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- Domestic credit: A credit relationship arising within the territory of the country

- International credit: A credit relationship arising between countries or between a country and an international financial-credit institution. e According to the purpose of using the loan:

- Goods production credit: For enterprises and other business entities to use for the goods production and circulation purposes.

- Consumer credit: A form of credit for individuals to meet personal consumption needs such as building houses, vehicles, etc.

- Study credit: Applied to students for school fees or studying abroad. f According to risk:

Classified by 5 groups of debts: According to Clause 1, Article 10 of Circular 11/2021/TT-NHNN

4.2 The overview of credit rating to customers in commercial banks

4.2.1 Definition of credit rating to customers in commercial banks:

Internal credit rating is a crucial evaluation conducted by commercial banks to determine a customer's capacity to repay debt and assess the associated loan risks This assessment forms the foundation for credit approval, risk management, and the formulation of tailored policies for individual customers based on their ranking results.

The internal credit system encompasses a comprehensive framework of financial and non-financial indicators that evaluate customers' solvency and payment capabilities This system utilizes both qualitative and quantitative assessments of financial health, business conditions, governance, and customer reputation Additionally, it includes tailored assessment methods and rating criteria for various customer groups, particularly those subject to credit restrictions and their associated individuals.

(“According to Clause 1, Article 5 of Circular 11/2021/TT-NHNN”)

4.2.2 Classification of credit rating to customers in commercial banks:

The internal credit rating system uses a separate scoring and rating method for each subject:

- Group of financial institutions customers.

4.2.3 Principles of building internal credit rating system:

According to “Clause 2, Article 5 of Circular 11/2021/TT-NHNN” , the internal credit rating system is built according to the following principles:

CREDIT RATING TO CUSTOMERS IN VIETNAM

Credit rating for individual customers borrowing capital at

1 Concept of individual credit rating:

Credit rating evaluates an individual's financial responsibility and credit risk, considering their ability to fulfill financial obligations, the likelihood of default due to changing business conditions, and their willingness to repay debts For personal credit ratings, borrowers are assessed as individual customers.

2 Subject of individual credit rating:

The credit rating system evaluates various factors related to credit risk, but commercial banks utilize these ratings not to assess the inherent value of borrowers, but to form current opinions By analyzing risk factors, banks can establish suitable credit policies and loan limits While a high credit rating may suggest reliability, it does not ensure complete repayment of principal and interest; rather, it serves as a foundation for making informed, risk-adjusted credit decisions regarding the borrower and their loans.

Borrower ratings are essential for predicting default risk and are categorized into three levels: danger, warning, and safety, based on the probability of default (PD) This probability is derived from data on a customer’s past debts over the last five years, including outstanding and uncollectible debts The data is classified into three groups: financial data related to customer financial ratios and ratings from agencies; non-financial qualitative data concerning management capabilities and industry growth; and warning data indicating potential insolvency, such as deposit balances and overdraft limits These data groups are processed through a predefined model, typically developed by professional consulting organizations, to calculate the likelihood of customer default using methods like linear models or unit probability models.

Loan ratings are determined by borrower ratings and various factors such as collateral, loan term, total outstanding balance at credit institutions, and financial capacity The risk associated with a loan is quantified through the Expected Loss (EL), calculated using the formula EL = PD x EAD x LGD Here, EAD represents the total outstanding balance at the time of default, while LGD indicates the estimated loss ratio.

3 Methods of individual credit rating:

Internal credit rating for individual customers uses 2 main methods: expert method and statistical method.

A method of collecting and It is a method based on processing predictive practical data such as debt assessments by gathering and level, the capacity of

Concept consulting experts in the repayment and systematic banking and finance sector to testing method to detect determine the risk and quality of variables affecting credit a credit risk.

Advantages Easy to build, simple - Objective assessment.

Disadvantage s -It is costly and time-consuming due to the large number of experts involved.

-The result of subjective assessment => deviation in assessment highly reliable

Requires the data set to be large enough and accurate.

Credit rating method for corporate customers at

1 Concept of corporate credit rating

A corporate credit rating represents an independent agency's assessment of a corporation's ability to fulfill its financial obligations on time This rating reflects the company's capacity to pay its creditors and is crucial for investors and stakeholders However, it's essential to understand that corporate credit ratings are subjective opinions rather than definitive facts.

