Describes Bank Protection Against Credit Losses

repayment and the term of the loan. Regular review and classification of debt helps banks to control credit quality well.

(1) Classification of bad debt according to overdue debt period and debt recovery ability

Countries with different financial and economic institutions have different ways of classifying debt. However, the classification of bad debt in credit activities is often based on the assessment of the overdue time and the ability to recover the granted credit, including: Substandard debt (i); doubtful debt (ii) and debt with the possibility of losing capital (iii).

State Bank of Vietnam Regulations on asset classification, provision levels, methods of provisioning for capital reserves and use of capital reserves include: [13]

(i) Substandard debt (group 3 debt) includes: Debt overdue from 91 days to 180 days; Debt extended for the first time; Debt exempted or reduced interest due to customers not having enough

Maybe you are interested!

ability

ability to pay

full profit

under the credit agreement; and debt

belong to one of the

following case:

Debt of customer or guarantor is an organization or individual belonging to the subject

entities that credit institutions and bank branches are not allowed to grant credit to according to the provisions of law;

Debt secured by shares of a credit institution or a subsidiary of a credit institution or loans used to contribute capital to another credit institution on the basis that the lending credit institution receives collateral in the form of shares of the credit institution receiving the capital contribution;

Debts that are unsecured or granted with preferential conditions or with a value exceeding 5% of the equity capital of a credit institution or foreign bank branch when granted to customers subject to credit restrictions as prescribed by law;

Debts granted to subsidiaries, affiliates of credit institutions or enterprises over which the credit institution holds control have a value exceeding the limits prescribed by law;

It has a value exceeding the credit limits, except where permitted by law;

Debts violating the provisions of law on credit granting, foreign exchange management and safety ratios for credit institutions and foreign bank branches;

Debts violating internal regulations on credit granting, loan management, risk provisioning policies of credit institutions and foreign bank branches.

(ii) Doubtful debt (group 4) includes: Debt overdue from 181 to 360 days; Debt with first-time restructured repayment term overdue less than 90 days according to the first restructured repayment term; Debt with second-time restructured repayment term; Debt to be recovered according to inspection conclusions that is overdue for recovery up to 60 days and has not yet been recovered;

(iii) Debts with potential loss of capital (group 5) include: Debts overdue for more than 360 days; Debts with restructured repayment terms for the first time overdue for 90 days or more according to the first restructured repayment term; Debts with restructured repayment terms for the second time overdue according to the second restructured repayment term; Debts with restructured repayment terms for the third time or more, whether not overdue or overdue; Debts of customers being credit institutions announced by the State Bank to be placed under special control, and state bank branches with capital and assets frozen.

(2) Classification of bad debt according to accounting principles

Bad debt is divided into 2 types:

bad debt on balance sheet (i) and debt

bad

off balance sheet (ii):

(i) On-balance sheet bad debts are bad debts that are still being monitored on the balance sheet of credit institutions. These bad debts will directly affect the business performance of the bank during the period because credit institutions must set aside provisions for these debts at the rate prescribed by the State Bank of Vietnam from time to time.

(ii) Debt

ugly

The table is the debts

bad has been used

use of funds

DPRR for processing is monitored off-balance sheet for continued application of collection measures.

Recovery of these debts will increase the extraordinary profits of credit institutions.

1.1.3.3. Method of determining bad debt

(1) By quantitative method

Determining bad debt by quantitative method is used to analyze and evaluate loans mainly based on the customer's repayment time and signs of not paying interest and principal on time. However, the credit institution still has the right to proactively decide to classify any debt into higher risk debt groups corresponding to the risk level if the customer's ability to repay the debt is assessed to have declined.

According to regulations in Vietnam, with a quantitative approach, bad debt is debt of groups 3, 4 and 5 including substandard debt, doubtful debt, debt with the possibility of losing capital as prescribed in Article 10 of Circular No. 02/2013/TTNHNN dated January 21, 2013, amended and supplemented by Circular No. 09/2014/TTNHNN. Specifically,

debts

bad will

including debts

expired from

91 days

up, the

Debts with first-time debt restructuring, debts with interest exemption or reduction due to customers' inability to pay full interest under the credit contract.

According to international practice, bad debt includes not only loans overdue for more than 90 days but also loans showing signs of depreciation (according to IAS 39), or taking into account factors that may cause future loan losses (Basel II). Specifically:

Group 4 added:

Debts with debt term restructured for the second time;

Debts that must be recovered according to the inspection conclusion but have been overdue for up to 60 days and have not yet been recovered.

Group 5 additional:

Debts with first-time restructured repayment terms that are overdue for 90 days or more according to the second repayment term;

Debts to be recovered according to the conclusion of the inspection but overdue

over 60 days and still not collected.

(2) By qualitative method

According to the qualitative method, it is not necessary to base on the number of overdue days of unpaid debt but on the internal credit rating system and risk provisioning policy of the credit institution. On the other hand, according to this method, it is mainly based on the bank's assessment of the ability to recover capital and principal from customers.

However, the classification of bad debts by this method depends largely on the operational experience, subjective assessment of the bank itself and the standard Internal Credit Rating System (ICRS). On the other hand, there is no common standard for qualitative criteria, also known as ICRS, of credit institutions. The reliability of input databases from organizations, individuals, and businesses for internal credit scoring is still very limited. Building an internal credit rating system for customers is difficult to implement comprehensively and requires a lot of time and effort.

