Table 2.22: Credit policy by risk level 71
Table 2.23: Risk Matrix 74
Table 2.24: Overdue debt recovery rate of 2010 in 2011 78
Table 3.1: Consumer credit scoring criteria table 95
Table 3.2: Credit decisions based on 96-point score
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CHART
Chart 2.1: Capital mobilization structure over 3 years 2009, 2010, 2011 46
Chart 2.2: Comparison by loan period 2009 - 2011 52
Chart 2.3: Comparison of outstanding debt by economic sector 2009 - 2011 54
Chart 2.4: Comparison of credit balance by currency 2009 - 2011 55
Chart 2.5: Comparison of bad debt structure between years 58
Chart 2.6: Comparison of overdue debt structure over time 59
Chart 2.7: Comparison of overdue debt by economic sector 60
Chart 2.8: Overdue debt recovery ability 78
DIAGRAM
Diagram 2.1: Organizational chart of NHNO&PT Hanoi Branch 42
Diagram 3.1: Credit granting organization 61
INTRODUCTION
Any business sets the goal of maximizing profits and minimizing risks. However, in reality, profits and risks always go hand in hand, the higher the profit, the higher the risk and vice versa. Risks have become very common and almost inevitable for all phenomena both in nature and in human socio-economic life. Therefore, accepting and facing risks is inevitable. Commercial banks are special enterprises specializing in currency trading with an important role in providing capital for the economy, so credit activities account for the largest proportion (over 60%) in the bank's asset portfolio, which means that credit risks are the largest and most complex type of risk. Over time, the nature of credit risk also changes as businesses have to compete more fiercely in introducing new products and services to capture domestic and international markets, so they will be willing to accept more credit risk.
In recent years, credit activities of Vietnamese commercial banks have achieved significant achievements, contributing to the overall development of the country's economy. Outstanding bank credit has increased sharply, meeting the requirements of high economic growth in the context of limited operations of the stock market and capital market. The market economy with the trend of economic globalization and internationalization of financial flows has created a fiercely competitive environment, causing businesses as well as individuals in production and business to face the risk of loss and the harsh selection rules of the market. Banking business activities are becoming increasingly complex and facing many risks, requiring banks to have effective solutions to manage risks, especially credit risks.
As a branch of a large bank in the system of State-owned commercial banks, the Hanoi Bank for Agriculture and Rural Development has focused on credit risk management for many years, but the results have not been as expected. Realizing the importance of credit risk management in commercial banks, I decided to choose the topic: " Improving the effectiveness of credit risk management at the Hanoi Bank for Agriculture and Rural Development " as the topic for my graduation thesis.
2. Research purpose of the topic
- Research to better understand basic theoretical issues on credit risk and credit risk management at commercial banks.
- State the main measures applied in credit risk management activities at Hanoi Bank for Agriculture and Rural Development, evaluate the effectiveness of the above measures through analyzing the current status of credit risk and credit risk management at the Branch.
- Propose some ideas to improve credit risk management at
Hanoi Bank for Agriculture and Rural Development
3. Research object and scope
- Research object : Theoretical issues on credit risk and risk management
credit at commercial banks
- Research scope :
+ Credit activities include two aspects: capital mobilization and lending. Within the scope of research, the thesis only studies credit risks and risk management in lending activities.
+ Research on practical risks and credit risk management of Hanoi Agricultural and Rural Development Bank from 2009 to 2011 and propose solutions to improve by 2015.
4. Research methods
Using a combination of methods: Dialectical materialism, historical materialism, interpretative analysis, comparison combined with statistical methods. In addition, the thesis also uses tables and diagrams for illustration.
5. Structure of the thesis
After the introduction, the thesis is divided into 3 chapters:
Chapter I: Basic issues of credit risk and credit risk management
of Commercial Bank.
Chapter II: Current status of credit risk and credit risk management at Hanoi Bank for Agriculture and Rural Development.
