Credit risk management at Joint Stock Commercial Bank for Investment and Development of Vietnam - Trang An Branch

To minimize credit risks, credit management officers need to strictly follow the procedures and regulations on credit appraisal and analysis before lending, and properly follow the inspection and monitoring procedures during and after lending.

Currently, BIDV Trang An branches are granting credit according to the general process of granting retail credit issued by the Head Office. BIDV Trang An needs to develop a process and regulations that are more suitable for small business conditions in the area, such as decentralizing appropriate credit decision authority, adding specific credit granting conditions for each credit product (loan amount, type of collateral, etc.) to ensure risk limitation but still ensure that there is no increase in loan procedures for customers.

Completing the appraisal of collateral assets

Appraising collateral in accordance with the prescribed procedures helps to minimize legal risks. Correctly assessing collateral will also help BIDV Trang An reduce risks in credit activities, and annual asset revaluation is also very important in limiting credit risks, but in reality, the number of staff cannot fully undertake the annual asset revaluation work. Currently, this work at BIDV Trang An is only done in form, that is, only on paper without actual appraisal. To effectively carry out asset revaluation, BIDV Trang An needs to take a number of measures: establish an appraisal team, promptly re-evaluate the value of collateral according to real estate market developments, and strengthen inspection of movable assets.

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Encourage the sale of loan insurance at BIDV Trang An

Currently, at BIDV Trang An, loan insurance is only mandatory for unsecured consumer loan products. BIDV Trang An needs to have a motivational mechanism such as bonuses for officers with high insurance sales revenue so that credit officers actively participate in selling loan insurance, and at the same time develop a preferential interest rate policy for customers who borrow money to buy insurance to encourage customers, that is, when customers participate in insurance, customers will receive a lower interest rate compared to the normal loan interest rate without insurance.

Strengthen internal control

Internal audits must be conducted periodically and unexpectedly to detect errors and warn of signs of violations. Every year, the internal audit system must inspect all branches in the system to detect and take timely measures to prevent violations of procedures and regulations to avoid serious consequences and then handle them later, which will be very costly for the bank.

Credit risk monitoring should be divided into: Monitoring each loan and monitoring the overall portfolio as described above. - Monitoring each loan regularly to detect early warning signs for timely corrective action. The establishment of an internal credit scoring system as mentioned above will also be used to assess the current status of borrowers, it is an important credit monitoring tool, the internal credit scoring system needs to monitor signs of possible deterioration of the credit and customer status. Monitoring each loan is also done through:

+ Review and analysis of financial statements should be conducted regularly to evaluate the performance of loan customers.

+ Visiting customers on site: To have a clear picture of the customer's operating situation, analyzing financial reports is not enough, credit officers need to regularly visit customers on site, from which they can determine the existence and actual status of factories, machinery, equipment, and collateral. Moreover, visiting the site can also verify the quality and accuracy of financial reports.

- Overall credit portfolio monitoring - overall credit portfolio analysis to detect credit concentration, assess the quality of the credit portfolio. Although BIDV Trang An has mentioned this, the evaluation of the results is not in-depth and not carried out regularly to be able to take timely measures to avoid the bank from having to suffer adverse fluctuations in credit activities.

3.2.4. Completing risk handling work

Diversify your investment and lending portfolio

- Diversify credit products and services: Promote the diversification of credit products such as: Limit loans, loans by item, co-financed loans. In addition, there are also forms such as entrusted loans...

- Diversifying the loan portfolio is associated with diversifying the investment portfolio: When a bank develops its strategy and business plan, to minimize credit risk, they must consider the factors and risk levels of the target market, customer segments, the combination of credit products, the ability to grant as well as the focus of the portfolio. Therefore, diversifying the bank's loan portfolio will minimize risks because loans often have different risk levels according to capacity, customer size, industry, and ownership nature.

Improve the efficiency of bad debt handling

The debt settlement department at BIDV Trang An is the Risk Management Department. This department must proactively develop plans and organize implementation, directly exploit debt settlement plans approved by competent authorities to recover debts in accordance with the provisions of law and regulations of the bank. Closely monitor and coordinate with officers and specialists of the Corporate Customer Department to implement procedural measures according to the decision of the competent authority.

competent and in accordance with regulations.

