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Impact on Banking Operations


1.2.3 Credit risk assessment

1.2.3.1 Overdue debt and overdue debt ratio

a/ Expired Debt

Overdue debts are debts that are not repaid on time, are not allowed and are not eligible for debt extension. For strict management, overdue debts in the Vietnamese commercial banking system are classified by time and divided by maturity into the following overdue levels:

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- Overdue debt from 10 days to 90 days: Overdue debt from 10 days to 90 days is the main item of Debt in group 2 - Debt requiring attention

- Debt overdue from 91 to 180 days: Debt overdue from 91 to 180 days is the main item of Debt in group 3 - Substandard debt : debts that are assessed by credit institutions as being unable to recover principal and interest when due and are likely to lose a part of principal and interest. Including: Debts overdue from 91 to 180 days; Debts with restructured repayment terms overdue less than 90 days according to the restructured term

Impact on Banking Operations

- Debts overdue from 181 to 360 days: Debts overdue from 181 to 360 days are the main item of Debt in Group 4 - Doubtful Debt . Debts are assessed by credit institutions as having a high possibility of loss. Including: Debts overdue from 181 to 360 days; Debts with restructured repayment terms overdue from 90 to 180 days according to the restructured term.

- Debt overdue for more than 360 days Debt overdue for more than 360 days is the main item of Debt in Group 5 - Debt with potential loss of capital . Debts that are assessed by credit institutions as being irrecoverable or losing capital. Including: Debts overdue for more than 360 days; Debts frozen pending Government settlement; Debts with restructured repayment terms overdue for more than 180 days according to the restructured term.

b/ Overdue debt ratio

+ The index used to assess the level of overdue debt is the overdue debt ratio.


Overdue debt

Overdue debt ratio = -------------------------------x 100%

Total outstanding debt

In which: Total outstanding debt includes

– Loans, overdrafts and financial leases

– Discounts and rediscounts of valuable documents

– Factoring

– Other forms of credit

1.2.3.2 Bad debt and bad debt ratio

a/ Bad debt (Non Performing Loans – NPL )

Bad debts are overdue debts, but at a more serious level, so they are called bad debts. Bad debts can seriously affect the business results of the bank, so they need to be closely monitored and managed. Bad debts include:

- Overdue debt in group 3 - Substandard debt

- Overdue debt in group 4 - Doubtful debt

- Overdue debt in group 5 - Debt with potential loss of capital

According to Decision No. 493/2005/QD-NHNN dated April 22, 2005, bad debts of credit institutions include the following debt groups:

+ Substandard debt group (Group 3 debt): Includes debts that credit institutions assess as being unable to recover principal and interest when due and are likely to lose a portion of principal and interest. Including: Debts overdue from 91 to 180 days; Debts with restructured repayment terms overdue less than 91 days according to the restructured term.

+ Doubtful debt group (Group 4 debt): Includes debts that are assessed by credit institutions as having a high risk of loss. Including: Debts overdue from 181 to 360 days; Debts with restructured repayment terms overdue from 91 to 180 days according to the restructured term.

+ Group of debts with the possibility of losing capital (Group 5 debt): Includes debts that credit institutions assess as no longer recoverable or losing capital. Including: Overdue debts


Overdue over 360 days; Debts frozen pending Government settlement; Debts with restructured repayment terms overdue over 180 days according to the restructured term.

b/ Bad debt ratio

The percentage of bad debt compared to total outstanding debt at the time of comparison. The bad debt ratio shows the level of danger that a commercial bank is facing, and therefore must have measures to resolve it, if it does not want its bank to fall into a dangerous situation.

Bad debt ratio = Total bad debt / Total outstanding debt

According to the regulations of the State Bank of Vietnam, according to Decision 493/2005/QD-NHNN, the bad debt ratio must not exceed 5%.

1.2.3.3 Credit risk coefficient


Credit risk management

Total outstanding loansx 100%

Total assets

This ratio shows the proportion of credit items in assets, the larger the credit item in total assets, the greater the profit but at the same time the credit risk is also very high. Normally, the total outstanding loans of the bank are divided into 3 groups:

+ Outstanding loans of good quality: are loans with low risk but may not bring high income to the bank. These are also loans that account for a low proportion of the total outstanding loans of the bank.

