Organization of Bad Debt Management Activities

overlap, or multiple parts doing the same job and being redundant or duplicated.

* Organizing bad debt management apparatus

Organizing and arranging personnel to carry out the scientific process with the right person for the right job will maximize the ability of each individual and save resources. The debt management process approved and issued by the competent authority is the basis for internal inspection and control of the bank. Based on the debt management process, the internal inspection and control department of the bank will check compliance with the bad debt management process.

The Board of Directors must approve the RRTD policy, review RRTD and develop a strategy throughout the bank's operations (bad debt ratio, risk acceptance level, etc.).

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The Board of Directors is responsible for implementing the guidelines approved by the Board of Directors and developing policies and procedures to detect, measure, monitor and control bad debts in all activities, at the individual credit level and the entire investment portfolio.

From here, banks base on the responsibilities and tasks of each individual and each department of the bank to organize the most effective QLNX apparatus, need to identify and manage risk in general and QLNX in particular in all of their products.

2.2.2.3 Organization of bad debt management activities

Organizing the implementation of bad debt management activities including: Implementing preventive measures; Measuring, classifying and handling bad debt; Inspecting, monitoring and handling violations; Preparing reports on bad debt management results.

*Take precautions

Building an early warning system for bad debts arising

Bad debt is currently a great pressure on the economy as well as the banking system. Especially in the context of the current economic difficulties, the work of monitoring and managing bad debt, including early detection of signs of bad debt, becomes very necessary, helping banks to promptly take measures to respond, minimize the risk of bad debt as well as its harmful effects on banking operations.

In fact, early identification of problem loans is very complicated because bad debts originate from many causes: bad debts can come from difficulties, as well as shortcomings in the management and operation of enterprises; difficulties or adverse changes in the market, related industries; problems related to the macro economy or adverse fluctuations of the macro economy... But at the same time, there is another group of causes that originate from the difficulties or problems within commercial banks themselves, from the appraisal and monitoring of loans... Therefore, building an early warning system for bad debts is very necessary and especially important.

Debt classification should be automated in a transparent manner on

System-wide debt management software makes overdue debt groups automatically arise on loan management records and balance sheets.

Implement good labor management process

The credit management process includes the following steps: appraisal, disbursement, pre-loan inspection, lending, and post-lending, etc. To manage credit well, banks must strictly, fully and reasonably implement it, that is, follow a certain credit management process.

The credit process at banks today includes the work from receiving customers' credit applications to liquidating credit contracts,...

All products, services or any transactions arising from customers at the bank are processed according to a certain credit process. This process is built by the bank on a common standard, ensuring speed, accuracy and preventing unnecessary risks.

There are many concepts of credit process. Many opinions say that: Credit process is a synthesis of principles and regulations of the bank in granting credit to customers, including work in a certain order from the beginning to the end of the credit relationship. This is a process that includes many stages of a continuous nature, in a certain order, at the same time having a close relationship and connection with each other.

In short, the credit process is a summary table describing the bank's work from receiving a customer's loan application until deciding to lend, disburse, collect debt and liquidate the credit contract (Financial Market, 2018).

Compliance with credit procedures in banks is extremely important. Establishing a credit procedure, applying it and constantly improving it will help banks improve the quality of their credit products and services and minimize credit risks.

In addition, for management, the credit process is the basis for defining authority and responsibility for departments in credit activities, and is also the basis for establishing loan records and procedures,...

* Measuring, classifying and handling bad debt

Including activities: Identifying and measuring bad debt; Classifying bad debt; Handling losses from bad debt.

Identify and measure bad debt

Currently, in Vietnam, according to Decision 493/2005/NHNN and Circular No. 02/2013, credit institutions are allowed to determine and measure bad debt by quantitative and qualitative methods, but most credit institutions determine and measure by quantitative methods and do not consider qualitative factors, except for some large banks such as Agribank, BIDV, VCB and Vietinbank.

Classification of bad debt

How many debt groups are classified and which groups are considered bad debt depends on the regulations of the national banking supervision agency and the internal classification system of each bank. In Germany, there are 4 debt groups, Japan: 4 debt groups, Brazil: 9 debt groups, the US: 5 debt groups, Australia: 5 debt groups, China: 5 debt groups, Vietnam: 5 debt groups, India: 4 debt groups, Mexico: 7 debt groups, Russia: 5 debt groups, the European Union: 5 debt groups [Bholat and Nguyen Thi Hong Vinh (2017)].

