Determine the Weight (or Parameter) for Each Sign

General such as: industry development index, investment capital safety index, national economic growth rate, political stability level...

1.1.2.3. Investment instrument credit rating

The instruments that are mainly ranked are still instruments such as: corporate bonds, government bonds and other types of bonds and bank bills. In some countries and some credit rating organizations, preferential shares, bonus shares, etc. are also ranked. The credit rating of investment instruments is based on a number of criteria such as: liquidity, maturity, interest rate, face value, possible risks, etc.

In our country, we currently only focus on rating businesses participating in credit activities at commercial banks, businesses listed on the stock market, there are not many products, investment tools, ... so the rating of investment tools has not received much attention. We are not yet able to perform national ratings, but only for large rating organizations such as Moody's, Stand & Poor or Fitch, ... to rate. As for personal rating, because the collection and search of information for these subjects is quite complicated and difficult to control, personal rating has not been widely implemented.

In the scope of my thesis, I will study and research credit rating for businesses.

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1.1.3. Characteristics of credit rating

Credit ratings have several characteristics:

 First, XHTD is conducted based on information collected from the subjects of XHTD, and information sources considered reliable.

 Second, XHTD is not a recommendation to buy or sell an entity, nor is it advice to finance, invest or hold debt instruments, but XHTD only performs the independent function of assessing the level of credit risk or creditworthiness of a rated entity. They are just one of the factors that investors and sponsors should refer to before making investment and financing decisions.

 Third, credit rating results are only a criterion for decision-making and are valid for a certain period of time. Credit rating does not absolutely guarantee credit quality and credit risk in the future.

Thus, XHTD is an important factor, but cannot completely replace the explanation of the reliability of the XHTD object.

1.1.4. Basis of credit rating

According to Vuong Quan Hoang (2006), a personal rating system is based on answering four basic questions: determining the information to be collected, building a scale, determining weights, and building a model. From that research, we can deduce the basis for ranking businesses in the following order:

1.1.4.1. Determine which signs should be included to obtain customer information, which signs should or should not be included?

From here, when a customer comes to apply for credit, they will be asked to provide personal information (both qualitative and quantitative). Information is a set of signs such as: for individuals, age, education level, income, marital status, etc. For businesses, it is the type of company, size, business sector, reputation, credit history, financial reports, etc. that we decide to include.

The first requirement is that the signs included must not be correlated with each other. The next requirement is to include signs that are as specific as possible, such that they make it easy for customers to answer and for banks to verify their accuracy.

1.1.4.2. Building a scale for signs

Each customer sign will be compared with a scale or classified according to a scale to be included in the credit scoring model or table. This is an issue that greatly affects the resolution of subsequent problems, requiring many complex techniques in establishing a scale for each sign.

1.1.4.3. Determine the weight (or parameter) for each sign

This weight characterizes the importance of that sign to the customer's ability to pay.

1.1.4.4. Building a credit decision-making model based on the credit score function

From the credit score of each customer, calculated from the credit score function, we proceed to classify (credit rating) the creditworthiness of that customer. Among the issues raised above, it can be said that issue (1.1.4.3) and issue (1.1.4.4) are the most important and also the most complicated.

1.1.5. Credit rating principles

1.1.5.1. Combining quantitative and qualitative analysis

 Quantitative analysis is the quantification of customer risk factors based on calculation, evaluation and scoring from quantitative criteria. It is measured by numbers.

 Qualitative analysis is the analysis, evaluation, and scoring based on the subjective assessment of credit rating officers for customer risk factors that cannot be quantified.

 Customer credit rating combines qualitative and quantitative criteria through analysis, evaluation and scoring for each criterion. Qualitative analysis complements quantitative analysis.

1.1.5.2. Objectivity of credit rating

 Data: Data collection for inclusion in the XHTD model must be done objectively, flexibly, and verifiable. Use multiple sources of information at the same time to get a comprehensive view of the financial situation of the borrower.

 Approval of results: The results of the credit rating must be approved by a higher level of the rater and grader, or automatically rated through a computer system, under review by the rater.

 Simplicity, ease of understanding and comparison: Credit rating results must be simple, easy to understand and easy to compare: build a scale, score the indicators, then summarize and reflect through a rating symbol in Latin characters.

1.1.5.3. Credit rating must be performed continuously:

The purpose of rating is to assess current risks and forecast future risks of customers' ability to repay debts. However, business activities of enterprises are continuous and unpredictable, so credit rating must be performed continuously according to the financial reports of enterprises.

1.1.6. Purpose of credit rating for commercial banks

 Building a customer information system that is regularly updated and diverse helps to comprehensively evaluate the bank's customers according to the credit portfolio.

 Develop a credit risk management tool, in which customers are ranked according to different credit levels, to assess current risk levels, predict potential risks to propose preventive measures, ensure credit and credit quality at each Business Unit.

 Develop credit policies and customer policies appropriate to the level of credit risk to improve efficiency and ensure safety for credit activities.

 Is the basis for classifying customer debts and setting up risk provisions according to Article 06 and Article 07, Regulation No. 493/2005/QD-NHNN.

 Establish a risk information database system on customers and credit granting sectors to support credit granting and credit risk management.

1.1.7. Meaning of Corporate Credit Rating

1.1.7.1. For banks

For a correct credit rating, its role is shown in the following aspects:

 Is the basis for making credit decisions: credit limits, terms, interest rates, loan methods... Financial analysis is only one of the contents of business evaluation, business performance of the enterprise is the result of the synthesis of many influencing aspects: business environment, quality of human resources, quality of management... Therefore, XHTD provides a general assessment of the factors that help banks make accurate credit decisions. From these assessments, banks build limits, loan terms, interest rates, loan methods... for customers.

