Thesis necessity
Commercial banks derive 60-70% of their profits from credit operations, with some institutions relying on credit for up to 90% of their earnings This reliance on credit creates a significant risk management challenge, as credit risk constitutes up to 80% of the fundamental risks faced by these banks, profoundly affecting their operations Consequently, effective risk management has emerged as a critical priority within the banking sector, garnering heightened attention from industry stakeholders.
Credit operations are facing intense competition from joint stock commercial banks, which, despite their later establishment, have leveraged advanced technology, strong human resources, and effective marketing strategies to secure a significant presence in Vietnam's promising financial market Meanwhile, established commercial banks continue to dominate with their brand recognition and substantial market shares, while foreign banks also play a notable role in the evolving landscape of Vietnam's banking sector.
Effective risk management, particularly in credit risks, is crucial for both developed and developing banks during completion procedures or scope expansion Since profits from credit activities significantly contribute to overall revenues, robust risk management practices are essential for securing banking operations and mitigating potential future risks.
The current financial landscape presents banks with significant opportunities for profit, alongside challenges related to competition and risk Effective risk management has become a crucial strategy in the banking industry Recent data from Agribank reveals that credit risk management within the system is not being executed effectively, leading to an upward trend in risks Therefore, it is imperative to systematically and efficiently control and monitor credit risks, ensuring that credit activities remain within acceptable limits This approach will facilitate better capital distribution in credit operations, reduce potential damages from credit risks, enhance profitability, and ultimately strengthen the bank's reputation and competitive edge.
Research Objectives
The main objectives of the thesis are to
- Clarify and contribute to the debate over credit risk management
- Analyze the situation of credit activities and credit quality, point out reasons for risks and methods of credit risk management in Agribank
- Based on the discussion and practical analysis of credit risks, propose several measures on credit risk management in Agribank.
Research Scope
To study from the theory to practices of reasons for credit risks, situation of credit risk management so far in Agribank, accordingly recommend measures on credit risk management.
Data sources
Secondary data is primarily sourced from books, newspapers, and both internal and external reports, including annual reports and financial statements from Agribank and other banks, as well as information available on the internet In contrast, primary data was collected through direct interviews and discussions with Agribank officials and managers.
Research Methods
I apply the method of relative and absolute comparison, statistical analysis method, interview some key managers.
Contributions of the research
In terms of theory: Clarify definitions and analytical framework related to bank credit activities, credit granting; credit risks, risk management
This article examines the lending activities and credit risk management practices at Agribank, highlighting the factors contributing to the emergence of credit risks Through in-depth research, it provides insights into how these two critical aspects are interconnected and identifies the underlying reasons for the occurrence of credit risks in the banking sector.
To enhance research efficiency and improve credit quality and risk management at Agribank, it is essential to adopt a systematic approach that addresses identified issues Implementing data-driven strategies, leveraging advanced analytics, and fostering collaboration among teams can lead to more informed decision-making Additionally, regular training and development programs for staff will ensure they are equipped with the latest industry knowledge and skills By prioritizing these feasible solutions, Agribank can effectively navigate challenges and strengthen its overall performance in the financial sector.
Limitation
This thesis aims to clarify credit risks and credit risk management practices at Agribank, while also identifying the primary causes of these risks and proposing corrective measures However, it is important to note that the analysis does not include a detailed comparison of credit targets or risk management models used by other banks, due to constraints in time and resources.
The financial and economic landscape is in constant flux, with credit policies and risk management strategies evolving rapidly This reliance on historical statistics may lead to assessments that are not reflective of the current situation.
Structure of the thesis
The thesis is presented into three chapters, not including the introduction part , the conclusion part and reference part
Chapter 2 Analysis of Agribank’s credit risk management
Chapter 3 Solutions and recommendations to improve credit risk management of Agribank are also suggested in this chapter
Commercial banks
A commercial bank serves as a financial intermediary, gathering credit from depositors and providing loans to borrowers, as outlined in the Credit Risk Management Book published by Oxford University.
A commercial bank is a financial institution that primarily engages in currency transactions, accepting deposits from customers with the obligation to return those funds It utilizes these deposits to provide loans, conduct discount operations, and facilitate various payment methods.
(Source: Vietnam’s Banking Ordinance dated 23, May 1990)
1.1.1 Main types of Risk in the bank operation
Banks face significant risks due to their high leverage, making effective risk management crucial to avoid insolvency A bank perceived as financially weak may experience deposit withdrawals, difficulty in securing loans from other banks, and challenges in selling debt securities, all of which can worsen its financial situation This fear of bank failure played a pivotal role in the 2007-2009 credit crisis and has historically contributed to various financial panics.
Although banks share many of the same risks as other businesses, the major risks that especially affect banks are liquidity risk, credit default risks and interest rate risks
Liquidity risk is a significant concern in finance, often characterized by extreme illiquidity, the protective buffer offered by a portfolio of liquid assets, or the capacity to obtain funds at standard costs.
Effective liquidity management poses a significant challenge for banks, as the timing and amount of bills are generally predictable, whereas customer demands for funds, particularly from demand deposits like checking accounts, can be highly unpredictable.
Liquidity risk refers to the challenges faced in raising funds, which is influenced by the ability to secure money at a reasonable cost This ability is shaped by two main factors: market liquidity, which fluctuates over time, and the bank's own liquidity The interaction between these factors ultimately dictates the funding conditions.
Liquidity risk is an inherent aspect of standard banking transactions, arising from the maturity gap between assets and liabilities Banks typically gather short-term funds while providing long-term loans, which creates a consistent liquidity risk and associated costs The cost of liquidity refers to the expenses incurred from securing liquidity for the duration of the loan.
Credit risks are crucial in assessing potential financial losses, as they encompass the risk of customers not fully repaying the principal and interest on loans or failing to adhere to repayment schedules after credit is extended, impacting both on-balance sheet and off-balance sheet items.
According to Clause 01 Article 02 of the Regulations on the classification of debts and the management of credit risk provisions in banking operations, as outlined in Decision No 493/2005/QĐ-NHNN issued by the Governor of the State Bank of Vietnam on April 22, 2005, credit risks in banking arise from potential losses that may occur when customers fail to meet their obligations as agreed.
Credit risks occur when a debtor fails to meet repayment obligations to a bank, leading to potential issues such as repayment incapability and late payments These risks are closely linked to the overall quality of the bank's credit activities.
Credit risks extend beyond traditional lending activities to encompass various credit-related operations, including guarantees, payment commitments, trade finance acceptance, inter-bank lending, and valuable securities such as bonds and stocks Additionally, these risks involve claims, swaps, hire/purchase credit, and club deals, highlighting the broad spectrum of financial transactions that can be affected by credit risk.
