CHAPTER 1: DISCUSSION ON CREDIT RISK
1.1. Credit Overview
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1.1.1. Credit concept
Credit is a transaction of assets in the form of goods or currency between a borrower and a lender, the lender transfers assets to the borrower for use within a certain period of time according to the agreement, at the same time the borrower is responsible for repaying the principal and interest when due.
Bank credit is a relationship of transferring the right to use capital from the bank to the customer for a certain period of time at a certain cost.
1.1.2. The nature of credit
The lender transfers the right to use capital to the borrower for a certain period of time.
The credit term is determined by agreement between the lender and the borrower.
The lender receives a portion of the income in the form of interest.
. .3. Functions of credit
1.1.3.1. Resource redistribution function
Credit is the transfer of capital from one entity to another in the economy. Through this transfer, the resource redistribution function of credit is shown in the following aspects:
The lender has some temporarily unused resources, through credit those resources are redistributed to the borrower.
Conversely, the borrower also receives a redistributed portion of resources from the lender through credit.
1.1.3.2. Function of promoting the circulation of goods and developing production
Credit creates capital to support the production and business process to be carried out normally, continuously and developed.
Credit creates capital for investment to expand the scope and scale of production and business.
Credit facilitates the acceleration of payment speed, contributing to promoting the circulation of goods by creating credit and currency.
1.1.4. The role of credit
Credit is the most important business of commercial banks, contributing to the development of the economy. Credit has the following main roles:
Is a tool to promote socio-economic development, meeting the capital needs of the economy.
Is a condition to ensure that the production and business process takes place regularly.
continuous.
Promote the process of capital concentration, production concentration, contributing to promoting
Businesses use capital effectively.
Contribute to improving people's living standards.
Is a tool to perform the socio-economic functions of the State.
. .5. Credit classification
1.1.5.1. Classification by credit term
According to this classification, credit is divided into 3 types:
Short-term credit:
Is a type of credit with a term of less than 1 year, used to finance investment in current assets.
Medium-term credit:
Is a type of credit with a term of 1 to 5 years, used to finance investment in fixed assets.
Long-term credit:
Is a type of credit with a term of over 5 years, used to finance investment in investment projects.
1.1.5.2. Classification by lending object
According to this classification, credit is divided into 2 types:
Working capital credit:
This type of credit is used to form working capital for economic organizations such as loans to stock goods, buy raw materials for production...
Fixed capital credit:
This type of credit is intended to form fixed capital, and is carried out in the form of medium and long-term loans. Fixed capital credit is often
Granted to serve the purpose of investing in the purchase of fixed assets, improving and innovating techniques, expanding production, constructing projects...
1.1.5.3. Classification by purpose of capital use
According to this classification, credit is divided into 2 types:
Credit for production and circulation of goods:
Is a type of credit granted to businesses and other business entities to carry out production and circulation of goods.
Consumer credit:
Is a type of credit for individuals to meet consumer needs such as personal consumer loans, loans to buy, build, repair houses, loans to buy cars, etc.
1.1.5.4. Classification by mortgaged assets
According to this classification, credit is divided into 2 types:
Secured credit:
Is a type of credit based on loan guarantees such as mortgages, pledges, or guarantees from a third party.
Unsecured credit:
This is a type of credit without collateral, pledge or guarantee from another person, but only based on the borrower's own reputation to decide on a loan.
. .6. Loan principles, conditions and interest rates
1.1.6.1. Lending principles
Bank loan customers must comply with the following two principles:
Loans must be used for the purposes agreed upon in the credit contract:
This principle aims to ensure the effectiveness of the use of loan capital and the ability to recover debt later. To do this well, each time a loan is borrowed, the Customer must make a loan application, clearly stating the purpose of the loan capital along with a feasible and effective production and business plan. The Customer must use the loan capital for the right purpose as committed in the credit contract. If the Bank discovers that the Customer is using the loan capital for the wrong purpose, the Bank has the right to request early debt collection.
Repay the principal and interest of the loan on time as agreed in the credit contract:
Repayment of principal and interest is an indispensable principle in lending activities. This comes from the temporary idle nature of the capital that the Bank uses for lending. Most of the capital that the Bank uses for lending is capital mobilized from the public, therefore, after the committed period in the credit contract, the borrower must repay the Bank so that the Bank can repay the depositor. The nature of the credit relationship is a temporary transfer of the right to use the loan capital, so after a certain period of time, both principal and interest must be repaid.
1.1.6.2. Loan conditions
According to the customer lending regulations issued by the State Bank, the loan conditions that customers need to have include:
Have civil legal capacity, civil conduct capacity and bear civil responsibility according to the provisions of law;
Have legitimate borrowing purposes;
Have financial capacity to ensure debt repayment within the committed period;
Have a feasible and effective production, business and service plan;
Implement regulations on loan guarantees according to Government regulations and instructions of the State Bank of Vietnam.
1.1.6.3. Loan interest rate
It is the percentage between the profit earned during the period compared to the capital lent during a certain period. Usually, interest is calculated annually, quarterly or monthly.
Loan interest rates are implemented according to the Bank's regulations in each period.
For loans according to credit limits, the interest rate is applied at the time of debt receipt, for seasonal loans, the interest rate is applied at the time of the crop.
In case of debt extension or debt reduction, the loan interest rate will be applied according to the agreement stated in the credit contract.
Maximum overdue debt interest rate is 150% of loan interest rate.
1.2. Overview of credit risk
.2. . Concept of risk
Risk is an uncertainty or an unstable situation. In the operations of commercial banks, risk is an unexpected event or incident that occurs during the process of
the Bank's business process, negatively affecting the Bank's existence and development.
