LITERATURE REVIEW
Overview of credit risk
According to Article 02, item 01 of Decision No 493/2005/QĐ – NHNN dated
April 22 nd , 2005 of the Governor of SBV, credit risk is the possibility in which a loss can happen in banking activities of credit institutions since customers do not take on or do not have the ability to take on their responsibilities as commitment
According to Circular No 02/2013/TT-NHNN issued by the State Bank of Vietnam, credit risk refers to the potential loss that credit institutions may face when customers fail to fully or partially meet their loan obligations.
Briefly, credit risk, per se, is a latent loss which is made when credit institutions grant loans to customers
1.1.2.1 Causes from credit institutions a Causes from humans: Low qualification of credit officers could lead to risk when granting loans Loan officers cannot obtain profound knowledge about business’s field of customers, which contributes to the incorrectness in analyzing business’s outcomes and the ability to pay off debts Additionally, bad work ethics of loan officers also results in credit risk b Credit policy: Inappropriate credit policy is one of the reasons causing credit risk If credit policy is not clear and informative, the ineffectiveness of credit may increase c Causes from information system: Credit institutions do not develop a thorough information system A lack of monitoring system, risk management and risk classification based on types of customers detrimentally influences credit quality
Credit risk is significantly influenced by business operational failures, often stemming from inadequate management and poor investment decisions, leading to persistent financial losses Consequently, businesses struggle to repay loans, heightening credit risk Additionally, some customers deliberately misappropriate funds from credit institutions by bribing loan officers or submitting fraudulent financial statements, resulting in inaccurate assessments of financial capability and unjust credit terms.
Consequently, credit risk is likely to happen
Credit risk is influenced by various objective factors, including legal frameworks, political systems, and economic fluctuations An unstable and underdeveloped economy reduces investment demand, negatively impacting credit activities Rapid changes in prices or inflation can quickly deteriorate a business's financial situation, making credit risk unavoidable Additionally, shifts in tax regulations or provisions significantly affect credit institutions, particularly in their lending practices Ultimately, inadequate economic policies and legal systems contribute to challenges in fund redemption for businesses, leading to an increase in credit risk.
Credit risk reduces the profit
Credit institutions provide loans funded by public resources, which come with specific mobilization costs When the quality of credit is low, these institutions struggle to generate interest income needed to offset those costs, leading to a significant decline in their profits.
Credit risk reduces payment capacity
Credit institutions face credit risk, which may necessitate using their capital to settle debts This repeated capital allocation for debt repayment can restrict their ability to repay depositors effectively.
Credit risk reduces the prestige of credit institutions
Poor credit quality and a high bad debt ratio highlight the operational inefficiencies of credit institutions This situation undermines customer trust, complicating efforts to raise funds and diminishing the institutions' overall prestige.
Credit risk may lead to the insolvency of credit institutions
Credit risk poses a significant threat to credit institutions, as failure to effectively manage issues related to profitability, liquidity, and reputation could ultimately lead to bankruptcy.
Credit activities of financial institutions are interconnected with various sectors of the economy The bankruptcy of one entity can have ripple effects, potentially leading to the failure of others and creating barriers for businesses seeking funding Consequently, credit risk can contribute to economic instability and hinder overall development.
Credit risk in lending activity in finance companies
According to Article 02 of Degree No 79/2002/NĐ-CP, issued on October 4, 2002, by the Government, a finance company is classified as a non-bank credit institution Its primary functions include utilizing equity and capital to offer loans, make investments, and provide financial and monetary consultancy services However, finance companies are prohibited from making payments and accepting short-term deposits.
1.2.1.2 Characteristics of finance companies a Legal capital
In accordance with Degree No.141/2006/NĐ-CP, a finance company which is obtained the license for establishment and operation must have a charter capital of
A finance company can operate for a maximum of 50 years, but any extension beyond this period requires approval from the State Bank of Vietnam This regulatory framework presents both challenges and opportunities for competition within the finance sector.
Finance companies face fewer competitive constraints compared to commercial banks, as they primarily rely on internal corporate sources for funding, while commercial banks mobilize capital from the public.
Finance companies experience minimal risk as long as they operate efficiently Although they are restricted from making payments and receiving deposits for less than one year, they have adopted effective strategies like trusted fund management and fund arrangement These approaches allow finance companies to offer services comparable to those of commercial banks, enhancing their competitiveness in the financial sector.
Large corporations typically maintain at least one finance company, which serves as a vital tool for effectively managing and utilizing resources This structure allows for the seamless mobilization of idle funds across various member companies The primary benefits of having a finance company include access to substantial long-term resources and enhanced operational efficiency within the corporation.
