Complete and Improve the Quality of Customer Credit Information Center:

System of quantitative and qualitative indicators related to borrowers.

To implement credit risk management, the Basel II Committee allows banks to choose between the “standard assessment-based method” and the “internal assessment-based method”. Up to now, most banks are building an internal assessment method, which is the core of credit risk management. The internal assessment method, also known as internal classification, basically has two main tools: credit rating for corporate customers and credit scoring for individual customers. In essence, both tools are responsible for rating (or classifying) the credit of borrowers. The basic difference is that credit scoring is only applied in the banking system to assess the level of credit risk for loans to small businesses and individuals. Credit scoring is mainly based on non-financial information and the borrower's performance, due to the difficulties in collecting financial information for small businesses and individuals. The necessary information in the loan application along with other customer information collected by the bank will be entered into the computer, through the credit information system for analysis and processing by a scoring software. The result will give a number - credit score - indicating the credit risk level of the borrower. The effectiveness of this technique is very high, effectively helping in risk management for borrowers who are small businesses and individuals. Because small businesses and individuals often do not have financial reports or incomplete reports, lack of collateral, and lack of information, they often have difficulty in accessing banks. This tool makes it easier and faster to evaluate this type of customer, and if the risk level is within the allowable limit, they will have a lot of advantages in borrowing from banks.

Meanwhile, credit classification is applied to large enterprises with a long history of hundreds of years, a solid theoretical basis and accumulated statistical data over many periods to serve the classification technique. Because large enterprises often have complete financial reports, credit classification is mainly based on financial indicators. Credit classification is applied more widely, not only in banking and securities trading activities but also in trade and investment, helping enterprises choose customers, choose investment partners, joint ventures, etc.

According to the experience of banks in the region, to have an effective credit risk classification system, after the borrower classification step, it is necessary to classify the risks of the borrower's credit facilities (such as loans). The borrower classification will indicate the possibility of default of the borrower or a group of borrowers in performing their debt repayment obligations under normal business conditions. The credit facility classification shows the estimated losses of that credit facility (that loan). If these two classification levels are combined, the problem of credit risk management can be solved relatively thoroughly.

After classifying customers, it is necessary to have a specific policy for treating customers: interest rate policy, credit policy, collateral policy... suitable for each customer class. In addition, according to the experience of banks in the region, to have an effective credit risk classification system, after classifying borrowers, it is necessary to classify the risks of the borrower's credit facilities (such as loans). The classification of borrowers will indicate the possibility of default of the borrower or a group of borrowers in fulfilling their debt repayment obligations under normal business conditions. The classification of credit facilities shows the estimated losses of that credit facility (that loan).

If these two classification levels are combined, the problem of credit risk management can be solved relatively thoroughly.

Pursuant to Article 7 of Decision 493, it is expected that in 2012, Vietnam Bank for Agriculture and Rural Development will officially apply the method of debt classification by qualitative method. Based on the results of the internal credit rating system, customer debts will be classified into the following corresponding groups:

Customer rating according to AAA internal credit rating system

AA A BBB

Debt group classification Debt group

BB B
CCC	Substandard debt	Group 3
CC
C	Doubtful debt	Group 4
D	Bad Debt	Group 5

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Standard debt Group 1 Debt requiring attention Group 2

3.4.10. Complete and improve the quality of customer credit information center:

Ensure that the customer information system (CIC) is updated as quickly, completely and accurately as possible to serve the purpose of credit appraisal and approval. Only then can we ensure that credit risks are limited for the entire system of the Vietnam Bank for Agriculture and Rural Development.

- It is necessary to apply support software to prevent the situation where customers have overdue debts at this branch but borrow from other branches in the agricultural banking system. To do so, the information center must accurately and completely provide customers with overdue debts at the Vietnam Bank for Agriculture and Rural Development system and other credit institutions.

- It is necessary to establish close, regular and effective relationships with the Credit Information Center of the State Bank and other commercial banks, as well as exploit

Risk prevention information through other sources, including abroad, to provide to branches in the Vietnam Bank for Agriculture and Rural Development system.

3.4.11. Establish a reserve fund for bad debts and overdue debts and actively handle bad debts and overdue debts:

In fact, the establishment of a reserve fund has been implemented at the Vietnam Bank for Agriculture and Rural Development. However, the bank has not yet provided specific instructions for branches to implement this, which may lead to inaccurate provisioning by the bank and affect the bank's business operations. Therefore, the above solution requires the bank to complete the regulations guiding debt classification and risk provisioning in accordance with the regulations of the State Bank and the current bad debt situation at the bank.

In addition to providing methods to prevent risks, credit risk management must also control risks at an acceptable level. A quantitative manifestation of credit risk is the increasing level of overdue debt and bad debt. Therefore, the Operation Center of the Vietnam Bank for Agriculture and Rural Development needs to establish and maintain the operation of the Overdue Debt Handling Department (can be called the Debt Handling Department) to be able to issue documents guiding branches to analyze and find measures to handle bad debt and overdue debt to ensure the safety of the branches' operations. Depending on each cause of credit risk, there are appropriate measures to remove difficulties for customers as well as create conditions for banks to recover loans. Every month, officers of the Overdue Debt Handling Department conduct.

