Criteria for Evaluating Bad Debt Management of Commercial Banks

waste; handle complaints and denunciations according to the Governor's regulations and the law.

- Advise and assist the Director in performing the task of granting and revoking licenses for the establishment and operation of banks of credit institutions and other organizations with banking activities in the area under the Governor's authorization and regulations of law.

- Advise and assist the Director in submitting to the Governor for approval or approval by authorization for members of the Board of Directors, General Director (Director), Board of Supervisors of credit institutions and suspending the above positions according to the Governor's authorization and regulations of law.

- Advise and assist the Director in giving opinions to the heads of State-owned credit institutions and credit institutions with State-controlled shares in the appointment, dismissal, removal, transfer, and rotation of the director position (or equivalent) of member units located in the area.

- Advise and assist the Director in proposing and recommending to competent authorities on issues related to the organization and operation of credit institutions and other organizations with banking activities in the area.

- Advise and assist the Director in implementing information and reporting regimes according to the regulations of the State Bank and laws related to assigned tasks.

- Perform other tasks assigned by the Branch Director. (Information portal)

Electronic, State Bank Branch, Quang Ninh Province)

* Prepare bad debt management results report

QLNX results reports are usually prepared monthly/quarterly/fiscal yearly or upon request. Each financial statement usually includes the following contents:

(i) General report on QLNX results.

The general report on the results of the management of bad debts is a general assessment of the outstanding debt situation and the bad debt ratio of the bank. Through that, the bad debt results of the bank are evaluated compared to previous years and other banks.

(ii) Reporting and evaluating the results of QLNX.

Based on the key aspects of the Bank's financial situation at the end of the year, as well as the business performance and cash flow situation, the Accounting Standards of Vietnamese Credit Institutions and the regulations of the State Bank of Vietnam related to the preparation and presentation of consolidated financial statements. (Details are stated in the Bank's consolidated financial statements), the Board of Management of Credit Institutions reports a number of key results according to the following indicators: total outstanding credit; increase or decrease in bad debt ratio; ratio of irrecoverable debt; ratio of overdue debt to total outstanding debt; minimum capital safety ratio.

(iii) Orientation of debt and bad debt management activities for the following year.

Based on the functions and tasks of the Bad Debt Management Board as prescribed, in the following year, the Bad Debt Management Board will continue to:

- Closely coordinate with the Board of Directors, the Bad Debt Management Board proactively controls

control the development and implementation of the Board of Directors' Resolutions to

ensure compliance with legal regulations of the State Bank in general and the Bank in particular.

- Together with the Board of Directors, the Risk Management Board needs to improve and enhance the operational efficiency of the three lines of defense in banking operations, creating an effective risk management foundation in accordance with legal regulations and international practices.

- Continue to improve risk management capacity to promptly detect, prevent and effectively handle signs, violations or existing shortcomings in the system. Thereby, ensuring the completeness and effectiveness of the system, facilitating the bank's safe, effective and sustainable operation.

(iv) Recommendations.

Based on the above presentation, the Management Board reports and recommends the following content:

- The Management Board must fully and appropriately comply with legal regulations and the Bank's Charter on organizing meetings and passing resolutions/decisions of the Board of Directors;

- Leaders and members of the Board of Directors actively deploy and perform assigned tasks, promptly research and have resolutions and decisions to support and facilitate the Debt Management Board to handle existing problems and difficulties in credit activities;

- Actively exceed most of the planned targets, ensuring the goal

next year's target;

- The Board of Directors and the Debt Management Board closely coordinate in inspecting and supervising the Bank's operations and create conditions for the Management Board to properly perform its duties.

In short, the preparation of the report on the results of bad debt management is very important for banks: it helps banks to make a general and detailed assessment of the outstanding debt situation, bad debt ratio, and evaluate the bad debt results of this year compared to the previous year. On that basis, banks can orient and propose solutions to improve the bad debt management activities of the following years.

2.2.3 Criteria for evaluating bad debt management of commercial banks

To evaluate the quality of a commercial bank's QLNX activities, whether they are good or not, one can rely on many different criteria. The criteria can be considered for each management content or for all management contents. To ensure depth, in this study, in addition to evaluating the QLNX activities of commercial banks according to management content, the author of the thesis focuses on analyzing 2 criteria: compliance and effectiveness in evaluating the third management content, which is the organization of management activities.

2.2.3.1 Compliance

Compliance is the responsibility of all managers, executives and employees of the Bank in complying with State laws and regulations.

of the Bank itself on QLNX. The level of compliance is shown in the number of people and the number of times violating the Bank's policies and regulations. Compliance is also shown in whether the regulations issued by the commercial bank are consistent with the Bank's policies on QLNX? (VPBank's compliance policy, 2017).

