Current Status of Internal Control System at Vdb

% of total outstanding debt, down 3,423 billion VND compared to 2017, a decrease of 7% compared to 2017.

- Bad debt: The Branch's bad debt as of December 31, 2018 was VND 18,114 billion, accounting for 6.9% of total outstanding debt, bad debt decreased by 0.3% compared to December 31, 2017. Due to the insignificant decrease in bad debt, VDB's Board of Directors has directed its affiliated and subordinate units to consider implementing a number of solutions to remove difficulties for customers such as: Restructuring debt repayment terms, considering restructuring the debt repayment level for each period based on assessing measures to overcome difficulties in production and business activities to ensure compliance with the production - business cycle and the debt repayment capacity of customers, but up to now, some large customers whose restructuring period has expired are still unable to pay principal and interest according to the debt restructuring contract, so they continue to be transferred to overdue debt.

In addition, there are many bad debts of TDDT, TDXK... currently mainly outstanding debts that have lasted for many years, enterprises and investors have almost stopped operating and production is very difficult, the main source of debt collection is from handling secured assets; meanwhile, the handling progress is very slow because the secured assets are not legally qualified, or have low liquidity, partly due to specific assets, left to deteriorate for a long time, partly because the branches have not been really drastic in handling.

3.1.4. Control system in VDB system

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a) Board of Control

From establishment to April 6, 2016: VDB Supervisory Board was established under Decision No. 108/2006/QD-TTg dated May 19, 2006 and Decision No. 110/2006/QD-TTg dated May 19, 2006 of the Prime Minister. The operating regulations of the Supervisory Board are implemented according to Decision No. 36/QD-HDQL dated December 4, 2006 of VDB Management Board.

From April 7, 2016 to present: The organization and operation of the Board of Supervisors are implemented according to Decision No. 694/QD-BTC dated April 7, 2016 of the Ministry of Finance. The Board of Supervisors is a part of the management structure of VDB that conducts internal audits, controls, and evaluates compliance with legal provisions, internal regulations, VDB Charter, and resolutions, decisions, and other directives of the owner, the Ministry of Finance, and the Board of Directors of VDB.

Internal Audit Department under the Board of Supervisors: The Internal Audit Department was established and operates under Decision No. 361/QD-NHPT dated September 19, 2016 of the Board of Directors of VDB (formerly Decision No. 297/QD-NHPT dated December 16, 2015). The Internal Audit Department is a specialized department under the Board of Supervisors, under the direct direction of the Board of Supervisors, performing the internal audit function of VDB.

b) Internal audit apparatus

The Internal Inspection Department of VDB is implemented according to the functions, tasks, responsibilities and powers issued by the General Director of VDB, including the Internal Inspection Department at the Head Office and the Inspection Department at the Transaction Office, VDB Branch (Branch). The organization and operation of the internal inspection department are currently implemented according to Decision No. 49/QD-NHPT dated January 26, 2010 of the General Director of VDB. The main functions and tasks of the internal inspection department of VDB are summarized as follows:

* The Internal Audit Department is an advisory unit to assist the General Director:

Issue documents providing guidance on inspection and self-inspection of professional activities, anti-corruption work, anti-money laundering work, and complaint and denunciation settlement applied uniformly throughout the VDB system.

Preside over the development of plans and organize the implementation of plans to inspect all aspects of professional activities; prevent and combat money laundering; resolve complaints and denunciations, and prevent corruption in the entire VDB system. Propose handling and direct the correction and overcoming of shortcomings and errors after inspection, examination, and audit. Synthesize and monitor the results of the implementation of correction and overcoming to report to the General Director and inspection and audit agencies...

Working with and serving State management agencies on inspection, examination, and auditing; police agencies. Performing the duties of the Standing Committee of the Steering Committees for anti-corruption and anti-money laundering of VDB. Assisting the General Director in resolving related complaints and denunciations.

Perform other tasks assigned by the General Director of VDB.

The organizational structure of the Internal Inspection Board includes the Head and Deputy Heads.

Head of Department; General Department, Department of Operations I and Department of Operations II.

* The Inspection Department is an advisory unit to assist the Branch Director:

Organize and implement comprehensive inspections of business activities arising at the Branch according to the regulations and instructions of VDB. Organize the implementation of legal work; resolve complaints and denunciations; prevent corruption; prevent and combat money laundering according to the regulations of VDB. Be responsible for developing plans and organizing the implementation of periodic, annual and ad hoc inspection plans for all business activities arising at the Branch. Summarize and report the results of self-inspection, correction and correction after inspection, periodic self-inspection of arising activities and business activities to the Internal Inspection Department. Propose and recommend issues that need to be handled through inspection and self-inspection. Perform other tasks assigned by the General Director of VDB and the Branch Director.