Debt settlement also requires skills and the employees in the debt settlement department must be dedicated to their work. These skills are accumulated during the working process and contact with customers. The debt settlement department must understand the nature of debts and debt collection work; skillfully negotiate to collect debts effectively while still maintaining relationships with customers; prepare complete documents in case of debt collection by law.

BIDV Trang An needs to clearly analyze the causes of bad debt and overdue debt according to each subjective and objective criterion, recoverable debt, overdue debt that cannot be partially recovered or debt that can be lost in full. Every month, the staff of the debt handling department analyzes the overdue debt situation of the bank.

the area they are responsible for, from there to come up with measures and have appropriate handling directions. In case of overdue debt due to customers facing risks but still showing goodwill to repay the debt, the bank needs to advise the customer to have measures to overcome difficulties, possibly reduce the debt or extend the term or lower the interest rate, creating conditions for the customer to repay the debt. The bank needs to closely follow the customer, assess the customer's situation and ability to repay the debt, and work with the bank to develop a specific debt repayment plan in the coming time.

Use insurance and loan guarantees

Credit risks arise from many diverse causes, sometimes the bank cannot foresee these risks. Therefore, using insurance tools to limit losses when risks occur is necessary. Therefore, in the past, during the lending process, the Branch required customers to buy insurance until the debt is fully paid. In fact, in the past, thanks to the use of this requirement, loan losses have been paid by the insurance agency, which has significantly reduced losses for the Branch. For borrowers, this is a measure that borrowers proactively protect themselves when they encounter risks. The source of money from payments from the insurance company will help them have capital to continue reinvesting, restoring production and business activities with revenue to repay bank loans or directly repay bank loans.

3.2.5. Some other solutions

Improve professional expertise for credit officers

An important factor to minimize risks is the expertise of credit officers. A credit officer with good professional skills, good knowledge of law and finance will be able to completely avoid legal risks. Therefore, to improve the professional capacity of officers, BIDV Trang An should have competitions to learn about professional procedures for officers, or have meetings to share experiences, especially the experience of handling bad debts of the risk department for credit officers to know.

Improve the productivity of credit officers

BIDV Trang An should survey employees' opinions about problems or difficulties arising at work, and then open creative competitions.

Create applications in work to organize and rearrange work for staff to ensure productivity but still be effective, avoid staff being overloaded with work that is not effective, such as establishing specialized teams: customer development team; professional support team; customer care team, when work is highly specialized, the ability to serve customers will be better.

3.3. Some recommendations

3.3.1. Recommendations to the Government

3.3.1.1. Perfecting and stabilizing socio-economic development policies

The State has a decisive role in ensuring that the orientations on risk prevention activities are implemented in the operations of commercial banks. The solutions from there both play the role of overall solutions to create a solid and long-term framework for implementing risk prevention and limitation and point out solutions in the stages of bank operations facing risks. Some specific recommendations to the State to ensure credit risk management in banks are:

- It is necessary to forecast and direct promptly to orient the economy, especially the financial and monetary markets to develop sustainably in the face of fluctuations in the world market.

- Continue to propose solutions to focus on promoting investment activities, consolidating and developing the financial system, stock market and banking system.

- Improve the investment attraction environment, including foreign investment in the economy in general and the banking sector in particular, so that development is consistent with the domestic financial infrastructure.

3.3.1.2. Perfecting the legal environment

Conditions for a favorable legal environment are very important for the operation of commercial banks. In perfecting the legal environment, special attention should be paid to perfecting legal documents on mortgaged assets and foreclosure of collateral, as these documents still have many shortcomings, especially in determining ownership rights.

own assets used as collateral. The government creates more flexibility in liquidating collateral assets of businesses and individuals with bad debts.

Continue to improve the legal system on currency and banking activities, enhance the autonomy of credit institutions and comply with international commitments and standards, build a new banking law to create a legal basis for the modern Central Bank model and develop the credit institution system in the new period.

Completing the legal framework requires businesses to have honest and accurate financial reports, making it easier for banks to evaluate and appraise customers, thereby minimizing the possibility of encountering risks in banking operations.

