Indicators for Assessing the Sustainable Development of Commercial Banks

Risks of banking crisis. Overheating or underdevelopment of banking system are unsustainable development states because they contain risks that can cause crisis.

Third is environmental sustainability: banks are special enterprises because the tools and business objects of banks are money. Money is considered the lifeblood of the economy, and banks are the place to create reserves and pump blood. Therefore, the activities of commercial banks have a profound influence and impact on many industries and fields in the economy. Obviously, when a bank develops sustainably, it can completely meet the capital needs of industries and fields in the economy to develop together. Thus, the activities of commercial banks not only create development for themselves but also create positive effects on economic development in general (ie sustainable development of the economic environment). Thus, the activities of commercial banks not only create development for themselves but also create positive effects on economic development in general. Economic development is not only evaluated as quantitative growth but also as qualitative change (positive economic restructuring). The activities of commercial banks must support the economy to shift to a reasonable economic structure. On the other hand, changes in the economy will have interactions with the development of commercial banks. Commercial banks that still operate effectively can survive and withstand adverse impacts of the external environment are sustainable development banks.

In short, a bank will develop sustainably when it achieves two balances: first is the balance between expected profits and the level of risk that the bank can accept. Second is the balance between the interests of the bank and the interests of customers. Third is increasing benefits for the community and protecting the environment. Another requirement for sustainable development of the bank is that the bank needs to maintain these two balances over a long period of time.

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1.2.2 Indicators for assessing the sustainable development of commercial banks

A commercial bank is considered a PTBV if it has developed and stabilized over time and meets the requirements specified in a system of certain indicators. This system of indicators is:

(1) Indicators reflecting the scale, ratio, growth rate structure of capital, assets and market share of the bank

(2) Indicators reflecting the accessibility of banks

(3) Indicators reflecting the safety of the bank

(4) Indicators reflecting the bank's profitability

Indicators reflecting the scale, ratio, capital structure, assets and market share of the bank

Size, ratio, structure and growth rate of capital sources

The size of capital is the total balance on deposit accounts, securities issuance accounts, loan accounts, and equity accounts. The larger the balance on these accounts, the larger the size of the bank's capital (including debt capital and equity capital). The larger the size of capital and the more stable its growth, the more competitive the commercial bank is.

The ratio or structure of capital sources can be studied by term, by item or by capital mobilization market. These criteria are determined by the proportion of each capital source to the total capital according to the above corresponding criteria. Thus, having a large capital source and a reasonable capital structure will allow commercial banks to create a suitable fund to prevent liquidity risks.

In addition, the bank has the basis to implement a strategy of diversifying business activities such as lending, investing and providing other modern financial services to increase profits and minimize risks towards stable and sustainable development.

Size, ratio, structure and growth rate of assets

Asset size is the total balance on the accounts reflecting the bank's assets. Similar to the size of capital, the total balance on the accounts reflecting assets is positively related to the size of assets. The higher the growth rate of assets, the more the size of the bank's assets increases. When the size of assets is expanded, especially the growth of assets with good profitability, it is a condition for the bank to increase profits according to the requirements of the owners to survive and develop.

The ratio or term structure and asset portfolio structure are the proportions of each asset item to the total assets according to the above criteria. Each bank has different operating objectives and target customer groups, so the proportion of the loan item reflects the characteristics of the bank's operations and needs to account for a high proportion. However, the diversity of the asset portfolio structure also reflects the risk diversification strategy to ensure operational safety and the level of penetration and deep access to customers and the economy of the bank. On the other hand, the proportion of loan items by sector also indicates whether the bank invests in industries that create public goods to increase benefits for the community and contribute to the implementation of national programs to protect the environment.

Bank market share

Bank market share is the market share of bank products and services. Bank products and services are very diverse, from capital mobilization products to lending products. Therefore, the market share of a bank is large or small, which is assessed through capital market share, mobilized capital market share and credit market share.

In short, in theory, a sustainable commercial bank is a bank whose capital and asset size are constantly increasing over the years. In addition, the asset structure and capital structure must be reasonable. On the other hand, the bank must gain a superior market share compared to other banks, maintain and expand market share.

Indicators reflecting bank accessibility

The indicator reflecting the bank's accessibility reflects the number of customers who have access to and use the bank's services. This is also an indicator reflecting the level of benefits that the bank brings to customers. The indicator of the bank's accessibility is measured through two aspects: breadth of access and depth of access.

Breadth of reach

The breadth of a bank's reach is the extent to which it reaches customers on a large scale. That is, the ability of all customers who need to use the bank's products and services to access and be provided with these products and services. Thus, the more products and services a bank provides to meet the needs of its customers, the more likely it is that the bank has achieved breadth of reach. In addition, breadth of reach is also measured through the number and growth rate of customers, credit and savings balances, and the increase in the number of customers in both absolute and relative numbers.

Depth of approach

This is a concept used to measure the extent to which different customers can access banking services, as well as the net value that customers receive. However, indicators that measure the depth of direct access through the net change in the value of customers' income and assets after accessing credit services are difficult to determine. Therefore, the average loan level indicator can be used.

troops to assess the depth of approach.

The low average loan size means that even low-income customers can borrow from the bank. The average loan size/GDP per capita is considered a measure of the depth of bank outreach internationally:

Average loan size

Average loan amount (1.1)

= x 100%

GDP per capita

The lower this ratio, the deeper the bank's reach. This is a preferred index because it is simple to calculate and can be used for comparison.

cross-border. According to international standards, if this ratio is below 20%, then the bank's services have reached the lowest income group in society. If this ratio fluctuates between 20% and 150%, the bank has transacted with average customers and has a wide reach. If this ratio is above 150%, the bank only focuses on the rich customer class.

