Some solutions to restrain credit risk at Bank for Investment and Development of Vietnam Vinh Phuc Branch

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i DECLARATION I hereby declare that the thesis entitled ‘Some solutions to restrain credit risk at Bank for Investment and Development of Vietnam Vinh Phuc Branch’ is entirely my own work. All of data in my thesis is used honestly. I also declare that my researching results have not been previously or concurrently published in any other works. The Thesis Author Nguyen Huy Binh ii ABSTRACT The aims of this thesis are to clarify, explain basic theories of credit risk in business activities of commercial banks and analyze, assess the risk situation at BIDV Vinh Phuc branch. Moreover, the thesis also proposes some solutions to restrain credit risk at the branch. In the first part, literature reviews of commercial banks, bank credit and banking risks are presented. Furthermore, this part focuses on explaining general theories of credit risk such as causes, consequences, features and signs of the risk. Then the thesis mentions general introduction about BIDV Vinh Phuc branch, overview of business operations of the branch is also provided in this part. In addition, credit risk situation and the situation assessment at the branch are analyzed to find out remarkable achievements and remaining difficulties. In the last part, the thesis suggests some solutions to restrict credit risk at the branch and proposals to BIDV, State Bank of Vietnam and the Government. The thesis hopes to offer all banks managers and credit staff useful tips on preventing and constraining credit risk, and thus make a small contribution to improve the business result of Vietnamese banking system. iii ACKNOWLEDGEMENT This thesis would not have been possible without the support, the guidance and the help of several individuals who, in one way or another, contributed and extended their valuable assistance in the preparation and completion of this study. First and foremost, I would like to express my utmost gratitude to Ms Bui Thi Bich Thuy, my supervisor, for her constructive feedbacks and useful advices. This thesis would have remained a dream had it not been for her persistent help. I also would like to offer my sincere thanks to Mr. Kim Tuan Anh, director of enterprise customer relation department. He advised me some research ideas and assisted me a lot in collecting necessary data for the study. In addition, I owe particular thanks to the staff of BIDV Vinh Phuc branch whose support during my internship period I will never forget. Last but not least, I am very grateful to my beloved parents, my numerous friends who endured this long process with me and offered me great support, encouragement and love at all times. iv ABBREVIATION Agribank: Vietnam Bank for Agriculture and Rural Development BIDV: Joint Stock Commercial Bank for Investment and Development of Vietnam CIC: Credit Information Center EVN: Vietnam Electricity NPL: Non-performing loans SBV: State Bank of Vietnam VNPT: Vietnam Posts and Telecommunications Group v LIST OF TABLES Table 1: Business result 25 Table 2: Capital mobilization situation 26 Table 3: Credit activities situation 27 Table 4: Outstanding loans situation 28 Table 5: Overdue debts situation 29 Table 6: Overdue debts based on overdue time 30 Table 7: Overdue debts based on currency 31 Table 8: Overdue debts based on collateral 32 Table 9: Non-performing loans situation 33 Table 10: Non-performing loans structure 34 TABLE OF CONTENTS DECLARATION……………………………………………………………i ABSTRACT…………………………………………………………………ii ACKNOWLEDGEMENT.............................................................................iii ABBREVIATION…………………………………………………………...iv LIST OF TABLES…………………………………………………………..v INTRODUCTION...........................................................................................1 CHAPTER 1: LITERATURE REVIEW......................................................4 1.1 OVERVIEW OF COMMERCIAL BANK..........................................4 1.1.1 Definitions......................................................................................4 1.1.2 Characteristics of commercial banks..............................................5 1.1.3 Functions of commercial banks......................................................6 1.2 OVERVIEW OF BANK CREDIT AND BANKING RISKS..............7 1.2.1 Bank credit.....................................................................................7 1.2.1.1 Definitions...................................................................................7 1.2.1.2 Classification of bank credit.......................................................7 1.2.1.3 Roles of bank credit.....................................................................8 1.2.2 Banking risks................................................................................10 1.2.2.1 Definitions and nature of risk....................................................10 1.2.2.2 Definition of banking risks........................................................10 1.2.2.3 Classification of banking risks..................................................10 1.3 CREDIT RISK IN BUSINESS OPERATION OF COMMERCIAL BANKS........................................................................................................13 1.3.1 Definitions....................................................................................13 