effective risk management in practice. Directors or heads of business units are directly responsible for credit risks arising in their units. In addition, the Chief Risk Officer will be responsible for credit risk management within the policy frameworks set by the Risk Management Committee, and will be the leader in implementing the policy frameworks, and will independently manage risks in the following aspects: measurement, monitoring, mitigation and reporting.
On the use of loan portfolio risk management tools
The credit operations of Citibank USA show that in order to effectively control credit risk on the loan portfolio, the following contents need to be implemented: First, loan appraisal is considered more important than post-loan control in preventing credit risks. Cutting or skipping the contents in the appraisal process will lead to bad debts. In addition, lending risky debts will be very costly for the bank if taking into account the work that must be done to keep the loan from becoming overdue.
In addition, credit officers at this commercial bank focus on assessing the borrower's situation rather than relying too much on automated methods and formulas, such as credit scoring tools. The reason given is that with small-scale customer loans, such as individual customers or small and medium-sized enterprises, there are too many unique characteristics that are difficult to analyze through an automated system. Moreover, credit scoring can eliminate customers with good potential even if they have low credit scores.
Second , avoid using brokers in lending, because brokers have no incentive to provide higher quality loans since they are compensated based on no quality of loan.
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Third, the bank uses a centralized approach to lending decisions to ensure consistency and control. For all loans, the bank requires at least one officer who is not a loan appraiser.
to review the loan and make the final approval decision. This structure eliminates the need for final approval decisions from multiple scattered officers and centralizes approval to one officer or group to ensure consistency, control and efficiency in loan appraisal.
Fourth , require lending officers to be responsible for the loans they bring to their banks. Although in internal documents, commercial banks do not emphasize punishing officers when there are bad debts, in most cases lending officers must support the recovery of bad loans.
Fifth , apply a credit rating to new loans and review the rating periodically throughout the life of the loan. In a typical lending process, a new loan is assigned a numerical value that represents the risk level at the time of loan review. This number may be revised throughout the life of the loan based on the borrower’s repayment history and other factors. When a risk problem is identified, a method must be in place to identify and monitor the bad debt. This credit rating system is different from credit scoring and is used before credit scoring to make lending decisions.
Sixth, participate in new financial instruments as effective insurance measures for bad debts. Citibank as well as commercial banks in the United States are pioneers in the business of securitizing loans. In 1968, the first securitization based on mortgage loans was carried out by Ginnie Mae under the guarantee of the Government Mortgage National Association. Then in the 1980s, securitization was used more widely for the purpose of changing the structure of the loan portfolio.
Seventh , in addition to securitization measures, bank managers at Citibank USA also pay great attention to setting safety limits to limit the risk of concentration in the loan portfolio. In this country, there are legal regulations to control this type of risk, such as limiting lending limits for
Sensitive industries such as real estate are specifically regulated: real estate business debt must not exceed the bank's equity or 70% of the bank's mobilized deposits (Rose, 1993).
2.3.5. Lessons learned for Vietnamese commercial banks
On the organizational structure of loan portfolio risk management
Firstly, regarding the organizational model, through the experience of most commercial banks studied such as Citibank in the US or commercial banks in Japan, it shows that the centralized credit risk management model is chosen to manage loan portfolio risks. To implement this organizational model, it is necessary to separate departments belonging to two functions: credit risk management and operational functions. In addition, it is necessary to establish a Risk Management Committee or a Risk Director to lead and take responsibility for implementing the credit risk management function, including the management of the bank's loan portfolio risks. In addition, with the level of banking management still facing many difficulties and limitations in human resources, technology, finance... as in many commercial banks in Vietnam, the conversion credit risk management model as shown by the experience at Bangkok Bank is a suggestion for commercial banks in this group.
Second, regarding the role of internal control system in credit risk management, the experience as shown at KDB Bank is consistent with the theory that maintaining an independent internal control department enhances the transparency and effectiveness of credit risk management. This department should be structured as a separate branch in the risk management organization structure and be responsible for reporting directly to the Risk Management Committee or the Board of Directors.
On loan portfolio risk identification
Regarding the information used in identifying loan portfolio risks, the experience of commercial banks in Japan shows that the early identification system of credit risks of banks needs to take into account the influence of factors in the macroeconomic environment. Thus, the inclusion of indicators to forecast the "health" of the macro economy is considered an important lesson to improve the ability to forecast accurately.
of current credit risk early warning systems at Vietnamese commercial banks. In addition, to improve the quality of information sources on loans in the portfolio for credit risk identification, the use of information sources from a unified credit information center of the entire commercial banking system has been proven to be effective, as demonstrated by the experience at Bangkok Bank.