Chapter III: Solutions to improve the effectiveness of credit risk management at
Hanoi Bank for Agriculture and Rural Development
CHAPTER 1
BASIC ISSUES OF CREDIT RISK AND CREDIT RISK MANAGEMENT OF COMMERCIAL BANKS
1.1. Credit and credit risk of commercial banks
1.1.1 Commercial Bank Credit
1.1.1.1 Concept
The Banking Ordinance dated May 23, 1990 of the State Council of Vietnam defines: “A commercial bank is a monetary business organization whose main and regular activities are to receive deposits from customers with the responsibility to repay and use that money to lend, perform discount operations and act as a means of payment”.
In the operations of commercial banks, credit is the most basic operation. Credit is understood as a transaction of assets (cash or cash equivalents) between the lender (commercial bank) and the borrower (individuals, businesses, and other entities), in which the lender transfers assets to the borrower for use within a certain period of time according to the agreement, the borrower is responsible for unconditionally repaying the principal and interest to the lender when the payment is due. Credit is the most important method of capital mobilization in the market economy. Therefore, effective use of this method will contribute to solving the capital demand which is an urgent problem for production and investment development.
1.1.1.2. Characteristics of bank credit
Bank credit is the main and most popular type of credit in the economy.
market economy. Characteristics of bank credit include:
- Participating subjects : The subjects of bank credit are very diverse and flexible, including banks on one side and other subjects in the economy such as enterprises, households, individuals, etc. In credit relations, banks are both lenders and borrowers. As borrowers, banks receive deposits from businesses and individuals or issue certificates of deposit and bonds to mobilize capital in society. As lenders, banks provide credit to businesses and individuals.
Object : mainly currency, sometimes property.
Term : very flexible including short term, medium term and long term.
+ Short-term credit: 12 months or less;
+ Medium-term credit: from 1 year to 5 years;
+ Long term credit: over 5 years.
Tools : also very flexible, can be promissory notes, bank bonds, credit contracts...
Nature : Bank credit is indirect. Banks are credit intermediaries between savers and those who need capital for production, business or consumption.
Purpose : Through credit activities, banks provide capital for the economy, support businesses and individuals in production and business, stockpiling goods and materials, investing in basic construction... and meeting a significant part of personal consumer credit needs.
1.1.1.3. Forms of bank credit
a. Classification by term
The credit term is the period in which the bank commits to provide a credit to the customer and it is specifically determined by the day, month, year. Or the credit term is also understood as the period calculated from the time the first capital of the bank is issued until the time the last capital and interest must be collected. Credit classification by time is very important for commercial banks because it reflects the ability to repay, the risk as well as directly affects the safety and profitability of a commercial bank.
According to credit term is divided into three types
Short-term credit: is credit with a term of less than one year.
Short-term credit is often associated with business loans to supplement current assets, because current assets often have a turnover of less than one year. Therefore, within one year, the business can repay the loan from the Bank.
Medium-term credit : includes loans with terms from 1 year to 5 years
Fixed assets such as means of production, means of transport, some crops and livestock... equipment that wear out quickly require capital from 1 to 5 years.
Long-term credit : includes credits with a term of 5 years or more. Usually, large investment projects with long capital recovery, of macro scale such as: heavy industrial machinery and equipment, road and bridge construction... have capital needs from 5 years to 10 years, sometimes up to 20 years.
b. Classification by loan type .
Based on the form of loan, we have the following types of credit:
Discounting is the act of a Commercial Bank advancing money to a customer corresponding to the value of the commercial paper after deducting the Bank's income to own a commercial paper that has not yet matured. Legally, the Bank is not a lender to the owner of the commercial paper and is only a form of exchange of rights. However, for the Bank, spending money at the present time to receive a larger amount of money in the future at a predetermined interest rate is considered a credit activity, but perhaps this is considered an investment activity of the Bank rather than a credit activity.
Lending is understood as the Bank granting credit to customers with the commitment that the customer must repay the principal and interest within a specified period of time with the committed interest rate. Lending is called one of the traditional businesses of Commercial Banks, it was formed right from the beginning of Banks, and is considered the most profitable activity for Commercial Banks.
Guarantee is the Bank's commitment to fulfill financial obligations on behalf of its customers when its customers are unable to pay their debts. Although it does not have to pay out money, the Bank still benefits from its customers thanks to its reputation. This transaction is recorded in the Bank's off-balance sheet account. However, if there is a transaction that arises, meaning the Bank performs financial obligations on behalf of its customers, it is recorded in the on-balance sheet account.