1.2.2 Lending activity in finance companies
According to Decision No.1627/2011/QĐ-NHNN issued by the State Bank on December 31, 2001, lending by credit institutions involves providing clients with a specified amount of money for a designated purpose and time frame, based on the principle of repaying both principal and interest.
According to Government Degree No 79/2002/NĐ-CP, finance companies in Vietnam are authorized to offer various types of loans, including short-term, medium-term, and long-term loans that comply with State Bank regulations They can also provide loans on behalf of the Government, organizations, or individuals, both domestically and internationally, in accordance with the Law on Credit Institutions and relevant entrustment contracts Additionally, finance companies are permitted to extend consumer loans, specifically for installment purchases.
Depending on different criteria, loans are divided into several categories Finance companies, as a consequence, can choose many forms of loan which generate a high level of income
1.2.3 Credit risk in finance company
1.2.3.1 Classification of credit risk in lending activity
In terms of causes, credit risk is classified into portfolio risk and transaction risk
Diagram 1: Classification of credit risk
Portfolio risk, a critical aspect of credit risk, is composed of intrinsic risk and concentration risk, both of which arise from limitations in lending portfolio management Intrinsic risk is linked to the unique characteristics of borrowers or specific industries, including their business performance and capital utilization In contrast, concentration risk occurs when financial institutions allocate excessive resources to a limited number of clients, sectors, or geographical areas, or when they focus on high-risk loan types.
Transaction risk, a significant aspect of credit risk, arises during the transaction process and involves customer analysis and evaluation It encompasses three primary components: selection risk, underwriting risk, and operational risk Selection risk specifically pertains to the challenges faced in evaluating and analyzing information to make informed lending decisions.
Underwriting risk refers to the potential dangers arising from the criteria established to maintain credit safety, which include contract terms and collateral requirements In contrast, operational risk pertains to the risks linked to lending practices and loan management, encompassing the implementation of risk rating systems and strategies to manage overdue loans effectively.
1.2.3.2 Standards to evaluate credit risk in lending activity a Quantitative standards
Collected Loan Loan collection ratio = - x 100%
The loan collection ratio measures the effectiveness of loan recovery by comparing the number of loans collected within a year to the total number of loans disbursed during the same period.
The loan collection ratio is a key indicator of credit quality within finance companies, reflecting the amount of capital recovered from a set number of disbursed loans over a designated timeframe A higher loan collection ratio signifies superior credit quality, indicating more effective management of loan repayments.
Past-due loans Delinquency ratio (%) = - x 100%
According to Decision No 493/2005/QĐ-NHNN issued on April 22, 2005, regulations regarding the classification of debts in banking activities categorize loans into five distinct groups, with Group 1 encompassing standard loans.
• Outstanding loans that credit institutions assess as fully and timely recoverable in terms of principals and interests o Group 2 (criticized loans) includes:
• Loans which are overdue for a period of less than 90 days;
• Loans with restructured repayment term, which are still in due under the restructured repayment period o Group 3 ( sub- standard loans) includes:
• Loans which are overdue from 90 to 180 days;
• Loans with restructured repayment terms, which are overdue for a period less than 90 days under the restructured repayment period o Group 4 (doubtful loans) includes:
• Loans, which are overdue from 181 to 360 days;
• Loans with restructured repayment term, which are overdue for a period from 90 to 180 days under the restructured repayment period o Group 5 (potentially irrecoverable debts) includes:
• Loans, which are overdue more than 360 days;
• Frozen loans pending settlement by the Government;
• Debts with restructured repayment term, which are overdue more than 180 days under the restructured repayment period
Past-due loans are those classed from Group 2 to Group 5 Total outstanding loans are the remaining number of loans that clients still owe finance companies
Delinquency loan ratio indicates overdue loan situation as well as credit management in finance companies Higher delinquency ratio equals to poorer credit quality and higher credit risk
Non-performing loan ratio (bad debt ratio) (%)
Non-performing loans NPL ratio (%) = - x 100%
Non-performing loans (NPLs) are classified as loans falling within Group 3 to Group 5 The NPL ratio serves as a key indicator for assessing the credit quality of financial institutions; a high NPL ratio signifies poor credit quality, while a low ratio indicates better credit health.
- NPL ratio ≤ 3% : high level of safety;
- NPL ratio 3% - 5%: normal level of safety;
- NPL ratio ≥ 5% : credit activities hold many risks;
- NPL ratio ≥ 7%: low level of safety
Provision rates refer to the funds allocated by credit institutions to cover potential losses when clients fail to repay both principal and interest as agreed This allocation is classified as an expense for these institutions and is categorized into two types: specific provisions, which address particular identified risks, and general provisions, which cover broader potential losses.
