THEREOTICAL BASES OF CREDIT RISK
Concepts and classification of credit risk
Risk lacks a uniform definition, with various authors and schools of thought offering distinct interpretations The Vietnamese Dictionary defines risk as an unexpected negative occurrence, while the Oxford Dictionary describes it as the possibility of danger or harm In "Risk Management and Insurance," C Arthur William Jr and Michael L Smith explain that risks represent potential fluctuations in outcomes, introducing uncertainty in nearly all human activities Frank Knight, a prominent early 20th-century scholar, characterized risk as measurable uncertainty.
Risk is defined as an uncertainty linked to unexpected events, as noted by Alain Willet While definitions may vary, they consistently convey that risk involves unforeseen occurrences that can lead to measurable damages It results in unexpected losses and embodies uncertainty that is independent of human will To ensure survival and growth, business leaders must proactively identify and assess potential risks, implementing strategies to mitigate and manage them effectively to minimize potential losses.
Credit granting refers to an agreement that allows individuals or organizations to access a specific amount of money, with the understanding that it will be repaid This can occur through various financial mechanisms such as lending, financial leasing, factoring, and bank guarantees, as outlined in the Law on Credit Institutions (2010).
Pursuant to Circular No 02/2013/TT-NHNN dated January 21, 2013 on
Credit risk in banking refers to the potential loss that a credit institution or foreign bank branch may incur when a customer fails to meet their obligations This risk arises when borrowers or partners are unable to fulfill their commitments, as defined by Basel II Regulations outline the classification of assets, the level of deductions, and the methods for establishing risk reserves to manage these risks effectively in banking operations.
Credit risk refers to the potential financial losses that arise when a borrower fails to fulfill the terms of a credit agreement This includes situations such as late payments, partial repayments, or total defaults on principal and interest at maturity, which can significantly impact the operations and profitability of commercial banks.
Different customers and different professions have different risks;
Different products (consumer loans or production and business loans, secured loans or unsecured loans, etc.) have different risks;
Credit officers’ qualification and virtues, credit management policies and resources of the bank (including IT system) can make a positive contribution to reducing credit risk
According to Joel Bessis (2011), Risk Management in Banks
(Vietnamese translation version), Labour and Social Publishing House, credit risk has the following characteristics:
Credit risk is inherently passive for banks, as credit losses only materialize after loans are disbursed and utilized by customers Customers possess firsthand knowledge of the loan's quality and their efficiency in using it, while banks often rely on delayed or incomplete information regarding the customers' financial challenges and overall business performance This lack of timely insights can hinder the bank's ability to respond promptly to potential credit risks.
Credit risk is inherently diverse and complex due to the variety of borrowers, creditors, and credit types, along with the various causes and consequences involved Consequently, banks need to prioritize effective credit risk management, which encompasses the development of robust credit policies and the implementation of risk management tools This comprehensive approach includes meticulous processes for identifying, measuring, processing, and controlling credit risk.
Credit risk is a fundamental aspect of banking, as all business activities involve some level of risk In banking credit operations, the acceptance of risk is essential to balance the potential for profit with acceptable risk levels To maintain safe and effective operations, banks must ensure that risks are manageable and align with their financial resources and business capabilities.
There are many different ways of classifying and approaching credit risk According to Assoc Dr Dinh Xuan Hang, MA., Nguyen Van Loc
(2012), “Credit management at commercial banks” textbook, Finance Publishing House; the exact classification of credit risk should be based on the following criteria:
Transaction risk refers to the potential challenges associated with individual loans or customers, stemming from operational weaknesses in processes like credit appraisal, approval, disbursement, and post-lending control This risk also encompasses issues related to loan security and adherence to commitments outlined in the credit agreement.
Credit portfolio risk arises from the limitations in a bank's credit portfolio management and encompasses both internal risk and concentration risk Internal risk is influenced by the unique characteristics of individual customers or industries, as well as the specific operational or loan utilization traits of those customers On the other hand, concentration risk occurs when a bank disproportionately allocates credit to a limited number of customers within specific sectors or geographic regions, potentially increasing vulnerability to economic fluctuations.