A bank generates profit primarily by transforming its liabilities, such as deposits and borrowings, into assets like loans and securities This profit arises from the bank's ability to pay lower interest rates on its liabilities compared to the higher interest rates it earns on its assets, with the difference between these rates known as the net interest margin.
Banks often face interest rate risk due to the mismatch between the shorter terms of their liabilities and the longer terms of their assets While the interest rates on deposits and short-term borrowings fluctuate with short-term rates, the rates earned on long-term assets remain fixed This disparity means that if interest rates rise, banks may incur higher costs for their liabilities, ultimately leading to reduced profits.
Interest-rate sensitivity is a key characteristic of short-term and floating-rate assets and liabilities, as their interest rates fluctuate with market conditions In contrast, long-term and fixed-rate assets and liabilities remain unaffected by interest rate changes Examples of interest-rate sensitive assets include savings deposits and interest-paying checking accounts, while long-term certificates of deposit (CDs) do not exhibit this sensitivity.
To assess the impact of fluctuating interest rates on its overall risk, a bank must evaluate how its income will be affected by these changes Two widely used methods for measuring the interest rate risk associated with bank portfolios are gap analysis and duration analysis.
Bank credit & Credit Risk
Credit, as defined by Decision No 1627/2001/QĐ-NHNN issued by the Governor of the State Bank of Vietnam on December 31, 2001, refers to an asset transaction involving money or goods between a lender, such as banks and financial institutions, and a borrower, which can include individuals and enterprises In this arrangement, the lender grants the borrower the right to utilize the asset for a specified period, as mutually agreed upon, while the borrower commits to repay both the principal and interest to the lender upon maturity.
According to Clause 01 of Article 03 in the Regulations on Lending to Customers by Credit Institutions, established under Decision No 1627/2001/QĐ-NHNN dated December 31, 2001, by the Governor of the State Bank of Vietnam (SBV), specific guidelines govern the lending processes of credit institutions to ensure compliance and accountability in financial transactions.
Lending refers to the process where a financial institution offers a specific amount of money to a client for a designated purpose, with the expectation of repayment of both the principal and interest within an agreed-upon timeframe.
- Credit activities: Pursuant to Article 20 of the Laws on credit institutions
On December 12, 1997, the X Legislature of the National Assembly of the Socialist Republic of Vietnam passed No 07/1997/QHX, which defines "credit activities" as the utilization of equity and funds raised by credit institutions to provide loans This regulation became effective on October 1, 1998.
- Extension of credit: Pursuant to Article 49 of the aforesaid laws on
Credit institutions are authorized to extend credit to both organizations and individuals through various means, including loans, discounting commercial and other valuable papers, issuing guarantees, and providing finance leasing, as permitted by the State Bank of Vietnam (SBV).
1.2.2 Classification of credits & credit risk
Next, in order to be more aware of banking credits and credit risks, we further more specify the classification of credits
The classification of credits involves organizing loans into specific categories, providing a scientific foundation for establishing effective lending processes and improving credit risk management efficiency Credits are categorized based on various criteria.
+ Loans for production and trading
+ Loans for real estate trading
+ Loans for import and export trading, etc
Credit institutions consider granting loans to customers in the following modes:
+ Short-term: loans with tenor of up to 12 months
+ Medium-term: loans with tenor of between over 12 and 60 months
+ Long-term: loans with tenor of more than 60 months
Level of trustfulness towards customers:
+ Fiduciary loans: mean lending without collaterals mortgaged or pledged by customers, or guarantees by others but approval is fully based on the customers’ reputation
+ Secured loans: mean lending basing on collaterals such as mortgage, pledge, or guarantees by the third party
+ Separate lending: On each occasion that a loan is granted, the client and the credit institution shall carry out the necessary procedures and enter into a credit contract
+ Credit line: The credit institution and the client shall determine and agree on a credit facility to be maintained for a fixed period of time
Credit institutions offer loans to clients to finance investment projects aimed at enhancing production, business operations, and services, as well as improving living conditions through targeted development initiatives.
Syndicated lending involves multiple credit institutions collaborating to provide a loan for a client's project or plan, with one institution designated as the lead to coordinate the efforts of the others This lending process adheres to specific regulations set forth by the governing authorities, including those related to co-financing by credit institutions established by the Governor of the State Bank of Vietnam (SBV).
When securing a loan with installment repayment, both the credit institution and the client must agree on the interest amount to be paid alongside the principal This total is then divided into repayment terms throughout the loan's duration.
A credit institution offers loans to clients through a reserve credit line, allowing access to funds up to a predetermined limit The terms of the reserve credit facility, including its duration and associated fees, are mutually agreed upon by both the credit institution and the client.
Credit institutions offer lending through credit cards, allowing clients to access loan amounts within their credit limits for purchasing goods, services, or withdrawing cash Both parties must adhere to government regulations and guidelines set by the State Bank of Vietnam (SBV) regarding credit card usage Additionally, lending can occur through an overdraft limit, where institutions provide written agreements for clients to make payments exceeding their account balances, in compliance with relevant regulations on payment operations.
Along with the above mentioned lending methods, banks also perform their guarantee operations upon their own reputation
(Source: Decision No.666/QĐ-HĐQT-TD dated June 15 th 2010 of Vietnam Bank for Agriculture and Rural Development)
Upon root causes of risks, credit risks may be divided into the following types:
Transaction risk refers to credit risks arising from deficiencies in transaction duration, loan approval processes, and customer evaluations It encompasses three primary components: selection risks, security risks, and operational risks.
Selection risks pertain to the credit assessment and analysis processes that banks utilize to identify and approve profitable loan schemes On the other hand, security risks stem from the standards governing credit contracts, which include terms and conditions, collateral types, security entities, security modes, and instances where loan amounts exceed the value of the collateral.
+ Operational risks are those related to the management of loans and lending activities, including the use of risk rating and techniques of processing problematic debts
Portfolio risk: is a kind of credit risks resulting from shortcomings in management of the bank’s credit portfolio, divided into intrinsic risk and concentration risk
+ Intrinsic risk: originates from distinctive features and factors inside the borrower or the economic industry and sector It comes from the features of the borrower’s operations and loan use
Concentration risk arises when a bank focuses its lending activities on a limited number of key clients, numerous businesses within the same industry, a specific geographic area, or engages in high-risk lending practices.
1.2.3 Root causes of credit risk
Fast and unpredictable changes of the world market:
Vietnam's economy heavily depends on agricultural production and related industries, including aquaculture, food processing, and textiles, along with crude oil This reliance makes it vulnerable to fluctuations in weather and global market prices, increasing the risk of adverse impacts during times of global economic instability.