Thus, according to the compliance management function, is it shown in the stage of commercial banks: developing and promulgating policies, strategies for bad debt management and bad debt management processes; organizational model of bad debt management apparatus; Is the implementation of bad debt management activities in accordance with current regulations of the State Bank?

2.2.3.2 Efficiency

Since 500 BC, Greek thinkers have paid attention to efficiency: (but they were mainly interested in the category of economic efficiency).

According to Xanophon (427-355 BC) effectiveness focuses on human ability guided by good leadership as the key variable in management.

According to Plato (427-327 BC) recognized specialization and division of labor.

Movement as the source of efficiency and productivity.

According to A. Smith in his work "Inquiry into the Nature and Origin of the Wealth of Nations", efficiency is reflected through interest and profit, profit is the return on capital rather than the income of the enterprise.

Thus, efficiency (economic efficiency) is an important economic category that represents the comparative relationship between the economic results achieved and the costs incurred to achieve that efficiency. Efficiency is also reflected in the commercial banking stage: developing and promulgating policies, strategies for bad debt management and bad debt management processes; organizational model of bad debt management apparatus; organization of bad debt management activities to achieve good or bad results, at the current level prescribed by the State Bank? The efficiency of bad debt management activities of commercial banks can also be considered through the Results/Costs of bad debt management. However, in reality, most commercial banks cannot accurately calculate this data. Therefore, the efficiency of bad debt management can be assessed through the results of implementing the set bad debt management goals. It is usually measured as follows:

1. Total outstanding bad credit balance (NPL)

Total bad credit balance reflects the bad debt that the bank is currently monitoring and handling. This data needs to be compared over time and between banks with the same scale of assets and equity. This is easy to summarize but reflects the most general picture of bad debt of the bank.

Total outstanding credit

	Total outstanding debt		Total outstanding debt		Total outstanding debt
bad use of balance sheet	=	Group 3	+	Group 4	+	Group 5

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The increasing total outstanding bad credit debt shows that the bank's bad debt management currently has many loopholes and inadequacies.

2. Bad debt ratio on balance sheet:

Credit balance ratio

bad use of balance sheet =

Total outstanding credit balance in groups 3,4,5 Total outstanding credit balance in groups 1 to 5

x 100(%)

The ratio of bad credit debt on the balance sheet shows how much bad debt accounts for compared to the total outstanding debt of the bank, reflecting the seriousness of the occurrence of bad debts in credit granting activities. This ratio needs to be compared between periods and compared with current regulations of management agencies.

If this ratio increases over time, it shows that the bank is having problems with bad debt management. If this ratio is even higher than the current regulations, the bank will face warnings from management agencies.

3. Provision rate for bad debt

This ratio reflects how much the risk provision is able to cover bad debts before they become bad debts. The higher this ratio is, the greater the compensation capacity of the reserve fund because the bank can predict the level of future losses and vice versa.

DPRR provision rate

for bad debt

=	Provision for DPRR	x	100 (%)
	Bad debts

2.3 Factors affecting bad debt management of commercial banks

Based on the research of PhD student Nguyen Duc Tu (Credit risk management at Vietnam Joint Stock Commercial Bank for Industry and Trade, 2012); research of PhD student Nguyen Thi Thu Cuc (Bad debt management at Vietnam State Bank of Vietnam, 2015); research of PhD student Nguyen Thi Hong Vinh (Bad debt of Vietnam's commercial banking system, 2017); research of PhD student Tran Thi Thanh Diep (Bad debt management at Vietnam Joint Stock Commercial Bank for Industry and Trade, 2017); research of PhD student Vu Ngoc Diep (Interest rate risk management at Lien Viet Post Joint Stock Commercial Bank, 2018); and through the synthesis of expert interviews, there are the following main factors affecting the credit risk management of commercial banks:

2.3.1 Subjective factors

(i) Compliance awareness of bank staff at each position

Awareness of compliance with principles, regulations on authority, responsibility and requirements for the management system of bank staff contributes significantly to the effective implementation of the QLNX policy. A bank that builds a system of codes of conduct and professional ethics establishes an environment of "culture of compliance with the law", in which all bank staff always understand, do the right thing and voluntarily comply with current policies and regulations, which is a good foundation for improving the quality, effectiveness and efficiency of QLNX.

The compliance and enforcement system is defined for each bank position: Board of Directors; General Director; Directors of business units and divisions;

Internal Audit; Legal and Control Directorate; Staff.