1.3.2 Features of credit risk...................................................................14 1.3.3 Signs to identify credit risk..........................................................14 1.3.4 Sources of credit risk....................................................................15 1.3.4.1 Objective sources......................................................................15 1.3.4.2 Subjective sources.....................................................................16 1.3.5 Impacts of credit risk....................................................................19 1.3.6 Criteria of measuring credit risk...................................................20 CHAPTER 2: CREDIT RISK RESTRAINT SITUATION AT BIDV VINH PHUC BRANCH................................................................................22 2.1 GENERAL INTRODUCTION ABOUT BIDV VINH PHUC BRANCH.....................................................................................................22 2.1.1 Establishment and development history of BIDV........................22 2.1.2 General introduction about BIDV Vinh Phuc branch..................23 2.1.3 Organization structure of BIDV Vinh Phuc branch.....................24 2.2 OVERVIEW OF BUSINESS PERFORMANCE OF BIDV VINH PHUC BRANCH.........................................................................................25 2.2.1 Business result..............................................................................25 2.2.2 Capital mobilization situation......................................................26 2.2.3 Credit activities situation..............................................................27 2.3 SITUATION OF CREDIT RISK AT BIDV VINH PHUC BRANCH…………………………………………………………………28 2.3.1 Outstanding loans situation..........................................................28 2.3.2 Overdue debts situation................................................................29 2.3.3 Non-performing loans situation....................................................33 2.4 ASSESSING THE SITUATION OF RESTRAINING CREDIT RISK AT BIDV VINH PHUC BRANCH.............................................................34 2.4.1 Policy of managing credit risk at BIDV Vinh Phuc branch.........34 2.4.2 Remarkable achievements............................................................35 2.4.3 Remaining difficulties..................................................................36 2.4.4 The reasons of credit risk at BIDV Vinh Phuc branch.................36 2.4.4.1 Objective reasons......................................................................36 2.4.4.2 Subjective reasons.....................................................................37 CHAPTER 3: SOLUTIONS TO PREVENT AND RESTRAIN CREDIT RISK AT BIDV VINH PHUC BRANCH...................................................39 3.1 ORIENTATION OF DEVELOPING CREDIT ACTIVITIES OF BIDV VINH PHUC BRANCH..............................................................................39 3.1.1 Orientation of developing credit activities of BIDV....................39 3.1.2 Orientation of developing credit activities of BIDV Vinh Phuc branch……………………………………………………………………39 3.2 SOLUTIONS TO PREVENT AND RESTRAIN CREDIT RISK AT BIDV VINH PHUC BRANCH....................................................................40 3.2.1 Improving the quality of appraisal...............................................40 3.2.2 Complying with the credit process tightly...................................41 3.2.3 Building durable relationships with customers............................41 3.2.4 Increasing secured loans...............................................................42 3.2.5 Applying risk dispersion solutions...............................................43 3.2.6 Improving the effectiveness of internal control tasks...................44 3.2.7 Accomplishing the credit information system..............................45 3.2.8 Enhancing the qualification of the branch’s credit staff...............46 3.3 SOME PROPOSALS...........................................................................47 3.3.1 Proposals to the Government.......................................................47 3.3.2 Proposals to State Bank of Vietnam.............................................48 3.3.3 Proposals to BIDV........................................................................49 CONCLUSION..............................................................................................51 REFERENCES................................................................................................52 1 INTRODUCTION 1. Rationale of the study Banking industry is always an indispensable part of every economy. The efficient and effective performance of the banks over time is an index to assess financial stability in any country. Thus, when a banking system faces financial crises or even collapses, the economy will suffer serious consequences such as high unemployment and inflation rate, fall in standard of living, stagnant industry…The reasons for these crises are various but the main one is credit risk. Credit risk is one of the oldest and most frequent forms of risk faced by banks. The higher the exposure of a bank to credit risk, the higher the tendency of the banks to suffer losses and vice versa. In addition, a bank exists not only to accept deposits