2 Indicators in corporate credit rating

Corporate credit ratings aim to assess the credit risk associated with a business over a specific timeframe To effectively analyze corporate credit ratings, it is essential to incorporate criteria that qualitatively and quantitatively capture three key types of business risks.

+ Business risk (including qualitative and quantitative indicators)

+ Financial risk (including qualitative and quantitative indicators)

+ Risks due to macroeconomic fluctuations.

Group of financial indicators is quantitative indicators, taken directly or calculated based on given financial statements such as balance sheet, cash flow statement, income statement, …

Ratios that reflect the provision of working capital

Ratios that reflect financial structure

Ability to pay short-term debt.

Ability to pay interest on loans.

Working capital turnover. Total asset turnover.

Return on Assets (ROA). Return on Equity (ROE)

2.2 Group of non-financial indicators

Qualitative indicators are derived from both internal and external sources of an enterprise, extending beyond just financial statements To accurately and effectively assess these indicators, it is essential for raters to possess specific qualifications and expertise in the relevant field.

The growth potential of an industry significantly influences the future prospects of businesses within it Sectors experiencing development and high growth rates tend to achieve better credit ratings compared to those facing recessionary conditions.

- Reputable relations with credit institutions:

When enterprises pay their debts in full and on time, it shows that enterprises have trust with credit institutions and use capital effectively.

The ability to repay medium and long-term principal in the future is crucial for assessing financial health This indicator is particularly effective when evaluating investment projects or business plans that demonstrate high efficiency, as a strong cash flow will significantly enhance the capacity to repay debts.

- Management qualifications of business leaders:

Management level is determined by various factors, including professional experience, leadership skills, executive capabilities, business dynamism, and educational background When a company's leadership possesses high levels of education, expertise, and competency, it fosters greater trust in their relationships with financial institutions.

Business activities are influenced by various indicators, including state policies, consumer behavior, supplier relationships, the availability of substitute products, and natural conditions External factors play a crucial role, and enterprises with lower dependence on these influences tend to have a higher level of creditworthiness.

SITUATION OF INTERNAL CREDIT RATE SYSTEM

Overview of BIDV …………………………………………………… 13 I

Founded on April 26, 1957, BIDV, or Bank for Investment and Development of Vietnam, has evolved into one of the top 10 largest state-owned banks in the country It holds the distinction of being the largest commercial bank in Vietnam based on total assets, reflecting its significant growth and development over the years.

By the end of Q2 2021, BIDV's total consolidated assets exceeded VND 1.64 million billion The bank boasts a vast network of nearly 1,100 branches and transaction offices both domestically and internationally, along with partnerships with 2,300 global financial institutions For several consecutive years, BIDV has been recognized as one of the top 2,000 largest and most powerful public companies worldwide by Forbes Magazine and ranked among the top 300 most valuable banking brands globally by Brand Finance.

BIDV is an investment and development bank in all fields, achieving great success In each field, BIDV always tries to create and launch services and

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II The overview of BIDV Banking Activities

In terms of business efficiency: Operational safety norms are always ensured in accordance with State regulations with a capital adequacy ratio (CAR) of over 8%.

As of June 30, 2021, BIDV's total assets amounted to VND 1,642,336 billion, reflecting an 8.3% increase since the beginning of the year, thereby reinforcing its status as the largest joint-stock commercial bank in Vietnam.

Capital mobilization: BIDV always has a capital mobilization source to fully meet the needs of capital use, ensuring the safety and liquidity of the whole system.

By the end of June 2021, capital mobilization reached 1,391 million billion; up 7.9% compared to the beginning of the year.

(Source: BIDV Annual Report 2020 and Consolidated

In the first half of 2021, BIDV reported a net interest income exceeding VND 23,527 billion, marking a significant increase of over 74% compared to the same period in 2020 However, the bank's total income from interest and other sources remained relatively stable at approximately VND 50,023 billion, showing minimal growth from the previous year's figure of VND 49,993 billion.