Leasing is when the Bank buys an asset and leases it to a customer under certain conditions. After that period, the customer must pay both principal and interest to the Bank. This is a fairly new activity for the Bank. However, this activity is quite profitable, but it also contains many risks, including technological factors. This requires credit officers to not only have professional expertise but also have technical and technological knowledge.
c. Credit classification by collateral.
Based on collateral, we have the following types of credit:
Secured credit is a commitment by the credit recipient to use the collateral owned by him to fulfill his financial obligations to the Bank in case of default. In this case, when the customer fails to repay the debt, or because of misuse of loan capital leading to default, the Bank will sell the property to recover the capital. Secured credit is applied
For high-risk customers such as new customers or customers with poor financial status...
Unsecured credit is a type of credit in which customers need to borrow capital with a certain limit without collateral. This type of credit is often granted to customers with high reputation, customers who have a good and long-term relationship with the Bank, they have a healthy financial situation, have a good relationship with financial institutions. It can also be loans made under the direction of the Government, or the Government requires no collateral.
1.1.1.4. The role of bank credit in the economy
In a market economy: Credit focuses on mobilizing many sources of capital, associated with effective use of capital to invest in socio-economic development, creating conditions for capital accumulation for industrialization and modernization. Credit is truly an economic lever to stimulate the development of key economic sectors as well as expand trade and services in both urban and rural areas. Therefore, credit plays an important role in the process of socio-economic development and is shown as:
Firstly, bank credit contributes to reducing idle capital in circulation.
and improve capital efficiency .
Credit provides capital for businesses and individuals to produce and do business, thereby regulating capital from idle places to the capital-deficient part. Small and medium-sized enterprises or households that have difficulty mobilizing capital in the market are also able to meet their capital needs for production and business. Households, businesses or individuals with idle capital want to lend to banks because this is a highly safe and profitable investment. Credit contributes to the distribution of capital, regulating capital throughout the economy, creating conditions for the production process to be continuous. In addition, credit is also a bridge between savings and investment, a driving force to stimulate savings and at the same time a means to meet capital needs for investment and development. Through credit activities, businesses can use labor and raw materials reasonably, promoting economic growth and solving social problems.
Second, by providing capital to businesses and individuals, bank credit contributes to promoting economic growth.
In all fields of production - business - service, enterprises, households or individuals are looking for ways to increase profits, improve productivity and efficiency of production and business. To do that, business entities must
Technical innovation, management improvement, and new market search therefore require a large and timely amount of capital. Bank credit will be the source of capital supply for those needs. However, businesses need to find many effective ways to use capital, increase capital turnover to repay credit loans on time, both principal and interest, otherwise it may lead to the risk of bankruptcy. To achieve this in a market economy is a fierce and fierce competition. Therefore, it promotes the increasingly high development of the commodity economy.
Third, bank credit is a tool for the Government to regulate the macro economy.
economy, implementing economic and social development strategy.
By controlling the volume of credit, investment orientation and credit interest rates, the government can operate a flexible and reasonable monetary policy, controlling inflation. Bank credit is also a tool for the State to develop strategic economic sectors and fields through focusing investment capital on key economic sectors, combined with social policy programs.
Fourth, bank credit is an important economic lever to promote foreign economic relations .
Nowadays, in foreign economic relations, the equal and mutually beneficial cooperation between countries in the world and in the region is being strongly promoted in both breadth and depth. In which, foreign investment capital and import-export business are considered the two most popular areas of cooperation between countries. But in reality, not every economic organization has enough capital to operate. Through credit activities, banks are effective assistants, providing capital for import-export businesses, helping domestic enterprises gradually approach international markets, innovate technology and product designs to better meet the needs of customers in international markets, contributing to promoting foreign economic relations.
Thus, bank credit plays a very important role in the economy as well as in the business activities of commercial banks. However, this is an activity that has many unpredictable risks. In order for bank credit to truly play its role, studying credit risks and the causes of credit risks is an urgent requirement.
1.1.2 Credit risk of commercial banks
1.1.2.1. Concept
Bank credit is present in all stages of the production and business process.
Business is an important capital supply channel for the operations of businesses and individuals.