According to Circular 02/2013/TT-NHNN dated January 21, 2013, equivalent provision rate for each loan group as follows:
The amount of specific provision is calculated by the formula:
R: the amount of specific provision
A: the value of the loan
C: the discount value of collateral r: provision rate for particular loan group
The amount of general provision is calculated at 0.75% of total outstanding loans in Group 1 to Group 4
THE REALITY OF CREDIT RISK IN LENDING ACTIVITY IN
History and development of EVN Finance Joint Stock Company
Established on September 1, 2008, EVN Finance Joint Stock Company is a dynamic financial institution dedicated to efficiently managing and arranging funds for the Vietnam Electricity Corporation.
With the charter capital of 2,500 billion VND, EVNFC becomes one of three finance companies having the greatest amount of charter capital in Vietnam
EVNFC operates as a non-bank credit institution, focusing on mobilizing idle funds from both domestic and international sources Its primary functions include arranging financing for electricity sector projects and offering valuable products and services to various economic entities, thereby supporting Vietnam's industrialization and modernization efforts.
In early 2010, EVNFC launched two branches in Ho Chi Minh City and Da Nang City to expand its business network As a newcomer in the financial market, the company aims to provide comprehensive product packages that address the growing demands of customers in these vital economic areas.
EVNFC is dedicated to evolving into a modern, integration-focused credit institution by continuously enhancing its operations and accumulating experience, all while delivering professional performance and high-quality services to ensure sustainable development.
To achieve planned objectives, organizational structure of EVNFC was fully constructed The company currently comprises of General Shareholders Meeting,
Board of Management, Board of Directors, Board of Supervisors, Internal Auditing and other departments and offices Besides, there are two branches at Ho Chi Minh
City and Da Nang City
2.1.3 Status of raising capital and results of operational activities in 2012-2014
Raising capital is a crucial function for credit institutions, as effective capital mobilization enables finance companies to secure additional resources for engaging in profitable business activities.
According to the Law on Credit Institutions, finance companies are prohibited from making payments and accepting short-term deposits, which presents significant challenges for capital mobilization Consequently, EVNFC must seek effective solutions to navigate these regulatory restrictions.
Table 1: Total mobilized capital from 2012-2014 (Unit: Billion VND, %)
(Source: Annual Report of EVNF)
The table illustrates the total mobilized capital from 2012 to 2014, revealing a slight downward trend in capital mobilization over this three-year period.
In 2014, total capital reached 15,011 billion VND, reflecting a slight increase of 1.09% compared to 2013, yet it was 1.89% lower than in 2012 The capital raised from deposits saw a significant rise in 2013, climbing from 4,171 billion VND to 5,354 billion VND, and then experiencing a modest increase to 5,431 billion VND by the end of 2014 Similarly, capital from entrusted funds followed a comparable trend, with a notable surge in 2012, followed by a moderate growth of 1.95% to 7,148 billion VND, before declining to 7,125 billion VND at the close of 2014.
From 2011 to 2013, EVNFC experienced a significant decline in debt financing capital, dropping from 4,318 billion VND to 2,347 billion VND However, by the end of 2014, this figure rebounded by 4.60% to 2,455 billion VND During 2013-2014, the company refrained from issuing valuable papers, which had minimal impact on the overall mobilized capital These changes in capital structure, particularly the increase in capital raised from deposits, reflect the growing trust customers have in EVNFC, serving as a key factor in the company's development.
( Source: Annual Report of EVNFC)
Three pie charts above represent the proportion of capital- mobilizing sources in
Over the past three years, significant changes have been observed in capital sources, particularly from entrusted funds In 2012, entrusted funds constituted 39.40% of the capital structure, which increased to 40.69% by 2015, reflecting a growing reliance on this funding source.
2014 This was then followed closely by the percentage of deposits This percentage, however, experienced a mere change, with the figure being 14.04% in
2012, 14.41% and 14.27% in 2013-2014 respectively The proportion of debt financing considerably decreased in 2012 and 2013 before recovered to 14.01% in
In 2014, EVNFC ceased issuing valuable papers, resulting in a capital structure consisting of four primary sources from 2013 This shift indicates the company's awareness of its challenges in capital mobilization, prompting the adoption of more feasible strategies for improvement.
2.1.3.2 Results of operational activities in recent years
Until 2014, the company achieved significant results through its own initiatives, with key activities such as lending, investment consulting, and investment generating substantial income.
