Completing the credit rating system of Bank for Agriculture and Rural Development of Vietnam

- Mathematical model of credit rating 2 : the model only focuses on quantitative data combined in the mathematical model to evaluate the asset quality, profitability, and debt repayment ability of the rating object. ratings are based on the disclosed financial statements, which have been substantially disclosed, with appropriate accounting adjustments.

With the increasing level of risk and more complex, in 2004, the Basel II Treaty was born to overcome the limitations of Basel I. To determine the level of credit risk, Basel II offers three methods: standardized approach (SA) 3 , basic internal credit rating system (F-IRB) 4 and advanced multiple credit rating system (A-IRB) 5 .

- According to the basic credit socialization method with institutional customers, credit institutions estimate the probability of default (PD) for each customer's credit score, the default loss parameters (Loss Given at Default - LGD) ), default risk (Exposure at Default - EAD) and effective maturity (M) are estimated by the supervisory authority (Central Bank).

- According to the advanced credit society method with institutional customers, credit institutions estimate PD parameters for each customer's credit rating, LGD for each contract's rating, EAD for each type of loan contract, and calculate M. according to the instructions of the governing body. For individual customers, the risk parameters PD, LGD and EAD are estimated by credit institutions for each customer basket.

Currently, due to certain limitations, Vietnamese commercial banks are conducting debt classification and risk provisioning based on the standardized approach and F-IRB. While the trend of rating agencies in the world is a combination of methods in which the focus is: F-IRB and A-IRB. Not available

2 Mathematical models of credit ratings: Model Driven Ratings

3 Standardized Approach [Standardised Approach (SA)]

4 Basic Internal Credit Rating System [Foundation Internal Rating-Based Approach (F-IRB)]

5 Advanced Internal Rating-Based Approach (A-IRB)

Which Vietnamese banks use the A-IRB method, while this rate in banks in member countries of the Bank for International Settlements (BIS) is 40%.

According to the results of the KPMG survey (2013), surveying 33 Vietnamese banking systems for credit risk, 47% of banks will use the standard approach to calculate capital requirements, the IRB method. : 33%, the remaining 20% have not decided which method to follow.

1.2.5. The role of credit rating

1.2.5.1. Selection of credit granting customers

For the Vietnamese commercial banking system, credit is a traditional activity and brings the main source of income. In the context of the current volatile and risky economy, the fierce competition between banks requires both quick and effective credit decisions. However, credit activities always have a lot of potential risks, especially in emerging economies like Vietnam because of the lack of transparency and incomplete information system, the level of risk management is still high. limited, the professionalism of bank staff is not high. In order to have a quick and accurate decision in credit activities, a bank must make a relatively accurate prediction of the customer's ability and willingness to repay. This depends on the important factor of the bank's information system about past and present customers.

Through the results of customer credit, the bank will assess the creditworthiness of each borrower, determine the level of risk when providing loans, and the ability to repay loans. Based on the results of the credit society, the bank will decide to lend or refuse to lend to ensure objectivity and science.

1.2.5.2. Developing customer and credit policies

On the basis of credit society, the bank will classify customers and apply appropriate policies to customers on lending interest rates, limits, and credit terms. At the same time, also develop credit policies, apply lending techniques corresponding to each type of customer. For customers with high creditworthiness and good credit, the bank will apply preferential policies: loans with low interest rates, large loan values, easier lending conditions, etc. Customers with low creditworthiness, low credit rating also means that credits contain many risks, the bank will apply stricter lending policies and control measures, in order to limit the possibility of credit risk. use occurs.

1.2.5.3. Build a credit portfolio

Based on the results of the credit society, the bank will assess the risk level of each enterprise, each customer's business area, thereby building an appropriate credit portfolio according to the bank's orientation in each period. .

1.2.5.4. Debt classification and provisioning for risks

According to Article 4 of Decision No. 493/2005/QD-NHNN dated April 22, 2005 of the State Bank, credit institutions must build an internal credit society system to support debt classification. credit quality management in accordance with the operational scope and actual situation of the credit institution. The support of the internal credit system is reflected in the fact that the customer credit results of the internal credit system will serve as the basis for calculating and setting aside risk provisions in accordance with the provisions of Decision 493/2005/QD - SBV dated 22/4/2005 and after 1/6/2014 is Circular 02/2013/TT-NHNN dated 21/01/2013.