Figure 1.1 Classification of risks by the causes
Source: “Credit management at commercial banks” textbook
Transaction risk ( Related to each credit item)
Credit portfolio risk (Related to credit portfolio)
(occurrin g before the credit decision)
Operation risk (occurrin g in credit managem ent)
Guarantee risk (occurring in the terms of the Contract and Collateral )
Internal risk (relative to the characteristi cs of each type of credit product)
Concentr ation risk (due to undiversif ied credit portfolio)
Late debt repayment poses a significant risk of stagnant capital for banks, as uncollected debts on their due dates result in frozen assets that diminish liquidity This situation hampers the bank's capital utilization strategy and complicates effective liquidity management.
The risk of capital loss arises when a borrower is unable to repay the principal or interest, leading banks to liquidate collateral for debt recovery This situation heightens the costs associated with bad debts and supervision, while simultaneously diminishing profits due to the need for increased credit risk reserves.
Risks from the Bank: are risks caused by the Bank’s policies, research, forecasting, monitoring, management of credit risk, credit officers, ineffective supervision and control
Risk from the borrower: is the main risk in the types of credit risk
For example: Weak financial capacity risk, business operation risk, etc
Risks from various external factors can significantly impact credit management, including state bank policies, economic fluctuations, and environmental issues Additionally, objective causes like natural disasters, sabotage, or the unforeseen disappearance or death of borrowers can lead to credit losses, even when both the bank and the customer adhere to established credit policies and contractual agreements.
Before lending, there are significant risks involved, particularly during the record preparation and credit analysis stages These risks can result in the approval of loans for ineligible customers who may struggle to repay in the future.
Lending risks arise during the disbursement phase, primarily due to errors in disbursement, delays in fund distribution, inadequate updates to customer information, and the inability to anticipate potential risks.
Necessity of ensuring the credit risk management efficiency in
For commercial banks, credit risk management is necessary because:
Credit risk poses a significant challenge for commercial banks, as it is an inherent aspect of lending that is both complex and diverse Effectively preventing and managing credit risk is difficult, often resulting in substantial capital and income losses for banks.
Effective implementation of credit risk prevention and limitation offers significant advantages for banks, including reduced costs and enhanced income, which help preserve capital Additionally, it fosters trust among depositors and investors, laying the groundwork for market expansion and boosting the bank's prestige, position, image, and market share.
Effective credit risk prevention and management are crucial for the overall health of the economy In today's interconnected financial landscape, the challenges faced by one commercial bank can quickly ripple through the entire banking system, impacting other institutions Therefore, robust credit risk management not only safeguards individual banks but also contributes to a safer and more stable market environment.
The bank's equity is significantly lower than its total assets, and despite having a small percentage of non-performing loans, this imbalance increases its vulnerability to bankruptcy Particularly, the high value of corporate loans means that losses from irrecoverable loans can inflict substantial damage on the bank's financial stability.
Credit risk management procedures at commercial banks
In business operations, banks face specific risks that can negatively impact their performance, making a robust risk management system essential to mitigate these effects on business results and owner’s equity To effectively manage credit risk, banks must develop tailored models that align with their unique scale, products, and risk appetite Despite these customizations, the core framework of risk management typically follows four fundamental steps: risk identification, risk measurement, risk control, and risk settlement.
Credit risk identification is a continuous and systematic process essential for banks to achieve their goals It involves recognizing anything that could impede success, particularly by understanding the risks associated with both existing and new products Effective risk identification requires analyzing the connections and interactions between various risks Early detection of potential loan issues, coupled with prompt and professional intervention, can significantly reduce negative impacts Warning signs, including both financial and non-financial signals from borrowers, play a crucial role in helping banks address and resolve problems efficiently.
Credit risk measurement involves quantifying the levels and probabilities of risk, as well as potential losses, to evaluate a bank's acceptability After identifying risks, banks must assess each transaction and portfolio to determine the frequency and severity of risks and their short-term and long-term impacts on capital and profitability This assessment is crucial for making informed loan decisions and developing prompt response strategies to address credit risks To effectively measure these risks, banks typically create tailored models for quantification.
Effective credit risk management and control is essential for commercial banks, serving as the foundation of the credit risk process This system encompasses a range of tools, policies, standards, and measures designed to mitigate and address credit risks Key components include the establishment of credit policies, the implementation of credit processes, and the setting of credit limits, all aimed at safeguarding the bank's financial stability.
