+ Doubtful debt: is debt overdue from 181 days to 360 days, debt with restructured repayment period from 90 to 180 days according to the restructured period, other debts according to regulations.
+ Debts with potential loss of capital: are debts overdue for more than 360 days, debts frozen and awaiting Government settlement, debts with restructured repayment terms overdue for more than 180 days according to the restructured term, and other debts as prescribed.
- Income from credit activities.
The higher this indicator is, the better the bank's credit activities are developing. The bank's credit quality will be proportional to this indicator. Indeed, the higher this indicator is, the better the bank's outstanding loans are growing, and customers are paying principal, interest and fees in full and on time.
Also from this indicator we can calculate another indicator, which is:
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Contribution of credit activities
Profit from credit
=Total profit
Obviously, the higher the credit quality and credit growth scale, the greater the profit and vice versa.
1.2.4. Factors affecting bank credit quality
There are many factors affecting the quality of bank credit, but in general they can be divided into the following main groups of factors: Bank; Customer; objective environment.
1.2.4.1. Group of factors belonging to the bank side
These are factors that belong to the bank itself, internal to the bank, related to the bank's development in all aspects affecting credit activities, including: policies, business processes, inspection, control; organization, personnel work, equipment, information technology.
a. Credit policy
Credit policy stipulates factors such as: customers, scale, interest rate, term, security, scope, problem loans, etc. Credit quality depends on whether the credit policy of the commercial bank is appropriate or not, regardless of the type of credit policy.
Any commercial bank that wants to have good credit quality must have a clear and appropriate credit policy.
In the micro perspective, in the past, credit policy has been shown to be decisive for the success or failure of commercial banks. A reasonable, correct and clear credit policy will bring many advantages and conveniences to the bank. It guides the credit staff to take steps within their scope and responsibilities. It helps commercial banks move towards an effective loan portfolio, which can achieve many goals such as: increasing profitability, limiting risks and meeting the requirements of management agencies.
b. Credit process
These are the sequences, stages, and steps of work that must be performed according to a certain procedure in lending and debt collection, starting from reviewing the customer's loan application to debt collection to ensure credit capital safety. Credit quality depends on the establishment of a credit process that ensures scientific logic and good implementation of the steps in the credit process as well as close and smooth coordination between the steps. The credit process consists of three main stages:
- Review customer loan requests and make loans: During this stage, credit quality depends largely on customer appraisal and compliance with bank regulations on lending conditions and procedures.
- Checking and monitoring the loan usage process and monitoring risks: Establishing an effective inspection system and effectively applying inspection forms and measures will contribute to improving credit quality.
- Debt collection and liquidation: the bank's flexibility in debt collection will help the bank minimize risks, limit overdue debts, preserve capital, and improve credit quality.
c. Bank organization
The organizational capacity of a bank greatly affects the quality of credit. Organization here includes the organization of departments, personnel and activities in the bank. A bank with a scientific organizational structure will ensure close and smooth coordination between officers, employees and departments in the bank.
Banks, between banks within the entire system as well as with other relevant agencies to ensure that banks operate smoothly, uniformly and effectively, thereby creating conditions to promptly meet customer requirements, closely monitor and manage mobilized capital as well as loans, thereby improving credit efficiency.
d. Quality of bank staff
The quality of the bank staff is the top requirement for each bank, it directly affects the bank's ability to operate and generate profits. People are the decisive factor in the success or failure of credit capital management in particular and banking operations in general. The more the economy develops, the more complex economic relations become, the more fierce competition becomes, requiring higher qualifications of workers. A team of bank staff with good professional expertise, ethics, capacity and experience will be a prerequisite for the bank to survive and develop. If the quality of people is good, they will perform well in the tasks of project appraisal, mortgage asset evaluation, loan monitoring and effective measures in debt collection, or handling situations arising in the bank's credit relations, helping the bank to prevent or mitigate losses when risks occur while implementing a credit.
