The highest rating is Aaa, but with Standard & Poor's the highest is AAA. The ratings go down from Aa (Moody's) and AA (Standard & Poor's) to reflect the high risk of non-repayment.
Moody's and Standard & Poor's rating models:
Standard Source
Rating | Status | |
Standard & Poor | Aaa | Highest quality, lowest risk |
Aa | High quality | |
A | Above average quality | |
Dad | Average quality | |
Three | Average quality with speculative elements | |
B | Below average quality | |
Caa | Poor quality | |
Song | Speculative, may default | |
C | Worst quality, worst outlook | |
Moody | AAA | Highest quality, lowest risk |
AA | High quality | |
A | Above average quality | |
BBB | Average quality | |
BB | Average quality with speculative elements | |
B | Below average quality | |
CCC | Poor quality | |
CC | Speculative, may default | |
C | Worst quality, worst outlook |
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Customers with the highest credit rating Aaa, decreasing through Aa, A, and Baa (According to Standard & Poor's rating standards) are cases where the risk is quantified at zero, and increasing the risk level to Baa, which can be accepted in investment and lending, without fear of risk, or the risk is at an acceptable level.
Similarly, according to Moody's standards, the risk level increases from AAA to the acceptable level of BBB. In the remaining cases, the risk is high, so it is not advisable to invest or lend.
1.2.6.2 Z-score model (Z – Credit scoring model)
This is the model used by EI Altman to give credit scores to businesses that borrow capital. The quantity Z is used as a composite measure to classify credit risk for borrowers and depends on many factors.
EI Altman has given the score scale (Z-Score Function) according to the following formula: (Z-Score Function) Z = R1 + R2 + R3 + R4 + R5
In there:
= | Net Working Capital (Working Capital) | |
Total assets | ||
(Working capital = Current assets – Liabilities) | ||
R2 | = | Net profit |
Total assets | ||
R3 | = | Profit before tax |
Total assets | ||
R4 | = | Market value of the enterprise |
Accounting price of the enterprise | ||
R5 | = | Revenue |
Total assets | ||
The higher the Z-score, the lower the probability of default of the borrower. Conversely, a low Z-score indicates a high risk of default.
- If Z is greater than 2.675 points : The enterprise is classified as type I.
Type 1 enterprises have good credit scores, the lowest risk level and will be easily lent by banks with preferential terms in terms of loan limits, interest rates, asset guarantees, etc.
- If 1.8 points < Z < 2.675 points : The enterprise is classified as type II, with average risk, the bank can lend but must have collateral, after
Carefully analyzed the customer's production and business plans and capital usage plans.
- If Z < 1,800 points : The enterprise is classified as type III. This is the worst category, with the highest risk and highest risk of bankruptcy. Any enterprise classified as type III will be refused a loan by the bank.
1.2.6.3 Consumer credit score model:
Important factors related to customers using credit scoring models include: Credit score, age, asset status, number of dependents, home ownership, landline phone, number of personal accounts, length of employment. The table below shows the categories and credit scores commonly used in consumer credit.
STT
Credit quality determination categories | Point | |
1 | Borrower's occupation (Max: 10 points) | |
- Expert or business manager | 10 | |
- Experienced workers | 8 | |
- Office staff | 7 | |
- Student | 5 | |
- Inexperienced workers | 4 | |
- Unemployed workers | 2 | |
2 | Housing status (Max: 6 points) | |
- Private house | 6 | |
- Rented house or apartment | 4 | |
- Living with friends or relatives | 2 | |
3 | Credit rating (Max: 10 points) | |
- Good | 10 | |
- Medium | 5 | |
- No profile | 2 | |
- Bad | 0 | |
4
Work experience (Max: 5 points) | ||
- More than 1 year | 5 | |
- 1 year or less | 2 | |
5 | Time lived at current address (Max: 2 points) | |
- More than 1 year | 2 | |
- One year or less | 1 | |
6 | Landline phone (Max: 2 points) | |
- Have | 2 | |
- Do not have | 0 | |
7 | Number of people living together (dependents) (Max: 4 points) | |
- Are not | 3 | |
- One | 3 | |
- Two | 4 | |
- Dad | 4 | |
- More than three | 2 | |
8 | Bank accounts (Max: 4 points) | |
- Both savings account and issuing sec | 4 | |
- Savings account only | 3 | |
- Only Sec issuing account | 2 | |
- Do not have | 0 | |
The total consumer credit score according to the above 8 criteria is 43 points (Max), the lowest is 9 points (Min). Suppose the bank determines that 28 points is at a fairly high risk level, and the loan should be refused. The remaining points above 28 points are divided into 6 levels according to the credit policy framework with the maximum loan limit as follows:
Total customer score
Credit limit | |
28 points or less | Credit Denied |
29 - 30 points | 500 USD (10,000,000 VND) |
31 - 33 points | 1,000 USD (20,000,000 VND) |
34 – 36 points | 2,500 USD (50,000,000 VND) |
37 – 38 points | 3,500 USD (70,000,000 VND) |
39 – 40 points | 5,000 USD (100,000,000 VND) |
41 – 43 points | 10,000 USD (200,000,000 VND) |
1.3. THEORY OF CREDIT RISK MANAGEMENT
1.3.1. Concept and necessity of credit risk management
Concept
Credit risk management is the use of necessary tools, measures and procedures to control and prevent credit risks to help minimize the possibility of loss for commercial banks.
