Guarantee to recover loans. Special attention is paid to implementing solutions to improve credit quality, not to let bad debt increase.
It is necessary to strengthen inspection and supervision of compliance with principles and procedures for lending and other credit granting, to avoid incidents causing asset loss; to reorganize the apparatus, and to strengthen staff training to meet the requirements of banking business in the context of international integration.
Build an internal credit rating system suitable for business operations, customer segments, and the risk nature of the credit institution's debts.
Implementing effective risk management policies, risk monitoring models, and methods for identifying and measuring risk, including ways to assess customers' ability to repay, credit contracts, collateral, debt collection capabilities, and debt management of credit institutions.
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Implement regulations to ensure risk control and safety of credit operations.
Use:
+ Develop and implement a synchronous system of internal regulations and procedures on
Risk management; in which special attention is paid to building loan customer policies, credit handbooks, regulations on loan customer assessment and ranking, credit quality assessment and bad debt handling.
+ Expand medium and long-term credit at an appropriate level, ensuring balance between loan terms and the term of mobilized capital.
+ Comply with regulations on lending limits, guarantees, financial leasing, factoring for a customer and business safety ratios.
In cases of delayed loan repayment, credit institutions need to apply resolute and legal measures to recover loans, including handling mortgaged, pledged and guaranteed assets, and filing lawsuits with the court.
Diversify lending risks: do not lend too much capital to one customer or concentrate too much lending on one high-risk industry or economic sector.
Conduct a good assessment of customers and their ability to repay before making a decision.
credit rating
Buy insurance for deposits and loans.
There must be a reasonable credit policy and provisions maintained to deal with risks.
Before lending to a customer, the bank must consider basic conditions such as: The customer's ability to repay the loan compared to the loan amount; The value of the collateral compared to the loan amount; The total outstanding loan limit for a customer or a group of related customers;….
1.4. METHODS TO PREVENT AND LIMIT CREDIT RISK
1.4.1. The need to prevent and limit credit risks
As analyzed above, bank credit plays an extremely important role in the market economy, therefore, RRTD not only eliminates the positive role of bank credit but also causes serious harm not only to the banking system, to borrowers but also to the economy and society. Therefore, the requirement to ensure the safety of each bank credit is mandatory. Without measures to prevent and limit RRTD, it is impossible to overcome the great harm that RRTD brings.
To limit RRTD, we must do well from prevention to resolving consequences caused by risks, specifically:
- Forecasting and detecting potential risks: detecting unfavorable events, preventing unfavorable situations that have occurred and are occurring and can spread widely. Addressing the consequences of risks to limit damage to the bank's assets and income. This is a strictly logical process. Therefore, management is needed to ensure consistency.
- Risk prevention is carried out by bank employees and leaders. In banks, employees have different thoughts and actions, which can be contrary to each other.
or hinder each other. Therefore, there is a need for governance so that people act in a unified manner.
Management sets specific goals to help the bank stay on track. There must be a specific and effective action plan in line with the set goals.
1.4.2. Tasks of credit risk prevention and limitation
- Planning directions and risk prevention plans. The direction aims to predict and determine where risks may occur, under what conditions, the causes of risks, and the consequences...
- Scientific risk prevention organization orientation to indicate specific goals to be achieved, safety threshold, and acceptable error level.
- Participate in building professional programs, risk prevention control structures, assigning authority and responsibility to each member, choosing technical tools to prevent risks, handling risks and seriously resolving consequences caused by risks.
- Check and control to ensure the implementation of the planned risk prevention plan, detect potential risks and errors in transactions, evaluate the effectiveness of risk prevention work, and propose measures to adjust and supplement the risk management system.
1.5. CREDIT RISK MANAGEMENT CONTENT
* Credit risk management policy for customers:
Customer credit risk is managed comprehensively and continuously at all stages where credit risk can arise, through specific regulations for each type of credit transaction.
- Credit limit for customers: comply with regulations on loan limits and guarantees for customers.
- Credit limits for corporate customers: perform internal credit ratings to quantify the risk level of each customer, determine credit limits to manage total credit risk. Internal credit ratings have 10
Rating: AAA, AA, A, BBB, BB, B, CCC, CC, C, D, customers with credit ratings from CC or lower will not be lent. The scoring structure, scoring levels, and scoring techniques applied in credit rating are continuously improved through practical implementation to suit reality.
- Restrict credit granting to customers: comply with legal regulations on cases where credit is not granted and credit is restricted, and at the same time implement the policy of reducing outstanding credit balances and restricting new credit granting to customers showing signs of risk (specific regulations for each type of customer).
* Credit allocation policy:
Credit allocation by geographical area: divide the scope of credit granting by geographical area based on the capacity and location of each branch; prioritize credit expansion in places with conditions for credit expansion and guaranteed credit quality, and control the maximum credit balance for branches with low credit quality.
- Allocation by loan term and loan type: ensure consistency between loan term structure and loan type with capital structure.
