In the current Vietnamese commercial banking system, Lien Viet Post Commercial Joint Stock Bank was established in 2008, the first bank established after 15 years of discontinuing establishment license. Therefore, LienVietPostBank’s operating time is quite short compared to the common “age” of other commercial banks.
Right in 2008, Lien Viet Post Commercial Joint Stock Bank issued regulations on internal credit ratings of borrowers including individual customers, corporate customers and financial institution customers. By 2011, after 3 years of operation, the ratio of overdue debt and bad debt of the whole system of Lien Viet Post Commercial Joint Stock Bank had increased significantly with the respective rates of 3.14% and 2.05. % of total loan balance as of September 30, 2011.
The above ratios have exceeded the allowable limit of the State Bank and the overdue debt ratio of the bank itself. With the top priority for safety and stability in credit activities, the administrators of LienVietPostBank have had additional regulations on the credit rating system of borrowers. Although LienVietPostBank’s internal credit rating system has more corrections and improvements than the previous system, the credit system in general and corporate credit in particular still has some limitations that need to be improved. and more complementary.
The topic “Improving the credit rating system of corporate customers at LienVietPostBank” has shown how to evaluate the internal credit rating system of corporate customers at Lien Viet Post Commercial Joint Stock Bank, the current status and potential issues. Proposals to help improve the above system.
2. Research problem overview
2.1 World
The world’s major credit institutions and credit rating agencies, when granting credit to any customer or according to professional requirements, one of the first things to do is to assess the credit rating of a particular customer. that customer, regardless of whether the customer is an individual, a business, or a country. With their long history of operation, the credit rating system and process of these financial institutions have been updated and perfected over many decades, so these systems are fully appreciated. aspects, prospects, and risks of the rated audience.
The world’s leading credit rating agencies including Fitch Ratings, Moody’s and Standard & Poor’s often update and revise their credit rating systems through research and scientific reports of those There are big names in the field, including Edward I. Altman with the Z-score (credit score model), the Probit regression model pioneered by Frankel and Rose (1996) and the structural model Merton’s composite risk model, which is being used effectively in many countries around the world to predict bankruptcy risk and credit risk rating.
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2.2 Domestic
With the goal of approaching international standards such as Basel in risk management of modern banks, the State Bank of Vietnam issued Decision No. 57/2002/QDNHNN dated January 24, 2002 on pilot implementation of a distribution scheme. Analysis and classification of corporate credit. The SBV also requested to strengthen the control of bad debts of commercial banks through Decision No. 493/2005/QD-NHNN dated April 22, 2005 on debt classification, setting up and use of provisions to deal with risks. credit risk.
Currently in Vietnam, most commercial banks are still classifying debts according to Article 6 of Decision 493/2005/QD-NHNN based on the overdue time of outstanding loans. Debt groups according to Article 7 of Decision 493/2005/QD-NHNN:
-Group 1 (qualified debt) includes: debts assessed by credit institutions as being able to fully recover both principal and interest on time.
-Group 2 (debts to pay attention to) includes: debts that are assessed by credit institutions as being able to fully recover both principal and interest but there are signs of customers’ declining ability to repay.
-Group 3 (substandard debt) includes: debts assessed by credit institutions as being unable to recover principal and interest when due. These debts are assessed by credit institutions as likely to lose part of the principal and interest.
-Group 4 (doubtful debts) includes: debts that are assessed by credit institutions as having a high probability of loss.
-Group 5 (possibility of capital loss) includes: debts that are assessed by credit institutions as unrecoverable or lose capital.
The actual probability of bad debt of commercial banks may be higher than the official figure given by banks, of which an equally important reason is the internal credit rating system of the banks. Trade in Vietnam has not yet comprehensively and fully assessed the characteristics in the process of production and business activities of each type of customer, the current and potential risks that customers and even customers face. that the bank can bear.
The credit rating system of domestic commercial banks has now made many significant improvements compared to the late 90s. It is also an inevitable result of the integration process in the financial sector. The banks themselves, the domestic banks often adjust their credit system, typically following the simulation of the credit system of foreign banks and other big names in the world. The theory of Edward I. Altman with Z index (credit score model) is widely applied in domestic commercial banks, however, there are still many requirements to be improved in these credit socialization systems. .