Indicators reflecting the safety of banks

Commercial banks' business activities are specific; assets are mainly formed from sources mobilized through debt instruments and savings instruments, these instruments have high liquidity and are very sensitive and unstable sources of capital. Meanwhile, bank capital has high maturity and is less liquid. Therefore, in business activities, commercial banks face liquidity risks, credit risks, interest rate risks, exchange risks and other risks.

(1) Liquidity risk is the possibility of loss for commercial banks associated with the event of liquidity demand exceeding the liquidity capacity of commercial banks. Liquidity risk originates from three main causes: the structure of bank assets in a state of liquidity imbalance, the collapse of public confidence in banks, and the impact of interest rate risk and credit risk on the liquidity capacity of banks.

(2) Credit risk is the possibility of incidents from credit causing losses to the bank due to customers not performing or not fully performing the commitments in the credit contract.

(3) Interest rate risk is the possibility of an event causing losses to a commercial bank associated with changes in interest rates affecting the scale and value of the capital and assets of a commercial bank. Interest rate risk is associated with two basic activities of a commercial bank: capital mobilization and financing. When mobilizing capital, a commercial bank must pay interest on mobilization, when financing and investing, a commercial bank earns interest and income from investment activities. When this income fluctuates in a sharp downward direction, the determined cost of resources will cause losses to a commercial bank.

(4) Exchange rate risk is the possibility of an event causing loss to the commercial bank associated with changes in exchange rates affecting the value of assets, liabilities and income.

Import of commercial banks.

(5) Other risks: Operational risk: Operational risk is the risk arising from events causing losses to commercial banks associated with human and technological factors in the implementation of management and provision of banking services. National risk: National risk is the risk arising from the operations of commercial banks towards partners in international business relations arising from changes in the attitude of the partner country, war and natural disasters. Political risk: Political risk is the risk arising from changes in the attitude of the government towards credit institutions through adjustments to tax policies, changes in the system of legal documents governing the operations of commercial banks.

The safety of a bank is its management capacity reflected in its ability to forecast and prevent risks, compensate for losses occurring in credit activities, and its willingness to pay and make payments to customers.

The bank's ability to hedge liquidity risk, interest rate risk and foreign exchange risk is assessed through the correspondence in the term structure between assets and capital sources, the correspondence between asset value and interest rate-sensitive capital value, and the balance in the bank's foreign exchange position.

The ability to prevent credit risks is assessed through the credit granting process and the level of compliance with this process by credit officers. If the credit granting process is strict and credit officers strictly comply with this process, the quality of the credit granted will be good, minimizing the risk of capital loss. The quality of the credit granted is reflected through the following criteria:

-Ratio of overdue debt to total outstanding debt

This ratio reflects the quality of the bank's credit operations. The lower this ratio, the higher the quality of the credit operations. In the condition that the bank expands its credit operations to many different customer groups with a growing scale, if the overdue debt ratio is high, it shows that the bank does not meet the requirements for expanding operations.

According to international practice, the ratio of overdue debt to total outstanding debt should not exceed 2%. The higher this ratio, the lower the quality of the credit.

- Ratio of overdue debt by different groups to total outstanding debt

- Ratio of irrecoverable debt to total outstanding debt

- Rate of outstanding interest not collected on outstanding balance

- Provision/ Total outstanding debt.

The ability to compensate for losses occurring in credit activities is reflected through the following indicators:

- The ability to cover lost loans

Compensating ability factor

lost loan

Credit Provision for Uncollectible Debts

(1.2)

This ratio must be equal to (=) 1. If < 1, it shows that the bank cannot cover irrecoverable debt.

- Provision/ Overdue debt

- Provision/ Bad debt cleared

- Provision/ Bad Debt

The ability of commercial banks to pay and make payments to customers is reflected through the following indicators:

Affordability ratio

TS can be paid immediately (1.3)

= x 100 Current liabilities

In addition, the level of safety in banking operations is also reflected through the following indicators:

Credit to deposit ratio

Credit balance (1.4)

Capital mobilized

Bank profitability

Bank profitability is measured through the following indicators:

-Profit before tax

Profit before tax = Interest income - Interest expenses + Other income - Other expenses

Profit before tax is an item reflected on the income statement. In addition to the general calculation method mentioned above, profit before tax can be determined as follows:

Profit before tax equals (=) Operating income minus (-) total operating expenses and increased credit risk provisions made during the year and plus (+) reversal of credit risk provisions during the year

- Profit after tax (net profit) = Profit before tax - Corporate income tax

- Return on assets (ROA)

ROA =

Profit after tax Total assets

(1.5)

This index shows the ability to generate income from assets, that is, the business efficiency of an asset. A large ROA shows that the bank's business efficiency is good, the asset structure is reasonable, and the bank has flexible coordination between asset items. If ROA is too large, the risk is also very high.

-Return on equity (ROE)

ROE =

Profit after tax Equity

(1.6)

ROE is an index measuring the efficiency of using a unit of equity, showing the net profit generated from 1 unit of equity. ROE is too large compared to ROA, showing that the bank's equity accounts for a small proportion of total capital.

In addition to calculating ROE on equity, for joint stock commercial banks that issue both common and preferred shares, people also calculate ROE on common equity (CPT):

ROE

(CPT capital)

= Profit after tax - Preferred stock dividends

CPT Capital

(1.7)

Or:

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