Credit Risk Measurement At Vietnam Bank for Agriculture and Rural Development

Customers. When receiving information about customers such as business losses, force majeure risks such as natural disasters and epidemics, through inspection and detection of customers using capital for the wrong purpose, the decrease in the value of collateral, all credit institutions report to the leaders of the Credit Department and the Director (if necessary) to propose solutions. Specifically, over the years, hundreds of loans have been transferred to debt groups and debt collection measures have been implemented, which are identified through the classification and assessment of customers by credit institutions. Typically, there is the outstanding debt of Minh Phuong Embroidery Company Limited (credit relationship at the District Agricultural and Rural Development Bank Center) which borrowed 3.9 billion VND to invest in ineffective export garments, ....

In cases of first-time loans, appraisal is extremely important, because if the appraisal is not good, it will lead to wrong judgments about customers and credit decisions that do not ensure credit conditions and principles, and the inevitable consequence is credit risk. Statistics over 3 years at the branch of the NHNo&PTNT in Phuc Tho district, through the initial appraisal of the CBTD, it was announced that many loans that did not meet the credit conditions were refused.

2.2.1.2. Measuring credit risk at the Bank for Agriculture and Rural Development of Vietnam - Phuc Tho District Branch, Hanoi City

When a bank agrees to grant any credit to a customer, it contains credit risk. However, the basis for assessing the level of risk must be based on the specific situation of that credit and whether it is capable of repayment according to the credit contract and debt acknowledgment contracts or not? Thus, to measure the credit risk arising, we use the bad debt indicator, according to Decision 493/QD-NHNN, bad debt is debt in groups 3, 4, 5. Bad debt is the most important indicator to assess the credit quality at any credit institution.

Table 2.5: Some indicators of bad debt in the period 2012-2014

Unit: billion VND

Target

2012	Proportion	2013	Proportion	2014	Proportion
Group III debt	0.3	33.9	0.01	1.8	3.9	89.1
Group IV debt	0.085	9.6	0.17	30.9	0.15	3.5
Group V debt	0.5	56.5	0.37	67.3	0.32	7.4
Total bad debt	0.885	100%	0.55	100%	4.37	100%
Total outstanding debt	310.4		349.4		421.2
Bad debt/total outstanding debt	0.29%		0.16%		1.04%

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“Source: Business performance summary report 2012-2014, NHNo & PTNT Phuc Tho district”

To illustrate the specific situation of bad debt at the branch, we use the following chart.

after:

Table 2.4. Some indicators of bad debt in the period 2012-2014

Group III Group IV Group V

Bad debt

2012 2013 2014

Table 2.5 shows : Bad debt ratio at the Bank for Agriculture and Rural Development of Phuc Tho district has

The trend is increasing both in absolute numbers and proportions. Specifically, bad debt in 2012 was 0.885 billion VND, accounting for 0.29% of total outstanding debt, in 2013 it decreased to 0.55 billion VND, accounting for 0.16% of total outstanding debt. However, in 2014 it increased to 4.37 billion VND, accounting for 1.04% of total outstanding debt.

Through the table above, we can see that bad debt in the years 2012 - 2014 at the branch mainly focused on group 5 debt, accounting for the highest proportion (on average, accounting for 56% to 67% of the total bad debt ratio). Also from the table above, we can see that group 3 debt accounts for a proportion of total bad debt, and is tending to increase every year. If in 2012, the bad debt ratio of this customer group was 33.9%, then

By 2014, it accounted for 89.1% of the total bad debt structure. This shows that the credit risk level at the branch of the Bank for Agriculture and Rural Development of Phuc Tho district is hidden in overdue debts from 90 days to 180 days and mainly in debts with restructured repayment terms for the first time.

Through table 2.4, it shows that bad debt at the branch increases every year along with the growth rate of outstanding debt. However, to understand the cause and clearly see the status of bad debt, we analyze the structure of bad debt.

- Bad debt structure at the branch of NHNo & PTNT in Phuc Tho district

Table 2.6: Some indicators on bad debt structure in the period 2012 - 2014

Unit: billion VND

Target

2012		2013		2014
Number money	Ratio weight	Number money	Ratio weight	Number money	Ratio weight
1. Bad debt by type loan	0.885	100	0.55	100	4.37	100
Bad loan balance short term	0.885	100	0.55	100	4.27	97.7
Bad loan balance medium and long term	0	0	0	0	0.10	2.3
2. Bad debt by type customer image	0.885	100	0.55	100	4.37	100
Bad loan balance Business	0	0	0	0	3.9	89.1
Bad loan balance household, individual	0.885	100	0.55	100	0.47	10.9
4. Bad debt according to TSDB	0.885	100	0.55	100	4.37	100
No TSDB	0	0	0	0	0	0
Have TSDB	0.885	100	0.55	100	4.37	100
5. Bad debt by ability recovery capacity	0.885	100	0.55	100	4.37	100
Bad debt no have the ability to collect	0	0	0	0	0.44	10
Bad debt is possible recovery capacity	0.885	100	0.55	100	4.37	90