3.2. Current status of internal control system at VDB

3.2.1. Control environment

- Credit activities have contributed to attracting more capital sources for investment, creating more development motivation for a number of important industries, fields and products, promoting economic growth, so the Board of Directors of VDB has issued many policies to strengthen control of credit growth quality. However, according to international standards and regulations of the State Bank on the internal control system as presented above, together with the results of interviews and surveys, it is shown that 32/38, accounting for 84.2% of the total number of leaders at VDB, believe that VDB needs to issue specific regulations on the internal control system in the system, control based only on processes, programs and plans in each period is not enough. The remaining 6/38, accounting for 15.8% of the leaders at VDB under investigation and observation, have no opinion on this issue.

- The current situation of the internal control apparatus of VDB is not really suitable: 21/38, accounting for 55.2% of the total number of leaders at VDB, believe that the division of functions/tasks between units is not tight. For a long time, the system of branches has been widespread nationwide, but due to the weak information system, the monitoring and management of branches has not been effective. This is reflected in the following aspects:

+ Existing departments have not yet fulfilled their responsibilities well (credit management departments sometimes do not promptly grasp the operational situation of projects/customers; coordination and unity in information as well as operational management are not good).

+ There are some work contents that have arisen in practice but there is no independent department in charge (asset-liability management (ALM), credit decisions for large investment projects/export credit limits; risk management; internal audit).

+ VDB organizes "management by business" (TDĐT, TDXK, Guarantee...) not "management by customer", and also by administrative boundaries (depending on the investment location). Therefore, there are customers who are managed by many units (Appraisal, TDĐT, TDXK, Guarantee) or many branches with different management methods, regulations, and processes for each business, leading to overlaps, duplication, or gaps in control.

- Human resources: Although VDB's Board of Directors is very interested in human resources and always identifies the human factor as the center of all activities. However, through interviews, it was shown that 25/38, accounting for 65.7% of the total number of leaders at VDB, said that VDB has not yet built a high level of professionalism and qualifications for officers and employees in the bank, especially in the fields of banking administration, consulting, credit analysis, risk management, and customer search. On the other hand, VDB also organizes training courses to improve professional qualifications in general and inspection and supervision in particular, but the quality and efficiency are still limited. Recruitment work in some units has not been focused on both quantity and quality, leading to a shortage of qualified and capable officers to meet job requirements. 32/38, accounting for 84.2% of the total number of leaders at VDB, believe that VDB has not yet established clear disciplinary sanctions associated with public service responsibilities.

VDB has paid attention to the welfare of its staff, but there is no truly attractive remuneration policy for staff, so some staff are not really dedicated to their work. In particular, recently, due to many different reasons including the working environment and remuneration policy, many staff have requested to transfer jobs, the phenomenon of "brain drain" is still an issue that needs special attention (from 2014 to now, there has been a decrease in staff throughout the system - a decrease of 241 people, nearly 10%, mainly due to many staff resigning).

- The decentralization and delegation of authority between the Head Office and the Branches are not really clear and are not linked to specific responsibilities and are frequently changed, not highly stable, the "collective" decision-making mechanism still exists. Therefore, in many cases, the decentralized authority is not fully utilized or abused. Overlapping in management and operations between departments still occurs frequently; Departments and Centers are still not proactive in coordinating work handling, sometimes there are still heavy administrative procedures within the Head Office, or there is a phenomenon of avoiding responsibility. Or the situation where a credit officer at the Branch simultaneously undertakes many tasks from customer contact to submitting to the leadership for loan approval/disbursement, this makes the lending decision not objective, difficult to identify potential risks and have appropriate preventive measures.

- By the end of 2018, VDB had not yet completed the task of innovating and updating the system of internal procedures and regulations. The internal management mechanism of VDB after the model conversion since 2006 essentially remained almost the same as the operation of the previous HTPT Fund. This has had a certain impact on customer relations, management mechanisms, control activities...

The system of regulations and business processes is "both redundant and lacking" and unclear, the specific distinction between "control points" is still limited ( In the internal audit system, the specialized internal audit department is considered the "third control point"; the first control point is located right in the business processing process; the second control point is performed by back office support departments; the third control point is the responsibility of specialized departments such as regular control, compliance, etc. ). Many similar regulations appear in many different executive documents, leading to confusion and difficulty in application and reference; some conditions/requirements are not included in the regulations and processes but are required to be supplemented during the operation - in some cases due to the subjective perception of the unit performing the advisory work.

- The independence and objectivity in the self-inspection work at the Branch have not been ensured. In fact, the inspectors at the Branch are under the management, assignment of work, and evaluation of work results of the Branch Director. Therefore, through interviews, it was shown that 30/38, accounting for 78.9% of the total number of leaders at VDB, believe that the activities of the internal inspection department at the Branch have not yet ensured the necessary independence, which can easily lead to conflicts of interests between each individual Branch and the interests of the entire system;

Self-inspection work has not been as effective as expected. Meanwhile, the inspection activities of the Head Office are more or less affected by work requirements and geographical distance. Inspections are mainly carried out according to plan, and each year, the Branch can only be inspected once or several times.

- Honesty and responsibility of some officers are still limited: Although isolated, in the past, at VDB branches, there have been a number of incidents, due to many different reasons, including the limitation of honesty and responsibility of officers, leading to some branch leaders and credit officers not fulfilling their assigned responsibilities, violating the regulations of the State and VDB in management and lending.