but also to grant credit facilities so it is inevitably exposed to the risk. In recent years, banks in Vietnam have experienced a lot of difficulties in business activities due to credit risk. Therefore, preventing and restricting the risk are extremely urgent and essential tasks. However, Vietnamese banking industry has not been stable yet because it is in the process of reform and integration with the banking sector of other countries. Moreover, the credit operation of commercial banks is not very efficient and safe. Thus, how to limit credit risk effectively is always a big challenge for all banks in Vietnam in general and for Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) in particular. From the above reasons, it is, to my mind, an urgent need to curb credit risk at BIDV. Therefore, in my graduation thesis, I decide to choose the topic Nguyen Huy Binh CQ47/51.01 2 ‘‘Some solutions to restrain credit risk at Bank for Investment and Development of Vietnam Vinh Phuc branch’’. 2. Aims of the study The specific aims of the research are clarifying and explaining basic theories of credit risk at commercial banks. Besides, the writer analyzes and assesses credit risk situation and reasons of the risk at BIDV Vinh Phuc branch. At last, some solutions are proposed to restrict the risk at the branch. 3. Methods of the study In order to perform this study, I firstly choose the method of analyzing, summarizing, listing, comparing, and synthesizing materials and books to form the theoretical background. In the process of writing this paper, I also base myself on the knowledge I have learnt from my teachers, my supervisor and from other references. Last but not least, my own experiences gained during the internship period at BIDV Vinh Phuc branch and in learning English for Finance and Accounting at Academy of Finance provide me favorable conditions to complete the study. 4. Scope of the study This paper is intended, as the title suggests: ‘Some solutions to restrain credit risk at Bank for Investment and Development of Vietnam Vinh Phuc Branch’, to mention basic theories of credit risk at commercial bank and situation, reasons of the risk and solutions to solve this matter at BIDV Vinh Phuc branch. In addition, all information about business performance of BIDV Vinh Phuc branch from 2010 to 2012 is also used for the study. 5. Organization of the study Nguyen Huy Binh CQ47/51.01 3 The study is divided into three parts: The first part is the introduction including the rationale, aims, methods, scope, organization and significance of the study. The second part is the main part of the paper with three chapters: Chapter I deals with general theories about commercial bank, bank credit, banking risks and credit risk in business activities of commercial banks. Chapter II refers to the situation of restraining credit risk at BIDV Vinh Phuc branch. Chapter III mentions some solutions to restrain credit risk at BIDV Vinh Phuc branch. The last part is the conclusion that summarizes the content of the paper and gives some suggestions for further study. 6. Significance It is hoped that this study, to some extent, will be a helpful reference material for banks’ credit staff and bankers to get more solutions to prevent and constrain credit risk. Nguyen Huy Binh CQ47/51.01 4 CHAPTER 1 LITERATURE REVIEW 1.1 OVERVIEW OF COMMERCIAL BANK 1.1.1 Definitions Establishment and development history of commercial banks has lasted for hundreds of years and it always associates with the commodity economy. Along with the development of commodity economy, commercial banks have evolved a lot to become one of the most important financial institutions in an economy. The definition of commercial banks is various. According to Basel Accord II, commercial banks are defined as financial institutions that provide a list of various financial services, especially credit, savings, payment services and perform financial functions. French Banking Law in 1941 defined commercial banks as enterprises whose usual functions are accepting money through different forms and using those resources for their own sake in discount, credit and financial activities. In U.S, commercial banks are regarded as money-dealing enterprises that specialize in supplying financial services and operate in financial service industry. In Vietnam, Banking Ordinance issued on May 23rd 1990 by State Committee stated: ‘‘commercial banks are money dealing organizations whose main and usual activities are accepting deposits from customers with the responsibility of repaying and using them for lending activities or performing discounts, making as means of payment’’. According to Law on Vietnam credit institutions in October 1997 and Law on amending and supplementing articles of law on Vietnam credit institutions in 2004, Nguyen Huy Binh CQ47/51.01 5 commercial banks are credit institutions permitted to conduct all banking activities and other relating business ones. In general, commercial banks are financial institutions whose main function is providing financial services such as accepting deposits, giving business loans and auto loans, mortgage lending, and basic investment products like savings accounts and certificates of deposit. 