Credit risk settlement represents the final phase of credit risk management, where banks make strategic decisions to address and mitigate potential risks This process involves implementing measures to fund, remedy, and minimize both risk costs and losses, ensuring the financial stability of the institution.
The credit risk management process consists of four interrelated steps that greatly influence the efficiency of risk management Among these, steps one and three are particularly crucial, as early detection of risk allows banks to proactively manage and control it, ultimately reducing potential losses in credit activities.
Thus, it can be seen that the core issue of the banking credit management is to provide solutions and methods for early detection of risks
At present, many banks have established the early risk warning system, conducted credit assessment and consolidated the MIS system, etc., which are the ways to detect credit risks early
Despite the implementation of early risk warning systems, their effectiveness is limited due to several factors The warning indicators primarily focus on cash flow, overdue statuses, and excessive balances, neglecting the underlying causes of credit risk Additionally, the quality of credit assessments remains inadequate, hindering comprehensive risk evaluation.
From the above four steps, the author builds the following credit risk management process simulation model at commercial banks:
Figure 1.2 Credit risk management process at commercial banks
Source: Data synthesized by the Author (2018)
Credit risk management experience of some commercial banks in the
1.4.1 Experience of commercial banks in the world
Credit risk management experience of ANZ – Australia
ANZ employs a traditional credit risk measurement method known as the Expert System Approach, which empowers credit officers to make independent credit decisions grounded in their experience and historical customer data.
ANZ employs a risk compensation method to determine the required rate of return for its lending activities, reflecting the high risks associated with certain loans This approach results in higher interest rates for riskier loans, as seen in the disparity between interest rates for institutional loans and exchequer bills, as well as between first-grade and second-grade installment loans For instance, when Australian bond yields increased from 6.1% to 6.5% in 2007, ANZ adjusted its standard installment loan rates to between 6.5% and 7.9%, applying even higher rates for secondary loans to adequately compensate for the elevated risk.
ANZ utilizes the probability of default as a fundamental criterion for evaluating borrower credibility, which is integrated into its internal credit rating process This system relies on a comprehensive database of historical customer data, including instances of irrecoverable loans In accordance with Basel II regulations, ANZ assesses a customer's debts over the past year by analyzing the outstanding loans from the preceding five years.
The RAROC method is a quantitative approach that assesses profitability in relation to risk, distinguishing it from traditional risk management practices While RAROC is a valuable tool employed by modern banks, it is only one aspect of a broader risk management strategy Unlike conventional definitions of credit risk, which focus on the likelihood of customer default, RAROC redefines credit risk as the volatility of net income resulting from variations in credit losses.
ANZ utilizes the RAROC method to assess loan efficiency, ensuring that loans are only approved when they provide value to shareholders If the RAROC of a loan falls below the Return on Equity (ROE), the loan will be declined; conversely, loans with a higher RAROC than ROE will receive approval.
The Value at Risk (VAR) method employed by ANZ utilizes data from its internal auditing system, historical records, overdue interest rates on non-performing loans, and profit variations to calculate the VAR for each loan In 2005, the VAR at a 97.5% confidence level was US$ 0.8 million, which rose to US$ 1.1 million in 2006 Similarly, at a 99% confidence level, the VAR increased from US$ 1.2 million in 2005 to US$ 2.3 million in 2006.
Some evaluation ideas of ANZ’s credit risk management:
ANZ has effectively implemented a flexible credit risk management system that integrates both modern and traditional practices By utilizing an expert system approach, risk compensation methods, an internal rating system, as well as RAROC and VAR techniques, ANZ has structured its credit risk management models to enhance efficiency and accuracy.
ANZ effectively implements credit risk management by focusing on both individual and portfolio risks, achieving notable success through a centralized credit line system The bank diversifies its loan portfolio to mitigate geographic and industry risks, while also maximizing profitability by accurately establishing concentration limits for different customer groups.
Credit risk management experience at Korea Development Bank (KDB)
KDB's credit risk management system is built on five essential components: a well-defined risk strategy and appetite, an effective risk management model, a robust risk limit management system, a comprehensive credit approval system, and a diligent credit risk control system.
(i) Strategy, limits and risk management infrastructure
KDB implements a comprehensive risk strategy aimed at maximizing profitability while maintaining an acceptable risk level and optimizing risk capital allocation The bank's philosophy emphasizes that risk encompasses both opportunities and challenges, extending beyond mere quantitative factors like capital and income fluctuations to include potential effects on organizational structure, performance outcomes, and the bank's reputation.