Inevitable risks of the financial libertization and international integration process:
Credit risk management
Credit risk management involves the strategic use of management systems and tools by banks to oversee credit activities Its primary goal is to prevent defaults and late repayments, ensuring the full recovery of both loan principal and interest By implementing effective measures, banks can proactively mitigate potential credit failures.
Business failures rarely occur overnight; instead, they are often preceded by warning signs that can be subtle or obvious Banks must be adept at recognizing the early indicators of problematic loans and take appropriate measures to mitigate or address these issues It's important to understand that these signs may emerge over time rather than at a single moment Therefore, credit officers need to systematically identify these indicators The signs of poor credit can be summarized as follows:
1 Abnormal and unreasonable delays in providing financial statements and repaying according to the schedule as agreed; or delays in contacts with credit officers
2 For corporate credits, any abnormal changes in depreciation, compensation and benefit plans, inventory values, collaterals and income
3 For corporate credits, any debt restructuring or restraints of dividend allocation, or changes in creditability ratings
4 Delays or raising difficulties for banks in regular/ extraordinary inspections of loan use, financial situation, business operations without any transparent and convincing explanation
5 Net income decreased in one or a number of years, especially indicators of return on assets (ROA), return on equity (ROE), earnings before interest and taxes (EBIT)
6 Unfavorable changes in capital structure (equity on outstanding), liquidity (current ratio), or performance level (e.g return on inventories)
7 Gaps of revenue or cash flows in comparison with plans on which credit was granted
8 Sudden, unexpected and unreasonable changes in deposit balance of the customer’s account with the bank
9 Frequent proposals for credit restructuring and extension
10 Identified with history of loan reverses (principal to be partially reduced upon receipt of a new loan)
11 Frequently increasing loan demands, loan demands higher than expected
12 Abnormal increase of receivables and inventories, equity increase based on assessment of assets
13 Frequent changes of the management organization, or presence of conflicts or disputes
14 Signs that customers expect other abnormal income sources rather than the major production and trading, repayment performed on the basis of abnormal sources (e.g sales of factory or machines and equipment)
15 Accept expensive loans on all conditions
(Sources: FDIC, Bank Examination Policies, Washington, D.C., selected year) 1.3.3 Preventive and corrective measures against groups of risk signs
To mitigate potential risks to a customer’s business, banks must conduct thorough inspections and monitoring Any loans exhibiting signs of risk should be promptly downgraded and placed under special monitoring status to prevent further complications.
In the event of any downgraded loans, the bank must consider and choose preventive actions:
To effectively monitor a loan, it is essential to regularly collect updated financial statements and relevant information about the borrower's financial situation This allows the bank to assess any signs of improvement or decline If the borrower's financial condition appears unfavorable, the bank should request more frequent financial reports and conduct thorough analyses, even in the absence of clear negative indicators.
To address the negative trends in customer business operations, the bank must promptly evaluate the severity of the situation It is essential to analyze the underlying causes of instability, determining whether they stem from temporary factors, financial weaknesses, market conditions, or management deficiencies.
+ Review and re-evaluate collaterals
When a loan is downgraded, it is essential for the bank to conduct a thorough review and re-evaluation of the collateral This re-evaluation must be both practical and prudent, enabling the bank to determine the appropriate handling of the collateral in both normal and abnormal business scenarios.
The bank should review all legal documents of the loan to supplement any missing documents in case of any insufficiency
When loans are downgraded to group 4 or 5, the following measures should be applied:
When a loan is deemed problematic, banks must take immediate action to secure additional collateral This involves a thorough review of financial statements and relevant information to identify potential collateral options It is crucial to assess whether these collaterals can be liquidated or converted into cash without significantly affecting the debtor's business operations.
This method is designed for customers with approved credit relations, requiring close monitoring of loans after restructuring to maintain these relationships It should only be applied when borrowers demonstrate their ability to repay both principal and interest at the new maturity date The bank must conduct a thorough analysis to decide on restructuring or extending the loan, ensuring that repayment is feasible through regular cash flows or asset sales and future revenues.
In all cases of restructuring, the borrower must fully submit applications for restructuring to the bank, including:
Restructuring request, including proposed tenor and amounts of principal and interest to be repaid;
The assessment of income, profit, and cash flows is crucial for evaluating the borrower's ability to meet rescheduled repayment terms Comprehensive reports detailing the borrower's liabilities and assets are essential, including the current market values of each asset Additionally, it is important to list the names and addresses of creditors, along with the total amounts owed and corresponding collateral for each debt.
Mortgaged assets are required to be used as collaterals or supplementary collaterals to secure the repayment
A restructured loan will remain classified as a bad debt until it is fully repaid according to the agreed terms Once the minimum repayment is made, the loan will be reviewed and may be upgraded to a better status.
After reviewing and concluding that the loan is unrecoverable, the bank shall apply measures of debt recovery to reach the following goals:
Recover the debt as much as possible
Minimize costs during debt recovery; diminish reactions from customers;
When the loan is downgraded to the highly risky level, the bank may apply the following actions:
To effectively manage collateral sales, banks should encourage customers to voluntarily sell their assets If a customer is reluctant, the bank can proceed to auction the collaterals, ensuring that this process is conducted under the oversight and approval of legal authorities.
+ Repayment performed by the third party: Require the guarantors to repay instead of the borrower
+ Prosecution: In case of compulsory prosecution, the bank must complete all legal procedures to prosecute the customer
Debt trading involves the sale of an entire company or portions of it, making it crucial to assess whether the new owner can enhance profitability or provide the necessary capital for the company's future survival.
It depends on each particular case to decide to sell the whole company or part of the company only
+ Repayment simulative measures: exemption or reduction of interest, recalculation of interest, cancellation of penalty interest, etc should be applied for customers with willingness of principal repayment
Provisioning should primarily be utilized for bad debts that cannot be recovered despite all corrective measures, debts with sold collaterals resulting in a deficit (including both principal and interest), or irrecoverable debts due to force majeure events.
Provisions are utilized to mitigate credit risks and enhance a bank's financial stability, though they do not eliminate customer debts entirely Debts that are provisioned are recorded off-balance sheet, and these loans are subsequently monitored for potential recovery Corrective measures remain in place to facilitate the recovery process.
Risk management from the viewpoint of Basel Committee and criteria
Credit granting criteria and credit monitoring process (Standard 7):
A crucial part of the inspection system is to assess policies, practices and procedures related to credit granting, implementation and management of investment and current portfolio
Banks operate their credit and investment functions based on sound principles, emphasizing the importance of prudent lending policies and procedures Effective management of lending activities requires adherence to reasonable lending documentation and continuous monitoring of existing customer credit relationships A well-structured database is crucial for the bank's information management system, as it helps to clearly define and manage the credit portfolio.