In the first half of the year, BIDV's total assets rose to over 1.6 million billion VND, with a 6.8% increase in credit balance However, interest income remained stagnant, primarily due to decreased input costs affecting net income This indicates that BIDV's asset growth and loan expansion have not been truly effective.

Credit activities of BIDV in 2020:

Include: outstanding 1.134.503 1.230.569 8,5% balance of business organization and individuals corporate bond

2 Non-performing loan 1,59 1,54% 1,39% ratio – Circular

(Source: Report of business results for 2020 and Consolidated financial statements of 2021)

As of 2023, total outstanding loans for credit and investment reached 1,438,520 billion, reflecting an 8.5% increase from 2019 The credit balance from financial institutions, individuals, and corporate bonds stood at 1,230,569 billion, also up by 8.5% compared to 2019 This growth aligns with the State Bank's assigned credit limit of a maximum of 9%, representing 13.4% of the total credit balance in the economy, which has grown by 8.7% since 2019.

In the first half of 2021, customer loans surpassed VND 1,297 trillion, reflecting a 6.8% increase since the beginning of the year This growth rate is comparable to pre-epidemic levels seen in 2019 and earlier, and it shows a more favorable trend compared to the same period in 2020.

- By audience: The target customer segments all achieved good growth:

In 2020, the retail banking sector solidified its dominant market position, with retail credit balances representing the largest share of the customer segment Retail loans experienced a notable growth of 13.7% compared to 2019, making up 35.7% of total outstanding loans The number of individual customers surged to over 11.6 million, reflecting a 13.7% increase from the previous year By June 30, 2021, the retail customer segment continued to expand, rising by 11.6% since the start of the year.

The wholesale segment has demonstrated robust growth, with outstanding loans to SMEs increasing by 16%, representing 27% of total credit balances and a 1.8% rise compared to the same period in 2019 The number of SME customers has reached nearly 310,000, marking a 6.2% increase since 2019 and accounting for 40% of the country's SMEs As of June 30, 2021, the SME customer segment saw a 7.9% growth compared to the beginning of the year.

- By period: Balanced medium and long-term loans are extended to retail, SME, and FDI segments; key projects and programs are effective By the end of

In 2020, medium and long-term loans are projected to rise by 7.4% from the start of the year, with their share of total outstanding loans reaching 37.9%, surpassing the lower control target.

Outstanding credit growth in high-risk sectors has lagged behind the overall industry growth, with loans in the securities sector rising by 10% compared to the industry's 15% increase Similarly, the real estate sector experienced a loan growth of only 1.9%, while the entire industry saw an increase of 11.9%.

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BIDV, one of the leading large banks in the industry, boasts a commendable bad debt ratio compared to its competitors Over the past three years—2019, 2020, and the first half of 2021—BIDV's bad debt ratio has consistently remained below 2%, indicating effective management of bad debts As of June 30, 2021, the bank's bad debt ratio, in accordance with Circular 02, stands at 1.39%, reflecting a decrease of 0.15% since the beginning of the year, while the ratio for group 2 debts is at 1.38%, down by 0.06%.

- BIDV is currently controlling the bad debt problem well, so credit quality has improved positively compared to the beginning of 2021.

III BIDV's internal credit rating principles

Clause 2, Article 5 of Circular 02/2013/TT-NHNN, issued by the Governor of the State Bank of Vietnam, outlines the principles for developing an internal credit rating system This includes guidelines on asset types, deduction levels, risk provision setup, and the application of provisions for managing risks in credit institutions and foreign bank branches BIDV has established its internal credit system in accordance with these principles.

The bank's internal credit rating system relies on customer data and information gathered over the past year, necessitating an annual review and update Each year, banks must assess and enhance their internal ratings system to incorporate the latest customer information and historical data, ensuring its accuracy and relevance.

The internal credit rating system must maintain comprehensive and readily accessible information, ensuring it can be provided promptly upon request by internal audits, independent auditing organizations, and relevant authorities during inspections, supervision, or audits.