In line with its operational objectives, KDB is developing a roadmap towards a modern risk management model with the following steps:
Step 1 of Credit risk management is compliance with the Basel II’s management principles by establishing an internal credit rating system to calculate three PD components - the probability of customer’s default, LGD - expected loss ratio (%) in case of customer’s default and EAD - risk loan balance Based on the results of the PD, LGD and EAD calculations, banks will develop applications in credit risk management in many respects, of which the first is to calculate and measure credit risk through EL - Expected loss and UL - Unplanned loss at a particular customer level: ELi = PD x LGD x EAD
Measuring and calculating the minimum capital is essential to mitigate risks associated with loans, encompassing not only individual loans but also the overall risk of the entire loan portfolio.
Step 2: is portfolio risk management by quantifying the expected loss (ELp) and unplanned loss (ULp) of the whole portfolio based on determining the relative risk of Asset/ default level of risky assets and the level of concentration risk of the whole portfolio
Step 3: The bank can manage its capital and evaluate the loan at the corresponding risk level When the credit risk measures including EL and UL have been quantified, the bank has the basis to determine the loan rates in line with the motto of “high risk, high profitability; low risk, low profit” through the risk compensation price calculation mechanism
Step 4: Higher than capital management and risk-based loan evaluation, the bank targets at Active credit portfolio management (ACPM) instead of passive portfolio risk management by identifying and transferring risk actively through the use of Credit Treasury and Securitization
CURRENT STATUS OF CREDIT RISK MANAGEMENT
Introduction of BIDV-Hong Ha Branch
2.1.1 Establishment and development history of BIDV- Hong Ha Branch
In November 2013, the Hong Ha branch of the Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) officially commenced operations, following extensive preparations and the approval of Decision No 1909/QD-BIDV by the Board of Directors Despite initial challenges, the Hong Ha Branch's leadership and staff demonstrated remarkable dedication and collaboration with Transaction Center 1 and Dong Do Branch to ensure a smooth transition of customer data This commitment enabled the branch to effectively meet customer needs from day one without compromising service quality.
BIDV-Hong Ha Branch, one of the first three retail branches of BIDV, was established to cater to individual customers and micro-sized enterprises After three years of operation, it transitioned in 2016 to a mixed retail and wholesale banking model, allowing it to serve a broader clientele that includes individuals, small and medium-sized enterprises, and larger corporate customers.
BIDV-Hong Ha Branch serves as the legal representative of BIDV, equipped with its official seal and integrated accounting within the BIDV system It is tasked with executing banking operations and related business activities in compliance with the Law on Credit Institutions and the Organizational and Operational Charter of BIDV.
The Hong Ha Branch operates under a leadership regime that adheres to the principles of democratic centralism The Director, appointed by the General Director of BIDV, manages the branch and addresses staffing issues within the organization In addition to overall responsibilities, the Director provides direct guidance on various projects as assigned by the Board of Directors The organizational structure includes a Board of Directors consisting of one Director and three Deputy Directors, along with 11 departments, including six Transaction Offices, organized into five operational divisions.
Customer Relations Division (CR) including: Customer Department (P.KH)
Risk Management Division (RM) including: Risk Management Department
Operational Division including: Credit Management Department (P.QTTD), Customer Transaction Department
Internal Management Division including Internal Management Department (P.QLNB)
Sub-units including: 6 Transaction Offices (PGD)
Figure 2.1 Organizational structure of BIDV- Hong Ha Branch
Figure 2.2 Organizational structure of BIDV
Board of Management and Chief Accountant
Capital and Monetary Business Division Risk Management
2.1.3 Business results of BIDV- Hong Ha branch
BIDV- Hong Ha Branch has been newly established and operated for nearly 5 years but have achieved the impressive results
Some highlights in BIDV- Hong Ha Branch’s business operations:
Table 2.1 Business results in the 2015-2017 period
Source: BIDV –Hong Ha Branch
The Hong Ha branch demonstrated significant operational stability and growth, with earnings before tax increasing from 18.91 billion dong in 2015 to 25.41 billion dong in 2016, marking a rise of 6.5 billion dong This upward trend continued in 2017, as earnings reached 42.76 billion dong, an impressive increase of 17.35 billion dong compared to the previous year.
