Basic Theory of Credit Risk Management Capacity of Commercial Banks;

Vietnam Technological and Commercial Joint Stock Bank is focused on comprehensive research from the current situation to proposing reasonable solutions.

Research scope:

- Regarding content: credit activities of commercial banks include two aspects, capital mobilization and credit granting. The thesis focuses on research on credit risk, credit risk management and credit risk management capacity at commercial banks in the credit granting stage.

- Regarding space: The thesis focuses on studying credit risk management capacity at Vietnam Technological and Commercial Joint Stock Bank.

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- Regarding time: Analyze the current status of risk management and risk management capacity at Vietnam Technological and Commercial Joint Stock Bank in the period of 2014 - 2019. Implementation solutions according to the roadmap until 2030.

6. Research methods

To achieve the research objectives and answer the above questions, the thesis uses a combination of the following methods:

- Scientific methodology: dialectical materialism and historical materialism of Marxism - Leninism. This is a premise method combined with other methods to show a logical dialectical way in theoretical and practical research at commercial banks.

- Statistical method: Collect primary and secondary data related to credit risk management at Techcombank according to time series from internal reports, reports of State management agencies and direct observation at the Transaction Office, some branches to collect information and data for the thesis research.

- Interview method : Interview and ask for opinions from experts, credit officers and managers at some branches of Techcombank (in person, via email) to get more necessary and useful information to serve the research process and complete the thesis.

- Questionnaire survey method : Distribute survey forms on credit risk management capacity at branches: to have more information for assessing credit risk control at branches of Vietnam Technological and Commercial Joint Stock Bank. The branches selected by NCS for survey ensure representativeness: There are branches in big cities, branches in rural areas, branches with high bad debt ratio, branches with low bad debt ratio.

- Experimental method : Based on the results of questionnaire survey and

interviewing experts, the author processed data on Excel and SPSS software, analyzed the reliability of each component as well as the measurement criteria, and verified the research results. The author also applied descriptive statistics to synthesize,

Comparison to quantify the impact of Techcombank's risk management capacity factors

- Comparison, analysis and synthesis method: Through statistics, comparison, analysis and synthesis of data from Techcombank's statistical reports, NCS assesses and analyzes the current status of credit risk and credit risk management at Techcombank in the period 2014 - 2019 .

- Logical reasoning method: From theoretical and practical issues, especially the shortcomings, weaknesses and causes at Techcombank regarding credit risk management, the researcher makes logical inferences to propose solutions and recommendations to strengthen credit risk management at Techcombank.

7. New contributions of the thesis

The completion of the above thesis has the following scientific and practical significance:

- New contributions to basic theory:

Systematizing the basic theories of credit risk management, credit risk management capacity at commercial banks with new changes when banks are implementing the regulations in the Basel 2 Agreement. Especially the issue of credit risk management capacity, with the establishment to research and present the concept, meaning, content and reflection criteria is considered the core and new theory of the topic. Systematizing lessons learned in improving credit risk management capacity of some commercial banks in the world and Vietnam, thereby drawing some valuable lessons learned for reference to improve credit risk management capacity for Vietnam Technological and Commercial Joint Stock Bank.

- New practical contributions:

+ The researcher used basic theoretical knowledge of credit risk management and credit risk management capacity in line with international practices and current regulations in Vietnam to analyze and evaluate fully, comprehensively and systematically the current status of credit risk management capacity at Vietnam Technological and Commercial Joint Stock Bank in the period of 2014 - 2019. Using the econometric model, the researcher analyzed the level of influence of the factors constituting credit risk management capacity at the bank. With rich, updated data sources with clear origins, the thesis pointed out the level of success, limitations and causes of the limitations in a realistic manner. From those studies, the thesis provides reliable practical research results, this is a method of assessing the current status with more advantages than similar published topics.

+ Proposing new solutions, advanced and modern content to improve credit risk management capacity at Vietnam Technological and Commercial Joint Stock Bank by 2030 such as: Improving management and operation capacity in accordance with international practices and Basel standards; Improving capacity to build and operate credit risk measurement tools; Completing the last line of defense in the three-line-of-defense model to improve credit risk control capacity; Improving credit risk handling capacity, applying risk dispersion tools such as derivatives, credit insurance... Proposing recommendations to agencies and departments to improve credit risk management capacity at Vietnam Technological and Commercial Joint Stock Bank by 2030.