BIDV Bank's internal credit scoring and rating process

1.1 Scoring criteria on personal identity and debt repayment ability

2 of loan over total income

Other family 50-100 mil 30-50 mil < 30 mil

Overdue Overdue payment, but debt and debt/ New now stable unstable customers payment payment

1.2 Point Summarization and Customer Assessment

Personal score = Score for personality indicator x Weight for personality indicator + Score for the indicator of solvency x Ratio for the indicator of solvency.

In which: The proportion for the indicator of personality: 40%.

The ratio for the indicator of debt repayment ability: 60%.

Customers will be classified into 3 groups based on the number of points achieved:

Type of account, Promissory No

Collateral CDs, Note, CDs collateral

(House) securities T-bill and others

3 collateral upward 1-10% 10-30% 30-50% >50% value in the trend last 2 years

(Source: Bank for Investment and Development of Vietnam).

After summarizing, collateral assets will be ranked on the following scale:

(The system of symbols for evaluation of collateral of BIDV)

Matrix of combination of credit rating results with BIDV's collateral assessment results:

BB Excellent Average Average/ Refuse

(Source: Bank for Investment and Development of Vietnam)

First, determining the business line that will be based on the main business activities of the enterprise:

• Main business activities can be said to bring in 50% or more of the total annual revenue.

• The bank will use this facility to determine its line of business.

• Next, the industry with the largest proportion will be selected in the case of a multi-industry enterprise and no industry has a revenue of more than 50%.

Businesses are divided into three groups:

• Large enterprises: total score from 22 to 32.

• Medium-sized enterprises: total score from 12 to 21.

• Small-sized enterprises: total score below 12.

• The following are the criteria for grading scale:

From 5 – 10 billion VND Under 5 billion

Total outstanding loans of the Bank

(Source: Bank for Investment and Development of Vietnam)

2.3 Determine the type of the corporate’ ownership

Businesses have varying credit relationships with BIDV, and the credit rating system evaluates them on distinct scales Enterprises are categorized into three groups based on their ownership type.

Operating ratio Debt Ratio Income Ratio Ratio

Working Capital Total liabilities/ Gross profit/Net payment

Turnover Total assets revenue abilities

Fast payment Inventory Long-term

Operating profit/Net debt/Owner's ability Turnover revenue equity

Receivables Profit after tax/Equity payment

Profit after tax/Average using fixed total assets assets

(Profit before tax + Interest expense)/

For each main business line of the enterprise, the scoring criteria will change accordingly The 4 common business agile groups that can often be found are:

2.5.1 Non-financial indicators include 5 groups:

- Ability to repay from cash flows:

• Medium and long-term debt repayment capacity.

• Credit officer's assessment of the customer's debt repayment source.

- Internal environment - management level of the enterprise:

• Education level as well as professional experience of the head of the business.

• The credit officer's assessment of the executive ability of the head as well as the dynamism and acumen of the business when the market changes.

• Personality of the head of the business, chief accountant and the relationship of the business leadership with other agencies.

• Strategy as well as vision in business of the enterprise from 2 to 5 years.

• Relationship history on off-balance sheet commitments as well as debt repayment of customers in 12 months.

• Overdue debt situation and information provided by customers at BIDV's request in the past 12 months.

• Ratio of restructuring debt to total outstanding loans and proportion of revenue transferred to BIDV in total revenue.

• Number of restructuring times in 12 months, duration of credit relationship as well as usage of services such as deposits and other services of BIDV.

• Orientations on credit relationships with customers.

• The prospects, the ability to enter the market of the enterprise according to the assessment of the credit officer.

• The stability of the inputs as well as the ability of the enterprise's products to be replaced by other products.

• Preferential policies of the State as well as other countries – the main export market.

- Other operational characteristics of customers:

• Dependence on some suppliers as well as consumers (Inputs and Outputs)

• Growth rate of both revenue and profit of the business in the last 3 years.

• Number of years, operating position, reputation with consumers of each enterprise.

• The company's ability to access capital and future development prospects as assessed by the credit officer.

However, the number, standard value and number of sub-criteria in the non- financial indicators will have different degrees of evaluation because the business lines of enterprises are different.