Handling losses from bad debt

Bad debt causes losses to commercial banks, so when bad debt occurs, banks need to liquidate it with appropriate measures. Bad debt handling of commercial banks is often divided into 2 groups: debt exploitation group and debt liquidation group .

Debt exploitation group : To exploit debt, commercial banks have the following measures:

Consulting for customers (i);

Support customers in debt collection (ii);

Debt restructuring and restructuring of borrowing enterprises - according to Decree 78/2002/ND-CP (iii).

(i) Handling bad debt through consulting customers : In practice, due to various reasons, some customers have financial difficulties, cannot pay their debts when due, etc. At that time, the bank needs to advise customers: create conditions for customers to have cash flow, advise customers on business, reform financial spending, and even find a consumer market for those customers.

(ii) Handling bad debt by supporting customers in debt collection : is a measure to find every way to collect debt for customers. In the condition that the customer paying the debt has good economic development conditions, or the customer has difficulty in paying the debt due to many uncollected receivables. To support customers in having a source of debt repayment, the Bank can support customers in recovering uncollected debts. If the customer's receivables are related to customers who are transacting with the Bank (including customers who deposit or borrow money at the Bank), the Bank will rely on its relationship to support customers in debt collection, thereby fulfilling the customer's debt repayment obligation to the Bank.

(iii) Handling bad debt through debt restructuring and restructuring of borrowing enterprises

For bad debts of corporate customers, after analyzing the financial situation and production and business activities, if the bank assesses that the customer still has the ability to pay bad debts to the bank, the loan plan is still feasible, the customer's difficulties are only objective and temporary, ... The bank can apply measures to restructure corporate finance and restructure production and business activities for the enterprise. However, the big disadvantage of this form is that the time to process a debt is relatively long, so it is very difficult to meet the current volume of bad debts of banks.

To effectively apply this measure, banks must closely monitor to ensure that borrowers take the necessary actions to improve their financial situation; must maintain close relationships with customers during the process of XLNX; in addition, each measure must have conditions for applying that solution. One of the important conditions is that banks need to have staff/experts with knowledge of corporate governance. On that basis, banks can implement the following measures:

- Adjust debt maturity by extending/postponing or reducing the principal amount payable of the debt repayment period but not reducing the total outstanding debt payable.

- Debt extension is the bank's agreement to extend the repayment period of principal and/or interest of the loan, beyond the agreed loan term to avoid the pressure of debt repayment for customers to continue doing business. The bank also considers providing additional credit to help customers have more potential to overcome difficulties, creating the ability to recover previous debts. This is a very risky measure.

- Reducing or exempting part of the interest payable: This measure is applied depending on the customer's willingness to repay the loan, and must comply with the regulations of the State and each bank. This action causes the bank to lose part of its revenue but can recover the capital it has lent.

Debt liquidation groupincluding the following measures:

Handling bad debt through handling collateral, collecting loan guarantors (i); Handling bad debt through establishing AMC (AMC established by commercial banks) (ii); Handling bad debt through selling debt to a centralized AMC (iii);

Bad debt settlement by DPRR fund (iv).

(i) Handling bad debt through handling collateral and collecting loan guarantees

For bad debts that cannot be restructured, customers are unable to pay and have no willingness to pay, the Bank must handle the collateral assets of the loan, including real estate including land and assets attached to land under the Bank's disposal in the form of the Bank selling the assets directly to the buyer or selling through auction centers. The Bank uses the collateral assets to replace the performance of financial obligations secured by mortgaged assets. The debt handling process using collateral assets must comply with State regulations and the Bank's procedures for buying/selling and auctioning assets.

The Bank can receive money or assets from a third party in case of mortgage of debt claims. The third party can be insurance companies or organizations and individuals receiving loan guarantees. The Bank can recover part of its loan capital. Although this measure is undesirable because the auction of collateral or debt collection from the guarantor is very complicated, the procedure goes through many stages, many parties participate, takes a lot of time, on average, it takes about 1-2 years to resolve the auction of a collateral to recover debt, the possibility of fully recovering the debt is not high, but this is the main measure.

the key that banks use to recover loans.

(ii) Handling bad debt through the establishment of AMC

The objective of this method is to liquidate bad debt assets of weak banks and restructure banks with profit potential. This solution is implemented through the establishment of AMCs under commercial banks.

