Current Status of Bad Debt Handling at Mekong Development Joint Stock Commercial Bank:

has not yet been approved and permitted by the State Bank to classify debt using the qualitative method.

In addition to some achievements, MDB's internal credit rating system still has some limitations. MDB's internal credit rating system is currently built according to the expert method, meaning that the selection and decision of all the basic elements of the rating system (set of indicators, weight of each indicator) depends entirely on the subjective views of experts instead of being based on historical statistical data and econometric model analysis. Internal credit rating results are subjective and are not really the basis for building quantitative risk measures, supporting banks to accurately calculate expected losses and minimum capital requirements to compensate for risks. This leads to limitations in portfolio risk management, credit pricing, and determining MDB's risk appetite.

2.3.2. Current status of bad debt handling at Mekong Development Joint Stock Commercial Bank:

In 2010, MDB's bad debt was quite low, so MDB did not handle bad debt. From 2011 to 2013, MDB used many measures to handle bad debt such as: organizing debt collection from customers, using reserves to handle credit risks and selling debt to VAMC. The total amount of bad debt handled over the years is shown in Table 2.9.

Table 2.9: Results of bad debt settlement of MDB over the years

Unit: billion VND

Target

2010	2011	2012	2013	2014
Total bad debt handled	0	15	120	300	115
In there:
Debt collection organization from customers	0	15	82	63	55
Debt sale	0	0	38	236	49
Use of credit risk reserves	0	0	0	1	11

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Source: MDB Bank Risk Management Division

The debt collection work from customers is organized quite well by MDB. The debt handling department under the legal compliance department at MDB Headquarters is in charge of this work. When the credit risk management board decides to process the loan by direct debt collection from the customer, the file will be sent to the debt handling department. The debt handling department staff will check and review the file, then go to the field to directly contact the customer to collect the debt. Using professional measures, the debt handling department staff will urge and persuade the customer to pay the debt in cash to the bank. At the same time, the use of legal measures such as suing the customer in court to collect the debt, as well as having to handle the collateral, will be minimized.

The measure of selling debt to VAMC asset management company was thoroughly implemented by MDB in 2013. In 2013, the amount of bad debt sold was 236 billion, accounting for 88% of the total.

The bad debt was handled this year. This measure helped MDB's bad debt ratio in 2013 decrease significantly compared to 2012 (from 3.46% to 2.65%). The debt sale not only improved MDB's bad debt ratio but also helped MDB have more special bonds (received from VAMC to pay for purchased debt), MDB can use these special bonds to borrow for refinancing when necessary.

When selling bad debt to VAMC, the value of the bad debt currently recorded on the bank's balance sheet will be reduced. At the same time, MDB receives special bonds from VAMC, the value of which is recorded as an investment item on MDB's balance sheet. Thus, the benefit of selling bad debt to VAMC is that the bad debt ratio is reduced, contributing to improving MDB's reporting.

However, this is not the optimal solution because besides the benefits mentioned above, selling bad debt to VAMC also has many disadvantages. Special bonds received from debt sales are not guaranteed by the Government and the State Bank, these bonds have a term of 5 years and an interest rate of 0%. After selling the debt, MDB still has to set aside a 20% risk provision for the special bonds received from VAMC. Bad debt can return to MDB if after 5 years VAMC has not yet resolved it.

Although MDB has made full and serious provisions for credit risks according to the regulations of the State Bank, MDB has used very little or not at all, only in 2013 did MDB set aside 1 billion VND, in 2014 it was 11 billion VND to handle bad debts for unsecured loans. This has helped MDB's profits not be affected by the cost of credit risk provisions.

CONCLUSION OF CHAPTER 2

In recent years, MDB's bad debt ratio is not too high compared to the general level of the entire banking industry. However, for a bank with a small scale and charter capital like MDB, a bad debt ratio of 4%, 5% is high, and this negatively affects the credit quality and business results of the bank.

In chapter 2, the author analyzed the current situation of preventing and handling bad debt at MDB. The author also pointed out the causes of bad debt at MDB. From such results, in chapter 3, the author closely followed to propose solutions to prevent and handle bad debt for Mekong Development Joint Stock Commercial Bank.

CHAPTER 3

SOLUTIONS TO PREVENT AND HANDLING BAD DEBT FOR MEKONG DEVELOPMENT JOINT STOCK COMMERCIAL BANK

3.1. MDB's development orientation to 2020:

Based on the results achieved in previous years and according to the proposed strategic plan, the Board of Directors has determined the development orientation for MDB until 2020 as follows:

On strategic direction:

Continue to build Mekong Development Commercial Joint Stock Bank according to the retail banking model focusing on individual customers and small and medium enterprises. In the future, in parallel with promoting agricultural, consumer and individual business loans, MDB will increase resources to develop the small and medium enterprise sector.