Every year, credit institutions must re-evaluate their internal credit system and risk provisioning policies to suit the actual situation and the provisions of the law.

1.2.6. Credit rating principles and procedures

1.2.6.1. Credit rating guidelines

Credit rating is made based on the main principles including credit analysis on the basis of customers' sense and willingness to repay debt in history, assessment of repayment potential through measuring financial capacity. of cutomer. From there, a comprehensive and unified risk assessment is based on the rating notation system. In the credit rating analysis, it is also necessary to pay attention to the qualitative analysis to complement the shortcomings of the quantitative analysis. The analytical criteria may change in accordance with the general environmental factors.

1.2.6.2. Credit Rating Process

Corporate credit loans are carried out in the following 5 steps: Collecting information

Categorize by industry, size Analyze indicators and give points Provide results of credit society

Approval and use of the results of the TD

Collect information

Collect information related to the criteria used in the analysis and evaluation, the rating information of other credit institutions related to the rating object. In the process of information collection, in addition to the information provided by the customer himself, the appraiser must use many other sources of information from the mass media, information from the bank's credit center. , information from rating companies…

Classification by industry and size

Each business line has its own characteristics, different nature of operations and is affected by different factors that greatly affect the debt repayment capacity of enterprises, for example, heavy industry needs capital. The agricultural sector is large, has little labor, and has a long cycle of capital, while the agricultural sector is highly dependent on natural factors, has seasonal characteristics, and has a large number of manual workers. The size of the enterprise is an extremely important factor that affects the business efficiency as well as the competitiveness of enterprises in the market. For large-scale enterprises, they will have advantages of scale, low product costs, diversification of products, large capital that can be invested in depth, improved equipment, etc. In contrast to large scale enterprises small scale, little capital, low competitiveness, it is easy to go bankrupt when it encounters negative external factors.

Analyze and score metrics

Analyze by model to draw conclusions about ratings. Using both financial and non-financial indicators at the same time. The financial indicators are scored based on the industry and the size of the business, usually including: liquidity criteria, debt ratio, operating criteria and income criteria. Each indicator has a different score and weight. Non-financial indicators usually include indicators of debt repayment ability, creditworthiness of transactions with banks, cash flows, etc. Especially for non-financial indicators, they must be alternately designed to ensure accuracy. The criteria must be unified in the process of evaluating the criteria and must be used flexibly, objectively, suitable for each type of business and each business item.

Provide credit rating results

After scoring the financial and non-financial criteria, the credit officer (CBTD) synthesizes the score by multiplying by the respective weights. To give the ranking results,

CBTD will compare the total score achieved by customers with the customer classification table and give the results of customer ratings.

Approve and use ratings

In order to ensure that the internal credit system is in line with reality, and the rating results accurately reflect the risk level of each customer, banks need to periodically review to edit and perfect the specific system: monitor the credit status of the rated subject to adjust the rating, the adjustment information is kept; aggregate the rating results compared with the actual risk, and based on the frequency of rating adjustments made for customers to consider adjusting the rating model.

1.3. Some credit rating models

1.3.1. Credit scoring model Z (Z - Credit scoring model)

This is the EI Altman model used to give credit to businesses that borrow money. The quantity Z is used as a composite measure to classify credit risk with borrowers and depends on:

- The value of the borrower's financial indicators.

- The importance of these indicators in determining the probability of a borrower's past default. Since then, Altman has built the following point model:

Z = 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 + 1.0 X5

In there:

- X1 = Working capital ratio/total assets

- X2 = Undistributed profit ratio/total assets

- X3 = Profit before tax and interest/total assets

- X4 = Market value of total equity / book value of total debt

- X5 = Revenue ratio/total assets

The higher the Z-value, the lower the probability that the borrower will default. When the Z value is low or negative, it will be the basis for classifying customers into the group with high risk of default.

1.3.2. FICO's Personal Credit Score Model

Fair Issac Corp (FICO) is an American public company that provides assessment and decision-making services, including credit scores, that help financial services companies make complex decisions.

According to FICO, a credit score is a number that represents a person's creditworthiness and ability to pay off debt. Credit scores are designed to measure default risk by taking into account various factors in a person's financial history. Banks and credit unions use credit scores to assess potential risk from borrowers.