(Source: Report on analysis of bad debt/overdue debt of the Bank for Agriculture and Rural Development of Phuc Tho district over the years)

Research and review of bad debt structure shows:

- Bad debt analysis by loan type : According to loan term, bad debt in short-term loans tends to decrease over the years. If in 2012, when starting to implement Decision 493/QD-NHNN, bad debt in short-term loans accounted for 100% of total bad debt, then by December 31, 2014, bad debt in short-term loans only accounted for 100% of total bad debt. Along with the reduction in bad debt ratio in short-term loans, bad debt in medium and long-term loans has increased compared to before. On December 31, 2012, bad debt in medium loans accounted for 0%, then by December 31, 2014, it accounted for 2.2% of total bad debt. This reflects that the credit quality of medium-term loans is not guaranteed ( over 2 years, bad debt decreased in total debt but the bad debt ratio increased in total bad debt, especially in 2014).

- Bad debt analysis by customer type: Bad debt balance for business loans in 2012 - 2014 is non-existent, in 2014 bad debt of business loans increased sharply due to the impact of the economic crisis and recession, so the operations of some businesses encountered many difficulties (absolute number increased by 3.9 billion VND with an increase rate of 89.2% in total bad debt). The bad debt ratio for households and individuals accounted for the highest proportion in the period 2012 - 2013: 100%. The reason is that the branch's loan balance for this customer group is the largest, and mainly focuses on customers who are farmers in the communes, business depends a lot on natural conditions and weather, if not favorable, the possibility of credit risk is very high.

- Bad debt analysis by collateral:

The branch of the State Bank of Vietnam in Phuc Tho district has increased outstanding loans, prevented and handled credit risks in the direction of a high proportion of loans with collateral in the total outstanding loans and thereby the proportion of bad debts with collateral always accounts for 100% of the total bad debts.

- Bad debt analysis by recovery ability:

Bad debts are assessed to be recoverable, accounting for an average of 100% of the total bad debts of the NHNo&PTNT Phuc Tho district. In order to recover these debts, it is necessary to regularly pay attention, monitor and urge customers to find sources of income to repay the bank, and promptly collect debts as soon as customers have sources of income.

With debts assessed as uncollectible accounting for about 10% of the total bad debts of the Bank for Agriculture and Rural Development of Phuc Tho district, there will be measures to gradually collect them over the years.

2.2.2. Current status of credit risk prevention and handling

By analyzing and capturing information about regular customers, it helps CBTD at the NHNo&PTNT branch in Phuc Tho district recognize signs of potential credit risks from customers, thereby planning and working programs monthly, quarterly, and annually to overcome potential causes of risks or bring customer debts back to normal. For small loans of households in rural areas, CBTD implements measures to advise and help with difficulties, consider debt restructuring, and continue credit investment to overcome bad debts when customers are promising. Some specific tasks that have been applied at the NHNo&PTNT branch in Phuc Tho district are:

- Regularly classify customers to screen and reject when they do not meet credit conditions: over 3 years (2012 - 2014), the branch has rejected many loans for customers who do not meet the conditions and are classified as C according to the customer classification criteria in the system.

- Measures to exploit debt :

(i) When the loan is found to have high potential risk, if the asset has low commercial viability, the customer will be required to provide additional collateral;

(ii) Carry out the transfer of overdue debt when the risk is clear, and apply necessary measures to collect the debt.

- Technical and professional measures: Establish a bad debt handling team, conduct detailed analysis of potentially risky debts, bad debts, outstanding debts, and debts that have been handled with risks to find the cause, thereby having appropriate debt handling and recovery measures; at the same time, help CBTD clearly understand their responsibilities in complying with the lending process, and attach importance to the economic efficiency of the loan project.

capital and actively urge debt collection, including debts that have been handled with risk by the reserve fund.

For overdue debts arising due to subjective reasons of bank staff, the Bank for Agriculture and Rural Development of Phuc Tho district has applied measures to recover debts such as: in case of selling assets that do not recover enough debt, the bank staff will be held responsible to pay the remaining amount; or apply administrative measures such as: emulation fines, not allowing business salary, temporarily suspending work to focus on recovering bad debts.

Establish a steering group for bad debt recovery with the branch director as the team leader, the deputy director in charge of business as the deputy team leader, and members being heads of functional departments, to propose measures and solutions to direct debt recovery and urge the progress of debt recovery to each Transaction Office and each CBTD. Promptly resolve difficulties and obstacles reflected by the Transaction Offices and report to the Party Committee, local authorities, all levels and sectors to have measures to support timely resolution of bad debts.