e. Ability to collect and process information
Information is a vital factor for every business in a fiercely competitive market economy. In competition, whoever gets the information first is the one who has the greater chance of winning. For banks, credit information is extremely necessary as a basis for considering and deciding whether to lend or not and monitoring and managing loans with the aim of ensuring the safety and efficiency of the loan capital. Credit information can be obtained from many different sources such as purchasing information from information sources, going to the customer's facility for direct review, information from loan applications. The more complete, accurate, timely and comprehensive the information is, the greater the ability to prevent risks and the higher the credit quality.
f. Internal control
Through control, bank leaders can grasp the current business situation, the advantages and disadvantages of complying with legal regulations, internal rules, regulations, business policies, and credit procedures, thereby helping bank leaders have appropriate guidelines, policies, and strategies to resolve difficulties and obstacles, promote favorable factors, and improve business efficiency. Credit quality depends on compliance with regulations, rules, policies, and the level of timely detection of errors as well as the causes of errors and deviations in the process of implementing a credit.
g. Equipment for credit activities
Although equipment is not a basic factor, it contributes significantly to improving the credit quality of the bank. It is a tool and means to organize and manage the bank, control internally, check the process of using loans, and perform transactions with customers. In particular, with the current explosive development of information technology, information technology equipment has helped banks obtain information and process information quickly, promptly, and accurately, on that basis, make the right credit decisions, not miss opportunities in business, helping the process of managing loans and payments to be convenient, fast, and accurate.
1.2.4.2. Group of factors belonging to the customer side
To ensure that credit is used effectively, bringing benefits to the bank and contributing to the growth and development of the social economy, customers play a very important role. A customer with good moral character, a stable financial situation, and income will be willing to fully repay the Bank's loans when due, thereby ensuring safety and improving quality and credit. These factors include:
a. The level of ability of the enterprise's leadership team
A team of business leaders with professional qualifications and good ethics will be able to develop appropriate business and competitive strategies to help the business stand firm and develop. A good business is a condition for them to offset business costs and repay bank loans, both principal and interest, on time, thereby reducing risks and
Improve credit quality. Competency level of business leaders
is an important condition and is carefully considered by the bank before granting credit.
b. Business strategy of the enterprise
Based on an objective and accurate assessment of the enterprise's production development capacity, consumer preferences for its products, and the favorable and unfavorable environmental factors, the enterprise will decide on a strategic plan to expand, reduce or stabilize production, thereby building specific plans for production and consumption. Building the right business plans determines the success or failure of an enterprise.
c. Organizing production and business activities, organizing the consumption of the enterprise's products
Nowadays, businesses do not only do business in a small area, with a small number of products, but they often do business in a variety of products, expanding their consumption network to many territories, from provinces and cities in the country to countries in the region and the world. The formation of such a complex network of activities requires businesses to have a reasonable organization of production and consumption. Good organization of production and consumption of products is a factor that helps the reproduction process take place smoothly and quickly, increasing the ability to rotate capital, saving costs and increasing profits for businesses. The efficiency of business operations is a guarantee for banks to improve credit quality.
d. Capital - financial capacity of the enterprise
There are many different groups of indicators that show the financial situation and financial independence of the enterprise such as the group of indicators on payment ability, the group of indicators on operation, the group of indicators on capital structure, the group of indicators on profit. In addition, when considering the financial situation, banks also pay attention to cash inflows, cash outflows, treasury reserves, etc. Good financial capacity is a condition for enterprises to expand production and business, invest in purchasing advanced equipment, produce high-quality products, dominate the market and bring in large profits, good operation is a condition for enterprises to repay debts to banks.
e. Borrower's character and ethics
Moral character is considered in terms of the intention to repay the loan. In many cases, the borrower has the intention to appropriate capital and not repay the loan despite being able to repay the loan, which has caused significant risks for the bank.