8. Thesis structure

In addition to the introduction, conclusion, list of references and appendices, the main content of the thesis is basically divided into three chapters:

Chapter 1: Basic theory of credit risk management capacity of commercial banks;

Chapter 2: Current status of credit risk management capacity at Vietnam Technological and Commercial Joint Stock Bank

Chapter 3: Solutions to improve credit risk management capacity at Vietnam Technological and Commercial Joint Stock Bank

CHAPTER 1: BASIC THEORY ON CREDIT RISK MANAGEMENT CAPACITY OF COMMERCIAL BANKS

1.1. Overview of credit risk management of commercial banks

1.1.1. Credit risk

1.1.1.1 Concept of credit risk

Risks are unexpected events that, when occurring, lead to loss of bank assets, decrease in actual profits compared to expectations, or have to spend additional costs to complete a certain financial transaction.

In banking business, credit is the main profit-making business of the bank but it is also a business with great potential risk. Credit risk in general and risk in lending activities in particular are one of the main causes of loss and seriously affect the quality of banking business.

There are different concepts of RRTD:

According to Timothy W. Koch (Bank Management, 8th edition 2014)[77] Once a bank holds an earning asset, the risk arises when the customer defaults - meaning the customer does not pay the principal and interest as agreed. RRTD is the potential change in net income and market value of capital arising from the customer's non-payment or late payment.

According to Thomas P.Fitch (Dictionary of Banking Terms, 2018)[67] RRTD is a type of risk that occurs when the borrower fails to pay the debt according to the contract agreement, leading to a delay in the debt repayment obligation. Along with interest rate risk, RRTD is one of the main risks in the lending activities of banks.

According to Henie Van Greuning - Sonja B rajovic Bratanovic (Analyzing Banking Risk: A Framework for Assessing Corporate Governance and Risk Management - Third Edition, 2009 [69]: RRTD is defined as the risk that the borrower cannot pay interest or repay the principal compared to the time specified in the credit contract. This is an inherent attribute of banking activities. RRTD means that payment is delayed, or worse, not paid in full. This causes problems with the cash flow and affects the liquidity of the bank.

According to the book Banking Risk Management (2001) by Joel Besis [53], RRTD is understood as losses due to customers not being able to repay their debts or the decline in credit quality of loans.

In the “17 principles of credit risk management” of the Basel Committee [50], it is mentioned that “credit risk is the possibility that a bank borrower or counterparty will not meet its payment obligations according to the agreed terms”. Thus, credit risk arises when one or more parties in a credit contract are unable to pay the other parties. Credit risk can occur at any time and is inevitable in the business activities of a bank.

In Vietnam, according to Circular 02/2013/TT-NHNN issued by the State Bank of Vietnam on January 21, 2013 [34], “Risk risk in banking activities is the potential loss for debts of credit institutions and foreign bank branches due to customers not performing or not being able to perform part or all of their obligations as committed”.

Thus, from the concepts referenced through previous studies, along with his own point of view, the author summarizes the concept of RRTD as follows: "RRTD of commercial banks is a type of risk that causes losses to commercial banks when customers do not perform or do not fully perform their debt payment obligations according to the commitments made to the bank."

1.1.1.2. Credit risk classification

Based on the cause of the risk

- Transaction risk:

Transaction risk is a form of credit risk that arises due to limitations in the transaction process, loan approval, and customer assessment. Transaction risk includes selection risk, guarantee risk, and operational risk.

+ Selection risk: is the risk related to credit assessment and analysis when the bank selects effective loan options to make lending decisions.

+ Guarantee risk: arises from guarantee standards such as terms in the loan contract, types of collateral, guarantor, form of guarantee and loan level based on the value of collateral.

+ Operational risk: is the risk related to loan management and lending activities, including the use of risk rating systems and techniques for handling problem loans.

- Portfolio risk:

Portfolio risk is the risk that arises due to limitations in managing the bank's loan portfolio, divided into intrinsic risk and concentration risk.

+ Internal risks: originate from the factors and characteristics within each borrower or economic sector or field. It originates from the characteristics of the borrower's operations or capital usage.

+ Concentration risk: is the case where the bank concentrates on lending too much to a number of customers, lending to too many customers operating in the same industry, economic sector or in the same certain geographical area,...

Based on subject:

- Objective risks :

Objective risks are risks caused by objective reasons such as natural disasters, war, death or disappearance of borrowers and other unexpected changes that cause loss of loan capital while the borrower has strictly implemented the policy regime.

- Subjective risks :

Subjective risk is the risk caused by the subjective nature of the borrower and lender due to accidental or intentional loss of loan capital or for other subjective reasons.