Table 2: The total income and expenditure of EVNFC in 2013-2014
(Source: Income Statement of EVNFC)
In 2014, EVNFC achieved a record total income of 434 billion VND, while its total expenditure was 305 billion VND The primary driver of this income was interest income, which accounted for 1,100 billion VND of the overall revenue for the year.
There was an increase of 17 billion VND in the total expenditure from 2013 to
2014, leading to a tiny increase in profit before tax Despite a rise of 26 billion
In 2013-2014, EVNFC demonstrated positive growth, with total income and profit before tax increasing by 9 billion VND, or 7.5% While the improvements were not rapid, these figures reflect the company's commitment to sustainable development.
The reality of credit risk in lending activity in EVN Finance Joint Stock
The credit policy is formulated in accordance with the regulations set forth by the Government and the State Bank of Vietnam (SBV) regarding lending collateral, as well as guidelines for lending activities and the strategic orientation of credit operations within EVNFC Key components of this credit policy encompass these regulatory frameworks and strategic directives.
Lending object : EVNFC wish to provide services for all individuals and business entities; especially give priority for those who are in the electricity sector
Lending principle : Customers must use lent funds on appropriate purposes and commit to repay both principal and interest in due
To qualify for a loan, borrowers must demonstrate that the funds will be used for legal purposes, possess the financial capability to repay the debt as agreed, and present viable investment projects that align with their financial goals.
Government’s law To ensure credit safety, EVNFC has to implement lending guarantee as instructions of the Government and SBV
Lending limit : Lending limit in EVNFC is flexible It mostly depends on demand of customers and capital sources of EVNFC
Lending term : Terms are flexible and it depends on capital source, customers’ repayment capability and period of debt collection
Lending interest : EVNFC’ s lending interest is based on the average lending interest of 3 largest banks namely Agribank, Vietcombank and BIDV; it could be a fixed interest or variable interest
Lending collateral : Credit officers take responsibility to choose types of collateral to reduce credit risk in lending activity in accordance with SBV’s regulations
2.2.1.2 Status of lending activity a Outstanding loans classified by loan terms
Table 3: Outstanding loans classified by loan terms
Medium and-long term loans
Figure 2: Outstanding loans classified by loan terms
(Source: Annual Report of EVNFC)
In 2012, EVNFC experienced a notable decline in outstanding loans, but by the following year, the figure rebounded to exceed 5 billion VND Nevertheless, by the end of 2014, outstanding loans had decreased again to 3,803 billion VND.
Between 2012 and 2014, short-term loans constituted a small fraction of the total outstanding loans, fluctuating between 31.7% and just over 50% In contrast, medium and long-term loans represented a significant portion, exceeding 60% of the total outstanding loans in 2013.
2014 c Outstanding loans classified by groups of customer
Table 4: Outstanding loans classified by groups of customer
Medium and Long-term loansShort-term loans
Figure 3: Outstanding loans classified by groups of customer
(Source: Annual Report of EVNFC)
The chart illustrates the lending structure of EVN, highlighting significant shifts in customer group proportions Notably, customers outside the electricity sector dominated the lending landscape, with their loans increasing from 2,917 billion VND in 2013 to 3,146 billion VND, representing 82.72% of total outstanding loans in the following year In contrast, loans to customers within EVN surged from 854 billion VND to 2,833 billion VND in 2013 but then experienced a sharp decline to 657 billion VND in 2014.
2.2.2 Analysis of credit risk in lending activity in EVNFC
2.2.2.1 Credit risk management policy a Credit authorization mechanism
EVNFC is implementing a decentralized authorization mechanism for credit approvals, where the head office will make decisions on large-scale project loans, while the branches in Ho Chi Minh City and Da Nang will manage credit grants within their respective regions This approach includes specific policies regarding credit products and collateral requirements.
Credit products are mainly provided for the electricity sector including Vietnam
Electricity Corporation, other entity members and staff in EVN Besides, EVNFC tends to expand customer base by providing other loan products for all subjects allowed by the Government
EVNFC also implements policy on collateral in accordance with regulations of the Government and the State Bank of Vietnam c Policy on debt classification and provisions
Currently, the company classifies debts according to Decision No.493/2005/QD-
On April 22, 2005, the State Bank of Vietnam (NHNN) issued regulations regarding debt classification in banking activities for credit institutions These provisions were further detailed in Circular 02/2013/TT-NHNN, which was released on January 21, 2013, and includes guidelines for customer rating.
The company is establishing an internal credit rating system to assess customers by evaluating both financial and non-financial criteria, along with other relevant information.