- The working regulations issued together with Decision No. 94/QD-NHPT dated March 13, 2007 of the General Director of VDB regulating the working regime of VDB have stipulated the principles, responsibilities, working style, working relationships and work handling procedures of VDB's leaders, leaders of units and officers and civil servants in the VDB system, basically covering the necessary regulations. However, this regulation was issued from the time VDB was first established and put into operation (2007), and up to now, there have been many contents that need to be supplemented and adjusted to suit the current actual operations and the new Charter, as well as the upcoming restructuring process of VDB.

3.2.2. Risk identification and assessment

In the process of operation, banks in general often face many types of risks, especially for VDB, due to the nature of its operations, the risks are often higher than those of commercial banks. These risks can arise from the bank itself or from the external economic, political and social environment. However, risk management is not easy for banks. The violations in recent years at VDB may show that the process of identifying, assessing and managing risks at VDB is not really effective in terms of design and operation, this needs to be recognized and paid attention to in depth.

38/38, accounting for 100% of the total number of leaders at VDB, believe that VDB does not have a risk management system , especially for major risks such as credit risk, liquidity risk, market risk and operational risk ... In addition, VDB has not issued policies to encourage officers and employees in departments to pay attention to detecting, evaluating and quantitatively analyzing the impact of risks.

The harm of existing and potential risks and the lack of specific measures for officials and employees to clearly perceive the harm of risks as well as the minimum risk limit that VDB can accept. Because risks that have a significant impact on VDB's operations have not been identified, systematic measures and policies have not been put in place to prevent and minimize the negative impacts caused by risks on all VDB operations.

With the nature of banking operations in general and VDB in particular, VDB always faces the risk of fraud, even scams to appropriate capital. On VDB's side, fraud cases often leave very serious consequences.

Regarding the appraisal work carried out by VDB, it mainly stops at appraising the financial plan, the loan repayment plan of the project, sometimes focusing on evaluating administrative procedures, investment procedures...; but not paying due attention to appraising the investor's capacity. The "qualitative" assessments of customer quality and loan quality have a large gap between theory and practice; or the appraisal results of many projects are inaccurate. The appraisal process does not provide specific measurements of the credit risk of the loan; for lending: originating from the borrower who has not fulfilled the obligation to repay the loan on time as committed in the credit contract, due to business losses causing the inability to pay the principal and interest to VDB, the principal and interest have become overdue, the debt group has been transferred to bad debt, making VDB unable to recover capital. Therefore, VDB is still passive in debt management and has not updated according to the actual business situation or only detects problem debts when customers have clear signs of overdue debt.

On the other hand, the database on business environment analysis and forecasting, resource assessment and medium and long-term vision determination is still limited, so VDB is still confused in planning long-term strategies; even if there is a long-term strategy, the "long-term" aspect is not yet met and must be researched, revised and adjusted immediately in the short term. The plan is made based on the assessment of the previous year's results and the next year's goals without considering the analysis of the level of risk and the corresponding management capacity. Therefore, in the past, many types of risks have arisen from operations, credit, ethics, etc.

The activities of the Credit Council have not been maintained regularly and have not been effective in practice. The decentralization of authority to the Branches

There is no convincing basis for lending decisions. VDB has not yet conducted credit ratings to determine the loan amount; has not yet controlled the maximum loan amount for customer groups or industries...

The VDB CIS early warning system is still under development and has not been put into use to improve credit risk monitoring and management.

3.2.3. Control activities

Inspection and control activities (inspection and supervision right from the process of processing business by business units to post-inspection by specialized departments such as the Internal Inspection Department and the Control Board) at VDB, although having achieved many positive results, have mostly not performed well the function of prevention and supervision but have only performed the function of inspection, detection, assessment and handling of arising problems. 33/38, accounting for 86.8% of the total number of leaders at VDB, believe that inspections in general are mainly aimed at compliance, completeness of documents and records, but have not focused on assessing risks and the suitability of control procedures of each unit. Control activities focus on processing control, not on management control as well as general control. The control mechanism focuses on surprise inspections and controls while related business units have not paid due attention to the regular control mechanism.

Internal regulations are not really complete and consistent, leading to many tasks being solved by "submission", that is, problems will be done according to habit, experience or situational nature, without written regulations, and leaders at all levels will base on the submission to decide, or in other words, the work will be "correct" if the submission is approved, otherwise it is "wrong". This will make it difficult for internal control activities because without a standard system, it is difficult to monitor compliance.

Control activities are not only carried out by inspectors, department heads, Board of Directors... those responsible for control, but also by all employees, business processes, monitoring equipment, regime documents, organizational structures... who are performing control tasks every day, every hour. However, awareness of the role and responsibility of control at each stage and level is not complete, as shown in the following: (i) many people are still confused, unable to distinguish between the internal control system and the inspection department , specialized internal control, or have a one-sided understanding that control is performed by the internal control department... (ii) There is a phenomenon that the professional department (control circle)

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