In recent years, the business landscape has experienced significant fluctuations, posing challenges for capital maintenance and growth, particularly for commercial banks like BIDV-Hong Ha Branch Despite these obstacles, BIDV-Hong Ha Branch has demonstrated remarkable dedication in successfully executing its capital mobilization plan as assigned by the Main Operation.
The center has successfully sustained annual growth in mobilized capital while continuously expanding its market share and capital mobilization network By maintaining strong relationships with existing customers and effectively leveraging connections with branch staff and other stakeholders, the center has created opportunities for market expansion, cross-selling products, and scaling operations.
Table 2.2 Capital mobilization scale of BIDV –Hong Ha Branch in the
Scale Scale Growth rate (%) Scale Growth rate (%) End-year mobilized capital 3824.57 4269.99 111.65 4555.04 106.68 Average mobilized capital 3111.03 3890.04 125.04 4357.02 112.00
Source: BIDV –Hong Ha Branch
Particularly, the mobilized capital balance was 3,824.57 billion dong in
2015 and 4,269.99 billion dong in 2016, an increase of 445.42 billion dong compared to 2015; 4,555.04 billion dong in 2017, an increase of 285.05 billion dong compared to 2016
In addition to its core activities of credit and capital mobilization, BIDV-Hong Ha Branch also generates substantial profits through a variety of non-credit services, attracting a significant customer base Currently, the branch offers a range of key services, including payment services, guarantee services, card services, e-banking services, POS services, insurance services, and fund management.
Current status of Credit Risk Management at BIDV- Hong Ha Branch 36 1 Current status of Credit Risk Management at BIDV- Hong Ha Branch 36 2 Evaluation of the risk management process at Hong Ha branch
2.2.1 Current status of Credit Risk Management at BIDV- Hong Ha Branch
Credit activity is vital to the Bank's operations and serves as its primary income source BIDV – Hong Ha Branch has implemented numerous effective strategies for sustainable development, prioritizing safety and quality while consistently adhering to BIDV's evolving guidelines.
In accordance with government regulations and the policies of the State Bank of Vietnam (SBV) and BIDV, the branch is committed to a credit growth strategy that emphasizes the importance of maintaining high credit quality and ensuring loan security.
Regarding credit risk management: The branch has closely followed the business situation of customers, urged customers to repay the principal and interest on time
The Main Operation Center has effectively implemented credit guidelines that govern authority, limits, structure, and management of non-performing loans, ensuring safe and efficient credit operations for the branch This approach has facilitated a gradual shift in customer demographics, with a focus on attracting and nurturing new clients and potential customers who demonstrate stable financial capacity.
In alignment with the Main Operation Center and the State Bank of Vietnam's guidelines, the Branch consistently adapts its loan interest rates This flexible approach ensures that the rates remain competitive and closely aligned with market trends, ultimately supporting customers while enhancing business efficiency.
Credit risk assessment indicators, as outlined in Chapter 1, encompass overdue loans and non-performing loans The author employs secondary data collection methods to provide a comprehensive overview of the credit situation at BIDV - Hong Ha Branch.
Table 2.3 Credit scale of BIDV –Hong Ha Branch in the 2015 -2017 period
Scale Scale Growth rate (%) Scale Growth rate (%) End-year mobilized capital 919.59 1,157.57 125.88 1,812.95 156.62 Average mobilized capital 665.29 909.03 136.64 1379.90 151.80
Source: BIDV-Hong Ha Branch Regarding scale, growth rate: By the end of December 31, 2015, the
Branch’s outstanding loans was 919.59 billion dong, equivalent to 112.15% of the plan in 2015 (Plan in 2015: 820 billion dong)
The Branch’s outstanding loans at December 31, 2016 was 1,157.57 billion dong, an increase of 125.88% compared to that of 2015 and fulfilling 115.76% of the outstanding loan plan in 2016 (Plan in 2016: 1,000 billion dong)
As of December 31, 2017, the Branch's outstanding loans reached 1,812.95 billion dong, marking a significant increase of 156.62% from 2016 and surpassing the 2017 loan plan of 1,600 billion dong by 113.31% This growth was driven not only by the development of existing customers but also by the expansion of credit activities and coordinated loan reimbursements with other internal branches of the BIDV system, which contributed to an increase in the overall credit scale.