AA Low, but in the long run is still higher than AAA
BB Medium, the ability to pay both principal and interest in the future is less guaranteed than type BBB
B High, low financial capability EVNFC is likely to lose capital if customer’s business operation does not improve
CCC High, is the acceptably highest level Customers are highly likely to break the contract EVNFC will lose capital in short term if there is not any imperative solution
CC Very high, EVNFC will have to spend much time and resources to collect loans If there is not any imperative solution, capital loss will happen
D High C, D Especially high, EVNFC apparently cannot collect lending capital
2.2.2.2 Analysis of credit risk evaluation standard in lending activity a Qualitative standards
No Categories Year 2012 Year 2013 Year 2014
(Source: Annual Report of EVNFC)
The loan collection ratio reflects a finance company's effectiveness in collecting debts, and a higher ratio indicates successful debt-collecting activities In 2012, the loan collection ratio peaked at 110.17%, but it fell dramatically to just over 40% in 2013 Fortunately, there was a gradual recovery, with the ratio rising to 59.47% in 2014, highlighting that EVNFC has increasingly focused on improving its debt-collecting efforts.
No Categories Year 2012 Year 2013 Year 2014
Figure 4: Delinquency ratio in the year 2012, 2013 and 2014
(Source: Annual Report of EVNFC)
The chart illustrates the delinquency ratio over the past three years, revealing a significant downward trend In 2012, the delinquency ratio peaked at 20.99%, but by the end of the period, it had decreased by nearly 50%.
2013 It continuously went down in the following year, with the ratio being 7.59% since the company had applied a number of approaches to collect past-due loans
NPL ratio (Bad debt ratio)
No Categories Year 2012 Year 2013 Year 2014
Figure 5: NPL ratio from 2012 to 2014
(Source: Annual Report of EVNFC)
The chart indicates a decline in the company's bad debts, leading to a decrease in the non-performing loan (NPL) ratio from 4.92% in 2012 to 2.86% two years later A report dated March 21, 2015, highlights this downward trend in the NPL ratio as of March 31.
December 2014 of credit institutions in Vietnam was at 3.25% In comparison with this number, the NPL ratio in EVNFC in 2014 is still lower than the average ratio
(Source: Annual Report of EVNFC)
The data reveals the total number of debts across five groups and the actual provisions over three years starting from 2012 Notably, the company's provisions have shown a steady increase during this period EVNFC has effectively adhered to regulatory requirements regarding provisions and has made significant efforts to reduce credit risk while ensuring credit safety.
One of the quantitative standards is how finance company performs
Government and SBV’s regulations When executing credit activities, EVNFC has strictly followed the Law and regulations published by the Government and SBV
By targeting specific customers and enhancing service offerings for the electricity sector and EVN members, EVNFC has successfully broadened its customer base beyond EVN This strategic expansion not only fosters positive business outcomes but also mitigates concentration credit risk, ultimately benefiting the company's lending activities.
Evaluation of credit risk and credit risk management in EVN Finance Joint
Since 2011, Vietnam's financial market has experienced significant fluctuations, complicating the management of lending and credit activities Despite regulatory challenges that impact the competitiveness of financial companies, EVNFC has focused on limiting credit risk and has achieved notable positive results.
Firstly , credit structure has seen great movements Outstanding loans of outside
EVN customers has increased marginally EVNFC strives to expand target customers beyond EVN
Secondly , credit activities has operated effectively It not only assures safe improvement, limits an increase in bad debts but also ensures the risk management regulation
Thirdly , the ability to collect debts is positive EVNFC cares about disbursed loans as well as debt-collecting activity
Fourthly , credit risk provision has increased gradually over the period It indicates that EVNFC has strictly followed law and credit regulations
EVNFC's success is attributed to its effective credit risk management, which is both systematic and appropriate The company prioritizes evaluating corporate clients with strong financial performance and carefully considers loan structures that support their business operations and debt repayment capabilities Additionally, EVNFC actively expands its customer base within and beyond the electricity sector, currently engaging with over 400 companies and financial institutions This diversification of lending activities helps minimize potential losses for the company.
Although EVNFC has experienced striking improvements in credit quality, there are still some drawbacks as follows:
Firstly , loan collection ratio toward long-term loans and EVN customers was atrocious It means that debt collecting activity of these loans was not taken into account
In 2012, total outstanding loans decreased due to the impact of the international financial crisis However, from 2013 to 2014, there was a significant increase in total outstanding loans driven by on-lending activities mandated by the Ministry of Finance As a result, customer expansion efforts remain constrained.