3.4.12. Fully and synchronously apply modern information technology in credit activities

Modern credit uses diverse, online and centralized information. With a centralized processing technology system, it will help leaders and the Operation Center control the quality and efficiency of credit investment as well as comply with the credit orientations and goals set for each

period of each branch and the whole system; in addition, it also helps the credit staff have enough information to advise in lending decisions such as customer information, information on industry risks and competition, market risks, etc.

In order to control the information flow of customers borrowing capital at NHNo in a timely and complete manner, it is necessary to continue to deploy the IPCAS program to all branches that have not yet used this program.

In addition, more attention should be paid to providing adequate equipment and computers to branches in mountainous areas, remote areas, and underdeveloped areas, combined with sending staff to these branches to deploy and train them to use the machines for their operations.

3.4.13. Focus on handling outstanding debts, bad debts and overdue debts:

Customer debts greatly affect the business activities of the branch, it is necessary to have solutions to reduce outstanding debts and overdue debts. That is to regularly and periodically conduct analysis and evaluation of outstanding debts and overdue debts, find out the causes to have appropriate debt collection solutions.

- Implement measures to recover overdue debts. For normal overdue debts, officers should increase urging and debt collection in combination with checking the capital usage situation, financial situation, and collateral situation. At the same time, appropriate measures should be taken to help customers solve financial difficulties, repay bank debts, and temporarily postpone periodic interest collection on debts that have been transferred to overdue due to late payment of part of the principal or interest according to Article 22 of Regulation 1627. For bad debts over 6 months with risk, debt collection should be urged through many steps, and responsibility should be checked and assigned.

- Implement appropriate debt settlement measures for each loan.

Debt settlement measures as prescribed by the superior bank include:

+ Adjusting debt term: in case the customer has overdue debt or cannot pay the debt due due to objective difficulties, if the debt term is re-determined, the customer can stabilize production and pay the debt, the bank can consider adjusting the debt term.

+ Loan exemption and reduction for customers who have lost assets formed from loan capital due to objective reasons to reduce financial difficulties for customers who have the conditions to re-establish normal credit relations.

+ For customers with overdue debts due to force majeure, who are able to repay their debts and need capital to restore production and business, the bank can consider temporarily freezing old debts.

+ For customers who violate the credit contract, depending on the severity of the violation, the bank may suspend the loan, terminate the loan or file a lawsuit before the law.

- Exploiting assets to secure loans. First of all, it is necessary to review all documents and procedures to secure loans of overdue debts, from which there are measures to supplement, complete, ensure validity, legality, and completeness to facilitate handling. Carry out steps and measures to handle assets appropriate to the situation of each specific case, on the basis of the provisions of Decree 178 and other relevant documents.

- Coordinate with relevant sectors, Party committees, and local authorities to handle bad debts and overdue debts.

3.4.14. Use of derivative credit instruments:

Although the names of derivative instruments are not yet developed in Vietnam, in recent years many banks around the world have applied this new financial instrument to limit credit risks, while creating additional income for banks from collected fees. Derivative credit instruments include:

3.4.14.1. Securitization of loans:

Asset securitization requires banks to set aside a pool of assets to secure mortgages or consumer loans and sell securities issued on those assets to the market. When the assets are paid for, the bank will transfer the payment to the owners of those freely traded securities. In return, the bank will receive back the capital it spent to acquire the assets and use this capital to pay for operating expenses or create new products. Securitizing loans helps: allow the implementation of new investment or spending requirements of the bank, ensure liquidity for frozen loans; at the same time, the bank can collect additional fees by managing securitized loans.

While managing securitized loans, banks can take these loans off their balance sheets, eliminating potential credit risks.

3.4.14.2 Sale of loans:

The main buyers of loans are banks, pension funds, insurance companies, non-financial companies, and mutual funds.

Selling loans means transferring the buyer's debt from the seller or service provider to a debt buyer. The debt buyer will guarantee the collection of the debt, they can pay off all or part of the buyer's debt early with a commission and collection fee. All risks are borne by the financier.

The Governor of the State Bank of Vietnam issued regulations on debt trading, creating conditions for credit institutions to resolve outstanding debt issues in accordance with market mechanisms.

Debt trading is not only a debt settlement measure but also a new form of credit to diversify credit activities and increase

enhance competitiveness and increase profits. On the other hand, entities conducting debt trading in the market operate professionally, have many advantages in terms of information and scale, and are not subject to pressure from customer relationships like banks, so bad debt handling will be more effective.

To effectively implement this measure, Agribank must clearly recognize the role, importance, and benefits of debt trading, and specify legal regulations in order to make the right decisions to conduct debt trading legally and effectively.

Establish a specialized debt trading team to analyze the debt situation and the debt trading market to help make reasonable decisions.

3.4.14.3. Other derivative credit instruments:

- Credit rights contract: This is a tool to protect the bank against losses in the value of credit assets. When the credit quality of the bank declines, the credit rights contract will help the bank offset the cost of borrowing. If the customer's loans are reduced in value or cannot be paid, the credit rights contract will ensure the safety of the bank.

- Research and apply credit contract swap operations with other commercial banks, initially within the domestic banking alliance, then expand to all domestic and foreign banks to increase liquidity of credit balances and at the same time have financial resources to proactively respond to losses when bad debts arise.

3.4.15. Building a credit risk reporting system:

It is necessary to build a reporting system according to international standards to serve well the work of credit risk management, contributing to limiting risks and losses for banks. Through consulting documents from international organizations, I boldly propose that when building a reporting form, it is necessary to focus on clarifying some of the following contents (see table 3.1 on the next page) .

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