Experience in Credit Risk Management for Enterprises in Some Countries in the World and Lessons for Vietnamese Commercial Banks

Banks need to have a strict policy of checking before, during and after lending to businesses. In addition, building a credit process for businesses based on the division of approval levels will ensure that decisions are made carefully and effectively. Banks also need to build a process for collecting principal, interest, and other fees in accordance with the repayment terms. It is necessary to have regulations to resolve problems of loans that are not performed and a mechanism to exercise the rights of creditors in case of loan losses. The bank's reporting system must promptly and accurately notify the credit status of businesses, while maintaining the timely collection of detailed information about borrowing businesses to ensure continuous assessment of risk status.

Bank credit activities are rich and diverse, but at the same time, they also contain many potential risks. Building a consistent and reasonable credit policy, suitable for the characteristics of each bank, will help promote the strengths of each bank, thereby helping to improve the efficiency of credit activities and control bank credit risks.

Modern credit regulations and policies often stipulate that the total outstanding balance of a bank allowed to invest, lend or provide other credit to a business or a group of related legal entities exceeds a certain percentage of the total capital and reserves of that bank. Within this scope, bank managers can control credit risks for businesses of the entire banking industry and each bank to ensure the interests of depositors and prevent situations that may cause risks to the entire banking system.

Most countries limit the amount of credit to a business to between 20-25% of total capital, although in some places this ratio can be as high as 30-40%. The Basel Committee on Banking Supervision recommends a maximum ratio of 25%, which can be reduced to 10% where practical. The threshold for reporting to the competent management agency is usually set lower than the maximum ratio. In this case, managers can pay special attention to loans exceeding the threshold ratio and require banks to take preventive measures before the risk concentration becomes a risk. In any case, banks, due to the nature of their operations, are always subject to industry risk. Therefore, each commercial bank needs to have a policy to limit the maximum outstanding loan balance for an economic sector or for a narrow dealer area. In addition, each commercial bank needs to build a system to control these risks in the best way and assess the impact of changes in the quality of loans and the balance of profits and losses. Banks also need to have an organizational mechanism to address these risks.

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increase. In addition, banks need to set aside risk provisions in accordance with the outstanding debt situation at their banks. The risk provisioning rate is often regulated differently in each country. This rate is often given based on current statistics on the risk level of banks. In countries with a developed legal system for debt management, lower provisioning rates are applied. Typically, in the US, the provisioning rate is about 10% for substandard loans, 50% for bad debts and 100% for loss loans. In developing countries such as Thailand, the provisioning rate is about 20-25% for substandard loans, 50-75% for bad debts and 100% for loss loans. In Vietnam, specific provisions are made for 5 debt groups (Group 1- Group 5).

The organization of risk management apparatus in banking activities is also an important factor affecting credit risk management for enterprises because if a risk management model is unscientific and outdated, it will lead to the greatest potential risks, especially in credit activities for enterprises of commercial banks.

(2) The factor of commercial bank staff : In all matters, the human factor is always an important and decisive factor. Therefore, the work of credit risk management for enterprises at commercial banks must put the human factor, including bank staff and borrowing enterprises, first. To do so, the recruitment of staff to work at the bank must require publicity and transparency. Recruited staff must ensure qualifications and ethics.

The assessment of borrowing enterprises is also very important. Commercial banks can use customer scoring and credit classification. This is the process of determining the level of credit risk for a business, a loan or a type of asset used by a business to fulfill its debt repayment obligations. In general, every borrowing enterprise and every loan must be carefully evaluated and classified.

(3) Enterprise scoring and credit classification for enterprises is an important tool of credit risk management. Enterprise scoring is the process of classifying enterprises into different levels based on qualitative and quantitative factors. Enterprise scoring will help commercial banks filter out bad customers, thereby having specific policies for each type of enterprise (credit granting policy, interest rate policy, etc.)

Borrowing businesses or loans are scored and classified at the original time and need to be re-evaluated and re-classified (according to risk level) after a period of time.

This reassessment is based on the actual performance and use of credit capital of the credit recipient.

(4) Technology factor: Currently, banks have equipped themselves with modern information systems to build direct relationships with businesses, online with transactions. In the trend of globalization and increasingly fierce competition in the banking and finance sector, we see more and more the role of technology in business operations as well as the competitiveness of each bank. Technology will clearly demonstrate its support for banks in the field of administration, in expanding products and services, thereby increasingly meeting the strict needs of the banking system. In addition, technology also allows banks to better manage risks, thereby providing support tools to help banks make the right decisions.

The above factors are both relatively independent and closely related and influence each other, which can help commercial banks reduce risks and improve credit quality...