.2.2. Concept of credit risk
Credit risk is the risk that arises when a customer is unable to pay. In banking operations, credit risk is the risk that arises when a customer is unable to pay all or part of the loan, or will not pay on time, thereby negatively affecting the Bank's business operations.
.2.3. Classification of debt, bad debt, overdue debt
1.2.3.1. Debt classification
According to Decision No. 493/2005/QD – NHNN and Decision No. 18/2007/QD – NHNN on classification of debt, bad debt, overdue debt is regulated as follows:
Group 1: Standard debt
Current debts that the Bank assesses as having the ability to fully recover both principal and interest on time.
For debts overdue less than 10 days, the Bank assesses that it is possible to fully recover both overdue principal and interest and fully recover the remaining principal and interest on time.
Debts are classified into group 1 according to regulations (Clause 2, Article 6, Decision No. 18/2007/QD - NHNN).
Group 2: Debts that need attention
Debts overdue from 10 to 90 days.
Debts with adjusted repayment terms for the first time that the Bank assesses as having the ability to fully recover both principal and interest on the first adjusted repayment date.
Debts are classified into group 2 according to regulations (Clause 3, Article 6, Decision No. 18/2007/QD - NHNN).
Group 3: Substandard debt
Debts overdue from 91 to 180 days.
Debts with restructured repayment terms for the first time, except for debts with adjusted repayment terms for the first time, are classified into group 2.
Debts with interest waived or reduced due to the Customer's inability to pay full interest under the credit contract.
Debts are classified into group 3 according to regulations (Clause 3, Article 6, Decision No. 18/2007/QD - NHNN).
Group 4: Doubtful debt
Debts overdue from 181 to 360 days.
Debts with restructured repayment terms for the first time are overdue for less than 90 days according to the first restructured repayment term.
Debts are restructured for the second time.
Debts are classified into group 4 according to regulations (Clause 3, Article 6, Decision No. 18/2007/QD - NHNN).
Group 5: Debt with potential loss of capital
Debts overdue for more than 360 days.
Debts with restructured repayment terms for the first time that are overdue for 90 days or more according to the first restructured repayment term.
Debts with a second restructured repayment term are overdue according to the second restructured repayment term.
Debts that have been restructured for the third time or more, whether they are overdue or not.
Debts frozen and debts pending settlement.
Debts are classified into group 5 according to regulations (Clause 3, Article 6, Decision No. 18/2007/QD - NHNN).
1.2.3.2. Bad debt
Debts belonging to groups 3, 4 and 5. The ratio of bad debt to total outstanding debt is the ratio to assess the credit quality of credit institutions.
1.2.3.3. Overdue debt
Is a debt in which part or all of the principal and/or interest is overdue. Includes debts in groups 2, 3, 4 and 5.
1.2.4. Credit risk measurement indicators
Overdue debt on total outstanding debt
This indicator shows what percentage of total outstanding debt is overdue, contributing to measuring the quality of the Bank's credit operations. The smaller this ratio is, the better and vice versa.
Total outstanding debt
Overdue debt on total outstanding debt = Overdue debt
Bad debt on total outstanding debt
This indicator measures the quality of a bank's credit operations. Banks with lower ratios have higher credit quality.
Total outstanding debt
Bad debt on total outstanding debt = Bad debt
1.2.5. Damages caused by credit risks
1.2.5.1. Damage to the Bank
When credit risk occurs, the Bank will suffer both material and reputational losses. Credit risk will directly impact the Bank's business operations such as the risk of capital loss, lack of liquidity, imbalance in revenue and expenditure, loss of depositor confidence. The majority of the Bank's operating capital is mobilized capital, when the Bank cannot recover the principal and interest, the Bank will fall into a state of shortage, loss of payment ability, affecting the Bank's reputation.
Credit risks occur at different levels, in mild cases the Bank's profits decrease, in more severe cases the Bank cannot recover capital and interest, leading to the possibility of capital loss. If this situation cannot be overcome, the Bank will lose liquidity, possibly go bankrupt, causing serious consequences for the economy in general and the banking system in particular.
1.2.5.2. Damage to the economy
The banking system is the lifeblood of the economy. When credit risks occur, they can cause banks to lose their ability to pay, creating fear among the people, people will go to banks to withdraw money en masse, banks may lack the ability to pay, leading to mass bankruptcy of banks. At that time, credit risks will seriously affect the entire economy, the economy will be in recession, prices will increase, purchasing power will decrease, unemployment will increase...
1.2.5.3. Damage to international relations
Due to the unstable economic - political - social situation in the country, leading to recession and national economic - political crisis, causing damage in international relations with countries in the region and the world.
1.2.6. Causes of credit risk
1.2.6.1. Objective causes
Causes from the economic environment:
Due to economic fluctuations such as economic recession, exchange rate fluctuations, inflation affecting the production and business activities of enterprises, causing difficulties for banks in recovering loans.
Causes from social environment:
Major economic and political fluctuations in the world always affect the operations of businesses and banks. Political changes can cause fluctuations in the international trade balance, exchange rates, domestic markets such as prices of raw materials, goods, services, market interest rates, etc., which directly affect the production and business activities of businesses and the affected parties are banks.
Causes from the legal environment:
Due to the incomplete and synchronous legal environment, or changes in a direction unfavorable to businesses, it also makes commercial bank loans difficult.
1.2.6.2. Subjective causes
Reasons from the Customer side:
Using loan for wrong purpose.
The Customer's management level, experience and capacity are still weak.
Customers lack goodwill in paying debts.
The Customer's financial capacity is weak and lacks transparency.
Reasons from the Bank:
Poor credit analysis and appraisal.
Credit staff qualifications are still limited.
The ethical qualifications of credit officers are still weak.
Lack of inspection and control of capital after lending.
Lack of cooperation between Banks when lending to Customers.
Overemphasizing collateral and underestimating risk prevention.