+ The group of outstanding loans of average quality: are loans with acceptable risk levels and moderate income for the bank. This is the credit that accounts for the overwhelming proportion of the total outstanding loans of the bank.

+ Outstanding loans of bad quality: are loans with high risk but can bring high income to the bank. This is a credit that accounts for a low proportion of the total outstanding loans of the bank.


+ Substandard debt group: debts that credit institutions assess as being unable to recover principal and interest when due and are likely to lose a portion of principal and interest. Including: Debts overdue from 91 to 180 days; Debts with restructured repayment terms overdue less than 90 days according to the restructured term.

+ Doubtful debt group: debts that are assessed by credit institutions as having a high probability of loss. Including: Debts overdue from 181 to 360 days; Debts with restructured repayment terms overdue from 90 to 180 days according to the restructured term.

+ Group of debts with the possibility of losing capital: debts that credit institutions assess as being irrecoverable or losing capital. Including: Debts overdue for more than 360 days; Debts frozen pending Government settlement; Debts with restructured repayment terms overdue for more than 180 days according to the restructured term.

1.2.3.4 Outstanding debt on mobilized capital

This indicator shows how much mobilized capital is used to lend to the economy. Outstanding debt on mobilized capital also indirectly reflects the bank's ability to mobilize capital. This large indicator shows that mobilized capital participating in outstanding debt is low, and the bank's ability to mobilize capital is not good.


Debt

on capital

Debt x 100% of mobilized capital

The higher the ratio of outstanding debt to mobilized capital, the greater the credit risk. However, if this ratio is too low (less than 50%), the bank's business activities will not be effective, because the level of using mobilized capital for profitable assets is low.

1.2.3.5 Debt collection ratio

A high debt collection ratio shows that debt collection is progressing well and credit risk is low. This indicator also shows the bank's ability to recover debt from loans to customers.


Debt collection system

Debt collectionx 100%

Loan turnover

Debt collection ratio reflects cash inflow and outflow in credit activities. If cash outflow is greater than cash inflow (ratio less than 100%), the outstanding debt will increase.


But the efficiency of using credit capital of the economy is not commensurate, there are no results, on the contrary, the debt collection turnover is larger, the outstanding debt will decrease, credit activities are narrowed. Both of these cases are not good. Therefore, in credit management, it is necessary to maintain the debt collection ratio from about 75% to 90% which is considered reasonable.

1.2.4 Causes of credit risk

1.2.4.1 Objective reasons :

Objective causes have impacts and influences on a large scale.

+ Due to fluctuations in the economic environment (domestic, global)

+ Inadequacies in state mechanisms and policies.

+ The legal corridor for banking activities is not complete.

+ Force majeure (natural disasters, epidemics...)

1.2.4.2 Causes related to the borrower .

+ Unstable and unsteady production and business situation

+ Bad financial situation

+ Business management is still limited

+ The borrower's unfriendly and uncooperative attitude

+ Phenomenon of intentional, deliberate fraud

Most businesses when borrowing capital from banks have specific and feasible business plans, but there are also some businesses, especially in the non-state sector, that intentionally falsify accounting data to create artificial stability, to deceive the bank, if not checked, analyzed and considered, they may be at risk. The number of businesses that use capital for the wrong purpose, intentionally defraud banks to appropriate assets, although not many, but not non-existent, there are even extremely serious and serious cases that arise , related to the reputation of officials, negatively affecting other businesses.

Poor business management capacity is also a reason for risk. Many businesses invest in many areas beyond their management capacity. The business scale is too large compared to management thinking, which is the reason for the bankruptcy of feasible business plans that should have been successful in reality.


Enterprises borrow capital from many banks at the same time, making monitoring and management complicated, making it difficult to track cash flow, leading to overlapping use of loans and chain-level insolvency.

The financial situation of enterprises is weak and lacks transparency. Small scale of equity capital and unbalanced financial structure are common characteristics of most Vietnamese enterprises. Financial accounting management is still arbitrary, unsynchronized, and reactive, making the information obtained from banks inaccurate and only formal. Therefore, when bank staff prepare financial analysis reports of enterprises based on data provided by enterprises, it is often unrealistic and too inaccurate, and risks are inevitable.