1.1.1.3. Impact of credit risk

Credit activities always bring the main income to a bank, so credit risk also has a great influence on the bank's operating efficiency, specifically the effects of credit risk are as follows:

Impact of credit risk on banking operations:

Reduced bank profits

When RRTD occurs, bad debts will arise, capital stagnation will lead to a decrease in bank capital turnover, arising administrative costs, debt collection supervision... these costs are higher than the income from increasing overdue debt interest rates, because these are only virtual incomes, one of the bank's handling measures, in reality, it is very difficult for the bank to fully recover them. Besides, the bank still has to pay interest on mobilized funds while a part of the bank's assets cannot earn interest or be converted into money for lending to others and earning interest. The result is a decrease in the bank's profits.

Reduced bank solvency

Banks often plan to balance cash outflows (interest and principal payments on deposits, loans, new investments, etc.) and cash inflows (deposits, principal and interest collections, etc.) at future points in time. When loan contracts are not paid in full and on time, it will lead to an imbalance between the two cash flows. In fact, customers' savings deposits still have to be paid on time while customers' loans are not repaid on time. If the bank does not borrow or sell its assets, the bank's ability to pay will be weakened, leading to payment risks.

Reduced bank reputation

If the situation of insolvency recurs many times, or information about the bank's RRTD is disclosed to the public, the bank's reputation in the financial market will decline, which is a good opportunity for competitors to compete for the market and customers.

Bankruptcy

If many bank borrowers have difficulty repaying, especially large loans, it can lead to a crisis in the bank's operations. When banks do not prepare contingency plans in advance and are unable to meet the huge demand for capital withdrawals, they will quickly lose their ability to pay, leading to the collapse of the bank.

Impact of credit risk on the economy:

Banking activities are related to the activities of the entire economy. Therefore, when RRTD occurs, it can bankrupt some banks, potentially spreading to other banks, causing bankruptcy of the Bank and rushing to withdraw money, creating a fear in the people so they rush to the bank to withdraw money before the deadline. That can lead to bankruptcy of many banks and will have a negative impact on the economy. When banks go bankrupt, it will cause a part of enterprises, businesses, and residents to lose capital, negatively affecting production and life.

In addition, business production is interrupted due to lack of capital, and depositors cannot get their money back. These consequences also reduce public confidence in the stability and soundness of the financial system, as well as the effectiveness of the Government's monetary policies.

1.1.2. Credit risk management

1.1.2.1. Concept of credit risk management

Management is a concept that covers many fields: administrative management (in social organizations), business management (in economic organizations). In the field of business management, it is divided into many fields: financial management, human resource management, marketing management, production management.

The term management in English: “Management” means both management and administration, but is currently used mainly with the meaning of administration. However, when using the word, we consider the term management to be closely associated with state management, social management, that is, management at the macro level. The term administration is often used on a smaller scale for an organization, a business, or a bank.

There are many concepts of management: Koontz and O'Donnel [78] introduced the concept of management through its tasks, arguing that the basic task of management is "to design and maintain an environment in which individuals working together in groups can accomplish selected tasks and objectives". According to James Stoner and Stephen Robbins, [94] "Management is the process of planning, organizing, leading and controlling the efforts of organization members and of using all other organizational resources to achieve stated goals".

In the field of commercial banking business, currently, with many different approaches, scientists, financial institutions, and banks have proposed many concepts of risk management of commercial banks. Some typical concepts can be mentioned:

According to Moody's Analytics [81], QTRRTD is a process of implementing loss reduction measures by fully understanding capital and RRTD reserves over a certain period of time. From this perspective, QTRRTD is essentially the administrator's measures to manage capital and reserves for RRTD.

According to the Basel Committee [50] , credit risk management is the implementation of measures to maximize the rate of return adjusted for credit risk by maintaining credit balances within the allowable parameters. The Basel Committee's concept of credit risk management has clarified that the purpose of credit risk management is to maximize profits based on ensuring that losses caused by credit risk are within the limits that banks can accept.

According to the Standard Chartered Bank's Risk Management Framework (2012)[93] , Risk Management is the process of managing credit risks through establishing a framework of policies and procedures to control the measurement and management of credit risks. Meanwhile, the MAS (Singapore) Risk Management Guideline states that Risk Management is the process of identifying, measuring, evaluating, monitoring, controlling and reporting credit risks through establishing a framework of policies and procedures to control the measurement and management of credit risks.

According to the textbook "Credit Management of Commercial Banks" (2012)[12] by Dinh Xuan Hang and Nguyen Van Loc:

Risk management in banking is a combination of measures and policies to grasp the occurrence and quantify potential losses, thereby finding ways to minimize or eliminate those losses.

Thus, although the views on credit risk management have different approaches, they all have in common that credit risk management focuses on the process of implementing strategies, policies and measures to limit credit risk, thereby aiming at the business goals of commercial banks. "The effectiveness of credit risk management is an important part of credit risk management.

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