Asset quality assessment and provisions for debt loss (Standard 8):
Bank inspectors should be all aware that the bank establishes and maintains policies, habits and procedures appropriate with asset quality assessment and provisions
The bank should develop a process to identify problematic debts and filter past-dues
In implementation of guarantees or receipt of mortgages, the bank must assess reputation of the guarantor and evaluate the mortgaged asset
In the events of problematic debts, the bank promotes its lending activities on the basis of credit granting and overall financial strengths
Risk centralization and huge risks (Standard 9):
The bank needs to establish a management information system to identify key aspects of its investment portfolio and implement prudential ratios This system will help prevent the bank from overly focusing on specific customers or customer groups, ensuring a balanced and diversified approach to investment management.
To mitigate potential abuses in relationship lending, credit relationships must adhere to the principle of being "under control," enabling effective assessment of credit expansion for risk management Given the unique risks associated with relationship lending, such transactions should receive approval from the Board of Directors.
1.4.2 Methods of credit risk approach as per Basel II
There are two approach methods for calculation of bank credit risks:
The first method: measures credit risks by the standardized approach based on external credit assessments
The second method: the bank uses its own internal ratings-based system (IRB)
The standardized approach enables banks to categorize credit risks based on observable characteristics, such as company loans and collateralized loans like mortgages It assigns fixed ratings to various risk types and relies on external assessments to improve risk sensitivity This framework offers guidance to inspectors and supervisors in determining the appropriateness of external assessments for banks A significant modification in this approach is the classification of loans as past-due when their credit rating reaches 150%, unless provisions have been made for those loans.
Banks' expansion of credit derivatives, including mortgages and guarantees, is recognized by Basel II as a means to mitigate credit risks The standardized approach broadens the range of acceptable collateral beyond national issues and introduces various methods for evaluating the reduction in capital due to market risks associated with these collaterals.
The standardized approach addresses retail risks by adjusting the ratings of mortgage-backed loans and loans to non-rated firms Additionally, loans to small and medium-sized enterprises may be classified as retail risks if they fulfill specific criteria.
The Basel Committee has introduced "the simple standardized approach" to assist banks and supervisors when options are limited, providing a straightforward method for calculating risk-weighted assets Banks utilizing this approach must adhere to market inspection, monitoring, and discipline requirements that align with the latest Basel agreement.
The Internal Ratings-Based Approach (IRB):
Banks should establish independent credit risk supervision units that focus on the design and implementation of internal rating systems These units must operate independently from management teams that are responsible for identifying potential risks Key aspects of their supervision include ensuring the integrity and effectiveness of the risk assessment processes.
- Check and follow up the internal ratings;
Prepare and analyze summary reports from the bank's rating system, focusing on historical data regarding repayment failures classified at the time of occurrence and one year prior Evaluate risk mitigation strategies and monitor trends in key rating criteria to enhance overall financial stability.
- Implement processes to inspect whether rating definitions are uniformly used by Departments, Boards and regions or not;
- Assess on and record all changes in the rating process and reasons thereof
To effectively assess the relevance of rating criteria for risk anticipation, it is essential to evaluate their current impact Any modifications to the rating process, criteria, or parameters should be documented and archived for supervisory review.
The credit risk supervision unit must take an active role in the development, selection, and implementation of rating models, ensuring that valid values are determined This unit is responsible for the oversight and monitoring of all models utilized in the rating process and holds the primary accountability for conducting regular assessments and updates of these models.
1.4.3 Criteria for development of a modern risk management model as per Basel Committee
The Basel Committee emphasizes that weaknesses in a country's banking system, regardless of its development status, pose risks to financial stability and internal affairs To address this, the Committee prioritizes enhancing the resilience of financial systems by issuing principles for managing defaults, which fundamentally focus on credit risk management These principles aim to ensure efficiency and safety in credit granting, highlighting the importance of robust financial practices.
Develop an appropriate credit environment: Accordingly, Basel
The Board of Directors is required to regularly approve credit risk policies and assess credit risks to establish a comprehensive strategy for the bank's operations, including managing bad debt rates and risk acceptance levels Based on this framework, the Board of Management is responsible for implementing these directives and developing policies and procedures to identify, measure, monitor, and control bad debts across all operations, both at the individual loan level and within the overall financing portfolio Additionally, banks must effectively determine and manage credit risks associated with every product and activity, ensuring that any new products receive approval from the Board of Directors or Committees under their oversight.
To ensure healthy credit granting, banks must establish clear criteria that define target markets, eligible customers, and terms of credit They should create distinct credit lines for various borrower types to effectively identify and manage credit risks, aligning these with internal customer ratings across different sectors A transparent credit granting process must involve collaboration among marketing, credit analysis, and approval divisions, with well-defined responsibilities for all participants Additionally, banks should cultivate a team of skilled risk management professionals to make informed decisions regarding the assessment, approval, and oversight of credit risks Fair transactions are essential in credit granting, particularly with relationship customers, necessitating prudent and reasonable evaluations.
Maintain a suitable credit follow-up, monitoring and management process:
Banks must implement an updated management system for their investment portfolios to effectively address potential risks This includes maintaining current credit files, gathering up-to-date financial information, and managing essential documents like credit contracts, tailored to the bank's complexity The system should monitor customers' financial situations and compliance with commitments to promptly identify problematic debts Additionally, banks need a proactive approach to manage bad debts, with clear credit risk policies outlining management methods Responsibilities for handling these credits may fall to the marketing or debt recovery divisions, or a combination of both, depending on each loan's specifics Furthermore, the Basel Committee recommends that banks establish an internal rating system for risk management to differentiate between various levels of credit risk associated with potentially risk-weighted assets.
To sum up, in developing the credit risk management model, Basel principles include the following remarkable contents:
- Clarify the credit granting system by divisions of marketing, credit analysis and credit approval as well as clear responsibilities of participants thereof
- Improve the capabilities of risk management staff
- Develop an efficient information management and update system to maintain a reasonable credit monitoring and measuring process, meeting the requirements of credit assessment and risk management
1.4.4 Vietnam’s existing regulations on debt classification, provisioning and use of provisions for settlement of credit risks
Overview on Agribank and its loan system
On March 26, 1988, the Council of Ministers issued Decree No 53/HDBT, leading to the establishment of specialized banks, including the Vietnam Bank for Agricultural Development Initially, credit activities were heavily subsidized, primarily benefiting state-owned and collective sectors However, the bank began transitioning towards an independent commercial model, emphasizing lending to the food industry in the Mekong River Delta and piloting direct loans to farming households in An Giang and Vinh Phu.