1.1.2 Characteristics of commercial banks One of the most typical characteristics of commercial banks is running for profit. Commercial banks operate with the objective of making profit so their fee structure and interest rate are designed with the intention of making money for owners and shareholders. The second significant feature is being owned privately. Commercial banks are owned by private individuals or collections of private individuals acting as shareholders. They are regulated by Government institutions and must follow all applicable laws, but they are not owned by the Government. Private individuals who run commercial banks are responsible for major policy decisions. Another feature is that business operations of commercial banks always face risks. Commercial banks are among the major financial intermediaries in the marketplace and the nature of banking business is always associated with risks so risks are unavoidable to the banks. Consequently, commercial banks are always exposed to the risks that affect both the banks and their customers. Last but not least, commercial banks’ activities depend very much on customer’s trust. Main functions of commercial banks are mobilizing capital from customers and lending that capital to others so customers always play an important role in business strategies of every bank. Without customers and Nguyen Huy Binh CQ47/51.01 6 their trust, banks can hardly exist and develop. Thus, all banks always try their best to gain customer’ belief through discount and preference interest rate. However, after recent collapses and bankruptcies of some banks, regaining customers’ trust is really a tough challenge for all banks. 1.1.3 Functions of commercial banks The most important function of commercial banks is credit intermediation function. Being credit intermediaries, commercial banks become the connection between customers who have capital deficits and ones with capital surpluses. This function benefits not only customers but also the banks and the economy. Another important function of commercial banks is payment intermediation function. In more details, the banks conduct payments by transferring money from this account to others following their customers’ requests. The function makes commercial banks become ‘‘a treasurer’’ of enterprises and individuals because the banks keep customers’ money and carry out payment for them. Last but not least, commercial banks carry out a function of creating money. This is the result of two above functions. The creation of money means that after the process of lending and transferring money of commercial banks, a new amount of deposit which is much more than the initial one is created. Therefore, performing this function, commercial banks can create a huge amount of money which is multiple larger than the money issued by central bank. Nguyen Huy Binh CQ47/51.01 7 1.2 OVERVIEW OF BANK CREDIT AND BANKING RISKS 1.2.1 Bank credit 1.2.1.1 Definitions It is very essential to study definition of credit at first to understand more about bank credit. Credit is a contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company. Therefore, bank credit can be defined as the amount of credit available to a company or individual from the banking system. It is the aggregate of the amount of funds financial institutions are willing to provide to an individual or organization. A company or individual's bank credit depends on both the borrower's capacity to repay and the overall amount of credit available in the banking system. 1.2.1.2 Classification of bank credit Based on different criteria, bank credit can be classified as the following: Based on the loan term: Short-term credit: are loans with a term of less than 1 year. These loans are often used to support payment, supplement temporary shortage of working capital for enterprises or satisfy daily consuming demand of individuals. Medium-term credit: are loans with a term of 1 year to 5 years. Mid-term loans are used for investing, purchasing fixed assets, technical upgrading and production expansion. Long-term credit: are loans with a term of more than 5 years to finance capital for construction, upgrade and expand large-scale production. Nguyen Huy Binh CQ47/51.01 8 Based on guaranteed assets: Credit with guaranteed assets: are loans with mortgage, pledge, collateral or guarantee from the third party. Credit without guaranteed assets: are loans without mortgage, pledge or guarantee from the third party. These loans depend very much on customers’ prestige and banks often perform these loans to their traditional customers. Based on loan purpose: Good production and circulation credit: are loans provided for enterprises to do business. Consuming credit: are loans provided for individuals to satisfy their consuming demands such as buying houses, cars, real estate… Based on transaction methods between banks and customers: Direct credit: are loans lent directly from banks to borrowers and the borrowers pay back the loans directly to the banks without financial intermediaries. Indirect credit: are loans provided for borrowers from other financial intermediaries. 