In addition to the above measures, in the process of managing RRTD at the branch of NHNo&PTNT in Phuc Tho district, a risk protection mechanism is applied by classifying customers into 5 groups according to Decision 493/NHNN, mainly based on quantitative factors regarding the overdue time of debts as follows:

Group 1: Standard debt (debt in due date)

Group 2: Debts requiring attention (Debts overdue less than 90 days)

Group 3: Substandard debt (Debt overdue from 90 days to 180 days)

Group 4: Doubtful debt (Debt overdue from 181 days to 360 days) Group 5: Debt with potential loss of capital (Debt overdue from more than 360 days)

Based on the classification of debts into 5 groups, the NHNo&PTNT Phuc Tho district makes provisions for possible losses due to customers not fulfilling their committed obligations. Provisions for risks are calculated based on the principal debt and accounted for in the Bank's operating expenses. Provisions for risks include:

General provisions and specific provisions. Specific provisions are amounts set aside based on specific classification of debts as prescribed (in Article 6 or Article 7 of Decision 493/2005/QD-NHNN) to provide for possible losses. The specific provisioning ratio is as follows:

(i) Group 1 deduction is: 0%;

(ii) (ii) Group 2 extract is: 5%;

(iii) (iii) Group 3 extract is: 20%;

(iv) (iv) Group 4 extracted: 50%;

(v) (v) Group 5 extract is: 100%.

In addition to the specific provisioning ratio, the District Bank for Agriculture and Rural Development also makes general provisions to reserve for unidentified losses during the debt classification process, specific provisions or in cases of financial difficulties when the quality of debts declines. The general provisioning ratio as prescribed in Decision 493 is 0.75% of the total value of debts from groups 1 to 4. Within a maximum period of 05 years from the effective date of Decision 493/2005/QD-NHNN, the District Bank for Agriculture and Rural Development of Phuc Tho must make sufficient provisions for the above general provisions. The implementation of debt classification and provisioning of general provisions according to Decision 493/NHNN has created a much more proactive position in risk prevention, not only with existing risks but also with potential risks, increasing the endurance of the District Bank for Agriculture and Rural Development of Phuc Tho branch when RRTD occurs.

In case RRTD has arisen, the ability to recover capital from cash flow in the customer's business plan is very difficult or the loan has entered group 5 status (debt with the possibility of losing capital), then the branch will take the following measures:

- Measures to handle the liquidation of assets securing loans:

Handle loan collateral in case customers violate the provisions of the credit contract (CPA) and loan guarantee contract (LOA) to recover bad debts and transferred debts.

Off-balance sheet. In addition, the Branch also initiates a lawsuit if the debtor shows signs of fraud, has applied measures to handle assets but cannot recover the debt. Over the years, the bad debt ratio at the district branch of NHNo&PTNT is always below 3% of the total outstanding debt and the bad debt collection rate and RRTD debt settlement always reach over 100% of the plan assigned by NHNo&PTNT Ha Tay branch.

- Measures to handle with RRTD reserve fund:

The Phuc Tho District Branch of the Bank for Agriculture and Rural Development uses the reserve fund to handle credit risks for debts in the following cases:

(i) Customers are organizations or enterprises that are dissolved or bankrupt according to the provisions of law; individuals who die or go missing.

(ii) Debts belonging to group 5 as prescribed in Decision 493/QD-NHNN

For debts that the branch has applied all collection measures but has not been able to recover. As for debts that are frozen and awaiting government settlement, risk handling is carried out according to the regulations of the General Director of the Vietnam Bank for Agriculture and Rural Development.

To make a provision for a loan that is overdue, the Phuc Tho District Bank for Agriculture and Rural Development branch must prepare a dossier according to regulations and submit it to the Ha Tay Branch for Agriculture and Rural Development - Hanoi City. The Ha Tay Branch for Agriculture and Rural Development - Hanoi City shall base on the actual situation of the branch's provision for loan recovery fund and the nature of the debt to consider and approve the provision for the branch. In case the Ha Tay Branch for Agriculture and Rural Development allows the loan to be provisioned for loan recovery but the branch's provision for loan recovery is not enough, the Phuc Tho District Bank for Agriculture and Rural Development is still allowed to transfer the debt to off-balance sheet monitoring, and is obliged to repay the under-provisioned amount when calculating the quarterly plan. The Phuc Tho District Bank for Agriculture and Rural Development branch shall continue to be responsible for collecting the loan that has been provisioned for loan recovery by all means, and the amount collected from the collection of the loan that has been provisioned for loan recovery shall be included in the income of the Phuc Tho District Bank for Agriculture and Rural Development.

Although the absolute number of off-balance sheet debt transfers increased year by year (showing the XLRRTD in Table 2.5) to improve the balance sheet. However, on the other hand, the branch of the NHNo&PTNT Phuc Tho district also increased

Credit Risk Measurement At Vietnam Bank for Agriculture and Rural Development - Phuc Tho District Branch, Hanoi City

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