1.4. Experience in credit risk management for enterprises in some countries in the world and lessons for Vietnamese commercial banks

1.4.1. Experience of the Bank of Thailand

After the Asian financial crisis in 1997-1998, the Thai banking system was shaken, many commercial banks went bankrupt or had to merge. That situation forced commercial banks to review all policies, methods, and procedures in banking operations, especially in the credit sector, to minimize risks. Therefore, a series of fundamental changes in credit risk management for businesses were quickly and thoroughly implemented by Thai banks. Some of the notable features are:

Firstly, separate and clearly assign the functions of departments and comply with the stages in the loan settlement process for businesses. Specifically, the stages of the credit process for business borrowers: customer contact; Credit analysis; Credit appraisal; Credit risk analysis and assessment; Loan decision; Disbursement contract procedures and documents; Quality assessment, loan review. From there, build a model to organize credit service implementation for businesses according to the principle of clearly dividing responsibilities into 2 departments: receiving, processing documents and appraisal department (applied at Bangkok Bank) or into 3 departments: Customer marketing, appraisal and loan decision department (applied at Siam Commercial Bank).

Second, strictly adhere to credit principles: Most Thai banks previously only cared about collateral, not the cash flow of borrowers, and did not comply with credit principles, so in the period 1997-1999, bad debt reached 40%. Currently, banks have strictly implemented credit principles, especially credit information. Based on financial reports and information sources, banks determine the cash flow cycle and investment recovery cycle, forecast future risks, solutions and business recovery capabilities.

When a business comes to borrow capital, bank officials must resolve the following issues before deciding to lend: The business's qualifications and business license, is it trustworthy? The business's business performance, which activities are successful, which activities are not successful? What is the purpose of the loan? What is the source of repayment? (cash flow and repayment ability); Can the bank control the business's use of the loan? Does the business have the capacity and knowledge to manage and operate the business? The business's financial situation...

The above process can be illustrated by the following diagram:

Credit Analysis

Contact business loan

Credit appraisal

Analysis and assessment of corporate credit risk

Loan decision

Procedures and legal documents

disbursement

Loan review quality assessment.

Diagram 1.4. Credit process for businesses borrowing from the Bank of Thailand

Third, implementing the principle of scoring corporate loans: Most Thai banks apply corporate scores to decide on lending. Usually apply corporate scoring according to Z-score models and consumer credit scoring models. Apply credit rating as an automatic decision tool for mortgage loans, corporate loans in popular forms...

Fourth, monitoring business loans: Inspection and monitoring work before, during and after lending is enhanced, based on collected information to evaluate and classify businesses and take timely measures to handle risky situations.

Fifth, comply with credit decision authority: Most Thai banks regulate credit decision in increasing levels from the decision level for Branch Director to credit committee, board of directors...

In addition to the above contents, most Thai banks attach importance to training for each job position to improve qualifications, skills, and create the ability to independently perform assigned tasks for bank officers and employees. Banks all apply credit handbooks and have separate lending policies for businesses in the real estate sector because this is a high-risk sector.

1.4.2. Experience of the Bank of Korea

The credit risk management system for enterprises of the Korea Development Bank (KDB) is expressed through 5 basic contents: (1) Risk management strategy and infrastructure;

(2) Risk management model; (3) Risk limit management system; (4) Credit approval system; (5) Credit risk control system” (48, 2012). [53].

1.4.2.1. Risk management strategy

KDB defines a risk strategy that aims to maximize profits within an acceptable risk range as optimizing risk capital allocation. Risk should be considered both as an opportunity and a threat, and not only in terms of its impact on quantitative aspects such as economic capital, profit volatility, etc., but also in terms of its potential impact on the bank's organizational structure, operating results, and reputation.

1.4.2.2. Risk management model

In line with its operational goals, KDB has built a roadmap towards a modern risk management model with each stage as follows:

Phase 1 of credit risk management for enterprises is to comply with Basel II management principles by establishing an internal credit rating system to calculate three components: PD - the probability of a business defaulting on its debt, LGD - the expected loss ratio (%) in case the business defaults on its debt and EAD - the balance of risky debt. Based on the results of calculating PD, LGD and EAD, banks will develop applications in credit risk management in many aspects, the first application of which is to calculate and measure credit risk through EL - expected loss and UL - unexpected loss at the level of a customer, specifically:

ELi = PD x LGD x EAD

UL = standard deviation of EL = LGD x EAD x rPD(1 − PD)

However, measuring and calculating the minimum capital needed to cover the risks of loans does not stop at individual loans but also takes into account the risks of the entire credit portfolio.

Phase 2: is portfolio risk management by quantifying the expected loss (Elp) and unexpected loss (Ulp) of the entire portfolio based on determining the relative risk between assets/default rate of risky assets and the concentration risk of the entire portfolio.