The following is a table of BIDV's non-financial indicators

Foreign-capital Other o Criteria enterprises enterprise enterprises

1 Ability to repay from cash flow

2.6 Summary of scores and ratings

We have the following calculation formula:

Total score = Score of financial indicators x Proportion of financial indicators + Score of non-financial indicators x Proportion of non-financial indicators

Through the total score achieved, businesses can be divided into the following groups:

• 90 – 100: The corporate is exceptionally good – Rating: AAA

This enterprise has exceptionally strong financial capacity, grows quickly and meets its debt repayment obligations, easily recovers all debts and principals on time.

• 83 – 90: Very good corporate – Rating: AA

This enterprise has good financial capacity and solid growth When lending, it is possible to fully recover both debt and principal on time.

This business is always growing, has stable financial capacity and is also able to fully recover both debt and principal on time.

• 71 – 77: Relatively good corporate – Rating: BBB

This enterprise possesses a stable financial capacity, although it exhibits some sensitivity to external changes While it can currently meet its obligations for both principal and interest, there are indications that its repayment ability may decline in the future.

An efficient business with strong financial capacity is currently able to meet its principal and interest obligations; however, it is vulnerable to changing conditions, which may indicate potential future difficulties in maintaining its repayment capabilities.

• 59 – 65: Corporate need to pay attention – Rated NO

Enterprises are inefficient, and their financial capacity is reduced The loan balance is likely to lose part of the principal and interest due to the enterprise's inability to pay.

Enterprises conduct business in moderation, financial capacity is unbalanced when there is a change in the business environment Banks may lose part of the principal and interest when lending.

Enterprises cannot fulfill their commitments on debt repayment The bank may not be able to recover part of the principal and interest.

• 35 – 44: The corporate is very weak – Rating: OLD

Business enterprises make losses, it is difficult to recover The possibility of not recovering the principal with interest in this business is very high.

• 0 – 34: The enterprise is particularly weak – Rating: EASY

Business enterprises suffer long-term losses and are unlikely to recover The bank cannot recover both principal and interest.

3 Comparison for the internal credit rating system between BIDV and Techcombank

3.1 Comparison for individual customers between 2 banks

Information to be collected includes: Information to be collected

• Status of Residence • Academic level Income • Number of dependents • Status of Residence and personal • Marital status, family • Number of followers information structure • Family structure

Assessment • Current job time • Current working time

• Personal income/year • Occupational risks

• Working time • Nature of current job

Income and • Relationship with other credit • Stable monthly income customer institutions (debt situation, • Payout/Income ratio relationship debt repayment, interest • Principal and interest payment

Techcombank (customer relationship, debt situation, debt repayment, interest payment )

= Score for the personal indicator × weight for the indicator of

Calculate the personal identity (40%) + score

= Total score of previous steps for the indicator of debt total score repayment ability × weight for the indicator of ability to repay debt (60%)

• The industry that brings in more than 50% revenue continuously for 3 years is the main business of the customer.

• If the business unit is multi- industry but none of them earns more than 50%, the main business is the most promising industry in the future.

Determined based on net revenue, equity, total assets, import and export payment turnover, foreign currency trading enterprises, number of employees

• The main production and business field is the activity that brings in 50% or more of the total annual revenue of the customer.

• In case of multi-sector business, none of which meet the above requirements, the branch is entitled to choose the most promising operation for ranking.

Determined based on equity size, labor size, net revenue, total bank loan balance

• Short-term solvency ratios • Current Ratios

• Average collection period • Accounts receivable turnover

• Efficient use of assets • Efficiency in using fixed assets

• Liabilities/Equities • Total liabilities/Total assets

• Overdue debt/Total • Long-term debt/Equity outstanding balance at the source bank

• Total income before • Operating profit/Net revenue tax/Revenue • Profit after tax/Equity

• Total pre-tax income/Total • Profit after tax/Average total assets assets

• Total income before • (Profit before tax + Interest tax/equity expense)/Loan interest expense

RATIONALITYAND ISSUES OF CREDIT RATING

Rationality…………………………………………………………… 31 I Issue

The credit rating system enables commercial banks to effectively manage credit risk through advanced techniques, allowing them to regulate customer credit levels and establish lending interest rates based on risk assessments for different customer groups By tracking changes in outstanding loans and categorizing them according to their ratings, banks can evaluate the performance of their loan portfolios.

