Experience in Limiting Risks in Banking Credit Activities of Some Countries in the World

There are large fluctuations in the balance of deposits at the bank... After detecting a problem loan, the next necessary task is what measures the bank will use to recover the capital. For bad loans, there are two methods of handling.

Debt collection method: The process of working with the borrower until a part or all of the loan is recovered without the bank having to use any legal means (only applicable to honest, responsible customers who want to repay the loan to the bank) . For example, consider helping the business repay the debt. If the above solutions cannot improve the business's debt repayment situation, the bank will have to resolve it from its side such as providing additional credit capital, extending the loan, transferring overdue debt, changing personnel...

Liquidation method: Forcing the borrower to comply with the terms of the credit contract by using legal tools to recover the debt, even though the cost of this solution is quite high. It can be the sale of mortgaged or pledged assets; receiving or buying back secured assets; receiving money or assets from a third party in case the borrower has a guarantee, the bank can receive money or handle assets from the guarantor to pay off the debt.

1.3 Experience in limiting risks in banking credit activities of some countries in the world

During the crisis of 1997-1998, many banks in the region and around the world went bankrupt, including banks with hundreds of years of operation such as the US, China... Large banks with global influence are taking many measures to prepare to deal with the world credit crisis. The following are some experiences in limiting bank credit risks of some typical countries in the world.

Maybe you are interested!

1.3.1 Experience in limiting risks in banking credit activities of the US and other European countries

In recent years, the credit crisis in the US has been very serious and has spread to other countries, it has had a significant impact on the US economy, mainly due to losses related to credit and real estate. Once powerful US financial companies such as Bear Stearns, Countrywide Financial and IndyMac have gone bankrupt or been acquired; a series of other corporations such as Fannie Mae, Freddie Mac, Washington Mutual, Citigroup and Wachovia are currently in difficult circumstances.

On August 8, 2007, one of Europe's largest private banks, Sal.Oppenheim, headquartered in Luxembourg (Belgium), announced the temporary closure of a credit and real estate investment fund worth 750 million USD. A day later, France's largest bank, BNP Paribas, took similar action by freezing assets worth 2.2 billion USD and Germany's NIBC bank announced a loss of nearly 200 million USD related to US credit and real estate... Global financial institutions have lost a total of about 925 billion USD due to the credit crisis, equivalent to 3% of their total assets. Of these, the most serious loss was up to 525 billion USD related to credit and real estate loans...

The US credit crisis spread rapidly to other countries in the world, especially those in the European region, due to its high level of involvement, with an estimated 50% of all mortgage debt issuances in the US currently held by foreign investors. Swiss bank UBS and German bank IKB Deutsche Industriebank have suffered asset deficits due to bad debts. In Norway, 08 cities have announced losses of at least 125 million USD due to investments in US credit and real estate. In addition, in the US and other European countries, the credit crisis is still "devastating".

"destroying" the entire auto, aviation, tourism and retail industries. This is reflected in the fact that auto companies such as GM, Ford, Chrysler are losing money due to difficult business situations, and US auto market sales are forecast to reach only 14.5 million units, the lowest in the past decade. The US economy and other European countries are facing many difficulties...

The US credit crisis has weakened the real estate market and turned it into a real disaster. US housing prices have continuously decreased, the number of foreclosures has continuously increased. The standards for home loans have become increasingly strict and not as simple as before, the purpose is to reduce investment loans, real estate... Up to now, many US banks and other European countries have become "problematic" and bankrupt. The reason is that banks have lost their liquidity related to credit due to the increasing list of bad debts, using deposits to lend real estate means taking short-term to support long-term, not assessing the source of debt repayment, lending sub-prime, until real estate prices plummeted, debts could not be recovered, banks lost the ability to pay due savings, the economic crisis, US businesses fell into difficult situations and went bankrupt, the bank's investments also suffered losses...

The credit crisis in the US and other European countries shows that the main cause is due to poor management and control of real estate business loans, credit quality is not taken seriously, there are many substandard loans, no careful appraisal before lending, using short-term mobilized sources to invest in long-term loans such as real estate, so it is inevitable that there is a risk of insolvency and debt recovery. This is also a valuable lesson for Vietnam when it falls into a similar situation.

1.3.2 Experience in limiting risks in banking credit activities of China and other Asian countries

China is a large country in the world and one of the typical Asian countries because it is close to Vietnam, it can learn from experience to limit potential risks that cause credit risks. Because, when the economy has problems, the banking industry cannot operate well. Even though banks play a supporting role for manufacturing and service industries, the banking system can also worsen the situation and stagnate the stability of the economy if the banks themselves encounter difficulties. If most of the bank loans are granted to unhealthy businesses, not only will the banks operate ineffectively but the economy will also be affected...

Through research on the credit market in China, it is shown that the cause of bad debts comes from credit balances increasing too quickly while the professional qualifications of credit officers are not up to standard; lending to areas outside the traditional market and relying on mortgages, guarantors, reputation as secondary sources of repayment without evaluating the main source of repayment; lending with the expectation that the assets formed from the loan capital will have high value... However, the recent serious housing and land price fever and decline in Shanghai, China has made the expectation meaningless, real estate prices have fallen, the value of mortgages is not enough to cover the loan, poor liquidity, the risk of not being able to repay the debt is very high. Because the loan to collateral value ratio is too high, loans are secured by the bank's own shares. Ineffective loan structure, lending beyond the ability to repay. Poor post-disbursement supervision, inadequate supervision of construction loans such as field trips, loan withdrawal progress, inspection. No written agreement specifically on the purpose and use of the loan, repayment plan. No documents.