Elp = ∑ Eli

Ulp = r∑∑Uli Ulj Pij

Stage 3: Banks can manage economic capital and price loans according to the corresponding risk level. When credit risk measures EL and UL have been quantified, banks have the basis to determine lending interest rates in accordance with the motto "high risk, high profit; low risk, low profit" through the risk compensation pricing mechanism.

Stage 4: Going beyond economic capital management and risk-based loan pricing, banks move towards active credit portfolio risk management (ACPM) instead of passive portfolio risk management by actively identifying and transferring risks through the use of credit treasury and loan securitization.

Stage 5: The most comprehensive model that banks have achieved is value-based management (VBM). At that time, all risk-adjusted values of individual credits to investment portfolios are determined, helping risk management to be effective and accurate.

1.4.2.3. Risk limit management system

Risk limit management includes two levels: credit limit by industry and by borrowing enterprise. For industries, the limit is determined based on the combination of assessment between the signal (long-term vision) and the rating (short-term vision) to provide growth, maintenance or withdrawal orientation. The goal of setting limits by industry is to prevent risks concentrated in a specific industry, while optimizing the effectiveness of risk management criteria for each industry. With its credit portfolio, KDB classifies it into 25 sub-industries for management. The risk of each industry is quantified based on criteria and the proportion of each criterion, such as: Risk adjusted profit, risk concentration ratio, market risk, industry rating and qualitative assessment factors.

Every year, KDB conducts analysis and evaluation of industries that need attention based on the preliminary list of industries from the market research department and evaluation department.

The technical and credit approval departments will thoroughly review and submit analysis reports to the Industry Management Council for review, final selection of industries that need attention and conduct special management programs for these industries.

Based on industry risk limits and industry credit rating results, the risk limits of enterprises (mainly large enterprises) are determined as follows:

Risk limit = Minimum value between the enterprise's debt repayment capacity and KDB's risk acceptance capacity. In which:

- Enterprise's debt repayment capacity = Enterprise value - Loans from other credit institutions;

- Bank's risk tolerance = Required capital x Credit limit granted to credit class.

In addition to the risk limits for each enterprise, KDB also sets risk limits for related groups of enterprises.

In case the risk limit of a business or a group of related businesses exceeds the allowable limit, credit granting decisions must be approved by the Chairman of the Board of Directors (Board of Members). For transactions with high risk levels, the system provides criteria for identifying and strictly managing risk limits.

1.4.2.4. Credit approval system

The bank's credit approval system is reflected in the role, function and authority of each department and individual in the credit approval process. The system is established according to each type of corporate customer: large enterprises, small and medium enterprises, financial institutions. KDB's credit approval model includes: planning department, risk management department, credit department, industry research center, the role of the credit approval department, technical assessment / technology support department, consulting department and customer relations department.

1.4.2.5. Credit risk control system

KDB's credit risk control system is independently established, applied to each individual credit, including off-balance sheet credits and the entire credit portfolio of the bank on the principle of daily management and giving early warnings whenever the system detects risks. The system also allows the bank to check the status of the loan from credit granting conditions, customer ratings, disbursement conditions, risk provisions, risk limits and legal compliance.

The system is also a tool to help banks reassess their risk strategies and policies before risks occur. The results of credit risk control checks will be reported directly to the Risk Management Committee.

KDB's early warning system was established in 2000, with the goal of minimizing losses and enhancing the safety of loans by early recognition of signs of corporate default and providing appropriate solutions.

This system is applied to relatively large-scale enterprises with total loans of over 1 billion KRW. The system includes (i) periodic assessments, conducted quarterly in February, May, August, and November; (ii) immediate assessments conducted to identify events such as the enterprise having overdue debts or selling debts at any credit institution; (iii) assessments when necessary, conducted when the bank realizes that there is an important economic event that may affect the bank's business operations.

With the support of the early warning system, the quality of credit risk management of the bank is improved by minimizing and preventing early risks of loss.

1.4.3. Experience of Bank of America

First, most banks in the US have clearly defined functions of the departments in the organizational structure related to the credit process:

- Board of Directors: Is the department with the highest decision-making power. The board of directors allocates capital and manages the operations of the entire bank, including credit operations. The board of directors sets the bank's risk level; sets strategic goals and general regulations applicable throughout the banking industry; and reviews credit granting decisions of credit officers if there is suspicion that they may cause material damage or affect the bank's reputation.

- Credit policy planning committee: Including senior officers, headed by the head of the committee. This committee is responsible for maintaining a complete and effective form of credit risk management; participating in planning indirect investments, predicting credit losses; establishing credit policies and standards in accordance with the law and general regulations of the bank; reviewing and amending credit policies if they are deemed to cause unusual risks; considering granting credit authority to qualified officers; preparing reports on indirect investments, focusing on assessing

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