According to regulations in Vietnam, with a qualitative approach, bad debts are also divided into 3 groups based on the XHTDNB System and the risk provisioning policy of credit institutions approved in writing by the State Bank. Specifically, bad debts include debts that credit institutions assess as being unable to recover principal and interest when due, with the possibility of loss or irrecoverability, and loss of capital. Assessing the value of a loan or calculating possible future losses according to international practice requires banks to have a unified risk management and asset valuation process to comply with debt classification according to international standards (including: outstanding debt; estimated probability of default; loss when risks occur).

1.1.3.4. Impact of bad debt

Bad debt in commercial banks will cause certain effects on the economy, the banking and financial system and each commercial bank itself. Researchers believe that a high ratio of bad debt always contains the risk of system collapse.

Banks lead to financial and monetary crises. On the other hand, bad debt creates a burden on costs for banks, reduces the ability to mobilize capital and lend to the economy, reduces public confidence and international reputation for banks and the banking system.

(1) Impact of bad debt on the financial situation of banks

Risks in banking activities are inevitable, however, the level of risk to a certain extent will also make the bank more difficult or even at risk of collapse. If the collapse is a chain reaction, it is a series of collapses. Bad debts of banks have a direct impact on the bank's ability to pay or the financial health of a commercial bank. If businesses that borrow from banks fail, especially those that borrow a lot of capital from a bank and are unable to overcome it, it will then lead to the collapse of the bank itself.

This is explained as follows: if the bank is at risk in credit activities, bad debts arise and must use capital to cover these losses, then to a certain extent it will no longer be able to "write off" these losses and the bank will lead to a state of insolvency to pay depositors.

Figure 1.5 Depicting the Bank's Resistance to Credit Losses

(Source Andrew Sheng 1996)

According to diagram 1.5 shows the basic principles of risk handling in credit.

of a commercial bank from the bank itself. However, only when the losses that the bank has enough capital and time to handle these losses. The first source that the bank uses to handle bad debt is from the bank's profits, then from risk provisions, then from the bank's capital and when it exceeds the capital, the problem weighs heavily on the budget whether it is a state-owned commercial bank or a private bank. For that reason, bad debt affects many aspects of the bank's operations. Specifically, it reduces profits: profits are formed from revenues, of which interest accounts for a large proportion.

the most important. Bad debts directly affect profits through 2

aspect: reduce

income

business and must set aside DPRR fund for

Loans reduce bank income.

Impact on ability

power

payment and accounting

plan

business: the

The bank's loan debt is not paid on time, causing a shortage of money compared to the bank's estimate. The total amount of money that ensures the bank's payment ability at the time of decline affects the bank's business plan due to lack of capital to meet and even loss of payment ability.

Lose

reputation of

NH: those

bad effects of debt

bad to good

Profitability and solvency have a profound impact on the psychology of depositors as well as partner banks. The loss of confidence can lead to mass withdrawals by depositors, leading to the risk of bank bankruptcy.

Lose muscle

integration of

NH: debt status

bad to do

for NH

unable to disclose their financial situation. Prolonged lack of transparency reduces international trust, leading to loss of competitive opportunities.

competition and integration. This is a big disadvantage in today's high international integration.

(2) Impact of bad debt on the economy

for NH in the trend of integration

Figure 1.6 Vicious cycle of weak financial status of commercial banks

(Source Andrew Sheng 1996)

Bad debt cannot exist in every bank, it always exists at some level. When bad debt occurs in banks, it affects the bank and the economy in general (such as currency devaluation, macroeconomic instability), thereby causing many negative effects on the economy (enterprises incur losses; overdue debts increase; commercial banks have reduced capital, weak finances; then banks want to increase refinancing needs; the central bank refinancing causes a state budget deficit; this

abuse

even increase

increase above the level

Average World

world; abuse

growth

causing devaluation of the domestic currency, economic instability... the above situation is repeated over and over again, showing the vicious cycle of poor financial status of banks.

The figure above illustrates the “vicious cycle” of unhealthy financial conditions in the banking sector, showing the very close relationship between the activities of

Commercial banks, fluctuations in macroeconomic policies as well as the performance of the business sector. The above figure depicts the “vicious circle” in the true sense of the word and it shows us that it is difficult to determine where the cause of the problem started. However, we can partly analyze the impact of the weak financial situation with large bad debts of the banking sector on both the economy and the banks.

The banking and financial sector with high bad debt ratio will face the risk of losing capital and falling into a state of insolvency. Poor performance, high bad debt ratio, and the risk of bankruptcy of commercial banks reduce the efficiency of the market mechanism and adversely affect the economy. In the context of high costs for banks due to bad debt affecting lending interest rates, businesses, households and even the Government may have difficulty in paying their current debts.

The inefficiency of the banking system is the cause of low internal savings. Low internal savings limit long-term growth and make growth dependent on external factors. Moreover, because banks do not perform well their financial intermediary function, potential investment flows from the population are not directed to investment opportunities that are effective for the economy and depositors.

1.1.3.5. Causes of bad debt

Analyzing the causes of bad debt is one of the important points that need to be done in order to come up with appropriate, feasible and effective management and handling strategies and methods.

Banking activities are the activities of intermediary financial institutions, so the activities of commercial banks depend on many factors: legal environment,

economic environment

natural environment, production and business situation

customer business, customer ethics and factors related to the bank itself...

Comment