On November 14, 1990, the Chairman of the Council of Ministers signed Decision No 400/CT, establishing the Vietnam Bank for Agriculture, which replaced the Vietnam Bank for Agricultural Development This multifunctional commercial bank primarily focuses on the rural and agricultural sectors and operates as an independent legal entity responsible for its own operations.
Since its inception in 1992, Agribank has actively engaged in foreign currency lending and international payments, becoming the first bank to implement international projects That same year, Agribank introduced a positive interest mechanism for farming households, where the lending interest exceeded the mobilizing interest This strategic move enabled the bank to achieve profitability starting in 1993.
On November 15, 1996, the Prime Minister authorized the SBV Governor to issue Decision No 280/QĐ-NHNN, officially renaming the institution to Vietnam Bank for Agriculture and Rural Development, commonly known as Agribank As a special-class State-owned enterprise, Agribank operates under the Law on Credit Institutions and is directly governed by the State Bank of Vietnam (SBV) The bank primarily serves the rural and agricultural sectors, focusing on the benefits of farmers In 1998, Agribank prioritized enhancing credit quality, recovering outstanding debts, and implementing strict management of loan approvals to reduce overdue debts.
On March 30, 1999, the Prime Minister issued Decision No 67/1999/QD-TTg, aimed at enhancing banking credit policies to support agricultural and rural development This initiative was designed to boost credit access for farming households Agribank played a crucial role by increasing deposit mobilization both domestically and internationally, while also focusing on the effective management of entrusted foreign projects and project financing.
In February 1999, Agribank's Chairman of the Board implemented Decision 234/HDQT-08, which centralized the management of foreign exchange activities within the Agribank system, specifically by consolidating NOSTRO accounts at the Operations Center.
Agribank proactively expanded international relations and foreign business It was granted funding from international financial institutions such as WB, ADB, AFD, etc
In 2001, the institution initiated its restructuring project, focusing on debt restructuring, financial cleanup, and enhancing asset quality Key reforms included updating the accounting system to align with international standards, reorganizing the structure to reflect modern banking practices, intensifying training in banking technology, and developing an advanced management information system.
Agribank is actively advancing its restructuring project to enhance its operations significantly and improve quality In recognition of its efforts, Agribank was awarded the Title of Labor Hero during the Doi Moi (Renovation) Period in 2003.
Agribank was ranked the number one among top 200 Vietnamese biggest enterprises by UNDP in 2007, got the title of Top 10 Vietnam gold star award in
2008, also got TOP 5 best correspondent service bank award; Corporate Sustainable (CS) Award, The Chairman of Board of Directors was awarded with the title
Agribank is dedicated to enhancing business operations and generating resources for rural and agricultural investments by expanding its network in urban areas and fostering payment and credit relationships with major corporations.
The current Agribank system consists of:
- 03 representative offices: 01 in central region, 01 in the south, and 01 in PhnomPenh - Campuchia
- 03 centers including: Information Technology Center, Training Center, Card Center
- 02 Operations Center: Settlement Center and Risk Prevention and Handling Center
The organization comprises eight subsidiaries, including Finance Lease Company No I, Finance Lease Company No II, a Securities Company, a Commercial Banking Service and Printing Company, a Jewelry Trading Company, Ho Chi Minh City Gold, Silver and Gemstone Company, a Trade and Tourism Company, and a Food Investment and Trading Company.
- 22 Departments, 01 Transaction center, - 72 level-1 branches and 85 level-2 branches and 776 level-3 branches
Overview of Agribank’s business performance in period of 2005 - 2009
2009 and in first 6 months of 2010
2.2.1 Business environment in period of 2005 - 2009 and in first 6 months of 2010
Business environment in period of 2005 - 2009
Figure 2.1 GDP Growth over the year 2005-2009 (%)
(Sources : General Statistics’ Press releases from 2005 to 2009)
In 2007, the global economy experienced its highest GDP growth in a decade; however, 2008 brought significant uncertainty due to the collapse of the U.S real estate market This crisis led to the failure of numerous financial institutions, including those once deemed reputable, severely impacting the global financial landscape Inflation surged in many countries, while oil prices reached unprecedented levels Consequently, the world stock market faced a dramatic and ongoing decline, prompting a resurgence in gold prices.
Vietnam's economy is facing significant challenges, including persistently high inflation and the government's tightening of interest rates in response to a continually rising monetary market This has led to competitive interest rate hikes and liquidity shortages in many commercial banks.
Despite the global economic downturn and severe natural disasters in 2009, Vietnam's economy demonstrated resilience, achieving a GDP growth rate that exceeded the planned target of 5% and outperformed many countries that experienced negative growth Although the 2009 GDP growth rate of 5.32% was lower than the 6.18% recorded in 2008, it was a notable success in the context of the world economy's depression.
In early 2009, the Government's economic stimulus package significantly enhanced bank liquidity and supported customer repayment capabilities, helping to mitigate economic deficits However, this initiative also revealed several shortcomings, including an unfair advantage for enterprises receiving subsidized loans compared to those that did not, resulting in an unequal business landscape Additionally, the combination of interest rate subsidies, fiscal expansion, and relaxed monetary policies led to a substantial increase in total payment means and credit, raising concerns about potential reinflation and instability in the forex, gold, and real estate markets.
Movements of exchange rates in 2009 were relatively complicated In late
In 2009, significant turbulence in the foreign exchange markets led to the devaluation of exchange rates, creating a surplus of credit USD and a shortage of commercial USD Banks struggled to provide sufficient foreign currencies to enterprises, and when available, the exchange rates exceeded the ceiling rates set by the State Bank These imbalances in the forex market continued to hinder import and export activities.
In 2009, Vietnam faced significant challenges in its import and export sector due to the global economic downturn, which led to production stagnation and reduced consumption in key export markets like the U.S., Japan, and the EU Consequently, the total export turnover for the year was estimated at approximately 56.5 billion USD, reflecting a decline of 9.9% compared to 2008.
The total import turnover of 2009 was expected to reach 67,5 billion USD, down by 16.4% against 2008 This reflects difficulties of local production due to the economic depression
However, it can be said that under the huge impacts of the world economic crisis, the decline of Vietnam economy did not last long and had growth drive recovered
Socio-economic situation of the first 6 months of 2010:
In 2009, the global economy faced significant challenges, but timely government interventions and effective solutions have since helped to stabilize the financial depression, fostering a more optimistic outlook for the world economy.