Thirdly , credit structure is still in trouble since short-term loans stand at a moderate figure This could easily lead to liquidity risk in lending activity
Fourthly , EVNFC did not closely follow financial situation and business operation of customers Therefore, specific solutions to minimize credit risk are not proposed
Subjective and objective factors contribute to drawbacks in credit activities, with the limited operating network being a significant subjective cause Currently, EVNFC operates two branches in Ho Chi Minh City and Da Nang City Expanding to additional locations would allow EVNFC to attract a broader customer base from various regions, thereby mitigating concentration risk in lending.
Furthermore, lending procedure has not been completed in a synchronized way
Despite the fact that customer is a vital factor in lending activity, lending procedure of EVNFC is just built up under loan terms, not under target customers yet
In recent years, the drawbacks of credit have been attributed to both an imperfect lending process and a limited quality of human resources Loan officers often lack experience in critical areas like construction and engineering, hindering their ability to effectively analyze and evaluate business plans and investment projects Additionally, weaknesses in the information system, along with insufficient supervision and investigative efforts, further exacerbate these issues.
Customer-related inadequacies significantly contribute to credit risk, as evidenced by the rising bad debt ratio in EVNFC during 2013 This increase was largely due to customers' dishonesty in their financial statements Furthermore, the lack of sustainable development practices exacerbates these issues.
The Vietnam stock market, alongside a stagnant real estate sector, significantly impacts business operations and lending quality at EVNFC Increasing competitive pressures may lead to a wave of bankruptcies among enterprises, resulting in an unavoidable rise in past-due and non-performing loans.
In conclusion, after seven years in operation, EVNFC has achieved significant milestones in lending and business activities, successfully mobilizing increased funds for EVN investments and making strides to reduce the bad debt ratio in 2014 However, the company currently faces substantial challenges in managing credit risk in its lending operations due to various subjective and objective factors, as detailed through analysis of data from 2012 to 2014 The next chapter will offer solutions and recommendations aimed at mitigating these credit risks within EVNFC's lending activities.
SOLUTIONS TO CREDIT RISK MITIGATION IN LENDING
Orientation toward the development of credit activities in EVNFC
From 2010 to 2020, EVNFC has made significant strides to establish itself as the leading finance company in Vietnam The company has implemented strategic initiatives focused on enhancing its credit activities, laying the groundwork for sustained growth and success in the financial sector.
Specifying general goals and visions about total outstanding loans and customer base, investment field, loan terms, lending currency and bad debt ratio;
Specifying measures and essential resources involved in order to achieve these goals
General goals of credit strategies for the forthcoming period include:
Implementing flexible operating model with customer-oriented and profit-centered principle
Enhancing competitiveness with advanced technology to modernize credit process
Diversifying credit activities in general and lending activity in particular
Expecting the credit growth rate to be at 20-22% annually
Expecting the bad debt ratio to be at less than 3%
By 2020, EVNFC is expected to face significant challenges, including economic instability, fluctuating interest rates, and stringent regulations from the State Bank of Vietnam (SBV) To effectively address these issues, it is essential to develop a clear and actionable short-term credit strategy.
Firstly, in terms of corporate customers, EVNFC aims at continuing to provide services for EVN and other related entities Additionally, it is imperative for
EVNFC to improve competitiveness by expanding customer base, particularly giving priority to businesses having financial strength and operation effectiveness
Clients with strong credit ratings and collateral will receive preferential lending policies featuring lower interest rates By publicly disclosing all credit requirements and lending documentation, enterprises can easily access resources and leverage these benefits for business growth.
EVNFC can leverage its strong relationships with loyal clients in the electricity sector to attract new customers and diversify its investment areas Additionally, collaborating with higher education institutions like Electric Power University can further enhance its offerings and market reach.
Developing educational loans for students aspiring to study abroad is a viable strategy for colleges This initiative will provide a diverse array of loan products, enabling EVNFC to enhance its lending operations and cater to a broader customer base.
To enhance customer satisfaction and fund utilization, EVNFC should not only diversify its loan products but also focus on developing support services, including consulting on customer requirements and business plans.
Solutions to credit risk mitigation in EVN Finance Joint Stock Company
3.2.1 Tackling problems of overdue loans thoroughly
To mitigate credit risk, addressing overdue loan issues is crucial for finance companies, as it allows them to unfreeze capital and enhance credit activities Loan officers must identify the reasons behind overdue loans and implement solutions to minimize losses If clients show willingness to repay, companies may offer support to help them through difficulties However, if customers intend to misuse funds or if debts are deemed irrecoverable, finance companies should halt further disbursements and refer these cases to the Debt Resolution Department to manage collaterals and prevent financial losses.