About human resources:

Improve basic policies, procedures and processes to promote business operations and create transparency in the working environment. Promote the use of KPI tools with specific and measurable criteria to serve as a basis for objectively assessing the capacity and contribution of each employee.

Build and implement a new salary management system based on considering the quality of resources for each position and promoting the working capacity of each employee.

Focus on building professionally trained human resources, improving skills to meet new processes and meet customers' increasingly high demands for professional service quality.

On improving asset quality, controlling credit quality and handling bad debt:

MDB continues to control credit quality and maintain the bad debt ratio at below 3% of total outstanding debt through risk handling using risk provisioning sources.

Actively collect debt, handle collateral, complete policies and procedures on debt classification and risk provisioning; sell debt to VAMC, AMC, credit institutions and the Debt Trading Company under the Ministry of Finance.

Conduct debt settlement training for branches and affiliated transaction offices in the system to complete the comprehensive debt settlement training program as set out.

About financial investment:

Focus on expanding relationships with financial institutions in the financial market, offering products and services to link services with partner banks. At the same time, increase information exchange and capital transactions in the interbank market to create prestige and promote capital business, creating initiative in supporting capital for the credit business department.

Product and service business plan:

The business plan focuses on mobilizing capital from the population, mainly individual customers and small and medium enterprises through diversified products and services, standardizing products and services according to international practices. The bank will also focus on reviewing and adjusting product policies so that the bank's products increasingly better meet customer needs and compete in the market. Some new products and services (e.g. export finance, chain finance, LC...) will also be deployed to serve the increasingly greater needs of customers.

3.2. Bad debt prevention solutions for Mekong Development Joint Stock Commercial Bank:

3.2.1. Improve the quality of customer inspection and supervision after disbursement:

With the large number of large commercial banks operating today, the race for loan sales and finding customers is inevitable. Some banks, in order to increase loan sales, have neglected to comply with the regulations of the law.

credit process. Including regulations on post-disbursement inspection and control. The work of post-disbursement assessment and appraisal of the situation of collateral assets and the production and business situation of customers is neglected. This leads to a very high risk of bad debts. The work of checking and supervising customers is to avoid cases where customers use loans for the wrong purposes, do not generate revenue from using loans, and borrow to pay off external debts.

Customer inspection and supervision after disbursement is carried out regularly and in the following two forms:

Checking through records and documents: credit officers must open books to monitor loans and debt collection, periodically evaluate the production, business and financial situation of customers through financial reports or quick reports on financial situation and income from customers.

On-site inspection: credit officers must periodically or suddenly inspect on-site the progress of production, business, status of raw material purchase, goods warehousing, ensuring consistency between purchase invoices and documents with the quantity of purchased goods and the actual value formed from loan capital.

Credit officers make a specific plan for post-disbursement inspection, including full details: time, location of inspection, expected inspection content. If necessary, credit officers propose to request other functional departments (finance and accounting department, appraisal department) to coordinate in participating in customer inspection and supervision.

3.2.2. Building an internal credit rating system according to Basel II :

For Vietnamese commercial banks in general and MDBs in particular, Basel II content is completely new, however, the benefits of implementing Basel II for banks are enormous and all credit institutions must acknowledge.

Implementing Basel II will help MDB improve credit quality, reduce bad debt; the process of contacting, monitoring and managing customers will be supported by risk measurement and monitoring tools that are capable of distinguishing good/bad customers. Basel II not only requires credit risk management for each individual loan, but also has the ability to quantify risks at the portfolio level. In addition, operational risk management requirements will help minimize risks caused by processes, people, technology systems and external events. In addition, applying risk management according to Basel II standards into operations will help MDB improve business efficiency.

Although MDB is not on the list of ten banks selected by the State Bank to pilot the application of Basel II standards, realizing the benefits of implementing Basel II in credit risk management, the author proposes that MDB should build a credit risk management system according to Basel II standards, the core of which is the internal credit rating system.

During this time, MDB has advantages to implement Basel II, such as positive changes in awareness of credit risk management, the macro economy is gradually stabilizing, overcoming short-term difficulties and MDB is on the way to improving financial capacity.

To manage credit risk according to Basel II, MDB must build an internal credit rating system (called IRB Use Test) and apply it to credit risk management. The core of this internal credit rating system includes risk components: probability of default (PD), expected loss at default (LGD) and expected outstanding balance at default (EAD). After building an internal credit rating system according to Basel II standards, MDB will build credit risk estimates that accurately reflect the actual risk status, thereby optimizing the amount of investment capital on the basis of both ensuring safety for banking operations and avoiding capital waste. At the same time, the credit rating system