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1 The best efficient investment decision for banks

Banks prefer not to lend to high-risk customers, which is why they rely on credit ratings to assess a borrower's creditworthiness By evaluating credit rating reports, banks can make informed lending decisions while saving time and effort in analyzing a borrower's financial strength This reliance on credit ratings from agencies helps streamline the lending process and mitigate risk.

1.1 Being the fundamentals of choosing borrowers

The bank evaluates each borrower's creditworthiness by analyzing customer credit rating results, which help determine the associated risk of lending and the borrower's ability to repay loans This objective and scientific approach guides the bank's decision to either approve or deny loan applications.

Commercial banks adopt varied strategies to attract customers and manage risk, tailoring their approaches based on customer credit ratings By categorizing customers according to risk levels, banks offer preferential policies to those with high credit and low risk, while customers deemed higher risk face less favorable terms These customer policies encompass aspects such as credit mechanisms, loan interest rates, and associated fees.

Credit ratings play a crucial role in determining loan interest rates, as banks offer loans based on current market conditions and adjust rates accordingly A borrower's credit history, reflected in their credit rating report, significantly influences the interest rate; generally, a higher credit rating results in a lower interest rate This is vital for borrowers, as the interest rate directly affects the overall cost of borrowing Lower interest rates make loans more manageable, leading to easier repayment compared to loans with higher interest rates.

Based on the results of the bank's credit rating, the bank will assess the risk level of each enterprise, each customer's business field, thereby building an appropriate credit portfolio.

Most commercial banks classify loans and allocate provisions for loan losses in accordance with Article 6 of Decision No 493/2005/QD-NHNN, issued by the State Bank on April 22, 2005 However, once credit institutions develop their own internal credit rating systems, they will classify loans and make provisions for loan losses based on the outcomes of these internal assessments.

2 Efficiency in the Investment Markets

Credit rating agencies enhance the efficiency and transparency of the credit market by bridging the knowledge gap between borrowers and lenders, particularly regarding the creditworthiness of borrowers.

In today's global economy, credit rating agencies play a crucial role in stock markets worldwide, bridging the information gap between lenders and borrowers These ratings serve as valuable resources for investors, helping them make informed decisions based on the creditworthiness of entities The significance of credit ratings in financial markets cannot be overstated, as they enhance transparency and trust in investment opportunities.

- Investors use credit rating results to implement strategies investments so that the risk is lowest but the results are as desired;

Organizations seeking to borrow must effectively mobilize capital by leveraging their credit ratings to instill confidence in investors This approach enables them to execute strategies for raising capital at lower costs while achieving their desired funding levels.

- Through credit rating, other organizations use credit rating results to promote their organization's image, provide information to partners, and create market confidence.

Evaluating the credibility of the market is essential for businesses, and Corporate Social Responsibility (CSR) assessments conducted by independent organizations play a crucial role in this process The outcomes of these assessments can indicate the market's trust level in a business; a high CSR score reflects strong market confidence, while a low score suggests diminished trustworthiness.

Building trust with investors and lenders is crucial for enhancing capital-raising capabilities High CSR rankings indicate lower risk levels for businesses, reassuring investors and encouraging them to invest confidently.

Enterprises leverage credit rating results to enhance their business image, while disclosing CSR outcomes serves as an additional strategy to promote transparency and communicate operational status to the market.

In summary, banks and financial institutions utilize credit rating agencies to assess the creditworthiness of loan applicants, enabling informed lending decisions These ratings provide insights into the risk associated with individual or corporate borrowers Additionally, effective credit rating agencies enhance efficiency and transparency in credit markets, bridging the knowledge gap between borrowers and lenders They also promote fairness in lending by significantly influencing the appropriate interest rates applied to loans.

1.1 Lack of many important indicators reflecting the financial position and operational capacity of the enterprise:

- Failing to include indicators of development prospects of industries and fields of operation of enterprises into the ranking system; reflect the ability to pay loan interest.

- Failing to include criteria on the ability to repay debt from cash flows into the system of criteria for ranking.

- Management qualifications of business leaders have not been assessed

- External factors affecting the business have not been focused on.