3.2.2 Perfecting lending procedure and lending policy
After seven years of operation, EVNFC's lending procedures and policies exhibit certain shortcomings that need to be addressed It is essential for EVNFC to align its lending processes with new regulations and international best practices Additionally, the procedures should categorize target customers based on their affiliation with EVN Enhancements in risk management and processing are also necessary to improve the lending framework.
To enhance its lending policy, EVNFC must establish clear guidelines on collateral requirements This involves diversifying the types of collateral accepted while also closely monitoring the cash flow of its customers' businesses.
EVNFC then should implement an appropriate debt collection policy as well as timely credit adjustments
3.2.3 Improving the quality of lending activity
The quality of lending activities is essential for managing bad debts and mitigating credit risks To ensure safe and sustainable growth, EVNFC must focus on enhancing the quality of its lending practices This involves adhering to the regulations set forth by the State Bank of Vietnam, including Circular 02/2013/TT-NNHH, along with other relevant guidelines concerning loans and secured assets.
Credit appraisal is crucial for ensuring high-quality lending activities Loan officers must assess customers' creditworthiness by reviewing their transactions with other credit institutions and consulting reputable sources like the CIC For large lending proposals, EVNFC should consider hiring professional consulting firms to evaluate and verify customer profiles, leveraging their expertise in credit appraisal.
This might increase expenses but it ensures credit safety for finance companies
Following the disbursement of loans to clients, EVNFC must maintain oversight and supervision of the project completion process In cases of contract violations, loan officers are required to take proactive measures, such as collecting debts sooner or categorizing the loan as overdue, to mitigate potential credit risks.
The advancement of technology significantly enhances the quality of credit appraisal, making it crucial for companies to utilize software that effectively ranks customers for quicker and more accurate project evaluations In a competitive landscape, credit institutions that leverage cutting-edge technology during the appraisal process can process information rapidly and seize more opportunities Consequently, investing in technology is a strategic move to improve lending quality and mitigate credit risk.
3.2.4 Improving the quality of human resources
Loan officers play a crucial role in credit activities as they directly engage with customers to create lending contracts Their qualifications and integrity are vital in significantly reducing credit risk, making them the most essential element in the lending process.
EVNFC needs to develop an effective and suitable strategy for recruiting, training and managing loan officers
To ensure a successful recruitment program, EVNFC must prioritize hiring candidates with strong analytical and evaluative skills, as well as a high level of responsibility for credit-related tasks It is essential to select highly potential and talented individuals with good personal integrity Additionally, preference should be given to applicants with relevant certifications and essential soft skills, including foreign language proficiency, IT knowledge, and effective communication abilities.
To enhance the quality of human resources at EVNFC, it is essential to encourage loan officers to improve their expertise The company could establish a fund to sponsor staff for overseas studies, with a commitment to work at EVNFC upon completion Additionally, implementing training sessions would help raise their academic qualifications and provide practical experience in lending activities.
To enhance staff management, EVNFC should establish a transparent and fair reward and discipline system Recognizing and rewarding high-performing credit officers not only acknowledges their contributions but also serves to attract young talent and foster creativity and commitment among employees.
However, strict discipline policy also needs to be applied for those having poor work ethics
Lastly, EVNFC ought to consider monitoring management system in a simple and intensive way This could be done by mergers between departments such as
Department of fund arrangement with Credit Department
3.2.5 Building up a credit information system
To enhance operational efficiency and ensure credit safety, EVNFC must establish a comprehensive, accurate, and synchronized information system across all departments Implementing a robust internal information network and an effective data transmission mechanism will provide the company with a holistic view of customer profiles Furthermore, diversifying information sources is essential for improving lending activity effectiveness and significantly reducing credit risk.
To enhance the credit information system, finance companies must diligently adhere to the guidelines outlined in Decision No 1117/2004/QD-NHNN, issued on September 8.
2004 on the issuance of the regulation on credit information activity and other
SBV’s decisions on credit information activity This partly contributes to the improvement of credit quality, with effective, safe and sustainable development
To enhance the quality of collected information, EVNFC should broaden its data-gathering methods beyond direct client interviews and financial statements While these methods are cost-effective and straightforward, investigating business sites can provide a more reliable source of information This approach allows EVNFC to better understand the production and business conditions of borrowers, facilitating a more accurate assessment of their reliability, reputation, and repayment capacity.