- Allocation by product type, customer target, goods and investment sector: diversify loan products according to the principle of minimizing risks, diversify customer targets to minimize possible risks, diversify goods and investment sectors according to the principle of being consistent with economic development trends.
* Jurisdiction
Judgment authority includes the authority to approve credit limits, the authority to make credit decisions, and the authority to sign credit contracts. These authorities are classified according to each level in the commercial bank (Judgment authority of the Board of Directors, General Director, Deputy General Director in charge of credit, Heads/Deputy Heads of functional departments at the Head Office, Credit Councils, Branch Directors, etc.).
* Policy on debt classification, provisioning and use of credit risk reserves
Commercial banks will classify debts according to the regulations of the State Bank, especially bad debts will be classified more frequently, and the ability to repay will be assessed more frequently to serve the management of credit quality and risk. The orientation of commercial banks in the coming time will be to classify debts based on customer ratings and move towards making provisions according to international practices.
* Regulations on reporting, inspection and risk monitoring
Conduct periodic reports on credit quality throughout the system to assess risk management and propose measures to improve credit quality.
1.6. CREDIT RISK MANAGEMENT EXPERIENCE OF COUNTRIES
* Risk management by provisioning:
Provisioning is an effective way to manage the risk of credit losses. Provisioning should be based on actual repayment of loans rather than on the past repayment ability of customers. Countries share their experiences in applying different provisioning principles based on the classification of loans with different levels of potential losses.
- Hong Kong: classify customer risks and set up corresponding provisions.
- Korea: provisions are segregated by credit type.
- Singapore: Estimated loan loss provision from loan portfolio applied to consumer loans.
- Thailand: Loan classification is included in the law. Banking supervisors have the right to require provisioning for loans that need attention.
- Columbia: provision for consumer, commercial, mortgage and micro-credit with loan terms from 1-18 months.
* Risk management by complying with prudent credit principles:
- Hong Kong: limit lending to partners at 5% of the enterprise's net worth. Total outstanding loans to partners must not exceed 10% of the bank's equity.
- Korea: limit lending to shareholders to 25% of the bank's equity or the percentage they own. Limit lending to related partners to 10% of the bank's equity.
- Singapore: Banks are not allowed to engage in non-financial activities. They are also not allowed to invest more than 10% of their capital in companies with non-financial activities. The amount of capital investment in a single company is limited to 2% of the bank's equity capital. Total investment is limited to 10% of the bank's equity capital.
- Thailand: investment limit is 10% of borrower capital and 20% of bank capital. Loan limit for customer groups is 5% of bank capital, 50% of enterprise net worth and 25% of debt value.
- Columbia: loan limit for related customer groups 10% of equity.
Expandable up to 25% with good collateral.
* Risk management by setting loan limits:
Preventing credit concentration risk is considered a regular activity of banks in managing their credit portfolios. The measure used is to set lending limits based on the Bank's own capital for individual borrowers or groups of borrowers:
- Hong Kong: limit lending to individual customers to 25% of bank equity.
- Korea: limit lending to individual customers at 20% of the bank's equity and limit lending to customer groups at 25% of the bank's equity.
- Singapore: limit lending to individual customers at 25% of bank equity.
- Thailand: limit lending to individual customers at 25% of bank equity.
- Columbia: loan limit is 40% of borrower's net worth.
* Risk management by inspection and monitoring measures:
Monitoring and supervision are regular activities carried out before lending, during lending and after lending:
- Hong Kong: use CAMEL model (capital, assets, management, earnings, liquidity) for evaluation.
- Korea: using CAMELS model (Capital, Assets, Management, Earnings, Liquidity and Stress testing).
- Singapore: loan disbursement checks, monthly and quarterly reports
precious
- Thailand: checks during loan disbursement and after loan disbursement. System monitoring
Forecasted capital adequacy. Have a periodic reporting system.
- Columbia: checks during loan issuance, checks by the Banking Supervision Commission.
* Risk management by credit information system management:
A well-organized credit information system will effectively support the appraisal of borrowers, helping to limit and prevent risks right from the loan application appraisal stage:
- Singapore: The Bankers Association organizes and manages credit information from its members. Provides information on large credit facilities.
- Thailand: The Credit Information Bureau is managed by a private company, all Banks report information to the Bureau, then the Bureau generates reports on borrowers and loan repayment history every month, it does not provide credit appraisal information.
- Columbia: The bank reports loans to the supervisory authority on a monthly basis. Information on loan amounts, interest rates, loan quality, and borrower status is then aggregated.
Chapter I Conclusion
In banking business, facing credit risk is inevitable. Recognizing a natural risk rate in banking business is an objective and reasonable requirement. The problem is how to limit this risk to the lowest acceptable rate. Chapter 1 of the thesis has outlined the basic issues of credit risk as well as mentioned models and measures to ensure credit risk reduction, as a basis for the following chapters of the thesis.