In summary, through examining the factors affecting credit quality, we see that depending on the socio-economic conditions and legal conditions of each country, these factors have different effects on credit quality. The problem is to grasp the influencing factors and apply them creatively in specific circumstances to improve the credit quality of the bank.
1.2.4.3. Group of factors belonging to the economic environment
When the economy is stable, it will create favorable conditions for bank credit to develop. A stable economy, low inflation, no crisis, good business production and business activities, high profits, and the ability of businesses to repay bank loans, both principal and interest, will develop bank credit activities and improve credit quality. On the contrary, during economic recession, production and business are narrowed, investment and consumption decrease, inflation is high, credit demand decreases, and credit capital that has been implemented is difficult to use effectively or repay on time to the bank. Bank credit activities decline in scale and quality.
The level of compatibility between bank interest rates and the profit level of production, business and service enterprises in the national economy also affects the credit quality. The income of banks is limited by the profit of enterprises using bank loans. Therefore, with high interest rates, enterprises borrowing from banks are unable to repay their debts, affecting the production and business of enterprises in particular and the entire economy in general. At this time, bank credit activities are no longer a lever to promote production and business development and credit quality also declines.
In addition, fluctuations in market interest rates and exchange rates also directly affect bank interest rates. Lessons from the financial crisis
The global financial crisis of 2008-2012 has shown that the devaluation of domestic currency directly affects bank credit activities.
1.2.4.4. Group of factors belonging to the legal environment
The legal environment is understood as a system of laws and legal documents related to banking activities in general and credit activities in particular.
In a state-regulated market economy, the law plays an important role, as a legal barrier that creates a favorable and equal business environment, protects the rights and legitimate interests of economic entities, the state, and individual citizens, and forces entities to comply.
Legal factors affecting credit quality are the uniformity of the legal system, awareness of respecting and strictly complying with legal regulations and mechanisms to ensure strict and thorough compliance with the law.
Credit relations must be recognized by law, the law stipulates the credit operation mechanism, creates favorable conditions for healthy credit activities, promotes the role of socio-economic development, at the same time maintains stable credit activities, protects the rights and interests of the parties involved in credit relations. Legal regulations on credit must be consistent with the conditions and level of socio-economic development, on that basis stimulate more effective credit activities.
Currently, the system of legal documents is not consistent and changes frequently, causing difficulties for banks when signing and implementing credit contracts. The banking law has many loopholes and is not consistent with other legal documents. This affects the management of credit quality of banks.
Changes in government policies also affect the ability of businesses to repay debts. Sudden changes in economic structure and import-export policies cause disruptions in production and business, and businesses do not consume.
products, or no new production and business plan leading to overdue debt, bad debt, and declining credit quality.
1.2.5. Credit quality management of commercial banks
1.2.5.1. Basic requirements in credit management and quality improvement
First , build credit quality goals for the development stages of the bank. In which, short-term goals are the premise for implementing long-term goals. These goals must be linked and unified to ensure consistency in credit quality management and supervision.
Second , build a system of indicators to measure the credit quality of the bank according to international standards. The measurement indicators can be quantitative or qualitative indicators. The construction of measurement indicators includes methods and instructions on how to accurately measure the credit quality of the bank over each period.
Third , to achieve these goals, banks must identify and prepare resources and a system of tools to use in credit quality management. These tools are the concretization of credit quality management, which clearly indicates the implementation steps, the implementers, the resources to be used and the results to be achieved.
Fourth , the bank's credit quality monitoring apparatus. This is an important content in the bank's credit quality management, referring to the aspect of the organizational model and defining the responsibilities of participating members to ensure that the set goals and plans are being and will be completed.
1.2.5.2. Credit quality management tools
a. Loan process
One of the measures to improve credit quality is to establish a strict lending process to guide credit officers and related departments to practice lending to achieve the highest efficiency. According to the practice of advanced banks today, in the lending process there is participation and coordination