In the first half of 2010, the General Department of Statistics reported a GDP growth of 6.16% compared to the same period last year, with increases across all three sectors: 3.31% in agriculture, forestry, and fishery; 6.50% in construction; and 7.05% in services This growth trend indicates a robust economic recovery, with the latter quarter showing higher growth than the former, suggesting that the economy is poised for continued growth in the near future.
In April 2010, inflation rose marginally by 0.14% compared to March, while the open market saw a significant influx of funds totaling 6,700 billion VND Initially, the negotiable interest rate mechanism was limited to short-term applications, resulting in a credit increase of just 6% over the first four months of the year.
In 2009, banks showed limited interest in credit development due to a narrow gap between input and output interest rates, alongside a lack of borrowing interest from enterprises Instead of focusing on lending, banks prioritized purchasing government bonds, which led to a reduction in the interest rate for 3-year bonds to just 10.6% per annum This rate was approximately 1% lower than the deposit rate and 2.7% lower than the average lending rate of 13.3% per annum reported by the State Bank in late May 2010.
Since April 2010, the foreign currency market has achieved a balance between supply and demand, leading to high liquidity Credit institutions are now able to manage their foreign currency needs independently and have reduced their reliance on purchasing foreign currencies from the State Bank In fact, some institutions have begun to acquire surplus foreign currencies from customers to sell back to the State Bank.
In the first half of 2010, the growth of deposits and credit balances steadily rose, aligning with economic growth and inflation control objectives Compared to the end of 2009, deposits from credit institutions increased by 10.82%, while outstanding credit balances saw a rise of 10.52%.
In recent years, particularly during 2008 and 2009, Vietnam's commercial banks, including Agribank, encountered significant challenges stemming from a difficult business environment Despite these obstacles, Agribank has focused on sustainable development and the transition to a 100% state-owned one-member limited liability company This analysis evaluates Agribank's performance regarding capital, asset quality, profitability, and liquidity.
Agribank’s total assets increased with a reasonable structure In 2009, Agribank had total assets of 480,937 billion VND, which made it hold the first rank in Vietnam, followed by BIDV (292,298 billion VND)
Figure 2.2 Agribank’s total assets from 2005 to 2009
[Sources: Agribank’s Annual Report from 2005 to 2009]
AGRIBANK's total assets increased by 21.1% compared to 2008, although this growth was slightly below the average rate of 25% observed from 2006 to 2009, influenced by fluctuations in the business environment Despite these challenges, the bank has maintained a consistent growth trajectory since 2006, with credit activities accounting for 76% of total assets, which significantly contributes to the bank's income.
2007 – 2009, indicating that Agribank is always the bank with highest total assets nationwide
Table 2.1: CBs’ total assets from 2007 to 2009
[Source: Agribank’s Annual report from 2007 to 2009]
Total outstanding including lending to credit institutions and subsidiaries was
As of December 31, 2009, AGRIBANK reported a significant increase in its economy outstanding, reaching 360,846 billion VND, which represents a rise of 71,787 billion VND or 24.8% This growth follows the previous year's outstanding figure of 354,112 billion VND, which saw an increase of 69,495 billion VND and a growth rate of 24.4% Despite the overall high growth rate in credit over recent years, AGRIBANK has consistently adhered to the State Bank's credit limit regulations and effectively managed its credit expansion according to planned targets.
Deposit products including: Demand deposits; current account; savings (gold- backed savings, band deposits); term deposits; inter-bank deposits
Loan structure and quality during 2005-2009
Figure 2.9 Credit growth through years (2005 – 2009) (billion VND)
[Source: Agribank’s Annual report from 2005 to 2009]
Credit over the years has witnessed sharp increases The credit structure is evolving positively and credit quality has been obviously improved As at Dec 31 st
2009, the total credit balance stood at 354,112 bn VND, up by 24.4% against 2008 and up 2.2 times against 2005 and up by 46.2% against 2007
Credit analysis is detailed as follows:
2.3.1.1 Loan structure by economic regions
Big proportions of outstanding belonged to key regions such as Hanoi, HCM city, Southwest region The credit balance rate by regions did not change too much
Figure 2.10 Agribank’s loan structure by economic regions in the year 2009
[Source: Agribank’s Annual report in 2009]
2.3.1.2 Structure of lending by economic sectors in the years 2005-2009
Loans to State-owned were down from 11% in 2005 to 7.5% in 2009 Meanwhile, loans to non-state businesses and co-operatives increased from 29.2% in 2005 to 40.4% in 2009
In 2009, household financing accounted for the largest share of total outstanding loans, reaching 183,472 billion VND, which marked an increase of 27,787 billion VND or 17.8% This segment represented 51.8% of the overall outstanding loans, highlighting its significant role in the financing landscape.
Figure 2.11 Structure of lending by economic sectors (billion VND)
(Source: Agribank’s Business Summary Report for the years 2005 to 2009) 2.3.1.3 Loan structure by terms:
Over the years, the ratio of short-term loans to total outstanding loans has remained stable at 60/40 Agribank aims to decrease the outstanding balance of medium and long-term loans while increasing short-term loans to reduce risk By the end of 2009, Agribank's short-term loan rate reached 60.3%.
Figure 2.12 Agribank’s loan structure by terms in the years 2005-2009
Credit balance in local currency made up over 90% of the total balance and was nearly stable over the years
Figure 2.13: Agribank’s Outstanding by currencies from 2005 to 2009
2.3.1.5 Loan structure by economic industries:
Table 2.7: Loan structure by economic industries:
The labor export credit balance stood at 144 billion VND, with a notably high bad debt rate of 10.4%, significantly exceeding the common bad debt rate of 2.6% This substantial disparity can be attributed to a combination of factors, primarily the premature return of 50% of laborers, delayed repayment by customers accounting for 20%, and other contributing reasons making up the remaining 30%.
The agricultural and rural market continued to be the major market with million household borrowers
Short-term bad debts: 5,164 billion VND, covering 2.42% of total short-term outstanding and 1.46% of total outstanding
Medium and long-term bad debts: 4,102 billion VND, making up 2.92% of total medium and long-term outstanding and 1.16% of total outstanding
2.3.2.2 Credit quality by economic regions
Regions such as mountainous and bordering areas, formerly Region 4, HCM city suffer from bad credit quality due to the high rate of bad debts over total outstanding
2.3.2.3 Credit quality by enterprise types
Bad debts of enterprises: 5,160 billion VND, covering 55.6%/ total bad debts of the system and 2.8%/ total enterprises’ outstanding, up by 2,076 billion VND against December 31 st 2008
Household and individual bad debts total 4,100 billion VND, with group 3 bad debts amounting to 1,414 billion VND, representing 45% of total group-3 debts Group 4 bad debts account for 2,432 billion VND, which is 43% of total group-4 debts, while group 5 bad debts reach 1,644 billion VND, constituting 44% of total group-5 debts.
The increase of bad debt rate and a high proportion coverage in financing households and individuals resulted from constantly force majeures occurring in
2009 (natural disasters, diseases) in agricultural, forestry and fishery production in the Central, Central Highlands and Mekong river delta
Some branches had low bad debt rates of less than 1% such as Southern Hanoi, Hoàn Kiếm (0.3%), Hưng Yên, Sài Gòn (0.5%), Nghệ An (0.6%), …
As at December 31 st 2009, there were 21 branches all over the system holding the past-due rate of more than 5%/total outstanding Some of thems are: Tân Bình
(9.1%), North of Hanoi (10.2%), West of Hanoi (10.4%), Branch 11 (11.7%), Branch 10 (12.2%), especially Đông Anh (19.7%)
Below is the table of debt classification by groups over the years to more insightfully demonstrate the debt classification and credit quality of Agribank
Table 2.8 Agribank’s loan classification in the year 2006-2009 period
In 2008, the economic crisis led to a non-performing loan (NPL) ratio of 2.71% of the total credit balance, which slightly decreased to 2.62% in 2009 Despite this reduction in percentage, the absolute value of bad debts increased by 1,567 million dongs compared to the previous year, highlighting ongoing challenges in managing non-performing loans.
(2007, 2006), the bad debt rates over the years considerably increased in terms of both relative and absolute figures In 2009, rates of debts classified in groups 2 and
5 increased as compared to 2008, in which debts of group 2 covered 13% of total outstanding
The increase in bad debt rates, which rose by 20% in 2009 compared to 2008, is concerning, especially when juxtaposed with the outstanding growth rate of 24% This significant rise in defaults highlights the urgent need for Agribank to implement measures aimed at improving credit quality.
Despite Agribank's efforts to manage and reduce bad debts through measures such as accurate customer assessments, close monitoring of credit quality, and proactive debt recovery strategies, the issue of increasing bad debt persists.
Agribank will continue to ensure credit quality at targets: bad debts of less than 5%, reduction of debts classified in group 2 over total outstanding
In 2009, the bad debt rate remained within the acceptable limit of under 5% However, recent analyses indicate the presence of high-risk loans, particularly those associated with Finance Leasing II & I Company and the Vietnam Shipbuilding Industry Group (Vinashin) These loans have not yet been specifically classified, which is likely to increase the bad debt ratios once a thorough classification is conducted.
Loan classification serves as a significant indicator of loan quality, as it relies on quantitative criteria related to overdue periods However, it may not fully or accurately represent the quality of each individual loan This highlights the need for Agribank to place greater emphasis on assessing credit quality.
Comparisons of bad debts with other banks in VN & Regional banks as below:
Table 2.9: Ratios of NPLs of CBs in 2009
CBs in Vietnam NPLs (%) CBs in region NPLs (%)
Industrial & Commercial Bank of China Limited ICBC 2,29
(Sources: annual reports of those banks in 2009)
Agribank has a significantly higher proportion of bad debts compared to other local banks, while regional banks generally maintain low bad debt ratios, with the exception of Bangkok Bank.
2.3.3 Assessment on provision for impairment loss and methods to deal with bad debts
Table 2 10: Agribank’s provision for impairment loss
Agribank has adhered to the State Bank of Vietnam's (SBV) regulations and aligned its practices with international standards for debt classification and provisioning The bank has actively pursued the recovery of outstanding corporate debts as directed by the Government and the SBV Since 2005, Agribank has provisioned for credit losses in compliance with Decision 493/2005/QĐ-NHNN, with provisions rising to 7,410 billion dong in 2008 due to the impacts of the financial crisis This demonstrates Agribank's robust financial capacity in managing credit risk.
Provision/ NPLs 117.01% 136.61% 96.25% 81.4% controlling risk was enhanced In 2009, the bank set aside 7,551 bn VND of provisions, up against the 7,410 bn VND of the year 2008
Agribank has consistently increased its provisioned amounts over the years, successfully fully booking provisions from 2006 to 2009 Despite this progress, the bank has not fully accounted for its general reserves According to Article 9 of Decision 493, banks have a five-year period, starting from May 2005, to book general provisions, which has allowed Agribank some flexibility in managing its financial reserves.
2.3.3.2 Methods to deal with bad debts
+ Risk handling: in 2009: 4.183 billion VND, accounting for 45.1% of total bad debts
Table 2.11 Agribank’s Risk handling in the year 2007-2009 period
+ Debt recovery over the years:
Table 2.12: Agribank’s debt recovery in the year 2005-2009 period
+ For irrecoverable debts, AGRIBANK strongly determines to classify them in group 5 to refresh the asset balance sheets
State-owned enterprises undergoing equitization and struggling to manage debt repayment may benefit from banks considering the cancellation of interest on their debts However, it is essential that the principal amount remains due, which can either be repaid during the takeover process or converted into a share contribution by the bank, following prior negotiations.
AGRIBANK has actively engaged in debt trading by selling off bad and potentially irrecoverable debts to its Debt and Asset Trading Company and other entities This strategic move has effectively reduced the bad debts reflected on its balance sheets while enhancing the recovery of off-balance sheet debts, significantly boosting the bank's profits.
+ Exemption from and reduction of suspension interest is used as a solution to encourage customers to pay principals off to purify the bank’s finance.
Status quo of credit risk management in Agribank
2.4.1 Credit organization structure and risk management:
* At the Head Office: The credit risk management organization structure at the
Head Office is as follows:
The Internal Audit Committee, an independent unit within the internal inspection and audit board, operates autonomously from operational credit units to effectively manage credit risks.
The Credit Board offers consultancy services to the Board of Directors and the CEO, focusing on the management and guidance of local guarantees, as well as short- and long-term investments Additionally, it plays a crucial role in market expansion and conducts studies to propose recommendations aimed at enhancing lending practices.
Deputy General Director in charge of credit
- Departments related to credit activities procedures in the direction of facilitating customers in order to develop business safely and profitably
The Risk Prevention and Handling Center supports the Board of Directors and CEO by collecting, providing, archiving, and analyzing risk prevention information, as well as identifying and mitigating risks across all business operations within the organization.
The risk management system in branches consists of three major sectors directly joining the risk management process
- Independent credit inspection and monitoring team
The Branch Director oversees overall business operations and specifically manages credit approvals within their delegated authority This includes reviewing assessments from the Credit Department for approval consideration, signing credit and loan security contracts, and making decisions on debt recovery measures such as debt extensions, restructuring repayment terms, and classifying past-due accounts, along with implementing corrective actions for customers.