Table 1.2: Proportion of evaluation criteria in FICO's credit score model
Proportion	Evaluation Criteria
35%	Payment history: information such as bankruptcy, foreclosure, Late payment... lowers credit score
30%	Debt Burden (Debt Burden): too much debt than allowed to do credit score reduction
15%	Length of credit history: a credit history Good years will have a good impact on FICO scores
ten%	Types of credit used: consumers use the most type of credit will be more beneficial
ten%	Recent searches for credit: Borrowing is often seen as a sign of financial difficulty, resulting in a low credit score.
(Source: www.fico.com/en/)

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The FICO credit score model is widely used in the United States because information related to credit status can be easily checked through credit reporting companies. FICO has many scales such as general score, personal finance, bank card, mortgage... the higher the score, the lower the credit risk.

1.4. Experience in credit ratings of banks in the world, auditing organizations and Vietnamese commercial banks.

Credit ratings have been developed for a long time in developed countries with famous rating systems such as Moody's, Standards & Poor's of the US. In Vietnam, Ernst & Young Vietnam Co., Ltd (E&Y) is a reputable auditing organization and has been cooperated by many commercial banks to build the bank's internal credit rating system.

For Vietnam, commercial banks have implemented a credit rating system and are perfecting their rating system.

1.4.1. Ranking experience of banks in the world

1.4.1.1. Rating experience of American commercial banks

American banks' credit ratings are based on determining the probability of default through the analysis of 3 groups of indicators:

- Group of financial data: reflecting profitability, financial leverage, operational efficiency, cash flow management, liquidity and debt payment... These data are referenced and compared. with evaluation results of independent rating agencies.

- Group of non-financial data: related to industry, enterprise size, occupied market share, management capacity, operating organization... In which two important factors are enterprise size and equity. . If the business has

With large scale and capital, it is easier to innovate with modern technology and diversify activities.

- Group of warning data: the warning data will help the bank determine the level of risk of default.

The process of corporate credit rating of American banks:

Process

consider

1.4.1.2. The French Central Bank (FiBEL) Experience

The assessment and credit rating at the Bank of France is conducted in secret and only serves the commercial banking system. This information is updated and evaluated regularly, continuously and systematically.

Scoring for Scale:

- The scale of the enterprise's operation scale is indicated by a letter from A to H or J, N, X.

- The scale of operation is assessed according to the level of sales that in principle has not been taxed, except in certain cases.

Credit score:

The Bank of France's credit rating and scoring is mainly based on the analysis of the financial position of the balance sheet. The assessment also applies

used by each type of enterprise, by economic sector and by group of enterprises. There are 5 credit rating scales: 0, 3, 4, 5, 6.

Give points on payment

- Payment rating score: represented by the numbers 7, 8, 9.

Score the leaders

The highest head of the company, who is primarily responsible for the business, the score expressed by one of 3 numbers: 0, 5, 6.

Additional stats

In addition to the above assessment and scoring, the Bank of France also provides additional indicators:

- Publicity index : BILLION

- Indicator of missing or delayed information: CHEAP

1.4.2. Credit Rating System Ernst & Young

Ernst & Young Vietnam Co., Ltd (E&Y) is an auditing organization that has built its own credit rating system to serve the assessment of audited clients. E&Y's credit rating system is also built for individual and corporate customers.

1.4.2.1. Personal Credit Rating

E&Y's personal credit rating model consists of two parts: personal identity and creditworthiness of customers with a weight of 60:40, respectively.

E&Y's personal credit rating system is divided into 10 levels with decreasing risk from A+ to D based on a 100-point scale achieved by customers (weighted for each criterion).

Table 1.3: E&Y . personal credit rating symbology
Point	Rating	Evaluate	Risk	Classification according to Decision 493
100	A+	Top class	Short	Qualifying debt in group 1
ninety four	A	Excellent	Short	Qualifying debt in group 1
89	A-	Very good	Short	Qualifying debt in group 1
84	B+	Good	Short	Debts to pay attention to belong to group 2
79	REMOVE	Medium	Medium	Debts to pay attention to belong to group 2
69	B-	Satisfactory	Medium	Debts to pay attention to belong to group 2
59	C+	Below average	Medium	Subprime debt in group 3
49	OLD	Below standard	High	Subprime debt in group 3
39	C-	Possibility not high recovery	High	Doubtful debt in group 4
35	EASY	Possibility not very high recovery	High	Debts likely to lose capital belong to group 5
Source: Ernst & Young Vietnam Co., Ltd

1.4.2.2. Business Credit Rating

E&Y's corporate credit rating index consists of 11 financial indicators, which are classified into five levels: good, relatively good, average, below average, bad and five groups of non-financial criteria (flowability). currency, management level and internal environment, relationship with the bank and external factors, operating characteristics of the business) to assess debt repayment status according to three levels of good, medium, bad .