On measuring loan portfolio risk
The roadmap for implementing modern credit risk measurement that the Korean Development Bank (KDB) is applying is a useful suggestion for Vietnamese commercial banks. Accordingly, in order to quantify the risk of the loan portfolio, the implementation steps need to be outlined in a clear roadmap in the bank's credit risk management policies and procedures. The roadmap is implemented according to the experience of KDB bank, including three main stages: first, it is necessary to quantify the quantities that characterize the risk on the scope of each individual loan and then the scope of the portfolio, including: PD, EAD, LGD. From there, determine the expected and unexpected risk levels on the portfolio level. Finally, when the results of this risk level are available, proactive risk-based loan portfolio management is implemented.
On the use of loan portfolio risk management tools
The experience of many commercial banks such as Citibank USA or KDB has emphasized the role of credit limit and limit tools in credit risk management on the loan portfolio. These limit tools are divided into two groups for management and monitoring including: industry limits and limits for each customer group.
In addition, from the experience of Citibank USA, it shows that loan portfolio risk management should be implemented through a combination of many groups of measures: (i) credit risk management on each loan in the portfolio by increasing the importance of the appraisal step in the lending process, attaching the responsibility of credit officers to the loan, implementing centralized credit decision making, applying credit coefficients to borrowers in addition to credit scores;
(ii) strictly comply with regulations on safety limits on the loan portfolio;
(iii) use modern financial tools such as securitization to restructure and reduce risks in the loan portfolio.
Chapter 2 Conclusion
In chapter 2, the thesis has generalized the theoretical basis of credit risk management and loan portfolio risk management at commercial banks. Regarding the content of loan portfolio risk management, the thesis has raised issues about the concept, content and factors affecting loan portfolio risk management at commercial banks. In addition, the thesis synthesizes the experiences of commercial banks in four countries including Japan, Thailand, Korea and the United States on loan portfolio risk management in the following aspects: risk management organizational structure, risk identification, risk measurement and use of risk management tools. This will be the theoretical basis for the author to analyze the current situation of loan portfolio management at Vietnamese commercial banks in chapter 3 and propose solutions for commercial banks in Vietnam in loan portfolio risk management in chapter 4.
CHAPTER 3: CURRENT STATUS OF LOAN PORTFOLIO RISK MANAGEMENT AT VIETNAMESE COMMERCIAL BANKS
3.1. Overview of Vietnamese commercial banks in the research sample
To assess the current status of loan portfolio risks at Vietnamese commercial banks, the thesis is based on a research sample of 16 Vietnamese commercial banks divided into two groups. Group 1 includes 09 banks selected to implement Basel II according to the regulations of the State Bank of Vietnam and group 2 includes the remaining 07 randomly selected commercial banks. Below is an overview of the operations of the commercial banks in the research sample in three aspects: (i) Scale - shown through the Total Assets indicator, (ii) Profitability - shown through the Return on Average Assets (ROAA) indicator and (iii) Capital adequacy level - shown through the Capital Adequacy Ratio (CAR) indicator.
Group 1 Group 2
650.22
573.67
523.55
143.57
152
164.29
2017
2018
2019
Chart 3.1: Total assets of Vietnamese commercial banks in the period 2017-2019
Unit: Trillion VND
Source: Author's synthesis based on audited consolidated financial statements of the companies.
Commercial banks in 2017-2019 The above chart shows the average total assets of each bank for the two groups of banks in the research sample in the period 2017-2019. The results show that throughout the period, Group 1 commercial banks outperformed Group 2 commercial banks in terms of total assets, which shows the scale of operations and capacity.
The finances of group 1 commercial banks are many times stronger than those of group 2 commercial banks.
3.89
2.83
2.51
1.73
1.39
1.4
1.56 1.56
0.87
0.66
0.6
0.51
0.45
0.21
0.31
0.05
Chart 3.2: Average ROAA ratio in the period 2017-2019 of Vietnamese commercial banks
Unit: %
Source: Author's synthesis based on Annual Reports of Commercial Banks of each year
2017-2019 and S&P Global The above chart shows that, in general, Group 1 commercial banks have a higher ROAA ratio than Group 2 commercial banks, which reflects that the profitability on total assets of these commercial banks is better. Among Group 1 commercial banks, there is no big difference in profitability between banks, averaging at 1.47%, of which the three commercial banks with the lowest ROAA ratio in this group are Vietinbank, BIDV and Maritimebank with a rate below 0.66% - half of the group's average. Among Group 2 commercial banks, the above data shows that there are three commercial banks with ROAA ratios that are much higher than the remaining commercial banks in the group, including: HDBank, AB Bank and PVcomBank. On the contrary, there are three commercial banks in this group with the lowest ROAA ratio among the 16 commercial banks studied, including: Bao Viet Bank, PG Bank and NCB. Thus, the profitability of commercial banks in group 2 has quite large differences.