3. Objectives, objects and research methods
3.1 Research objectives
The research objective of the study is to answer questions from LienVietPostBank administrators about the rate of overdue debt and bad debt of LienVietPostBank increased significantly compared to the total outstanding loans from 0.19% in June 2009. (with a total converted loan balance of VND3,489 billion) until the ratio of overdue debt and bad debt at the end of September 2011 is 3.14% and 2.05% respectively (with a total converted loan balance of 11,459 billion VND) copper). Although LienVietPostBank’s managers have applied customer rating and loan management standards in accordance with Basel Committee and State Bank regulations, the bad debt ratios still increased significantly. In fact, the bad debt ratio as announced above may not necessarily reflect the actual number of the bank, this also depends on the purposes of disclosing the data of the bank managers, the hidden ways. tracking numbers or simply aiming for a planned figure for the future.
The thesis provides aspects for the managers of LienVietPostBank to approach the theoretical basis of the leading names in the credit rating field in the world such as Moody’s and Standard & Poor’s with Z-index (model number 1). credit score model) in the process of completing the internal credit rating system of its corporate customers. The study also shows limitations and recommendations to improve and perfect the internal credit rating system of LienVietPostBank’s customers.
3.2 Research scope and subjects
The scope and subject of the research is limited to the model of internal credit rating criteria for corporate customers of Lien Viet Post Commercial Joint Stock Bank in the period from 2010 to the end of 2011.
The basis of the above scope and object of study is that LienVietPostBank began to issue temporary regulations on the internal credit system of corporate customers on December 15, 2008 and the regulation on the internal credit system of corporate customers. business on February 5, 2010.
3.3 Research Methods
The topic uses the case study method to approach the subject matter expertise according to the content, methods and techniques of internal credit rating of corporate customers of LienVietPostBank. This study uses the internal credit rating procedures and regulations of LienVietPostBank’s corporate customers, the secondary information is the credit rating results of corporate customers at a branch of LienVietPostBank and the Credit Bulletin. application of LienVietPostBank Risk Management Department (legal & risk management division) during the period from 2010 to 2011.
The research topic uses qualitative data analysis method to clarify the current status of the internal credit rating system of corporate customers of Lien Viet Post Commercial Joint Stock Bank. Combined with the comparison method with popular evaluation standards in the international and domestic credit rating market, the research provides solutions to improve the credit system of LienVietPostBank.
4. Thesis structure
The structure of the thesis is composed of an introduction and three chapters with the following structure:
Introduction: Briefly about the reasons for choosing the topic, overview of domestic and international research issues, research objectives, objects and methods, practical significance of the topic.
Chapter I: Presents general issues about credit rating system including overview of credit society, experience of corporate credit society in developed countries, research by Edward I. Altman on corporate credit score model and overview of credit society in Vietnam.
Chapter II: Presenting the current situation of LienVietPostBank’s credit society system, actual results of the system’s credit society research cases. Since then, the thesis has analyzed, evaluated, compared and verified the comparative criteria in the ranking model to give the points achieved as well as the existing limitations that need to be improved, supplemented to enhance the effectiveness of the ranking model. effectiveness in preventing and minimizing credit risks through the customer screening system.
Chapter III: Present seven practical solutions to contribute to perfecting the internal credit system of corporate customers of LienVietPostBank.
5. Practical significance of the topic
The topic presents the need to improve the internal credit rating system of corporate customers at LienVietPostBank. The topic focuses on scoring and ranking methods, giving a direction to verify the criteria in order to improve the effectiveness of credit risk management with advanced tools and in accordance with international standards.
The research results of the topic can be practically applied to the credit rating process of LienVietPostBank’s corporate customers in order to meet the requirements of increasing credit growth in association with the criteria of stability and sustainability.
CHAPTER I: SOME GENERAL ISSUES ABOUT COMPANY CREDIT RATES AT commercial banks
The research objective of this chapter is to approach some modern theoretical foundations in the field of corporate credit society, to refer to the leading credit rating systems of the US, to introduce classic scientific works. The model of foreign authors has been published: Altman’s multivariable credit index model in predicting corporate default risk. The topic also presents the credit system of some commercial banks in the country. Thereby, it is possible to discover the achievements that the credit socialization systems of these organizations have achieved so that it is valuable to consider and propose a complete application to the internal credit system of corporate customers of LienVietPostBank.