(ii) Information technology system of commercial banks

Currently, banks have equipped themselves with modern information systems to build direct relationships with customers. Modern banking information technology will help banks monitor and manage collateral for customer loans, update collateral valuations to calculate risk provisions, update customer information, provide good support in debt management, adjust the credit management system to monitor debts and collaterals associated with customer data, and handle early and late debts and liquidate debts, or banks can widely publicize collateral handling information on the website.

The information technology system of the Bank is demonstrated through the early warning system for customer credit risk (EWS) which helps banks limit credit risk and warn about the level of customer risk to the Bank. From there, it helps the Bank to be proactive in handling and supporting customers, limiting the possibility of bad debt, and increasing the credit quality of the system. Thanks to the increasingly developed information technology of the Bank, helping the Bank to ensure credit safety in the banking system, the bad debt ratio will tend to decrease.

(iii) Professional qualifications, ethics and professionalism of bank officers and employees

The human factor is always an important factor that is decisive in all matters. Therefore, it is necessary for the work of human resource management to put the human factor or bank staff first. To do so, the recruitment of staff to work at the bank requires publicity, transparency and quality assurance. Recruited staff must ensure professional qualifications and professional ethics.

In fact, the problem of professional ethics risks of bank staff is also one of the causes of bad debts for banks. Some bank staff do not strictly comply with credit policies and lending conditions, and at the same time, there is collusion between credit departments and customers to conceal the truth, intentionally violating commercial bank regulations. Commercial bank staff are limited in capacity and qualifications, lending policies and procedures are not strict, there is no effective risk management process, there is no focus on customer analysis, credit risk classification to calculate lending conditions and debt repayment ability, lack of skills to grasp and be sensitive to socio-economic developments, then credit granting decisions will easily lead to potential credit risks. The ability of credit officers to forecast, analyze, assess credit, detect and handle problem loans is still weak, especially in industries that require high professional knowledge, leading to mistakes in lending decisions. In addition, it is also possible that the lending decision is correct, but due to lack of inspection and supervision after lending, customers use capital for the wrong purpose but the bank does not prevent it in time... leading to increased bad debt and difficulty in managing RRTD and QLNX.

difficulties, bad debt increased.

(iv) Bank equity

Thoroughly handling bad debt requires commercial banks to have strong financial resources, specifically the scale of equity capital. In fact, among the measures to handle bad debt, the provisioning and use of the DPRR fund still accounts for a significant proportion. However, not all commercial banks can set aside enough DPRR according to the provisions of law because the actual amount of RRTD provisioning is included in the cost and directly affects the bank's profitability. In fact, there are commercial banks that are in a situation of very low financial capacity, sometimes it takes decades to be able to handle all outstanding debt. Therefore, improving financial capacity and increasing the scale of equity capital are important conditions to help commercial banks be more proactive in their DPRR management work.

Banks with strong financial potential will also be more stable when facing large losses caused by bad debt.

2.3.2 Objective factors

(i) Business environment

The business environment greatly affects the credit risk management of commercial banks. If the business environment develops stably with attractive investment opportunities, it will help businesses continue to expand production and business, creating a source of debt repayment for banks. On the other hand, a healthy and transparent business environment, with the full development of the money market, capital market, etc., is also a factor that strongly affects the credit risk management of banks. On the contrary, negative fluctuations in the business environment will adversely affect the operations of banks, leading to many difficulties in credit activities, bad debts increasing faster than credit growth, and bank risk management will be unfavorable, and credit risk management will be a difficult problem.

(ii) Policy mechanism and legal corridor

Most governments of countries recognize the negative impact that bad debts can have on the banking system and the economy. Therefore, the Government and State management agencies of banks are often very interested in the process of bad debt settlement through measures such as issuing documents, laws, regulations to prevent and minimize bad debts and handle bad debt losses. There is a clear, transparent, favorable and strong legal environment to handle bad debts, have appropriate bad debt settlement measures with reasonable processes and procedures, improve the quality, effectiveness and efficiency of bad debt management.

(iii) Inspection and supervision of the Central Bank

The inspection and supervision work of the Central Bank is to prevent, promptly detect and resolutely handle risks, problems and weaknesses of banks.

Based on the developments in the monetary and banking situation, requirements for performing tasks

Based on the State Bank's policies and the inspection orientation of the Government Inspectorate, the State Bank will issue an inspection plan with a decision for unified implementation throughout the banking industry.