- Input data for credit society also depends mainly on the financial statements published by the customer

⇒ For example: some businesses may use "tricks" to beautify financial statements (maybe it only has book meaning) to conceal information to carry out

Bank loans often lead to a lack of transparency within credit institutions, resulting in information chaos that hinders customer evaluation This confusion ultimately drives customers to make poor choices regarding their financial decisions.

To effectively calculate rating points, it is essential to focus on relevant criteria that encompass the customer's financial situation, operational capabilities, and business outcomes, while also forecasting future operational prospects.

- Many financial indicators are not appropriate, do not need to be included or can be included in non-financial indicators such as: Revenue growth rate, profit growth rate

1.2 The criteria to evaluate the size of enterprises are not reasonable:

RECOMMENDATIONS TO COMPLETE THE CREDIT RATING

Solution to complete internal credit rating system of BIDV Bank

The accuracy and efficiency of internal credit ratings at commercial banks, including BIDV, heavily rely on the quality of input data sourced from various channels To enhance the precision and profitability of these ratings, it is essential to implement measures that improve the quality of the input information.

Firstly, credit officers need to strengthen the selection and control of input information to improve the quality and accuracy of information.

Credit officers should effectively utilize and carefully assess information from the Credit Information Center (CIC), particularly regarding customer data Additionally, the financial information provided by CIC must be verified or at least sanctioned by the tax authority in relation to the annual tax return.

Banks should establish dedicated teams focused on the search, selection, analysis, and evaluation of data and information to ensure they obtain the highest quality input data.

2 Completing the criteria system to evaluate

To enhance individual scoring criteria, it is essential to incorporate relevant personal information, such as criminal records, while eliminating redundant factors like working time and current working hours This adjustment prevents the inadvertent inflation of customer scores, especially for those who have not changed workplaces, and ensures that scores accurately reflect changes in income or promotions.

To enhance loan security, it is essential to establish criteria for evaluating the adequacy of collateral At BIDV, customers are required to fulfill specific collateral conditions as part of the credit relationship process.

Considering an optimal personal income of 120 million VND per month highlights the similar debt repayment obligations for customers borrowing small amounts versus those borrowing tens of billions of VND This situation underscores the need to reassess and potentially increase the maximum allowable personal income for borrowers.

Grade personal loans by repayment status and credit rating according to five levels: Qualified debt, notable debt, subprime debt, doubtful debt, and potential default.

- For small and medium sized enterprises, it is necessary to develop a separate credit rating system.

- For enterprises operating in the fields of light industry trade and consumer goods, it is necessary to adjust the proportion of the set indicators.

- Changing the criteria system to match the loan term.

- For enterprises that have been listed on the stock market, it is necessary to add a group of indicators to analyze the valuation in the market.

- Adjusting more reasonably the distance between benchmark levels.

The bank is expanding its documentation to enhance the evaluation of non-financial indicators, addressing the limitations of the current rating system, which is hindered by subjective biases among the rating staff, particularly concerning non-financial metrics.

- Adding criteria to assess the ability of collateral to secure loans because most of the customers must meet the conditions of collateral when BIDV exercise credit relationship.

3 Upgrading the information processing system

In the era of the 4.0 technology revolution, it is crucial for banks to upgrade their information processing systems to keep pace with rapid advancements in information technology and mitigate network security risks BIDV must invest in modern equipment and enhance its IT infrastructure by establishing a professional IT team at its Head Office and branches to address technical issues promptly and implement necessary system updates Regular checks and upgrades of the banking system are essential to ensure the smooth operation of the credit rating system.

4 Training for bank staff on the internal credit rating system

Despite BIDV providing guiding documents for its credit building system, many credit officers rely heavily on automatic rating software without fully understanding the criteria involved This issue arises partly due to the theoretical nature of BIDV's guidance To address this, it is essential to organize training sessions aimed at enhancing the knowledge of credit officers, enabling them to effectively absorb and apply the credit rating system Additionally, comprehensive and scientific training on customer evaluation methods is necessary to improve overall assessment practices.

BIDV must enhance its customer verification processes to effectively gather information on customer activities, enabling timely adjustments to credit ratings and the subsequent modification of credit policies.