Table 2.4 Credit quality of BIDV- Hong Ha Branch in the 2015 – 2017 period
Proportion compared to the previous year
Proportion compared to the previous year
(Need –to-note outstanding loan)
Non-performing loans (Group 3 to
The number of customers with overdue loans:
Non-performing loans/ total outstanding loans
Source: BIDV –Hong Ha Branch - Report on Debt classification, Credit risk reserve in banking activities for the 2015-2017 period
The credit quality at BIDV-Hong Ha Branch remains relatively strong, with a non-performing loan (NPL) ratio consistently around 2%, well below the State Bank of Vietnam's threshold of 3% However, there is a concerning upward trend in both overdue and non-performing loans at this branch As indicated in Table 2.5, the NPL ratio at Hong Ha branch, currently at 1.78%, is higher than the overall BIDV ratio of 1.68%, highlighting the need for improved management of these loans.
In 2015, the loan quality ratios for BIDV and Hong Ha Branch were 1.99 and 2.23, respectively By 2016, these figures adjusted to 1.62% for BIDV and 1.67% for Hong Ha Branch in 2017 Consequently, the outstanding loan quality of Hong Ha Branch is comparable to that of the overall system.
The credit quality of the branch remains at an acceptable level, despite a slight increase in newly arising overdue loans (Group 2) that have not been fully settled Additionally, the non-performing loan ratio (Group 3 to Group 5) has not been completely resolved, totaling 16.39 billion dong due to various underlying factors.
In 2015, the non-performing loans (NPL) stood at 25.77 billion dong, rising significantly in 2016 due to unresolved overdue loans and the transfer of debt groups caused by unrecovered principal and interest This situation led to an increased NPL ratio of 2.23%, necessitating urgent attention to assess and manage all loans effectively It is crucial to implement debt recovery measures and exercise caution in credit operations to prevent further increases in overdue loans and newly emerging outstanding debts, which could deteriorate the overall loan quality of the Branch and negatively impact its business results An inspection report on overdue loans from 2015 to 2017 identified key factors contributing to the rise in overdue loans and delays in resolution.
Overdue loans often stem from inadequate loan appraisals, particularly for individual and household customers due to insufficient information The evaluation of financial proof, cash flow, and business activities relied heavily on subjective assessments from interviews and field surveys, lacking robust evidence For business households, tax assessments, excluding license taxes, failed to accurately reflect their business capacity Additionally, customer-declared income sources, such as seasonal contracts and cash salaries, were primarily verified based on customer reputation rather than solid documentation Furthermore, corporate customers' financial statements were often unreliable, as many had not undergone audits, leading BIDV to not mandate audited financial statements from all enterprises during the appraisal process.
Overdue loans often stem from poor post-lending management, primarily due to customer dishonesty Even clients with strong cash flow may misallocate loans for unrelated business ventures, leading to ineffective investment management and capital stagnation, which ultimately hampers their main business operations and repayment capabilities Additionally, unexpected financial challenges, such as health issues or fraudulent activities by partners, can further exacerbate the situation, resulting in customers being unable to meet their loan obligations or facing bankruptcy.
Overdue loans, backed by mortgaged assets, often face resolution delays due to several factors These include lengthy loan application processing times, lack of cooperation from customers, and challenges in selling illiquid assets, particularly in remote districts like Chuong My and Dan Phuong, where finding buyers can be difficult.
Despite the Branch maintaining a controllable non-performing loan ratio, there has been a noticeable upward trend In 2015, overdue loans totaled 24.81 billion dong, which rose by 40.06 billion dong over the next two years, negatively impacting the Branch's credit quality and overall business performance Additionally, prolonged processing times in certain cases have hindered effective debt recovery efforts.
For overdue loan settlement, the Branch’s leadership directed directly, kept track of each outstanding loan, set up a debt-handling team to assign the
Department heads are responsible for managing overdue loans by directly contacting customers and reviewing their cash flows, additional income, and any influencing relationships They re-evaluate mortgaged assets, assess risk levels, and determine the capacity to manage these risks within specific timeframes, providing timely reports Furthermore, the branch actively seeks and develops potential clients to boost high-quality loans, enhancing overall business efficiency.