Thus , from the banking perspective, to achieve the goal of credit risk management, banks minimize risks through selecting customers with certain requirements, selecting safe investment portfolios, and managing and controlling customers through lending tools and processes developed by commercial banks. From the state management perspective, credit risk management can be implemented through strict regulations on bank business activities, controlling operational limits.
of NH in the safe and effective area.
The need for credit risk management
For the commercial banking system in Dong Nai province in particular and Vietnamese commercial banks in general, the income of banks mainly comes from credit activities, so when there is credit risk, it will greatly affect the banking business activities. Therefore, the need to manage credit risk comes from its impact on banking activities and even the entire banking system.
Firstly : Good risk management will of course limit the risks arising and improve the efficiency of capital exploitation and use of commercial banks. Any credit loan that is stagnant not only affects banking activities but also affects the payment capacity of credit institutions by slowing down the circulation and transfer of capital in the economy, reducing the efficiency of capital use. In other cases, if overdue debt or bad debt arises, it will increase costs. As a result, credit institutions have no revenue from this loan, while still having to continue paying interest on the loan. In addition, other costs that continue to arise are of a resonance nature (such as bad debt management costs and other related costs...) which can easily lead to poor business results.
Second : Effective risk management with the goal of minimizing overdue debt. That has great significance in expanding and growing credit, while enhancing the competitiveness of commercial banks themselves.
Third : It is necessary to implement credit risk management to minimize risks. Only good credit risk management can help banks recover principal and interest in full and on time. This is a basic factor to ensure income for banks to offset costs and make profits, improve business efficiency, and is a premise to increase profits, increase accumulation, increase capital and expand business activities. This is even more significant when credit is still a traditional product, the main business that brings income to banks.
1.3.2 Content of credit risk management
1.3.2.1 Credit risk identification
Credit risk can be detected through the factors that create credit risk. The factors that create credit risk include:
- Different customers and different industries have different risks.
The choice of target customers and target industries is very important for asset quality. The viability of any bank is closely related to the viability of the customers and industries to which the bank lends.
- Different credit products present different risks.
Most banks today provide many forms of credit such as loans in Vietnamese Dong, gold, foreign currency, syndicated loans, project finance, guarantees, etc. These types of credit contain different levels of credit risk. The type of credit must not only be suitable for the credit needs but also suitable for the borrower's level of debt repayment reliability.
- Liquidity risk associated with different financial instruments
Credit risk also arises for financial instruments other than loans, such as foreign exchange transactions and interbank transactions. The risk of counterparties failing to repay their debts at maturity of an off-balance sheet contract is known as settlement risk.
- Concentration of credit portfolio
The degree of concentration of a credit portfolio according to specific characteristics directly affects the risk of the credit portfolio. Banks can limit the concentration risk in their credit portfolio by regularly assessing the risk in each market, each industry, each geographic location, mortgage product and form, currency and form of maturity. This ensures that a diversified credit portfolio is maintained.
1.3.2.2 Comply with credit policies and procedures
In risk management it is important to design and implement written policies and procedures related to the detection, assessment, monitoring and control of risks.
RRTD. Credit policies should be clearly established, consistent with prudent banking practices and government regulations, and appropriate to the nature and complexity of each bank. Appropriate policies and procedures enable banks to achieve the following objectives:
+ Maintain safe credit standards
+ Correctly evaluate new business opportunities
+ Detect and manage problem loans
+ Good credit risk monitoring and control
1.3.2.3 Credit control and monitoring to control credit risk
Loans must be actively managed to ensure that they are repaid on time. Loan monitoring is one of the most important responsibilities of a loan officer. Loan officers can use the following information to monitor loans:
- Other departments in the bank that deal with borrowers
- Other financial institutions
- Credit center of the State Bank
- Visit borrowers on site
- Through key suppliers to customers
1.3.2.4 Credit risk management methods
To properly manage credit risks, banks must comply with the following requirements:
- Comply with legal regulations on lending, guarantees, financial leasing, discounting, factoring and loan guarantees. Consider and decide on lending with or without collateral formed from loan capital, avoiding problems when handling collateral to recover debt.