 Monitor and evaluate customers when there is outstanding credit. Customer ranking allows banks to predict credit quality and take timely countermeasures. Thereby limiting credit risks and other risks of the bank.

 The credit rating system of commercial banks aims to provide predictions about the possibility of credit risk, which can be understood as the economic difference between what the borrower promises to pay and what the bank actually receives. At the same time, it also supports banks in classifying debts and setting up risk provisions, aiming to maximize profits and protect the stability of the banking system. The concept of risk considered here is an uncertainty or an unstable situation whose probability of occurrence can be estimated. The concept of credit is understood as the relationship of mutual transfer of capital use rights between the lender and the borrower on the principle of repayment. The credit relationship is based on the foundation of mutual trust between the subjects. This foundation of trust is easily broken and is emotional, that is why

There is a need for a tool to estimate this level of trust. The credit rating system provides an estimate of the customer's trust level through credit scores and grades.

 The credit rating system helps banks minimize losses from credit risks. Because the credit rating system provides a general, comprehensive and scientific analysis of the customer's ability to repay debts. An accurate credit rating result helps make more accurate credit decisions, thereby minimizing wrong decisions and reducing losses from credit risks.

 The XHTD system creates an objective and unified assessment mechanism for customers across the entire banking system.

From the perspective of managing the entire investment portfolio, the XHTD system also helps banks:

 Develop marketing strategies to target low-risk customers and identify potential customers.

 Estimate the amount of loaned capital that will not be recovered to set up a credit loss provision. The rating system helps improve the quality of bank risk management, enhancing competitiveness in the process of international economic integration.

As analyzed above, correct credit rating plays a very important role for banks. However, all of these roles can only be achieved when the credit rating results are accurate and objective. Once the credit rating results are inaccurate, the consequences will be huge, causing heavy losses to profits as well as affecting the existence of the bank. When the credit rating results are incorrect, decisions on approving loans to customers and customer loan limits will also be wrong, making all policies and measures to manage customers wrong, leading to the risk of customers not being able to repay their debts. Therefore, credit rating is of utmost importance to banks and accurate credit rating is vital to banks' lending decisions.

1.1.7.2. For publishers

Issuers include businesses issuing debt instruments, businesses needing to raise capital, financial intermediaries, etc.

 First, credit ratings help companies expand domestic and foreign capital markets, reducing their dependence on bank loans. Credit ratings also help maintain the stability of corporate funding sources; highly rated companies can maintain capital markets in almost all circumstances, even when the capital market has adverse fluctuations.

 Second, expanding potential investors. Because credit ratings play a great role in protecting investors by rating the ability of a given issuer to pay both principal and interest, issuances with published credit ratings will encourage more investor participation.

 Third, maintaining market stability. XHTD can help issuers maintain the capital mobilization market in all circumstances; even in cases where the market has many unfavorable developments. For issuers, the higher the XHTD, the greater the ability to stabilize the capital market.

1.1.7.3. For investors

 Credit rating helps investors have more tools to assess credit risk, reduce costs of collecting, analyzing, and monitoring the debt repayment capacity of organizations issuing bonds and debt instruments.

 The higher the credit rating, the lower the cost of borrowing (interest rate), investors are willing to accept a lower interest rate for a safer security.

 Credit rating makes financing more flexible, the issuing company can structure the term and total value of issued securities appropriately.

1.1.7.4. For State management agencies

 Information on business environment will help state management agencies evaluate the subjects they manage, have information basis for comparison by economic sector and business operation field. It is the basis for state management agencies to come up with the most appropriate solutions to promote the development and operation of enterprises in the economic sector in particular and the entire economy in general, in order to ensure a healthy economic environment.

 For the State Bank: through information from the Enterprise Credit Rating System, the State Bank can know the level of risk by industry, economic region, and type of enterprise, thereby having appropriate monetary and credit policies, and inspecting and supervising credit institutions.

 Corporate credit rating requires that businesses that want to be rated must be transparent and public with their financial reports. This allows for the formation of a balanced and transparent financial information market and further limits the asymmetry of market information, making the financial market increasingly standardized and globalized. Therefore, developing good rating services

Credit ratings can be a way to bridge the gap between foreign capital and the capital hunger of domestic markets.

 Credit ratings help make financial markets more transparent, improve economic efficiency, and enhance the government's ability to monitor markets.

1.2. Credit rating process and methods

1.2.1. Credit rating process

In the process of conducting sexual intercourse with an object, one must perform many actions.

different jobs in a certain order. These jobs have connections and complement each other, so the ranking process needs to be arranged in a reasonable and scientific order. Based on the reference and experience of the ranking processes that have been published in the world, the basic order of XHTD is synthesized by me according to the following diagram:

Figure 1.1: Overview of the corporate credit rating process

1. Determine the purpose of the ranking

- Which object to rank?

- Purpose of ranking?

- What signs should be collected from the subject?

2. Collect information about the ranking object

- Information sources within the bank

- Information source from customers

- External information sources

- Check information reliability

3. Information analysis

- Choose the appropriate method for analysis

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4. Draw conclusions and make initial assessments

- Does the conclusion satisfy the purpose?

- Are the results guaranteed to be objective, accurate and reliable?

5. Provide official assessment results

- Announcement of results

- Make necessary decisions.

- Save the file.

Are not

Have

6. Monitor and supervise the subject

- Synthesize ranking results compared with actual risks.

- Compare actual risks and model forecast results to consider model adjustments.

Source: Students' own synthesis

1.2.2. Factors to be considered when rating credit