1.2.4.3 Causes related to the lending bank

+ Unreasonable credit policy

+ Not yet promoting autonomy and self-responsibility in credit activities

+ Not correctly determining the scale and growth rate of credit

+ No reasonable customer policy

+ Lack of flexibility in interest rates and interest rate incentives

+ No reasonable competitive and marketing strategy

+ The lending process has many loopholes that customers take advantage of.

+ Professional qualifications of credit officers are still limited.

+ Poor business ethics

The causes belong to the lenders, first of all, banks still lack a consistent credit policy, the credit policy here must include a general orientation for lending, short-term, medium-term and long-term credit regimes, regulations on loan guarantees, and a list of customer selection in each period. Banks do not have enough information on statistical data to analyze and evaluate customers, leading to incorrect determination of the effectiveness of the loan application plan, or determining the loan and repayment terms that are not suitable for the customer's business plan.


Laxity in the supervision process before, during and after making the bank fail to promptly detect the misuse of capital by customers.

Banks put too much trust in mortgaged assets, pledged assets, guarantees, and insurance, considering them as a sure guarantee for loan recovery.

Pursuing quantitative achievements or planned targets while ignoring credit quality and trusting too much in the customer's business plan.

The professional capacity and ethics of some bank credit officers have not kept up with the requirements. Management, use and treatment of bank officers are not satisfactory, and talented officers cannot be retained.

Competition between banks is too fierce and not even really healthy, chasing after scale, ignoring standards and conditions in lending, and lacking concern for loan quality.

1.2.5 Impact of credit risk

1.2.5.1 Impact on banking operations

When credit risk occurs, the bank cannot collect the granted credit capital and loan interest, but the bank must pay the principal and interest on the mobilized amount when due, this will cause the bank to lose balance in revenue and expenditure, the credit capital turnover will decrease, making the bank's business ineffective, and the bank's costs will increase compared to expectations.

If a loan is irrecoverable, the bank must use its own capital to pay the depositors. To some extent, if the bank does not have enough capital to pay the depositors, the bank will fall into a state of insolvency, which can lead to liquidity risk. As a result, the business scale will shrink, financial capacity will decrease, reputation and competitiveness will decrease not only in the domestic market but also spread to other countries. The bank's business results will get worse and worse, which can lead to losses or bankruptcy if there are no timely measures to handle and overcome.


1.2.5.2 Impact on socio-economic

A commercial bank is a financial intermediary organization that specializes in mobilizing idle capital in the economy to lend to organizations, businesses and individuals in need. Therefore, when credit risks occur, not only the bank suffers losses but the interests of depositors are also affected.

When a bank encounters a large credit risk, it will affect depositors, causing them to panic, fear and rush to withdraw money, not only at the bank with the problem but also at other banks, causing difficulties for the entire banking system. A liquidity crisis occurs and seriously affects the existence and development of the banking system.

The banking system is affected, ineffective operation will affect the entire socio-economic system. It can cause the economy to decline, inflation to increase, purchasing power to decrease, unemployment to increase, and social instability.

In summary, credit risks of banks occur at different levels, mild risks also cause banks to lose profits, severe risks cause banks to not collect enough capital and interest, or lose both capital and interest, leading to bank losses. If this situation persists and cannot be resolved, the bank will go bankrupt, causing serious consequences for the economy in general and the banking system in particular. Therefore, it requires bank managers to be extremely cautious and take appropriate measures to prevent and limit credit risks.

1.2.6 Quantifying credit risk

Credit risk quantification is the process of building an appropriate model to quantify the level of risk posed by customers, thereby determining the risk premium and maximum safe credit limit for a customer as well as setting up risk provisions.

The models that are relatively commonly applied when quantifying credit risk include:

+1.2.6.1 Moody's and Standard & Poor's rating models:

Credit risk is often expressed in the ratings of bonds and loans. These ratings are provided by a number of private rating services, of which Moody's and Standard & Poor's are the best. For Moody's ratings

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