Transaction address with borrowers. Incomplete legal documents, failure to collect, verify and analyze reports throughout the loan term. Failure to recognize warning signs such as slowing inventory and receivable turnover cycles, lengthening payable cycles and generating net losses in business... From some of the above causes among the countless causes of bad debts in China; recently, in other Asian countries such as Japan or Thailand, there have also been risks in credit activities similar to China. Specifically:

In Japan, lax lending coupled with an overly ambitious expansionary policy, fueled by market competition, resulted in bank losses. On the other hand, Japanese banks, lacking previous experience with serious loan losses, were not aware of how to manage credit losses when they arose. Banks did not understand the serious consequences of delaying decisive action against risky borrowers, so bank losses could not be resolved quickly and at lower costs...

In Indonesia: The Banking Law stipulates a specific reserve fund of 5% of total outstanding loans, plus 3% for substandard loans, plus 50% for problem loans and 100% for uncollectible loans.

In Korea: Banking Law allows annual debt loss of 2% of total outstanding debt.

As for Thailand, although it has been operating for hundreds of years, in 1997-1998, the Thai banking system was still shaken by the Asian financial and monetary crisis. Many financial companies and commercial banks went bankrupt or were forced to merge. In this situation, Thai banks were forced to review all policies, methods, and procedures of banking operations, especially in the credit sector, to minimize risks...

China and other Asian countries have now made initial progress in dealing with the problems of non-performing assets. Financial service organizations have played an important role in forcing banks to make necessary provisions and in dealing with bad debts that have caused large losses and profits for many years for most banks.

Above are some experiences in limiting risks in banking credit activities of some countries in the world such as the US and other European countries, China and other Asian countries. Depending on each region, different geography and based on the economic, social and development conditions of Vietnam, we need to have a choice, filter the experiences in limiting risks in banking credit activities of some countries in the world to apply at commercial banks in Vietnam. Because all countries in the world have the following common characteristics:

Firstly: For a long time, in order to conduct good risk management in lending, commercial banks in countries around the world and Vietnam have always built a written credit policy. Thanks to that, the viewpoints on lending policies are disseminated to each bank employee, helping to unify lending activities. Based on the credit policy, banks set out a specific lending process suitable for each type of loan as well as lending techniques. Lending regulations are often instructed during the training process, and are also printed in handbooks such as "lending instructions" or "credit handbook" to help employees respect and implement the lending process well.

Second: No matter how good the lending activity is, there is still a certain credit risk ratio. Therefore, when lending, there will be overdue debt. Therefore, commercial banks in countries around the world and Vietnam have formed a fund.

Reserves to prevent capital loss at an acceptable rate. This rate is always reviewed and adjusted in each period to suit the business conditions of the bank. The reserve fund is formed according to the ratio compared to the total outstanding loans and is included in the management costs of commercial banks. The formation of a reserve fund to prevent capital loss will ensure safety in lending and improve the health of credit.

Third: Commercial banks in countries around the world and Vietnam apply a wide variety of loan types and lending techniques. Low-risk lending techniques are widely applied such as discounting, co-financing, etc. Due to the diversity of credit products, commercial banks in countries around the world and Vietnam can choose the most suitable type and technique for a borrower with the principle of minimizing risks to increase profits.

Fourth: Commercial banks in the world and in Vietnam all have a long-term customer strategy. Therefore, the collection of customer information is conducted regularly and analyzed promptly. The bank's customers are classified to best serve and minimize risks in lending.

Fifth: Credit risks of commercial banks in the world and Vietnam are shared through other activities such as credit insurance, increased banking activities in the money market and stock market or adjusted through free interest rate policy and floating exchange rate policy...

Compared with the experience of limiting risks in banking credit activities of the US and European countries as well as China and other Asian countries, in Vietnam, besides those common characteristics, it still retains its own nuances. Specifically, at SCB Da Nang, the impact of the Law on Credit Institutions on the credit activities of commercial banks such as

regulations on lending (total outstanding loans to customers must not exceed 15% of the bank's equity) , regulations on capital (the legal capital level of joint stock commercial banks is regulated by the Vietnamese Government) , regulations on reserves and safety assurance... In addition, SCB Da Nang must also set up risk reserves in banking activities. This risk reserve is accounted for in operating expenses. To ensure safety, SCB Da Nang must maintain safety ratios according to regulations... These are valuable experiences when applied at SCB Da Nang. In particular, after applying these experiences, SCB Da Nang has brought about positive results such as:

Separate and clearly assign functions of departments and comply with the steps in the loan settlement process. In the past, at the Credit Department of SCB Da Nang (now the Credit Business Department) , the departments in the credit granting process were only one. Now, it has been completely separated into two independent departments, which are the Department of Receiving and Processing Documents (under SCB Da Nang) and the Appraisal Department (under SCB Debt Management and Asset Exploitation One Member Co., Ltd.). In which, the Appraisal Department must have a credit appraisal report for SCB Da Nang. This is a fundamental change of SCB Da Nang in particular and SCB in general to ensure independence and objectivity in the credit granting process.

Strictly comply with the principles in credit operations. Previously, at SCB Da Nang, many credit officers in the Credit Department did not strictly comply with the credit principles in the lending process, only paying attention to the collateral, not paying attention to the cash flow of customers. Therefore, the consequence was that bad debt sometimes increased very high. But now, credit officers in the Credit Business Department not only strictly comply with the credit principles but also pay much attention to customer information, attach importance to cash flow and capital recovery.

Comment