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Credit Risk for Individual Customers at Commercial Banks

PART 2: RESEARCH CONTENT

CHAPTER 1: THEORETICAL AND PRACTICAL BASIS OF MANAGEMENT

CREDIT RISK FOR INDIVIDUAL CUSTOMERS


1.1 Overview of credit and credit risk

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1.1.1 Credit concept

Credit is a traditional activity of credit institutions in general and of commercial banks in particular. Credit activities account for a large proportion, bringing in the main source of income for commercial banks, and at the same time playing a supporting role, promoting the development of other banking activities.

Credit Risk for Individual Customers at Commercial Banks

Bank credit is generally understood as a transaction of assets between the lender, a bank, and the borrower, in which the bank transfers assets to the borrower for use within a certain period of time according to the agreement, and the borrower is responsible for unconditionally repaying the principal and interest to the bank when due.

In the transaction relationship between the lender and the borrower, the following contents are shown:

- Assets in bank credit relationships are money.

- The borrower can only use the asset temporarily for a certain period of time. When the agreed period of use expires, the borrower must repay the lender. Based on the principle of repayment, the bank must have a basis to believe that the borrower will repay on time when transferring the asset to the borrower. This is a very basic factor in credit management, which is why the bank must conduct a thorough analysis before deciding to lend.

- The normal repayment value must be greater than the loan value, or in other words

The other is that the borrower has to pay interest in addition to the principal.

- In bank credit relations, loans are granted on the basis of an unconditional commitment to repay. In terms of law, documents defining credit relations such as credit contracts, contracts, etc. are essentially promissory notes, in which the borrower commits to unconditionally repay the bank when the payment is due.

1.1.2 Credit concept for individual customers

It is difficult to give an exact definition of personal loans, but in the most basic and simple understanding: " Personal loans are lending relationships in which commercial banks transfer capital within a certain period of time from commercial banks to individuals, households, and cooperatives for the purpose of consumption, investment, or production and business".

Personal loan features

About the subject

With the characteristics of the loan subjects being individuals, households, cooperatives that need to use capital for consumption, investment or production and business activities of that individual or household. Unlike enterprises and economic organizations, individual customers are often very large in number, have very diverse loan needs but are not regular and are greatly influenced by the economic, cultural and social environment. Therefore, in each different region, the loan needs of individual customers are also very different.

Loan period

The loan term of individual customers is diverse, including short-term, medium-term and long-term loans. For loans to supplement working capital for production and business, the term is mainly short-term. As for loans to serve the consumption needs of individuals and households, the loan term is usually medium-term and long-term.

Capital size and number of loans

Normally, loans to individual customers are usually smaller in size than loans to businesses and economic organizations. However, for commercial banks operating in the direction of retail banking, the number of loans to individual customers often accounts for a large proportion.

Loan costs

Costs that commercial banks pay for personal customer loans

often large in both human and tool costs. Because the customer loan object is

The individual has complicated developments, the number of loans is large, but the scale of each

The loan is relatively small.

Loan interest rate

Interest rates on personal loans are often higher than those on corporate loans. This is because the cost of personal loans per unit of loan capital is high, the risk level of the loan is high and it is less sensitive to interest rates.

Credit risk

Personal loans always have high credit risks. Because the lending subjects are individuals and households whose financial situation is easily changed depending on their work and health status. In production and business activities, individuals and households often have weak management skills, lack of experience, and outdated science and technology, so their ability to compete in the market is poor. Therefore, the Bank will face risks when borrowers become unemployed, have accidents, or go bankrupt. On the other hand, the appraisal and decision to lend to individual customers often lacks complete information, which is also one of the reasons leading to credit risks for personal loans.

1.1.3 Credit risk for individual customers at commercial banks

Concept of personal customer credit risk

KHCN credit risk is the type of risk that arises when an individual customer is unable to repay or does not want to repay part or all of the debt to the bank. Credit risk arises in the event that the bank cannot fully recover both the principal and interest of the loans, or the customer's repayment is not on time as scheduled.

Impact of personal customer credit risk

a) For banks

For banks, when facing risks, it means that they cannot recover the capital provided and the interest on the loan, but the bank still has to pay the principal and interest on the mobilized funds when due, this causes the bank to lose balance in revenue and expenditure, affecting the bank's business.

affecting profits and business efficiency. At the same time, when facing lending risks, banks often fall into a state of insolvency, directly affecting the bank's reputation and customer confidence, a situation that no bank wants to fall into.

b) For individual customers

For individual customers who are unable to repay the principal (interest) to the bank, they have almost no chance to access bank capital and even other sources in the economy due to loss of reputation.

Other individual borrowers' access to bank capital is also more limited as credit risks force commercial banks to tighten lending.

c) For the economy

For the economy, the smooth operation of the banking system is extremely important, related to individuals, economic organizations, and businesses. Bankruptcy of banks will directly affect individuals and businesses that need to borrow capital because banks are an important capital channel, the economy also suffers serious consequences, prices increase, purchasing power decreases, unemployment increases sharply, economic and social instability.

In short, the harm of credit risk is very large and wide-ranging. Therefore, preventing and limiting credit risk is a matter of special concern not only within the scope of banks, but also in the entire economy. In other words, credit risk management to prevent and limit credit risk in banks is extremely important.