In particular, the inspection work focuses on inspection of restructuring, debt collection, credit quality and some key contents in the bank's operations. Inspect and supervise the entire system of banks, develop and implement specific inspection plans according to assigned functions and tasks, in accordance with the State's management requirements in the area and inspection resources.

The implementation of inspection and supervision must be methodical, synchronous and serious, in accordance with legal regulations, and consistent with the content and inspection plan.

If the inspection and supervision of the Central Bank are well implemented, it will detect potential risks, even some banks that are insolvent and unable to consolidate and rectify themselves to return to normal operations, thereby promptly taking measures to handle them, without affecting political security and social order and safety in the locality.

(iv) Awareness from borrowers

Debt collection also depends largely on the customer's willingness to repay. Banks often encounter three customer cases: First , customers voluntarily repay their debts on time or cooperate to sell assets to repay the bank. Second , customers do not voluntarily repay but the bank puts pressure on them, sells assets to recover debts and the customer does not file any lawsuits. Third , customers who borrow money deliberately delay, refuse to pay bad debts even though they still have the conditions to repay, and react negatively when their assets are recovered, even when there is a judgment or decision with legal effect from the Court. This causes many difficulties and damages not only for banks and management agencies but also for the economy.

2.4 Experience in managing bad debt in credit activities of some commercial banks and lessons learned for Vietnam Joint Stock Commercial Bank for Industry and Trade

2.4.1 Bad debt management experience of some commercial banks

In the research content on bad debt management experience, NCS referred to the experience of two banks: Vietnam Joint Stock Commercial Bank for Investment and Development (BIDV) and Vietnam Joint Stock Commercial Bank for Foreign Trade (VCB). These are two large-scale banks with similar characteristics to Vietnam Joint Stock Commercial Bank for Industry and Trade, so the experience of bad debt management of these banks is a valuable lesson for Vietnam Joint Stock Commercial Bank for Industry and Trade.

2.4.1.1 Experience of Vietnam Joint Stock Commercial Bank for Investment and Development

* On the implementation of legal documents

Closely following the Government's policy in Resolution No. 01/NQ-CP, dated January 1, 2017; Directive No. 24/CT-TTg, dated August 2, 2016 and Directives and Circulars of

SBV, since the beginning of 2017, BIDV has proactively issued and actively implemented documents guiding comprehensive operations in the system, focusing on the Resolution approving the business target orientation and task plan for 2017 and Action Program No. 368/Ctr-BIDV. Continue to promote decentralization of authority associated with the responsibility of the head, issue a Decision on the Regulation on responsibilities, handling the responsibilities of the head and deputy head in the BIDV system; continue to improve the system of documents on decentralization of authority to ensure that decentralization of authority is associated with sanctions to control responsibility.

* About the organizational model

In 2017, BIDV continued to restructure the organizational model towards vertically centralized management, continued to streamline and simplify the apparatus, improve operational efficiency, and focus on customers, specifically:

- At the Head Office: Continue to restructure the organizational model at the Head Office according to a modern model, centralize management work, strengthen inspection and supervision and aim to operate business activities vertically according to the Block. Complete the governance model, clearly separate the functions and tasks of the Board of Directors, the Board of Supervisors, and the Executive Board; upgrade the Internal Audit Department to the Internal Audit Department; put into operation the Ho Chi Minh City debt settlement department and the Mekong Delta debt settlement department; perfect the Organization and Operational Regulations of the Personnel Committee, the Risk Management Committee, the Strategy and Organization Committee; reduce the operating model of the Representative Office abroad to ensure a reasonable organizational structure and improve the operational efficiency of the Head Office. At branches: Continue to arrange, consolidate and develop the branch network in the direction of increasing resources for direct business activities, specialized management according to strengths - regions and strongly shifting to retail activities, retail combined with SME.

- At member units, joint ventures, and overseas units: In 2018, BIDV completed the project of comprehensively restructuring the investment portfolio in depth for the period 2018-2020 with the orientation of increasing efficiency associated with portfolio structure, focusing on areas with long-term competitive advantages: putting into operation BIDV SuMi Trust Financial Leasing Company Limited; capital contributing units, present overseas continue to operate stably and effectively, actively contributing to the development of cooperative relations between Vietnam and the host country.

Regarding administrative reform: Continue to vigorously implement administrative reform to increase operational efficiency and enhance competitiveness, specifically: (i) Review, arrange and rationally structure the system of legal documents, reduce the number of documents by 60%; (ii) Shorten procedures and implementation time for a series of business processes, the operating time of business processes is reduced from 10% to 40%, especially IT has supported the reduction of operating time.