Evaluation of credit risk management at BIDV- Hong Ha Branch
BIDV-Hong Ha Branch has adopted a centralized approach to risk management, ensuring a clear distinction between business operations, risk management, and operational functions in line with BIDV's regulations The Risk Management Department serves as the central hub for all risk management activities.
Effective credit risk management is crucial for BIDV and other commercial banks, as it directly impacts credit quality and overall business performance To ensure compliance with regulations and guidelines from the Main Operation Center, credit officers at the branch continually enhance their professional skills and stay informed about policy updates and shifts in the customer business environment This proactive approach enables them to devise strategies for managing and mitigating the unpredictable changes associated with loans.
Amidst rising competition and a rapidly evolving market landscape, commercial banks, including BIDV-Hong Ha Branch, must adapt their business objectives and risk management policies to effectively integrate modern technology into their operations The branch has made significant strides in enhancing its risk management practices to navigate these challenges successfully.
Thorough implementation of credit policies and procedures: The Branch always follow the procedures and regulations of SBV, BIDV and other legal regulations on credit granting
Since its inception, BIDV-Hong Ha Branch has consistently focused on diversifying its portfolio and borrower base, actively seeking out new customers and expanding its market share This strategic approach has not only enhanced its brand visibility but also aimed at achieving safe and effective investment goals.
Credit appraisal is crucial as it serves as the primary step in risk prevention, enabling the early detection of potential risks and reducing the negative impacts of overdue and non-performing loans.
In loan appraisal, it is crucial to identify suitable borrowers by evaluating their intended use of the loan, financial status, and mortgaged assets Ensuring that the loan is utilized for appropriate purposes and that the borrower has a reputable background is essential for maintaining high-quality lending standards.
Enhancing the quality of mortgaged asset evaluations requires a combination of practical experience, reliable online resources, and fieldwork Collaborating with valuation experts is crucial to ensure accurate assessments At the Hong Ha branch, the processes for valuing and re-evaluating mortgaged assets have been effectively and promptly executed.
Effective post-borrowing management involves daily reviews of due loans, late payments of principal and interest, and the reassessment of loans secured by mortgaged assets It is essential to renew compulsory insurance for applicable loans, with timely reports sent to the Customer and Transaction Departments This proactive approach ensures that solutions are implemented promptly, encouraging customers to meet their financial obligations.
To enhance the professional qualifications and ethics of credit officers, it is essential to consistently update the relevant documents on BIDV’s internal platforms, including Bidvportal.com.vn, Totalcommonder, and the Electronic Office.
2.3.2 Weakness in credit risk management
The risk warning system has proven ineffective, relying solely on periodic customer assessments and ratings that fail to accurately reflect the current state of customers This disconnect highlights the inadequacy of the assessment process, as it does not account for changes in customer behavior at the time of scoring Furthermore, the significance of thorough information collection has not been adequately recognized, undermining the system's overall effectiveness.
The scoring criteria and classification of business lines require an update for improved classification and monitoring Currently, the reliability of scoring information is limited since not all financial statements are mandated to be audited Additionally, the financial parameters of individual and household customers are based on insufficient statistical surveys and interviews Furthermore, scoring is heavily influenced by the subjective judgments of the markers involved.
The system currently lacks an updated warning channel to monitor the debt status of borrowers exhibiting signs of financial deterioration, which hinders efforts to prevent and manage the growth of debt effectively.
Many credit officers often occupied multiple official roles and exceeded their authority, leading to potential negligence in their duties They were responsible for various tasks, including appraisal, valuation, inspection, and supervision, as well as liaising with lawyers and addressing other debt-related issues This overlap in responsibilities can negatively impact the quality of credit management.
The primary focus of credit activities is on individuals, households, and SMEs, making the inspection and verification of their financial indicators challenging These groups often lack comprehensive financial statements or provide overly simplistic ones, resulting in incomplete and outdated financial information required by banks While they represent a key target customer segment for the branch, they also pose significant challenges for growth and market share expansion To address the shortcomings in risk management for this customer group, the branch continually updates and improves its practices based on real-world experiences and insights gained from the broader banking system.
The branch faces a challenge with a limited number of credit officers, currently totaling 48 out of 110 staff members, which is insufficient to meet its credit growth objectives.
Causes from the Main Operation Center: