INTRODUCTION
Overview introduction about Vietinbank
Established on July 8, 1988, Vietinbank has grown significantly over more than 30 years, with equity increasing from 22 billion VND to over 67,455 billion VND, and total assets rising from 718 billion VND to nearly 1,164,435 billion VND Initially employing 11,380 staff, the bank now boasts nearly 23,000 employees across its headquarters in Hanoi, 2 representative offices, 9 career units, and 155 branches Vietinbank operates not only in Vietnam but also internationally, with a 100% capital bank in Laos, branches in Germany, and a representative office in Myanmar, collaborating with over 1,000 banks in more than 90 countries The bank aims to be the leading institution in Vietnam's banking sector, offering modern financial products and services that meet international standards, while aspiring to become a prominent regional player.
Figure 1.1 Shareholer structure by ownership ratio
State Bank of Viet Nam MUFG Bank, Ltd.
Table 1.1 Shareholer structure by ownership ratio which holding 5% or more of the charter capital
Shareholder structure Number of shares Ownership Percentage (%)
Central bank of Viet Nam 2,400,204,956 64.46%
Figure 1.2 Vietinbank Gorvernance model and structure
In recent years, Vietinbank has consistently demonstrated remarkable growth by developing modern products and services that promote sustainable efficiency Notably, in 2017, the bank successfully implemented a new Core Banking system, marking it as the largest and most complex project in the Vietnamese banking sector.
Vietinbank has demonstrated its commitment to long-term and sustainable development by meeting industry technology requirements In 2017, the bank made headlines by issuing 4,200 billion VND in secondary bonds, the largest amount among Vietnamese commercial banks, solidifying its market position and brand reputation In 2018, Vietinbank received numerous prestigious awards, including the First-class Labour Medal (for the second time), the Government’s Emulation Flag, recognition as one of the Top 400 Most Valuable Bank Brands Worldwide, and inclusion in the Top 2000 Largest Enterprises Worldwide, along with accolades such as Vietnam Value, Vietnam Excellent Brand, and Best Trade Finance Service.
In 2018, Vietinbank's total assets exceeded 1.16 million billion Vietnamese dong, marking a 6.3% increase from 2017 and a significant 22.78% rise from 2016 This growth solidified Vietinbank's position as the commercial bank with the largest asset scale in the market However, the banking sector is experiencing intensified competition as institutions strive to attract and retain customers.
Established in 1988, Vietinbank has grown to become a leading commercial bank in Vietnam, playing a crucial role in the country's currency market With a robust network of 148 branches across 63 provinces and cities, Vietinbank – Gia Lai Branch stands out as a significant entity within the system, boasting a capital of 3 trillion dong and outstanding loans reaching 13 trillion dong.
Vietinbank – Gia Lai Branch was established in 1999 The organisation structure is as the figure below:
Figure 1.3 Organisation chart (Source: Vietinbank – Gia Lai Branch internal report)
The main departments which bring profit to the bank is corporate department and retail department
The process of securing a loan from the bank typically takes two weeks for new corporate customers and one week for existing clients Initially, customers must gather all necessary documents to meet bank requirements The corporate banking division then verifies these documents and prepares a report, which is the most time-consuming step, often taking about a week Once completed, the report is sent for approval to higher management within the bank After receiving approval, the credit department conducts a final review of the documents to ensure accuracy before proceeding with the financing Any mistakes at any stage of this procedure can extend the overall timeline.
Short – term loans procedure of corporate customers when they first time borrow money at Vietinbank includes 5 steps, which are:
Step 1: Credit officer collect documents from customers and check them At this step, credit officer often present to customers about loan conditions and instructions for establishing the loan documents Also, credit officer will check the completeness and accuracy of legal documents, loan documents, collateral records and especially the legality of the loan purpose After checking the documents, credit officers will depend on the policies and the orientation of Vietinbank in order to identify whether customers are subject to credit restriction or non-credit extension or not
Step 2: Credit officer review credit conditions, prepare and submit appraisal report Depending on the documents collecting from customers and other sources, credit officer analysis and review the financial situation, business plan and ability to repay principal and interest of customers Credit officer will give comments and suggestions on the lending method, loan amount, loan duration, loan security measures, disbursement schedule and other conditions
Step 3: Appraisal report approval Depending on the appraisal report of Corporate
The Customer Department is responsible for evaluating and determining the credit limits for customers If the credit limit exceeds the authority of the Branch’s Board of Directors, the matter will be escalated to higher management, typically the Head Office, for approval.
Step 4: Completing collateral records, drafting and signing credit contracting and disbursing Once the credit limit has been approved, collateral contract and credit contract will be prepared after reaching agreement with customers on clause of the it Afterthat, disbursement can be made based on the customers’ needs and loan purposes
Step 5: Checking, supervising and recovering debt This is the process of steps after lending to ensure customers had used capital for the right purpose and effectively This will help detect risks and errors to have actions promptly Therefore, this step will help improving the quality of loans and ensuring the benefits of the bank
In short, the loan procedure is discribed as below:
Figure 1.4 The short – term loans procedure
In the Vietinbank system, each branch is assigned a level based on a point system that evaluates various criteria, including effectiveness, credit risk, management skills, and operating risk rating Detailed descriptions of these criteria can be found in Appendix 1 The total points accumulated from these evaluations determine the corresponding level for each branch, which is categorized into five distinct levels as outlined in the table below.
Table 1.2 Level of Vietinbank Branch
Grading and classifying branches is typically conducted quarterly to effectively monitor the quality and operations of all locations When a branch's performance declines, headquarters may implement corrective measures, such as reducing the authority of the Branch Director and enforcing stricter criteria for credit approval.
PROBLEM CONTEXT
The Corporate Customer Department and Retail Customer Department currently holds most of the Branch’s credit balance
Table 2.1 Credit balance depend on customer category from 2017 to 2019
Unit: million dong Year 2017 Year 2018 Year 2019 Credit balance of retail customers
Credit balance of corporate customers
(Source: Internal report of Vietinbank - Gia Lai Branch)
The Corporate Customer Department currently comprises three divisions: the Small and Medium Enterprise (SME) Division, the Large Enterprise Division, and the Foreign Direct Investment (FDI) Division The classification of customers into the SME and Large Enterprise Divisions is primarily based on their revenue, as outlined in the accompanying table.
Table 2.2 Corporate customer classification principle
In Vietnam, enterprises are categorized based on their capital, with micro enterprises having capital ranging from 20 billion to under 60 billion dong, small enterprises from 60 billion to under 200 billion dong, medium enterprises from 200 billion to under 500 billion dong, and large enterprises exceeding 500 billion dong.
(Source: Vietinbank Internal report) Especially, for the business which has revenue under 20 billion per year will be classified as retail customers
Table 2.3 Credit balance classification depend on loan duration
Medium and Long- term loans
(Source: Internal report of Vietinbank - Gia Lai Branch)
As of December 31, 2019, the company's short-term debt stood at VND 6,173 billion, reflecting a decrease of VND 225 billion or 3.52% from the start of the year In contrast, the medium and long-term loan balance increased to VND 5,502 billion.
As of December 31, 2019, medium and long-term loans reached VND 5,502 billion, representing 47.13% of the total loan balance and a 5.95% increase since the beginning of the year These loans primarily funded hydropower projects, including the Se San 3 and Se San 3A Hydroelectric Plants, Ry Ninh II, and Hoang Anh Thanh Hoa Hydroelectricity, along with construction initiatives such as the BOT project on National Highway 14 and various hotel developments The branch has focused on expanding capital investment for production and business households, as well as non-state enterprises, to diversify risks and foster growth over the years.
Table 2.4 Credit balance and bad debt of banks in Viet Nam in 2019
Bank Bad debt Credit balance Bad debt ratio
MB Bank 2,898 2,860 1.33 250,331 214,686 16.60 1.16% 1.33% Vietinbank 10,813 13,709 (21.12) 935,271 864,926 8.13 1.16% 1.59% Kien Long
In 2018, the average bad debt ratio in Vietnam's banking industry was 1.78%, which decreased to 1.63% in 2019 Notably, Vietinbank maintained a bad debt ratio below the industry average over both years, experiencing significant changes between 2018 and 2019.
PROBLEM IDENTIFICATION
Symptoms Analysis
3.1.1 Bad debt increased at Vietinbank - Gia Lai Branch from 2017 to 2019
Credit activities are the primary profit source for Vietinbank and all commercial banks in Vietnam In recent years, Vietinbank has experienced significant growth, contributing value to both the bank and the broader economy As highlighted by Viswanadham, banking plays a crucial role in economic development However, this growth comes with increased credit risk, which can result in substantial losses Reinhart and Rogoff noted that the bad debt ratio serves as an indicator of credit risk, potentially leading to a debt crisis.
According to Decision No 493/2005/QD-NHNN, outstanding debts refer to loans where either the principal, interest, or both are overdue Specifically, these are credits that have not been repaid on time and do not qualify for restructuring In Vietnamese commercial banks, outstanding debts are categorized into five groups based on the duration of the overdue payments.
Table 3.1 Debt classification regulation Debt classification Debt group name Characteristics
Group 1 Standard debt The original debt or interest on overdue below 10 days Group 2 Watch debt the original debt or interest on overdue more than 10 days and below 90 days Group 3 Substandard debt The original debt or interest on overdue more than 90 days and below 180 days Group 4 Doubtful debt The original debt or interest on overdue more than 180 days and below 360 days Group 5 Loss debt The original debt or interest on overdue more than 360 days (Source: Decision No 493/2005/QD-NHNN) Bad debts or non-performing debts are debt in group 3, 4 and 5
In the period from year 2017 to year 2019, standard debt (group 1 debt) acount for a high proportion in total credit balance and this proportion reduced sharply through years
In 2018, bad debt surged significantly, reaching a total of 302 billion dong, which is over 12 times higher than in 2017 Notably, irrecoverable debts saw a dramatic increase, more than five times that of the previous year This rise in debt across all groups was primarily driven by the challenging economic conditions in the province.
The agricultural sector is facing significant challenges due to unfavorable weather conditions, particularly prolonged heat, which has drastically reduced the production and prices of key crops like pepper and coffee This situation has adversely impacted the overall commercial and production activities of corporations in the province, leading to substantial price fluctuations for agricultural enterprises Additionally, electricity producers and distributors, including the Sesan 3A hydroelectric plant, are experiencing severe water shortages, resulting in diminished electricity output Furthermore, debt groups ranging from 3 to 5 now represent about 2% of the total credit balance, with a concerning trend of increase.
In 2019, bad debt continously increased a lot while standard debt reduced Total bad debt in 2019 was 1,896 billion dong which was more than 6 times higher than 2018
Standard debt in this year decreased largely, even lower than that of 2017 It just counted for only 83.76% in total credit balance, decreased 13.37% when comparing with 2018
This really a serious warning in credit activities in Vietinbank – Gia Lai Branch
Table 3.2 Debt classification in Vietinbank – Gia Lai Branch in period 2017 – 2019
The rise in bad debt has resulted in significant consequences for Vietinbank – Gia Lai Branch, which saw its rating drop from level 1 to level 4 in 2019 This decline in rating has led to a reduction in the Board of Directors' authority to make credit decisions, resulting in stricter control over the branch's credit activities.
In 2019, Vietinbank Gia Lai reported a bad debt ratio of 3.80%, which is over three times higher than that of Vietinbank itself Additionally, most banks in Vietnam had a bad debt ratio below 3.50% during the same year This significant disparity highlights that the bad debt ratio of Vietinbank Gia Lai is notably high compared to both Vietinbank and the average of other banks, indicating a concerning financial trend that warrants attention.
Potential problems
The article discusses the rising issue of bad debt at VietinBank Gia Lai, highlighting the author's approach to investigate this concern To gain insights, the author conducted interviews with three types of informants: an individual responsible for managing the bad debt, a person directly affected by it, and an expert knowledgeable about the situation.
Recent research reveals that the rise in bad debt is influenced by both internal and external factors Analyses based on financial reports, along with in-depth interviews with members of Vietinbank – Gia Lai, support these findings.
Branch, some potential problems are listed as following:
Effective management of credit risk in loan portfolios is crucial for banking institutions, as it significantly impacts their overall risk management strategies To enhance the quality of their portfolios, banks are increasingly developing tailored credit risk assessment models Additionally, poor management of loan portfolios has been identified as a major contributor to the rise of non-performing loans.
Mr Thinh, the Branch Director, highlighted a significant challenge facing the bank: a limited customer base, with most credit balances concentrated among a few key clients This reliance means that if any of these clients encounter business difficulties, it could severely disrupt the bank's credit balance structure Additionally, due to the region's characteristics, loan purposes are primarily tied to agriculture, particularly coffee and pepper, which are largely traded as raw materials The bank's performance is heavily influenced by weather conditions, as adverse weather can negatively impact crop yields, leading to substantial repercussions for the bank.
Loan portfolio management is a crucial process for mitigating credit risk within the credit management framework An undiversified loan portfolio can lead to significant credit risks, making effective loan portfolio management essential for banks globally This approach helps in identifying, forecasting, and controlling risk levels across various markets, customers, credit products, and operational conditions Research indicates that diversification is the most effective strategy to minimize credit risks, as reliance on a single industry or a limited number of customers can expose banks to substantial vulnerabilities Ultimately, inadequate loan portfolio management can result in severe financial losses and failures for banks.
The moral hazard hypothesis indicates that banks with relatively low capital levels may promote moral hazard by taking on riskier portfolios, resulting in a higher average of non-performing loans over time Additionally, research shows that a bank's specialization in certain types of loans can lead to a higher bad debt ratio compared to its peers Therefore, effectively managing the loan portfolio is crucial for a bank's operations, necessitating a proactive approach to mitigate risks and capitalize on opportunities.
Swalehe (7) discovered that effective pre-screening by credit officers significantly reduces the rate of loan defaults In an interview with Mr Chung Quang Vu, a bad debt manager, he expressed the challenges of balancing multiple responsibilities, stating, “While monitoring customers' cash flow and business conditions is crucial for identifying potential bad debts, my high KPI demands leave me with little time for this essential task The pressure to acquire new clients often overwhelms me, making it difficult to manage my workload effectively.”
To enhance customer attraction and achieve high KPIs, credit officers may bypass certain steps in the loan process, potentially lowering the perceived credit risk based on individual judgment Waweru and Kalani noted that bank managers often struggle to adhere to prudent credit policies due to the pressures of maintaining higher profits in a highly competitive market.
3.2.1.3 Employees lack of experiences and competences
Mr Dang Quoc Thinh, Director of the Branch, emphasized the significance of employee experience and competence He noted that the recent surge in recruitment, driven by high demand, has resulted in many new hires being recent graduates lacking sufficient experience Additionally, the departure of skilled employees to other banks has made it challenging for the Vietinbank – Gia Lai branch to recruit and train new staff quickly to fulfill its requirements.
Mr Ta Quang Binh, the manager of the Human Resources Department, stated that the training schedule for new employees is determined by the Head Office, typically lasting 3 to 4 weeks New hires must relocate to Ho Chi Minh City for this training, which cannot accommodate all newcomers simultaneously to avoid staffing shortages at the bank Consequently, the overall process for all new employees to complete their training can be prolonged Following their training, they require additional time to acclimate to the work environment, understand customer needs, and develop workplace acumen.
Experience significantly influences decision-making in credit assessment, as noted by Andersson in Beisland et al Employees lacking sufficient experience and competencies can increase credit risk Specifically, those without adequate knowledge may struggle to process information and evaluate customers accurately, resulting in poor credit quality and heightened risk Additionally, failure to adhere to loan procedures, such as collecting necessary documentation before financing or verifying the loan purpose, can lead to substantial capital losses Furthermore, a lack of responsibility and susceptibility to temptation may compromise a credit employee's judgment, causing them to overlook essential conditions due to personal relationships with borrowers.
Experience plays a crucial role in risk assessment, as noted by Schreiner in Beisland et al (9) Seasoned credit officers are better equipped to identify and avoid risky customers, enhancing their decision-making capabilities.
3.2.1.4 Loose process of loan management
Ms Le Thi Nhu Kieu, an employee in the bad debt management department, explained that the rise in bad debt this year is linked to numerous loans issued in previous years While these loans may have been sound at the time, inadequate customer management and gaps in the loan management process have contributed to the current issues.
Credit risk may arise from inadequate oversight in management activities It is essential for credit officers to obtain approval from higher management before disbursing funds If managers fail to thoroughly assess the credit officer's decisions, the potential for significant credit risk increases.
Previous research by Salas and Saurina and Klein indicates that a high historical bad debt ratio correlates with current non-performing loans These findings suggest that banks with a history of elevated non-performing loans demonstrate inadequate risk management in lending practices, which subsequently leads to an increase in current bad debt levels.
Problem validation
While customers express a lack of complete satisfaction with Vietinbank Gia Lai's services, they still find them acceptable Given that external factors, particularly the macroeconomic environment, are beyond the bank's control, the focus will be on internal issues to identify root causes and propose the most effective solutions.
Mr Dang Quoc Thinh, Director of Vietinbank Gia Lai, highlights a critical challenge facing the organization: a limited customer base, where 80% of the total credit balance relies on just 20% of customers This concentration means that the financial health of the branch is highly vulnerable; if any of these key customers default or switch to another bank, it could significantly impact the branch's profitability.
Mr Nguyen Tan Viet, Deputy Director of the Corporate Customers Department, highlighted that the Branch's market share in corporate clients is currently low, indicating significant growth potential He noted that many credit officers are stuck in outdated thinking, focusing solely on agriculture and dismissing new projects While agriculture, particularly cash crops, is a regional strength, there are other economic sectors to explore The limitations stem not only from employee competencies but also from their mindset regarding portfolio management Therefore, broadening the business fields for corporate customers is essential, as it will not only ensure stable profits for the Branch but also mitigate credit risk.
Weak loan portfolio management is currently the primary issue facing the organization If this problem persists without effective improvement processes, the rise in bad debt will lead to significant negative consequences Therefore, it is crucial to address this issue promptly to boost profits and support the organization's sustainable development.
Problem consequences
In some researches, credit is supposed to be the main cause of a bank bankruptcy
Credit risk, the oldest and most significant financial risk, is a major contributor to financial crises It can lead to substantial losses for banks, including increased costs, diminished profits, and a tarnished reputation.
3.4.1 Reducing profit of the bank
Credit risks significantly impact banks, preventing them from recovering principal and interest payments while still obligating them to honor due deposits Additionally, banks incur various expenses related to managing bad debts, such as enhanced supervision of overdue borrowers, negotiations with clients, and collateral maintenance These costs also include measures to protect the bank's reputation and comply with regulatory standards, ultimately leading to a decline in overall profitability Consequently, the rise in bad debts increases operational costs and diminishes the financial efficiency of the bank.
Understanding the factors that influence credit risk is crucial for managers aiming to maintain financial stability and implement responsible banking policies According to Berger and DeYoung, when loans turn into bad debt, banks incur significant costs related to nonperforming loans and must manage underwriting and monitoring expenses that affect loan quality Additionally, banks face opportunity costs in securing new loans, which can diminish their credibility and slow down credit cycles, ultimately impacting cost efficiency Research indicates a negative correlation between credit risk and bank profitability, as evidenced by studies showing that credit risk adversely affects return on assets (ROA) and return on equity (ROE) A study by Gizaw et al on Ethiopian commercial banks from 2003-2004 utilized multivariate regression analysis to demonstrate that credit risk, measured by bad debt ratios and credit risk provisions, significantly impacts business performance The findings underscore the need for enhanced credit risk management to boost banking efficiency.
Morever, increasing bad debt requires higher provision which makes the bank to be unstable, reduce profits and leads to the risk of bankruptcy
Credit risk can significantly damage a bank's reputation, especially when combined with inefficient business operations This decline in market reputation often leads to substantial, albeit less visible, losses Research by Zribi and Boujelbène (20) supports this assertion, highlighting the critical impact of credit risk on banking institutions.
3.4.3 Indirect affect to other banks
Lending activities pose significant risks that can lead to indirect losses for other banks, highlighting the crucial role banks play in the market economy They are interconnected with various sectors and are vital for providing capital to support economic growth Consequently, banks have a substantial impact on monetary policy and the country's macroeconomic regulations A major loss in credit activities at one lender can trigger a "chain reaction," jeopardizing the safety and stability of the entire banking system and resulting in severe repercussions for economic development.
Diagram 3.2 Initial Diagram of symptom, potential problems and problem consequences of Vietinbank – Gia Lai Branch
CAUSES
Possible causes
Every industry faces risks, with the banking sector being particularly vulnerable due to inherent uncertainties in its operations Banks, including Vietinbank, are exposed to risks stemming not only from their own activities but also from the behaviors and financial health of their customers A persistent challenge for Vietinbank is the presence of non-performing loans, which arise from various underlying factors.
4.1.1.1 Lack of full awareness of loan portfolio management
The lack of awareness among bank executives regarding effective loan portfolio management has led to a passive management approach and the absence of an independent risk management department Vietnamese banks have historically focused on managing individual loan transactions, neglecting the broader concept of loan portfolio management In a developing economy, the concentration of risks within loan portfolios may be masked by economic growth, leading banks to mistakenly believe that their current management strategies are effective due to short-term profit increases However, as signs of economic recession emerge, the dangers of centralized risk become evident Relying on the Central Bank for guidance is insufficient, as their interventions can be delayed and misaligned with real-time developments Banks that proactively manage their loan portfolios are better positioned to mitigate serious risks and navigate economic fluctuations successfully.
Many managers lack a comprehensive understanding of the importance of loan portfolio management, which is evident in their approach to setting Key Performance Indicators (KPIs) These KPIs primarily emphasize expanding the credit scale while neglecting the structure of the loan portfolio This oversight results in an unmanaged risk level within the portfolio, and when these potential risks materialize into actual losses, the bank faces significant financial repercussions.
Mr Dang Quoc Thinh, Director of Vietinbank Gia Lai, highlighted a common issue among branch managers who tend to think within conventional boundaries He noted that their habitual mindset primarily revolves around agriculture-related economic activities, leading to a narrow focus on agricultural loans while overlooking other potential loan opportunities.
4.1.1.2 Tendency to follow immediate but lack of durable profit
The lack of awareness regarding the importance of loan portfolio management, coupled with competitive pressures, often leads banks to prioritize profits over sustainability, negatively impacting the efficiency of their loan management Additionally, ethical concerns arise as some employees and managers may deliberately exceed lending limits, despite regulations set by the Law on Credit Institutions and Vietinbank's internal policies This misconduct is often rooted in the prevalent "cross-ownership" relationships among banks, enterprises, and state agencies within Vietnam's economy.
Mr Chung Quang Vu highlights the high targets set for credit employees at the start of each year, emphasizing the daily pressure to meet these goals He notes the intense competition within the industry, which sometimes leads employees to seek unconventional methods to attract new customers.
Research by Toloie-Eshlaghy and Shahriari indicates that the primary reason for bank losses and failures is attributed to issues within the loan portfolio, particularly stemming from weak credit standards.
4.1.1.3 Inadequate information analysing and forecasting
Effective loan portfolio management heavily relies on robust risk analysis techniques, which necessitate comprehensive data on customers, industries, markets, competitors, and regulations to accurately assess and predict future risks However, many banks face challenges due to inadequate information analysis and forecasting capabilities, hindering their ability to proactively design loan portfolios In commercial joint stock banks, the process of gathering information for credit analysis is limited, particularly in collecting data on economic sectors for industry risk assessment, which is essential for the internal credit ranking process Currently, the Credit Information Center (CIC) plays a role in addressing these challenges.
The central bank plays a crucial role in supporting the credit analysis process for commercial banks by providing essential information However, the data it offers is often outdated and presented in an unprocessed format, limiting its utility for banks Additionally, there is a lack of detailed customer information, aggregation, and forecasting, hindering effective portfolio management As a result, the design of loan portfolios is compromised from the outset of the loan strategy To enhance proactive portfolio management methods, it is vital to improve the accuracy and timeliness of economic and banking system forecasts.
Mr Nguyen Tan Viet, Deputy Director of the Branch, emphasized the limitations of the information provided by the Credit Information Center (CIC), stating that it primarily reveals the size of customers' loans at other banks and their history of bad debt He pointed out that the current system does not adequately indicate the risk levels of customers To enhance the analysis and forecasting of customer loan statuses, he advocates for the Central Bank to upgrade the system and expand the data collection efforts.
4.1.2.1 Unpredictable changes of macroeconomic environment
Changes in the macroeconomic environment significantly impact the quality of a bank's loan portfolio, with favorable conditions leading to improved solvency and a reduced probability of default, as highlighted by Fests et al Mileris has developed a model that underscores the importance of economic environmental analysis in credit risk management, demonstrating its ability to forecast loan portfolio credit risk Additionally, Heitfield et al found that the risk associated with Syndicated National Credits (SNC) portfolios increases with both name and industry concentration.
The unchecked expansion of the government's investment portfolio and commercial banks' loan portfolios poses significant risks, particularly in non-manufacturing sectors like securities, real estate, and commercial enterprises This rapid growth can create a supply-demand imbalance in the market, leading to severe repercussions such as recession and bankruptcy within these industries As a result, banks may face substantial losses that could undermine their operational efficiency in the future.
Commercial banks play a significant role in economic instability when they excessively pursue market demand and increase credit to non-productive sectors This behavior ultimately leads to the banks becoming victims of their own actions, facing severe consequences from bad debts Currently, these banks are struggling to find effective solutions to manage these repercussions The resulting economic instability greatly affects their short-term business strategies, particularly in the design of their portfolios.
4.1.2.2 The regulatory environment with the guidance and supervision of the Central bank has not actively supported commercial banks in loan portfolio management
The instability in the economy and banking operations is partly attributed to insufficient supervision by the Central Bank Implementing regulations for safe lending limits, particularly in non-production sectors, could establish a legal framework that compels banks to adhere to safer practices Currently, the Central Bank's oversight of banking activities is often delayed and reactive, leading to inefficiencies While the Central Bank prioritizes monitoring compliance from commercial banks, the role of proactive remote monitoring and early warning systems is rarely emphasized.
Mr Viet noted that the Central Bank primarily provides overall supervision of all banks in the market He pointed out that the lengthy procedures required to issue specific regulations often result in outdated rules that may not align with current market conditions While there have been improvements in this area, they have not significantly enhanced the loan portfolio management of commercial banks.
SOLUTIONS
Alternative solutions
5.1.1 Changing current loan porfolio management method
Stefania et al (34) conducted a study using mathematical models to explore how diversification affects the risk, performance, and capitalization of Australian commercial banks' loan portfolios Analyzing data from the 96 largest banks in Australia between 1997 and 2003, the research concluded that diversifying loan portfolios significantly enhances bank performance Specifically, diversification—particularly across various lending industries—can lead to a reduction in provisions for bad debts, allowing banks to operate with lower capital, thereby cutting costs and boosting profitability The study also highlighted that poor portfolio management was a key factor in declining loan quality, prompting banks to adopt diversification strategies and improve oversight in line with Basel committee standards for effective loan portfolio management.
Moreover, diversification by loan type is confirmed as a risk mitigation strategy
To establish a diversified loan portfolio, it is essential to consider various criteria such as industry, trade, production, geographic area, and scale to minimize specific risks This approach should promote efficient and sustainable credit growth while balancing profit maximization with risk minimization Vietinbank must align its credit targets annually, focusing on stable industries and setting flexible growth objectives that comply with Central Bank requirements while supporting its own development This strategy will enhance the quality of documentation and customer selection, ultimately reducing credit risk through careful appraisal and secure lending practices.
Building a loan portfolio that aligns with market fluctuations and risk management capabilities is crucial for a bank Additionally, it is essential to consider the bank's human resources If the branch lacks the necessary expertise, it can seek support from experts at the Head Office.
Regularly assessing the financial condition and repayment capability of customers is essential for identifying potential defects that may impact credit quality Utilizing a debt classification method serves as an effective warning system for credit risks By adhering to international standards, such as the Basel II framework, banks can detect credit risks early, enabling them to implement strategies to mitigate bad debt and optimize their credit portfolios.
To effectively manage credit risk, banks must regularly assess and restructure their loan portfolios to align with local socio-economic conditions Modern portfolio management theory suggests that diversifying loan types within a portfolio reduces overall risk compared to holding individual loan types separately This concept has been supported by research in developed countries, highlighting the positive impact of diversification on bank loan portfolios The primary goal for banks is to select a combination of assets that maximizes efficiency while considering their internal resources and anticipated losses Consequently, establishing a loan portfolio involves determining the appropriate size and proportion of each loan type within the overall structure.
5.1.1.1 Diversify the credit portfolio by economic sector
To enhance export production and processing, it is essential to increase investment in credit capital, as this sector demonstrates stable value-added potential in both domestic and traditional overseas markets Conversely, banks should cautiously reduce credit allocation to trade and service enterprises, particularly within the agribusiness sector Additionally, when selecting target customers, banks must exercise caution with industries that are sensitive to fluctuations in foreign markets, such as iron, steel, fertilizer, plastic resins, and large-scale credit enterprises that have maintained significant borrowing over the years.
5.1.1.2 Diversifying the credit portfolio by type of business
Vietinbank – Gia Lai Branch is committed to enhancing its lending services to small and medium-sized enterprises, private businesses, and individual consumers with loans, as this demographic demonstrates a strong level of loan security and a low risk of capital loss Given the bank's current scale, it is well-positioned to efficiently expand and develop lending opportunities for these customers.
Engaging with corporate customers involved in foreign direct investment is a strategic move; however, Mr Thinh notes that the unique economic conditions of Gia Lai province and its neighbors pose challenges in increasing credit for this sector While these businesses exhibit strong management and sustainable strategies, the scale of Vietinbank – Gia Lai Branch complicates the delivery of appropriate products and services Nevertheless, the Branch can adopt a gradual approach to cultivate potential customer relationships for future growth.
In order to develop and apply a new loan portfolio management model and method, the cost that the organisation need to pay is about 400,000,000 VND
1 Developing a complete loan portfolio management model and method
2 Etablishing database networks, machinery and software systems that meet the requirement of new model
5.1.2 Developing a human strategy in accordance with risk management requirements
Human resources play a crucial role in identifying, assessing, and mitigating credit risks, while also being a potential source of losses due to moral hazards and competency issues It is essential for branches to focus on the quality of employees from the recruitment stage, implementing strict and consistent procedures to ensure that candidates meet high standards of competence and ethical character This proactive approach is vital in minimizing credit risks associated with human factors The recruitment process should prioritize criteria such as educational background, proficiency in foreign languages and information technology, good health, strong social awareness, and effective communication skills.
Since 2015, Vietinbank has focused on credit portfolio management, initiating a restructuring process that established three key security lines: the Operations Division, Risk Management Division, and Supervisory Board However, these divisions have not fully realized their potential, primarily functioning in operational control without effectively implementing forecasting and strategic operational orientation.
To enhance operational efficiency, the bank must prioritize the development of three key departments, ensuring they fully leverage their functions Effective management of the credit portfolio requires a comprehensive approach, including the formulation of a robust credit strategy and management system, as well as the establishment of a complete loan portfolio management model Additionally, a specialized division dedicated to loan portfolio management should be created within the Risk Management Division, allowing it to operate independently while focusing on building and guiding the credit portfolio for the Branch.
The cost for establishing an independent division which main task is analysing information, forecasting and managing loan portfolio is about 250,000,000 VND
1 Recruiting employees who have knowledge and experiences in analysing information, forecasting and managing loan portfolio
2 Setting room, facilities for the loan portfolio management division
3 Developing a complete loan portfolio management model and method
5.1.3 Constantly renovating the training and professional development for staff at the bank
The banking industry is undergoing constant change due to new knowledge, products, and government regulations To keep up, banks must regularly conduct training and short courses to enhance employees' professional skills and share practical experiences Focusing on employee development is crucial for sustainable and effective bank operations, as competent and ethical staff serve as a protective "shield" against risks, particularly in credit risk management By ensuring thorough and compliant application processes, banks can mitigate potential issues and foster a more secure financial environment.
Employee training and development is an ongoing process that must be conducted professionally by the Branch through biannual direct or online courses Regular assessments of training quality are essential to ensure its effectiveness and enhance the skills, qualifications, and ethics of the workforce.
The cost for renovating the training program and professional development for staff at the bank is about 120,000,000 VND
1 The cost for building the training program about loan portfolio management for managers
2 The cost for building the training program about loan portfolio management for credit officers
3 The cost for inviting the specialists from Head Office 20,000,000
Solution validation
The training program focused on loan portfolio management for branch employees is the most effective solution for the Board of Directors at Vietinbank – Gia Lai Branch to enhance employee knowledge and capabilities, ultimately reducing bad debt and promoting sustainable development Workplace training fosters job satisfaction and strengthens employee cohesion, creating a workforce that is committed to the organization's values and goals This mutual commitment drives performance and helps employees achieve their targets The relationship between the organization and its staff is symbiotic; both parties must actively engage for success Any change in this dynamic can quickly diminish attachment, reinforcing Mr Thinh's view that employees are the key factor in organizational development.
Beside that, it is easily to see that the cost for training program is lowest when comparing the cost of three solutions
Ms Nguyen Thi Hoa, chief accountant of Duc Phu Gia company, emphasizes the significance of collaborating with experienced and qualified credit officers who can provide valuable advice on effective business investment options She believes that the working capacity of credit officers is crucial, as it enhances their appeal and engagement with customers Furthermore, she suggests that if Vietinbank prioritizes regular training to enhance professional competence, it will gain a significant competitive edge over other banks.
The Board of Directors must urgently establish an action plan to address the issue, as it can result in significant damage Below is a 6-month action plan for Vietinbank – Gia Lai Branch, with results to be evaluated at the end of 2020.
Tasks Department June July August Sep Oct Nov Dec
Collect as well as research the data and information about credit employees at the
Human Resouces Department, Customer Relationship Department
Testing the current knowledge of credit employees
Human Resouces Department, Testing organisation about loan portfolio management
Evaluating and dividing credit employees into suitable groups
Customer Relationship Department, Human Resouces Department Make the content of training
Specialists from Head Office, Customer Relationship Department, Human Resouces Department Training Specialists from Head Office, Human Resouces Department Receive feedback and make correction
Specialists from Head Office, Human Resouces Department
Survey and analysing the results
Human Resouces Department List all the employees which have low score
Receive feedback from employees which have low score
Specialists from Head Office, Human Resouces Department Correction and re- evaluate
Re-open the training class if neccesary
Board of Directors, Specialists from Head Office, Human Resouces Department
The operation of banks in a market economy is fraught with various risks, particularly the risk of bad debts This study focuses on Vietinbank – Gia Lai Branch, analyzing the branch's situation from 2017 to 2019 to address the increasing issue of bad debts By identifying the underlying causes and proposing effective solutions, the research aims to contribute to the reduction of non-performing loans at Vietinbank – Gia Lai Branch, drawing from both theoretical frameworks and practical experiences.
SUPPORTING INFORMATION
Methodology
The methods used in the research process including statistical research method, comparative research method, general method…
In addition, the research project also uses basic theories and scientific theories about credit risk and credit risk restriction.
Interview transcript
Interviewee: Mr Dang Quoc Thinh - Director of Vietinbank Gia Lai
PL Good morning Mr Thinh How are you today?
QT Hi Linh I’m good today Do you need my help?
Sure! I would like your insights on the current state of the Branch in a brief interview that should take about 15 to 20 minutes Are you available for this?
QT Ok Linh, you can ask me about what you’re concerned
PL I have read the Branch internal report in 3 years from 2016 to 2018 and I see that the bad debt ratio has been increasing rapidly Can you explain more about this?
QT Yah is currently facing significant challenges due to a rising bad debt ratio, primarily driven by customers struggling to repay large credit balances Notable cases include Hoang Anh Thanh Hoa Hydroelectric JSC, which owes over 1,300 billion dong, and the Duc Long BOT project with a debt of 980 billion dong This situation has resulted in a substantial increase in bad debt, particularly in the past year.
PL So what problem do you think the Branch is facing now?
The bank is currently facing a significant challenge due to its limited customer base, with a majority of credit balances concentrated among a few key clients This reliance poses a risk, as any business difficulties experienced by these customers could severely disrupt the bank's credit balance structure Additionally, the regional focus on agriculture, particularly in coffee and pepper production, further exacerbates this vulnerability, as the majority of transactions involve raw materials that are heavily influenced by weather conditions Consequently, adverse weather could lead to poor crop yields, which would have a detrimental impact on the bank's financial stability.
PL So you mean that this is the main problem of the Branch?
The branch's profitability is heavily reliant on a small customer base, with 80% of the total credit balance concentrated among just 20% of clients This significant dependency means that any defaults or customer migrations within this group could severely impact the branch's financial performance.
PL There is opinion that employees who lack of experiences and competences will lead to this problem What do you think?
The experiences and competencies of employees are crucial for the success of Vietinbank's Gia Lai branch Recently, high demand has resulted in a significant influx of new recruits, many of whom are recent graduates lacking sufficient experience Additionally, the departure of skilled employees to other banks has compounded the challenge of quickly recruiting and training new staff to meet the branch's requirements.
PL Why do you think that the management of the loan portfolio has not been given enough attention?
Many managers in the Branch struggle to think outside the box, relying on habitual ways of thinking and acting Their focus remains primarily on agricultural-related economic activities, leading them to prioritize loans for this purpose while neglecting other potential loan opportunities.
At the start of each year, I request department heads to create a detailed development plan and review it monthly However, many managers lack a clear development focus when setting annual targets, leading to no prioritized industry groups for growth This results in a scattered approach to identifying and pursuing potential customers, which significantly impacts the overall goal completion rate of the departments.
PL How about other causes?
At our bank, we prioritize capital safety regulations over profit pursuits, ensuring that our employees possess strong moral qualities and the ability to handle high-pressure situations Regular inspections are conducted to identify any violations, and to date, no errors related to these standards have been detected.
External influences will similarly impact other banks, yet each institution will respond in its own unique way Consequently, it is inaccurate to attribute the ineffective management of the credit portfolio at the branch solely to these external factors.
PL What do you think the main cause?
The root cause of the current issues in loan portfolio management stems from human resources, particularly the lack of awareness among branch managers Many of these managers, now in middle age, lack the necessary knowledge and adaptability to shift their thinking about portfolio management To address this problem effectively, the branch must implement comprehensive solutions that enhance the understanding of loan portfolio management not only among managers but also across all employees Improving this awareness is crucial for efficient loan portfolio management.
PL How about the solution?
QT I always want to focus on the employees cause the people is the most important in an organisation Therefore, I want to perform training about loan portfolio management for all the employees to help them gain knowledge and work more effectively
Interviewee: Mr Nguyen Tan Viet - Deputy Director of Vietinbank Gia Lai
PL Hi Mr Viet Can I interview you some issues about Vietinbank – Gia Lai Branch?
TV It’s my pleasure What do you want to know?
PL What do you think about current situation of the Branch?
Our market share in corporate customers remains low, indicating significant potential for development Many customers do not utilize any branch services, highlighting an opportunity for growth Unfortunately, some credit officers are limited by outdated thinking, focusing solely on agriculture and dismissing new projects While agriculture, particularly cash crops, is a regional strength, there are other economic sectors to explore This issue largely stems from employees' mindsets regarding portfolio management Therefore, it is essential to broaden our business fields for corporate customers, as this will not only generate stable profits for the branch but also mitigate credit risk.
PL Do you think CIC work helpful for the Branch?
Currently, the information provided by the CIC primarily helps us understand the loan sizes of customers at other banks and their bad debt status However, it does not indicate the true risk level of customers I believe the Central Bank should enhance the system and gather more comprehensive data to assist commercial banks in better analyzing and forecasting customer loan statuses.
PL What do you think about the role of Central bank in supervising Commercial Bank operation?
From my perspective, the Central Bank's role primarily involves overseeing all banks within the market However, the lengthy procedures and multiple approval levels required to implement specific regulations often result in outdated guidelines that may not align with current market conditions While there have been notable improvements in this area, the impact on the loan portfolio management of commercial banks remains limited.
Interviewee: Ms Nguyen Thi Hoa, chief accountant of Duc Phu Gia company
PL Hi Ms Hoa, how are you today?
PL Can you share with me your experience when using Vietinbank service?
My company has borrowed money from Vietinbank Gia Lai from 2016 until now The company at present owns hotel chains named Cicilia which is located in Nha
In my experience with Vietinbank, particularly in Trang, Da Nang, and HCM City, I found the process of collecting data, checking invoices, and completing loan approvals to be time-consuming However, I was impressed by the positive attitude and support provided by the bank's employees Additionally, I appreciated Vietinbank's innovative approaches to reducing wait times and enhancing productivity.
PL How about Vietinbank employees? Do you satisfy with the service?