Solution to complete internal credit rating system of Vietnam

1 Building an independent credit rating agency

Countries with market economies frequently establish independent credit rating agencies, which are privately owned and managed by shareholders, to enhance the transparency of credit information The creation of such organizations is crucial for promoting economic transparency and fostering trust in financial systems.

Southeast Asia has been an early player in the credit rating industry, with the Philippines launching its own credit rating center in 1982 This initiative was soon mirrored by Malaysia in 1991, followed by Thailand in 1993 and Indonesia in 1995.

Vietnam should establish an independent and reputable Corporate Social Responsibility (CSR) organization to assess the creditworthiness of businesses, drawing lessons from countries with market economies This CSR organization should operate as a joint-stock enterprise to ensure that no single entity can dominate its operations By promoting objectivity in CSR assessments, this initiative will foster greater trust among users.

2 Creating an environment for credit business to develop

In today's market economy, customer research has become essential for evaluating business opportunities, driven by the increasing availability of options Additionally, economic integration demands greater transparency in business information, including financial data, operational capabilities, and technological applications.

Hong Kong has about 300,000 corporates, but there are up to 40 trusted information companies Vietnam has nearly 145,000 enterprises and about 2.3

TIEU LUAN MOI download : skknchat@gmail.com million other business entities, but so far Vietnam has only had 2 enterprises operating in the field of credit information.

Therefore, in the coming time, it is necessary to issue legal documents, creating a mechanism and environment for credit business to develop.

3 Improving the quality of CIC's credit information

The State Bank of Vietnam benefits from access to comprehensive documents, financial records, and legal information from commercial banks regarding borrowers This includes details on outstanding balances and creditworthiness levels As a result, the State Bank can evaluate customer credit more accurately.

The State Bank's Credit Information Center (CIC) currently offers credit information services to financial institutions and businesses for a fee; however, the data provided is often incomplete and inaccurate To enhance the quality of information delivered by the CIC, it is essential to implement improvements in several key areas.

- Providing information must be prompt;

- Information sources must be updated and accurate;

- Non-financial information must also be included

4 Building a data system to provide business information quickly, completely and accurately

Accurate customer credit assessment relies heavily on the quality of information provided; thus, businesses must ensure they submit comprehensive and truthful financial and non-financial documents as requested by rating organizations Additionally, it is crucial to facilitate the evaluation staff's ability to verify and reassess this information effectively However, many Vietnamese enterprises often obscure their true financial status, emphasizing their strengths while downplaying weaknesses, which poses significant challenges for credit rating companies in Vietnam.

In a market economy, the significance of information in business operations cannot be overstated Quick and precise information equips managers with the necessary insights to make timely and effective decisions, ultimately driving positive business outcomes for the enterprise.

In Vietnam, the business information system remains underdeveloped, making it challenging to obtain comprehensive data on enterprises, including their financial status, business performance, and creditworthiness with financial institutions The only exceptions are companies listed on the Securities Trading Center, whose financial records are publicly accessible.

To enhance the transparency of economic information and ensure it is accessible to those in need, the State must establish a system that delivers data quickly, comprehensively, and accurately.

Credit ratings evaluate a borrower's risk and their future repayment capability An effective credit rating system should comprehensively assess the financial and business conditions of an enterprise, alongside the industry it operates in While the ranking system should reflect global standards, it must also align with the economic environment of Vietnamese corporations.

1 Textbook: 9th Bank Management & Financial Services – Peter S.Rose

2 Luận văn thạc sĩ kinh tế “Hoàn thiện phương pháp xếp hạng tín nhiệm khách hàng doanh nghiệp tại ngân hàng đầu tư và phát triển Việt Nam” - Thủy Ngọc Thu

3 BÁO CÁO “Xếp hạng tín nhiệm đối với khách hàng cá nhân tại các NHTM Việt Nam” -Ttrường Đại học Kinh tế TP.HCM

Tiêu đề	Credit Rating To Customers In Commercial Banks: Rationality And Issues
Trường học	National Economics University
Chuyên ngành	Advanced Education Programs
Thể loại	Group Assignment
Năm xuất bản	2022
Thành phố	Ha Noi

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Số trang	50
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