The Credit Department is responsible for developing customer credit policies, classifying customers, and establishing priorities for each category It conducts quarterly and annual analyses of credit activities, frequently assesses debts, investigates past-due accounts, and recommends corrective actions Additionally, the department prepares preliminary and summary reports, serves as the primary contact for managing credit risks, and formulates business strategies while evaluating lending proposals It also collaborates with the Internal Audit Department for branch inspections and topic-based reports as required.
The independent credit inspection and monitoring team operates under the Internal Inspection and Audit Department of Branches, functioning autonomously from Credit Departments This team evaluates the risk levels of credit portfolios and risk management practices from a commercial perspective, ensuring compliance with laws, State Bank provisions, and Agribank policies They conduct regular inspections to identify violations and shortcomings in credit activities, proposing corrective measures and preventive strategies Additionally, they recommend improvements to policies and procedures to the Operations Center and collaborate with various inspection and audit teams The team also prepares reports as needed, fulfilling its responsibilities to support effective credit management and compliance within the branches.
To effectively manage credit risks, it is crucial to establish a standard and appropriate credit process and to adhere to it meticulously The lending procedures at branches must align with the guidelines outlined in Agribank’s credit handbook, as well as comply with regulatory documents issued by the Government and the State Bank.
- Decision No.1627/2001/QĐ-NHNN by the Governor of the State Bank dated December 31st 2001 on lending regulations of credit institutions to clients
- Decision No.286/2002/QĐ-NHNN by the Governor of the State Bank dated April 03rd 2002 providing regulations on co-financing of credit institutions
- Decision No.666/QĐ-HĐQT-TD dated June 15th 2010 regarding lending regulations to customers in the system of Vietnam Bank for Agriculture and Rural Development and relevant documents
- Decision No.1300/QĐ-HDQT-TD dated December 3 rd 2007 on loan security Credit procedures in branches are conducted in the following steps:
Step 1: Credit officers directly receive loan applications from customers, undertake to compare with the application portfolio as prescribed, check the legality and validity of each application and report to Credit Department Manager or Head of credit team
Step 2: Credit Department Manager or Head of credit team assign officers to assess conditions of loan applications
Capacity for civil legality, civil acts and civil liabilities in accordance with regulations of the laws
Financial capability to secure due repayments as committed
Feasible and profitable investment projects/ business plans or feasible investment projects/ business plans for serving lives in line with a feasible repayment solution
Compliance with regulations on loan security as prescribed by the Government, Governor of the State Bank and guidelines of Agribank
Step 3: Credit Department Manager or Head of credit team is responsible for checking loan applications, legality and validity thereof and assessing reports submitted by credit officers, reviewing and re-assessing (if necessary) or directly assessing in case of any pluralism as a credit officer, giving comments in assessment reports, reassessing (if any) and submitting to Director for approval after credit officers have completed assessment reports and submitted to Credit Department Manager
Step 4: Branch Director, basing on assessment/ reassessment reports (if any) submitted by Credit Department, decides to approve or refuse the credit granting and transfers to Credit Department
Step 5: Loan applications approved by Branch Director are then sent to accountants for accounting and payment operations or to Vault to make disbursements (in case of lending in cash)
Step 6: After disbursements, credit officers perform inspection of loan use Above are general regulations and processes applied in Agribank However, the compliance with credit procedures on branches may vary
2.4.3 Regulations on customer classification as currently applied
Agribank's credit rating and customer classification procedures are governed by Decision No 1406/NHNo-TD, dated May 23, 2007 These guidelines aim to assess customers' risk levels through a standardized evaluation process that utilizes a scoring grid based on both financial and non-financial information This systematic approach to credit rating and customer classification supports the bank in effectively managing risk and making informed lending decisions.
- Classification for filtering and development
- Credit granting decision-making, determination of credit lines, loan tenor, interest rates, service fees, collaterals thereof
- Monitoring and assessment of the customers’ outstanding for anticipation of loan quality and set-out of corrective actions; Improving Agribank’s management capability in lending, debt collection and risk handling
According to these regulations, based on different features of customer groups, Agribank classifies customers in 2 groups: corporate and individual (individuals and households)
Agribank employs a straightforward customer classification model for corporate clients, utilizing five key indicators Among these, four are quantitative metrics that assess the financial status and creditworthiness of customers in their banking relationships.
+ Positive profit, equal to or more than the previous year: rated A
+ Positive profit, less than the previous year: B
Owner’s Equity/ Total Equity Level
- Bad debt ratio with AGRIBANK:
- Qualitative indicator reflecting the enterprise’s compliance with laws
+ Enterprises with no law breakings: A
+ Enterprises concluded by competent authorities to break the existing laws but not to the level of a fine penalty: B
+ Enterprises breaking the laws to the level of criminal liability: C
For households and individuals, classification is made via 2 indicators namely the bad debt ratio with Agribank and level of compliance with current laws
A-rated customers are given more priviledges to be granted with credits without collaterals or priorities of interest rates or service fees as per regulations of Agribank
B-rated customers may also be granted with partial credit unsecured by collaterals The proportion of credit unsecured by collaterals must not exceed 50% of total granted amount Priorities of interest rates and service fees can be considered
For C-rated customers, outstanding must be graduallu reduced and loans must be secured by collaterals No priorities of interest rates and services shall be applicable
2.4.4 Some shortcomings in credit risk management
2.4.4.1 Shortcomings in provisioning and risk processing:
Agribank manages credit risks by transferring irrecoverable debts to off-balance sheets, demonstrating its proactive approach However, this practice also highlights the persistently high level of credit risks within the bank The annual rise in provisioning and risk management expenses contributes to increased capital costs, ultimately impacting the bank's profitability.
The overall default rate in the system remains below 3%, yet certain branches exhibit concerningly high rates, indicating inconsistent credit risk management practices While the system's bad debt rate stands at 4.1% in the first half of the year, a significant increase from 2.67% in late 2009, some branches prioritize recoverable debts to meet financial targets, neglecting irrecoverable debts This short-sighted approach may lead to an inaccurate representation of credit risks and inadequate risk management if it continues unchecked.
2.4.4.2 Shortcomings in credit policies, customer policies and customer classification
The Chairman of the Board of Directors and CEO of Agribank regularly issues credit instructions; however, these guidelines often lack a focus on the dynamic nature of market fluctuations Recently, Agribank's definitions of markets and financing sectors have been vague, leading to insufficient clarity The Head Office primarily oversees branch credit activities through metrics such as credit limits and the ratio of total outstanding loans to average deposits, but fails to provide detailed credit segmentation based on specific features and regional priorities.