EVNFC should proactively create a dedicated team focused on collecting, aggregating, and storing customer information to maximize its effective use Additionally, the company can leverage external data sources, such as bank databases, to gain insights into client profiles.
Credit Information Center (CIC) EVNFC needs to frequently update information system by connecting with these sources to catch accurate and timely information about customers’ business activities
Petitions
To have the greatest operation efficiency in credit activities, particularly lending activity, EVN also needs to acts as a facilitator by
- Helping EVNFC build up the relationship with clients who suffer from a budget deficit; thereby, the company could represent the image of an effective fund arrangement entity in the corporation
- Improving capital scale invested in EVNFC in order to enhance financial capability and acquire more comparative advantages than other finance companies
- Encouraging workers and employers in the electricity sector to access and use consumer loan products which have been being launched by EVNFC
3.3.2 To the State Bank of Vietnam
The State Bank of Vietnam needs to prove its active role as a guide for credit institutions by considering some recommendations as follows:
Intensifying and improving the effectiveness of supervising and inspecting activity
Supervising and inspecting activity is one of the most important duties of
The State Bank of Vietnam (SBV) must enhance its supervisory and inspection activities to effectively address legal violations within credit institutions, particularly finance companies Currently, SBV often responds to risks only after they have occurred, rather than proactively inspecting operations By strengthening oversight, SBV can improve credit quality and mitigate credit risks, ensuring a more stable financial environment.
Promoting credit information system in order to develop the quality of risk management
A credit information system significantly reduces asymmetric information between lenders and borrowers, allowing lenders to accurately assess customers and gradually lower credit risk.
Despite the progress made by the SBV's credit information system in supporting credit activities, challenges remain, including poor information quality and outdated or inaccurate data transmission To address these issues, the CIC should invest in modern technology to ensure accurate and timely processing and analysis of information Additionally, the SBV should implement training programs for credit staff, particularly those in the CIC, to enhance their professional and soft skills, ultimately leading to a significant reduction in credit risk.
The Vietnam Asset Management Company (VAMC) plays a crucial role in enhancing lending quality and reducing bad debts, thereby strengthening the financial stability of credit institutions By operating effectively, VAMC contributes significantly to the purification of financial positions within the banking sector.
SBV’s regulation, it could decrease a number of irrecoverable debts and strengthen the financial system
To promote overall credit activities and enhance lending operations, the Government must support finance companies in their efforts to expand and improve credit quality.
A robust legal framework is essential for the effective functioning of financial operations and credit activities The Law on the State Bank of Vietnam and the Law on Credit Institutions serve as critical legal foundations in the finance and banking sector Additionally, regulations such as the Law on Insurance and the Law on Mortgage must be transparently communicated The Government should provide clear guidelines for the implementation of these laws and circulars, ensuring a cohesive approach among credit institutions This will enhance the safety and security of financial company operations.
The Government must enhance oversight of enterprises by mandating external audits for joint stock and limited liability companies, as many currently lack periodic auditing requirements This absence of regulation negatively affects credit institutions' ability to assess financial health, increasing credit risk By implementing comprehensive external audit regulations for all business types, the Government can mitigate these risks Additionally, careful evaluation of establishment licenses is essential to prevent adverse effects on business partners and society at large.
Building on the analysis of credit risk in lending from the previous chapter, Chapter 3 presents strategies to mitigate credit risk and enhance the quality of credit activities Additionally, it offers targeted recommendations to improve overall lending practices.
The Vietnam Electricity Corporation (EVN) is collaborating with the State Bank of Vietnam (SBV) and the Government to ensure safe and sustainable development This partnership emphasizes the necessity of coordination between the company and national authorities While EVNFC strives to reduce credit risk, it is essential for EVN and the Government to establish a favorable microeconomic environment that effectively supports credit activities.
This, in turn, contributes to the prompt and prosperous development of Vietnam economy throughout the integration process
Credit and lending are fundamental activities that remain a primary focus for credit institutions The operational effectiveness of finance companies is significantly influenced by their lending activities Therefore, enhancing the quality of lending and reducing credit risk are critical areas that require careful attention This thesis conducts an in-depth analysis of these issues within the context of EVNFC.
Firstly, several theoretical backgrounds of credit risk in lending activity and finance companies have been presented
Secondly, status of credit risk in lending activity together with achievements and drawbacks in lending activity in EVNFC from 2012 to 2014 have been researched
Thirdly, depending on the reality of credit risk in lending activity, a number of solutions and recommendations have been proposed to mitigate credit risk in
To achieve sustainable development and maintain its status as a leading finance company in Vietnam, EVNFC must prioritize credit risk mitigation as a key focus area.