1.2.1.3 Roles of bank credit Firstly, bank credit contributes to stabilize, expand business and economic growth. As a main channel to provide capital for the economy, this type of credit always satisfies capital demands of customers, hence it ensures the continuous development of business. In the market economy, the credit is one of the sources to form fixed and working capital of enterprises so it also helps the enterprises to expand production scale, promote technical improvements to gain more and more profit. Moreover, bank credit is the bridge between Nguyen Huy Binh CQ47/51.01 9 saving and investment. It not only stimulates saving but also supplies capital for investing. Thus, the credit plays an important role in economic growth. In addition, bank credit improves the efficiency of using capital. A main characteristic of this type of credit is borrowers’ responsibility of paying back the principal and the interest. On using loans from banks, enterprises and individuals must respect all terms and conditions of the credit contract, repay the loans and interest in a timely manner. Thus, the borrowers always have to try to use the loans effectively. This will enhance the efficiency of using capital and prevent capital waste. Besides, the credit is a tool to implement macroeconomic targets such as stabilizing prices, economic development, restraining inflation, increasing employment rate and social security policies of the Government. To achieve these targets, the Government needs to use bank credit because the state budget is limited whereas all targets need money to be accomplished. In addition, this type of credit is also used to implement monetary policies and regulate money circulation. Social security policies such as improving education, health care quality and living environment… are usually financed from domestic and foreign loans of the Government. Therefore, without bank credit, the Government can hardly conduct macroeconomic targets and social security policies effectively. Last but not least, this type of credit also contributes to develop foreign trade. Nowadays, economic growth of a country always associates with the world economy and the credit has become an important mean to link countries’ economy together. To developing countries in general and Vietnam in particular, bank credit plays a key role in promoting export, import and especially modernizing and industrializing the economy. Nguyen Huy Binh CQ47/51.01 10 1.2.2 Banking risks 1.2.2.1 Definitions and nature of risk All activities of individuals or groups in society have different goals. However, sometimes the goals cannot be achieved as expected due to risk. So what is risk? There is no official definition of risk so far. According to Wikipedia, risk is a probability or threat of damage, injury, liability, loss, or any other negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through preemptive action. The Oxford English Dictionary defines risk as the possibility of loss, injury, or other adverse or unwelcome circumstance; a chance or situation involving such a possibility. Economists consider risk as the probability that an actual return on an investment will be lower than the expected one. Although risk is defined variously, its nature is uncertainty or unexpected occurrence of an event that will harm the subject. 1.2.2.2 Definition of banking risks Banking risks are those risks the banks are confronted with in their current operation and the risks may have potentially negative effect on banks’ business. There are some types of banking risks which can be classified as the following. 1.2.2.3 Classification of banking risks Credit risk: The most significant and persistent risk faced by banks is credit risk. It may be defined as the risk that a counterparty of a financial transaction will fail to make repayments according to the term and conditions of the contract, thus causing the asset holder to suffer loss. This failure may be the result of Nguyen Huy Binh CQ47/51.01 11 bankruptcy, a temporary change in market conditions, or other factors adversely affecting the borrower’s ability to repay. The most obvious example of credit risk is the risk that a customer will fail to repay a loan. However, it is important to appreciate that credit risk exposure extends to a large variety of bank’s activities including the extensions of commitments and guarantees, acceptances, trade finance transactions, placements and the range of capital markets’ instruments activity such as foreign exchange, futures, swaps, bonds, options, equities and bullion. In addition, credit risk may also arise from off balance sheet transactions and take the form of delivery or settlement risk. Because credit risk can cause serious consequences to banks so how to restrict credit risk is always a top concern of bank managers. Interest rate risk: A fundamental banking objective is to borrow funds at one rate and to lend them at a higher one. Interest rate risk refers to the financial risks caused by the interest rate fluctuations that affect both the profit obtained by the client and the indebtedness degree to the bank. A major increase of the interest rate may determine a financial pressure for the client’s activities, which may result in customers’ inability to repay the amounts. Liquidity risk: Liquidity risk occurs when a bank is not able to meet its cash or payment obligation. The risk arises because cash flows on assets and liabilities do not match. Due to the size and the spread of the resources, the bank is often called to borrow ‘‘short’’ and lend ‘‘long’’. This gives rise to the risk that depositors may seek to withdraw their funds and the bank may not be able to effect Nguyen Huy Binh CQ47/51.01
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