Table 1.4: E&Y's corporate financial scoring criteria
Liquidity indicator	Current ability to pay
	The ability to pay quickly
Performance Indicators	Inventory turnover
	Accounts Receivables Turnover
	Efficiency of using fixed assets
Debt balance ratio	Total liabilities/Total assets
	Long-term debt/Equity
Income target	Operating profit/Net revenue
	Profit after tax/Equity
	Profit after tax/Average total assets
	EBIT/Interest payable
Source: Ernst & Young Vietnam Co., Ltd

Debt grouping according to E&Y is the result of a matrix combining financial position and debt payment situation.

Table 1.5: Combined Credit Rating Matrix of E&Y
Debt payment situation Financial situation	Good	Medium	Bad
Good	Sufficient debt standard	Debt notes	Underlying debt standard
Relatively good	Debt notes	Underlying debt standard	Underlying debt standard
Medium	Underlying debt standard	Underlying debt standard	Doubtful debt
Below average	Underlying debt standard	Doubtful debt	Potential debt capital loss
Bad	Doubtful debt	Potential debt capital loss	Potential debt capital loss
Source: Ernst & Young Vietnam Co., Ltd

1.4.3. Credit rating system of Vietnamese commercial banks

In order to support credit and banking risk management as well as comply with the provisions of Article 4, Decision 493 and Article 5 of Circular 02 of the State Bank, credit institutions, especially Commercial banks have built an internal credit rating system to support debt classification and credit quality management in accordance with their operational scope and actual situation.

The credit rating system of commercial banks has basically met the prescribed standards including financial and non-financial criteria sets, customer evaluation processes on the basis of qualitative and financial evaluation, business situation, management, reputation of customers. Depending on the development orientation, customer target and risk tolerance level, commercial banks have different in actual scoring criteria. However, the difference is not much because the core criteria must still be ensured to reflect the true reality of customers

row. Credit institutions can add a few criteria, especially non-financial criteria to better suit their customers.

Conclusion Chapter 1

Chapter 1 presented an overview of credit ratings. Covers some basic credit rating concepts, common credit rating models. Affirming the important role of credit ratings in credit risk management. Credit rating has shown its role as an effective and scientific tool in credit risk management through quantifying assessments and making appropriate decisions.

In this chapter, the author has presented lessons learned from the credit rating system of banks in the world, the credit rating system of a foreign rating agency, the auditing company E & Y, The organization was selected by banks in Vietnam as a consultant to build an internal rating system and introduced the rating system of some commercial banks as a basis for comparison with the credit rating system of the Bank. products of Agriculture and Rural Development of Vietnam.

CHAPTER 2

SITUATION OF CREDIT RATE SYSTEM OF BANK FOR AGRICULTURE AND RURAL DEVELOPMENT OF VIETNAM

2.1. Bank for Agriculture and Rural Development of Vietnam

2.1.1. About Agribank

Established on March 26, 1988, operating under the Law on Credit Institutions of Vietnam, up to now, Bank for Agriculture and Rural Development of Vietnam is a leading commercial bank playing a leading and key role in the banking sector. economic development of Vietnam, especially investment in agriculture, farmers and rural areas.

Agribank is the largest bank in Vietnam in terms of capital, assets, staff, network of operations and number of customers. As of December 31, 2013, Agribank's leading position is still confirmed in many ways:

- Total assets: 705,365 billion VND.

- Charter capital: 29,605 billion VND.

- Total mobilized capital reached VND 626,390 billion, an increase of 15.9% compared to the end of 2012, completing the target of raising mobilized capital in 2013.

- Total outstanding loans reached VND 530,600 billion, up 10.4% compared to the end of 2012, reaching the credit growth target in 2013 (from 10% to 12%).

- Network: nearly 2,300 branches and transaction offices, Cambodia branch.

- Personnel: nearly 40,000 officers and employees.