1.1 Overview of TD
1.1.1 Credit rating concept
Credit ratings are assessments of credit risk and credit quality, showing the borrower’s ability and willingness to repay (principal, interest or both) to meet financial obligations. fully and on time through a symbolic rating system.
1.1.2 Subjects of credit rating
Credit socialization system approaches all factors related to credit risk, commercial banks do not use credit results to show the value of borrowers, but simply give current opinions based on risk factors, thereby having an appropriate credit policy and loan limit. A high rating by a borrower is not a guarantee of full repayment of principal and interest, but only a basis for making an informed decision on the adjusted credit. assess the degree of credit risk associated with the borrower’s customer and all of that customer’s loans.
Borrower ratings mainly predict default risk according to three basic levels of danger, warning and safety based on the probability of default (PD). The basis of this probability is data on the customer’s past debts within the previous 5 years, including outstanding debts, outstanding debts and uncollectible debts. The data is grouped into three groups: financial data group related to customer financial ratios as well as ratings by rating agencies; group of qualitative non-financial data related to management qualifications, research and development capabilities of new products, data on the growth of the industry; and a group of warning data related to the phenomena that signal insolvency, deposit balance situation, overdue debt situation, … . These groups of data are put into a predefined model for processing, thereby calculating the probability of customer default. It can be a linear model, a probit model, etc. and is usually built by professional consulting organizations.
Loan ratings are based on borrower ratings and factors including collateral, loan term, total outstanding balance at credit institutions, and financial capacity. The risk of a loan is measured by the probability of expected risk EL (Expected Loss). This probability is calculated by the formula EL = PD x EAD x LGD. In which, EAD (Exposure at Default) is the total outstanding balance of the customer at the time the customer fails to pay the debt, LGD (Loss Given Default) is the estimated loss ratio.
According to statistics of the Basel committee, at the time of default, customers tend to withdraw loans to approximately the level of the granted limit. Basel II requires calculation of EAD = Average outstanding balance + LEQ x Average unused credit limit. In which, LEQ (Loan Equivalent Exposure) is the proportion of unused capital, which is likely to be withdrawn by customers at the time of default. “LEQ x Average Unused Credit Limit” is the outstanding balance that customers withdraw at the time of default in addition to the average outstanding balance.
Estimated losses include loan losses and other losses incurred such as interest due but not paid, costs of handling collateral, costs of legal services and certain expenses. relate to. LGD is the ratio of the capital loss to the total outstanding balance at the time of default by the customer, calculated by the formula LGD = (EAD – Recoverable amount)/EAD.
1.1.3 Importance of Credit Rating
The commercial bank’s credit system, which provides predictions of the probability of credit risk, can be understood as the economic difference between what the borrower promises to pay and what the commercial bank actually receives. . The concept of risk considered here is an uncertainty or a state of uncertainty that can be estimated with a probability of occurring. The concept of credit is understood as the mutual transfer of the right to use capital between the lender and the borrower on the principle of repayment. Credit relations are based on mutual trust between subjects.
1.1.3.1 Credit risk
Bank credit is a credit relationship between banks, credit institutions and economic organizations and individuals according to the principle of repayment. Commercial banks were born to solve the needs of capital distribution, production and business development needs of economic organizations and individuals with business characteristics in the monetary field. A commercial bank is a financial intermediary, mobilizing idle capital in the economy, then lending it to economic organizations and individuals at higher interest rates than mobilizing rates to earn profits. If the bank does not meet enough capital for the economy or mobilize enough capital but there is no market for lending, the bank will operate inefficiently, which will lead to risks. The repayment of the principal in a bank credit means the realization of the market value of goods, while the repayment of the interest in the credit means the realization of the surplus value in the market. Therefore, it can be considered that credit risk is also a business risk, but it is considered from the perspective of the bank.
The State Bank introduced the concept of credit risk in Decision No. 493/2005/QD-NHNN dated April 22, 2005: “Credit risk in banking operations of a credit institution is the possibility of loss in the banking activities of a credit institution due to the customer’s failure to perform or inability to perform his/her obligations as committed.
Credit risk arises in case the bank does not fully collect or collect on time both principal and interest of the loan. Credit risk is not limited to lending activities, but also includes many other credit-related activities of commercial banks such as guarantees, commitments, approval of trade finance, lending in the interbank market. goods, finance leasing, co-financing loans, ..