Changes in Customer Loan Reserve Fund

The bad debt ratio of Son Tay Branch is still considered safe, below 2.5%, however, the increase in bad debt over the years has partly reflected the quality of credit work at the Branch. This shows that credit quality is on the decline, the Branch has not paid due attention to credit risk management, the bad debt ratio increases if it exceeds the safe threshold, it will adversely affect the business activities of the Bank. The risk management work of the Branch still has many weaknesses and shortcomings due to the small number of credit officers and lack of experience, economic downturn, debt repayment awareness of customers, etc.

The Branch's bad debt ratio is trending in a negative direction as the Group 4 Debt (doubtful debt) and Group 5 Debt (Debt with the possibility of losing capital) ratios are increasing. Group 5 debt alone from 2012 to 2014 increased nearly 9 times and accounted for the largest proportion of the Branch's total bad debt.

Credit risk provisioning criteria:

Table 2.13: DPRR provision situation in the period 2012-2014.

Unit: Billion VND

Target

2012	2013	2014
Total outstanding debt	1,772	1,757	1800
Amount of risk provision	23.76	34.85	17.45
General reserve	16.15	15.34	12.17
Specific reserve	7.61	19.51	5.28

Maybe you are interested!

(Source: Financial statement for the period 2012 - 2014)

The above data shows that in 2013, bad debts at the branch suddenly arose, the amount of risk provisions of the branch increased significantly and focused mainly on specific risk provisions. In 2013, the amount of provisions increased by more than 11 billion VND compared to 2012. In 2014, both the overdue debt and bad debt ratios were

decreased compared to 2013, so the bank's risk provisioning ratio also decreased from 1.98% to 1.07%. The provisioning measure is a form of self-insurance for the Bank, this is a necessary and important thing in the current conditions to help Son Tay Branch be more proactive in risk management and its business activities. However, to properly assess the quality of credit work at the branch, it is necessary to consider the aspect of using the risk provision fund to handle bad debts.

Table 2.14: Fluctuations in reserve fund for customer loans

Unit: Billion VND

2012	2013	2014
Credit risk reserve balance	20	34	17
Provisions made during the year	23.76	34.85	17.45
Use redundancy to handle the bad debt	27	10	31

(Source: Financial statement for the period 2012 - 2014)

In the period from 2012 to 2014, bad debt at the branch tended to increase rapidly, so the branch proactively used measures to handle debt such as: setting up provisions and handling risks, suing customers to recover debt... with the goal of ensuring the bad debt ratio is below the industry average, the total bad debt handled by the risk reserve fund in this period reached 68 billion VND. The reason for the increase in provisioning costs may be that in previous years the Bank had not set up sufficient provisions, the credit balance contained many unsustainable factors, the deterioration of collateral assets... As of December 31, 2014, the bad debt ratio at the branch was 0.96% of the total outstanding balance on the balance sheet, however in 2014 the branch sold bad debt to VAMC for about 106 billion VND.

By selling bad debts to VAMC for a period of 5 years, the branch will reduce its financial burden and risk provisioning.

Thang Long University Library

is carried out evenly over 5 years and is refunded to income when bad debts are recovered, thereby helping the Branch to be safer in business operations.

However, credit activities at the branch still have many latent debts with a high risk of being converted to bad debt because by December 31, 2014, the outstanding debt structure remains the same debt group according to Decision 780/QD-NHNN dated April 23, 2012 and Circular 02/2013/TT-NHNN dated January 21, 2013, which is quite large, about 600 billion VND, accounting for 37% of total outstanding debt. Therefore, in the following years, in addition to using traditional measures to handle bad debt such as using risk reserve funds and suing customers, selling debt to the Vietnam Asset Management Company (VAMC) is a relatively good solution through which BIDV will receive bonds from VAMC and can mortgage them to borrow from the State Bank to create credit capital for the economy. Currently, the Government and the State Bank are considering increasing the debt purchase and sale term from 5 years to 10 years.