1.2 Credit risk management of individual customers at commercial banks

1.2.1 Concept of personal customer credit risk management

The main activity of a bank is to mobilize idle money from those with excess capital to lend to those lacking capital with the aim of recovering the principal and interest at a certain time in the future.

Besides, risk and profit are two sides of the same coin, if you want profit, you must have both.

profit must accept risk, if not accept risk will never gain

profit. Therefore, it is not a matter of whether there is risk or not, but improving the quality of risk management at commercial banks is a pressing issue both in theory and practice. The purpose of credit risk management is to maximize profits and maintain credit risk within the acceptable range of the bank.

Scientific and technological credit risk management is the process of approaching credit risk in a scientific, comprehensive and systematic manner to identify, control, prevent and minimize losses and adverse effects of credit risk.

1.2.2 Content of credit risk management for individual customers

Banks that want to manage credit risks well for customers need to build a unified, logical and strict credit risk management system that meets the following requirements:

a) Establishing an appropriate credit environment

Approve and review the credit risk strategy periodically, considering the

issues such as: acceptable level of risk, level of profitability.

Implement credit policy strategy. Develop credit policies and credit procedures for individual loans and the entire credit portfolio to identify, assess, and control credit risk.

Identify and manage credit risk in all products and activities

All new projects go through all approved procedures and processes.

b) Operate according to a reasonable credit granting process

Full credit granting criteria include: borrower characteristics, goals, credit structure.

Set up general credit limits for each customer and each group

client.

There are clear procedures established for approving credit facilities.

new use

Credit granting must be based on strict management of loans, reducing lending risks for related parties.

c) Ensure adequate control procedures for credit risk

Establish an independent and continuous credit review system, and communicate the results

results for the Board of Directors and senior management.

The credit granting process must be fully and specifically monitored.

Have a management system for problem loans.

1.2.3 Credit risk management process for individual customers

1.2.3.1 Credit risk identification

Risks always go hand in hand with the credit activities of banks. So how can banks identify risks, causes of risks, risk objects, risk levels and frequency of occurrence in order to have measures to limit and minimize risks to the lowest level or within the allowable limit to ensure safety and efficiency? This is important.

+ Group of signs related to the relationship with the bank:

This group of signs is also known by another name, the group of early warning signs, including the following basic signs:

- Delaying or causing difficulties or obstacles for the bank in the process of periodically or suddenly checking the loan usage, financial situation, and business production activities of customers without transparent and convincing explanations.

- Requesting to extend or adjust the debt repayment period many times without giving clear reasons or lacking convincing objective grounds for extending or adjusting the debt repayment period.

Group of signs related to customer management methods

Adverse changes in capital structure, liquidity ratio or customer activity level, specifically: sudden increase in debt/equity ratio; quick payment and immediate payment ratio showing signs of continuous decline; decrease in payables and rapid increase in receivables, inventories with large intensity; disproportionate increase in regular debt ratio, decrease in cash fund; increase

revenue but reduced or no profit, mismatched capital accounts, negative changes in gross profit and net profit ratios over revenue; volume of goods increases faster than revenue, number of customers in debt increases rapidly and payment terms of debtors are extended, beautifying the balance sheet by creating intangible assets, overvaluation through asset revaluation…

Frequent changes in the structure of the management system and the executive board. Disagreements and conflicts in the management and administration, disputes in the management process.

+ Group of signs originating from bank credit policy:

- Inaccurate assessment and classification of customer risk levels.

- Granting credit based on uncertain and unsecured commitments from customers to maintain a large deposit or benefits brought by customers from the granted credit;

- Drafting ambiguous and unclear terms and conditions in credit contracts; failing to specify a repayment schedule for each loan; intentionally compromising credit principles with customers despite knowing that there are potential risks;

- Credit policies that are too rigid or loose leave loopholes for customers to exploit;

- Incomplete credit records, lack of compliance or incomplete compliance with current regulations on credit approval;

+ Other warning signs

In addition to the signs originating from the customers themselves, there are a number of other warning signs originating from the Bank's credit policy. These signs also require special attention from bank managers to respond appropriately. This group of warning signs is also known as the group of remote warning signs, including:

Credit is granted based on uncertain commitments and lack of customer guarantees.

Credit growth is too fast, beyond the control capacity and capital of banks.

1.2.3.2 Credit risk analysis

After identifying and analyzing the causes of risk, banks need to assess and quantify the risk. To accurately determine the risk level of each loan, banks must have a reliable loan classification system based on credit risk. Banks often apply a number of specific models to assess credit risk. There are many credit risk measurement models, including classical credit analysis models (qualitative) and credit risk quantification models. The qualitative method has the disadvantage of being time-consuming, expensive, and subjective. As for the quantitative model, the advantage over the traditional method is that it allows for the rapid processing of a large volume of loan applications, at low cost, objectively, and thus contributes positively to controlling bank credit risk.

1.2.3.3 Risk control and financing

a) Risk control:

Control

while giving

Control

after loan

Risk control is the use of measures, techniques, tools, strategies and operational programs to prevent, avoid and minimize risks. Based on the calculated risk level, financial safety coefficients and risk acceptance, there are different preventive measures to reduce the level of damage. The basic measures to control credit risks are as follows:


Control before giving




Figure 1.1 Risk control steps in credit activities

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