The Government needs to take necessary measures to ensure that the law is implemented consistently and thoroughly. For the banking sector, it is required to strengthen the legal framework in the banking sector to meet the new requirements of economic development in the period of world economic integration.

3.3.2. Recommendations to the State Bank

3.3.2.1. Perfecting banking supervision methods

Good financial supervision needs to address four basic issues: Organizing a supervision system; Establishing a system of supervision indicators; Power of the supervision agency; Supervision costs. To complete and standardize the way of supervising banks to promote the implementation of risk management according to Basel II, the State Bank needs to:

Perfecting the model of organizing the banking inspection apparatus vertically from the central to the grassroots level and having relative independence in management and professional activities within the organization of the State Bank; applying the basic principles of supervising the effectiveness of banking operations of the Basel Committee, complying with the rules of prudence in inspection work;

Continue to apply the Basel Committee's core principles for effective banking supervision, as well as adhere to prudential principles in inspection.

Propose measures to improve the banking supervision system in the following basic directions:

- Improve the quality of financial situation analysis and develop an early warning system for potential problems in the operations of credit institutions, including establishing a direct survey team based on the principle of random sampling, analyzing financial reports and identifying sensitive points;

- Develop and unify the method of bank supervision based on theory and practice

- Develop an approach to assessing the quality of risk management within credit institutions;

- Improve technical requirements in risk provisioning.

3.3.2.2. Build and complete necessary systems to ensure security of banking credit activities

Build a system and measures to control international capital flows and foreign debt, focusing on a mechanism to monitor lending and borrowing in foreign currencies of commercial banks to avoid risks in exchange rates and foreign exchange terms, thereby providing early warnings to commercial banks;

Build a synchronous reporting system to minimize risk volume and improve information quality.

Improve the criteria in the licensing system and technical requirements for credit institutions based on standards of financial stability and safety indicators in the operations of credit institutions.

Continue to resolutely and steadfastly implement the forms of restructuring, closing, merging and consolidating the banking system, speeding up the equitization process of State-owned commercial banks while simultaneously linking it with listing shares on the stock market to disperse risks.

Credit institutions need to be assessed and ranked for their operational quality in a scientific and practical manner in accordance with international practices and in accordance with the management needs of the State Bank. Based on the assessment and ranking of each credit institution, the State Bank needs to strengthen the monitoring of compliance, classification and risk ranking.

In addition, it is necessary to establish and strengthen the system of related funds to ensure financial security in banking activities such as Compulsory Reserves; Deposit Insurance and risk provisioning.

Continue to improve and promote the use of valuable papers such as commercial papers, certificates of deposit and other types of bills and bonds of commercial banks. Further deploy operations in the money market to limit risks such as reverse repo, futures, options, etc.

3.3.2.3. Guide and direct commercial banks to implement State sanctions to secure credit activities.

Firstly, the State Bank needs to promptly deploy clear instructions for implementing legal frameworks related to credit safety under the Law on the State Bank and the Law on Credit Institutions.

Second, based on State institutions, the State Bank must have regulations requiring commercial banks to register mortgaged assets, comply with new regulations on debt classification and provisioning, new regulations on safety assurance... to help banks better control credit risks.

Third, the State Bank also needs to proactively focus on enhancing coordination with the State in promulgating the most appropriate institutions for implementing measures to handle outstanding debts and set aside risk provisions, thereby creating a synchronous and highly effective legal framework for credit risk prevention and limitation activities.

Fourth, the State Bank focuses on urging and supervising the implementation of programs to handle outstanding debts and restructure commercial banks as planned.

3.3.3. Recommendations to Vietnam Joint Stock Commercial Bank for Investment and Development

In order to separate the credit risk management function from the Branch's interests in order to improve the credit review in the most objective and honest way, it is necessary to develop more complete internal regulations related to the management and control of risks throughout the system in an effective and timely manner. Although BIDV has established a Risk Management Division, its operations have not been really effective, have not been able to advise and propose many risk management solutions to the Board of Directors, and have not helped branch leaders control credit risks at their branches.

Transferring the function of collecting bad debts from the branch to the debt collection department of the Head Office has contributed to freeing up time for the branch to have more time for business and market development. However, there are

Credit risk management at Joint Stock Commercial Bank for Investment and Development of Vietnam - Trang An Branch - 14

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