- Expense

Target

2012	2013	2014
Difference between income and expenditure	61.5	54.2	55.6
Total Cost/Total Revenue	73%	69%	71%

(Source: Financial statement for the period 2012 - 2014)

Branch costs began to increase with a low fluctuation range. The expansion of mobilization and development of retail banking services inevitably led to an increase in labor and costs... Son Tay branch had to invest in purchasing management software, setting up electronic banking services... Initial investment in technology was very expensive, increasing the bank's costs. Therefore, the cost/revenue ratio of Son Tay branch was relatively high, reducing the bank's business efficiency.

- Net profit

This is the indicator that determines the magnitude of the commercial bank's business efficiency. As the difference between revenue and cost, the net profit of Son Tay branch tends to fluctuate unsteadily. In 2012, it reached 4,235 billion VND but increased in 2013 to 5,428 billion VND and then decreased to 4,269 in 2014.

- Increase equity

Increasing equity is both a requirement of the State Bank of Vietnam to ensure the minimum capital safety ratio and a condition for commercial banks to increase their operations.

The equity of Son Tay branch in the period from 2012 to 2014 has grown strongly. In 2012, it was 18,300 billion VND, in 2013 it was 24,006 billion VND and reached 34,907 billion VND in 2014. Thus, the branch has implemented the capital increase roadmap according to the plan when the branch has selected and had preferential policies for strategic shareholders with potential and ability to support the development of the bank. Increased equity affects profits through increased investment in technology, network expansion, increased mobilization and lending. If equity increases gradually with accumulated profits, the ROE index will not be distorted and accurately reflect the bank's operating efficiency.

- Business efficiency

Table 2.15: Relationship between ROA and ROE of BIDV Son Tay branch in the period 2012-2014

Year

Profit after tax	LNST	VCSH bq	ROE	Total assets bq	ROA
2012	61.5	4,235	18,300	23.14	281,275	1.51
2013	54.2	5,428	24,006	22.61	337,788	1.61
2014	55.6	4,269	34,907	12.23	391,428	1.09

(Source: General Planning Department - BIDV Son Tay)

Thang Long University Library

Looking at the table, we can see that total assets have been increasing over the years, proving that Son Tay branch has maximized its assets to generate more and more profits for the bank. The profit after tax/average equity ratio (ROE) has decreased, showing that over the years, equity and total assets have increased, but the bank's operating efficiency has tended to decrease. This shows that the scale of operations of Son Tay branch is still not commensurate with the growth rate of equity. Moreover, the business efficiency of Son Tay branch mainly earns profits from credit activities, but over the past 3 years, there has been an increase in income from service activities, proving that the retail service activities of the branch have initially developed quite well in the town.

2.4 Evaluation of capital usage efficiency at Joint Stock Commercial Bank for Investment and Development, Son Tay branch

2.4.1 Evaluation of key successes

In general, the period 2012-2014 had many fluctuations affecting the Vietnamese banking system in general and the Vietnam Joint Stock Commercial Bank for Investment and Development, Son Tay branch in particular, including the application of Basel II safety standards, the application of modern technology (creating a foundation for centralized management, forming and developing electronic banking services)... To increase efficiency, bank administrators in general and Son Tay branch in particular must use a combination of many solutions, from strategic planning to building operational plans, from system-wide management to controlling each transaction office and each bank employee. The efficiency goal is always linked to the specific conditions and measures of the bank. At the same time, administrators regularly analyze measures to increase efficiency such as management, control, technology, service diversity, etc.

The measures taken by Son Tay branch to increase business efficiency can be successful or fail due to subjective and objective reasons. Next, the author of the thesis will analyze the aspects considered

is the success of the measures that Son Tay branch has implemented in the period 2012-2014

- Executive management

Regarding the organizational structure of the management board, including the director and 2 deputy directors, responsible for operating all business activities of the branch. Based on the assignment of tasks by the management board to each member, during the year, the management board actively implemented and completed its tasks well through issuing directive decisions on business activities, contributing to the implementation of the proposed business plan targets.

Regarding the banking management system: Son Tay Branch has a modern management structure that continues to be improved through the establishment of specialized blocks such as the risk management block to enhance operations and monitor risks in accordance with practices demonstrated by the branch's bad debt ratio in the period 2012-2015 always at a safe rate, lower than 3%.

Each department in the branch's organizational structure is given clear authority and duties, creating smooth and close coordination between the management board and the blocks, meeting the bank's development needs in both breadth and depth.

- Check, control

Inspection and control activities have been strengthened and developed in accordance with regulations, thus limiting risks in the branch's business operations. The proportion of loans with collateral accounts for nearly 90% of the branch's total outstanding loans.

- Ensure equity and other safety

In general, Son Tay branch always complies with and maintains the safety ratios according to regulations, but the equity is still low. However, in the period of 2012-2014, the branch's scale of operations has been increasingly expanded and increased strongly.

- Development of technical infrastructure

Thang Long University Library

In the period of 2012-2014, Son Tay branch has been investing in facilities and developing technical infrastructure. In general, the branch has applied modern technology and developed banking services. Up to now, the branch has a computer system with software applications for managing residential deposits, accounting and credit management software, and retail banking software applications, with a high level of convenience to support employees in transactions with customers. In addition, the branch also applies software for Homebanking, Mobilebanking services,... so the branch's card services have gradually developed and have a certain position in the market (see table 2.16; 2.17 and table 2.18).

Table 2.16: BIDV's position in the domestic debit card market

Bank

Number of domestic debit cards as of December 31, 2014			Card usage turnover
Quantity	Market share	Location	Revenue (billion VND)	Market share	Location
BIDV	4,142,656	9.45%	5	44,744	11.45%	5
VCB	6,033,696	13.76%	4	85,076	21.77%	1
Vietinbank	10,112,000	23.06%	1	47,840	12.24%	4
Agribank	9,300,815	21.21%	2	84,594	21.64%	2
EAB	6,462,615	14.74%	3	60,491	15.48%	3
Techcombank	1,626,111	3.71 %	6	17,866	4.57%	6
Whole market	43,850,024	100%		390,841	100%

(Source: BIDV's card business performance summary report)

Table 2.17: BIDV's position in the international credit card market

Bank

Number of credit cards International to 31/12/2014			Card usage turnover
Quantity	Market part	Location	Sales (billion VND)	Market part	Location
BIDV	38,871	3.1%	7	606.0	6.22%	6
VCB	309,507	24.5%	2	2,443.1	25.1%	1
Vietinbank	372,768	29.5%	1	1,213.7	12.5%	4
Agribank	19,637	1.6%	9	297.6	3.1%	9
ACB	107,311	8.5%	3	1,146.6	11.8%	5
Eximbank	40,301	3.2%	6	490.1	5.0%	7
Sacombank	68,895	5.5%	4	1,283.7	13.2%	3
Techcombank	64.44	5.1%	5	1,547.5	15.9%	2
VIB	34,121	2.7%	8	319.5	3.3%	8
Whole market	1,261,662	100%		9,741.4	100%

(Source: BIDV's card business performance summary report)

Table 2.18: Results of card service implementation in the period 2012 - 2014

STT

Target	Year 2012	Year 2013	Year 2014
1	Number of cards issued per year (cards)	2,745	3,216	6,695
2	Number of credit cards issued during the year (cards)	17	25	57
3	Number of ATMs installed in the year (machines)	1	2	3
4	Card service revenue (million VND)	284	369	805

(Source: BIDV's card business performance summary report)

 Expanding network of operations, increasing market share

As of December 31, 2014, the branch's affiliated units have 6 transaction offices operating in Son Tay town. The network of transaction offices helps the branch reach customers faster and more effectively, especially small and medium enterprises, consumers, households, and production households.

Thang Long University Library

Comment