AMCs established by commercial banks are called commercial bank asset management and debt exploitation companies, which were established to contribute to resolving bad debts. AMCs under the decentralized model are debt settlement units located within the bank itself with the task of focusing on debt settlement. This model is based on the view that banks have enough information about poorly performing enterprises to be able to promote the restructuring process of those enterprises. At the same time, banks are also the entities with the most motivation to try to recover bad debts to the maximum extent. However, this model is only effective in cases where banks and enterprises do not have a mutual ownership relationship.

(iii) Handling bad debt through selling debt to centralized AMC

AMCs under the centralized model are AMCs established by the state decision, independent in debt collection for banks. Banks will sell debts to AMCs so that these units are responsible for collecting bad debts. In terms of advantages, the centralized model can gather large financial resources and high-quality human resources into one agency, thereby increasing the ability to recover the maximum value of bad debt assets.

(iv) Bad debt settlement with RRTD reserve fund

To handle bad debt with RRTD reserve fund, the bank needs:

-Fully provision for RRTD (avoid false profits and real losses);

- Use RRTD reserves to handle bad debt;

- Applicable to bad debts that cannot be resolved/ are very difficult to resolve by other measures.

In this way, banks set aside RRTD reserves for credit activities. Handling bad debts with RRTD reserves reduces the fund balance to quickly offset losses from bad debts, while reducing the amount of corporate income tax payable. This is a necessary and immediate measure to quickly resolve bad debts. This measure may cause banks to suffer losses at the moment, but it will create conditions for it to have new developments in the future.

* Inspection, supervision and handling of violations

Headquarters inspects, supervises and handles violations with Branches and Transaction Offices:

(i) Inspection activities:

Bank inspection contents include:

Inspect compliance with laws on currency and banking, other relevant legal provisions, and implementation of provisions in licenses issued by the State Bank;

Review and evaluate the level of risk, risk management capacity and financial situation of the subject of banking inspection; review and evaluate potential risks, quality and effectiveness of the governance and management system, auditing system, internal control, risk management system of credit institutions and foreign bank branches, including risk identification, risk measurement, risk monitoring, control and mitigation, risk handling through reviewing factors affecting operational safety, quality, risk management effectiveness, risk resistance capacity of credit institutions and foreign bank branches;

Recommend competent state agencies to amend, supplement, cancel or promulgate legal documents to meet the requirements of state management of currency and banking;

Recommend and request the subject of banking inspection to take measures to limit, minimize and handle risks to ensure the safety of banking operations and prevent and stop acts leading to violations of the law;

Detect, prevent and handle according to authority; recommend competent state agencies to handle violations of the law.

Bank inspection form:

Planned inspections are conducted according to plans approved by competent authorities;

Unscheduled inspections are conducted when detecting signs of violations of the law by a banking inspection subject, risks or threats to the safety and health of the banking inspection subject, as required by the settlement of complaints and denunciations, prevention and combat of corruption, prevention and combat of money laundering, prevention and combat of terrorist financing, or as assigned by the Head of a competent state management agency.

(ii) Monitoring activities:

Banking supervision contents include:

Collect, synthesize and process documents, information and data of banking supervision subjects according to supervision requirements; combine safety supervision of the entire system of credit institutions with safety supervision of each credit institution and foreign bank branch;

Review and monitor the implementation of regulations on banking safety and other relevant legal regulations; the implementation of conclusions, recommendations, decisions on handling inspections and recommendations and warnings on banking supervision;

Regularly analyze and evaluate the financial situation, operations, governance, management and risk level of credit institutions, foreign bank branches, and systemic risks; annually rank credit institutions according to safety level;

Detect and warn of negative factors, trends, and risks that cause unsafe operations for each credit institution, foreign bank branch, and the credit institution system; risks and dangers leading to violations of monetary and banking laws;

Recommend and propose measures to prevent, stop and handle risks and violations of the law by banking supervision subjects according to the provisions of law.

Banking supervision activities are carried out according to the principle of centralized and unified management from the central to local levels, closely combining supervision of compliance with monetary and banking laws and regulations with risk-based supervision. Up to now, the supervision content does not only stop at supervising compliance with laws, compliance with ratios and operational safety limits, but also focuses on assessing and warning about risks in the operations of credit institutions. In addition to micro-supervision of each credit institution, macro-safety supervision systems have been gradually researched and deployed, such as the financial forecasting model FPM, the set of financial soundness indicators FSIs, and models for testing the system's endurance and the model for evaluating the operational efficiency of commercial banks (DEA).

(iii) Handling of violations

Violation handling is the activity of building policies, legal documents; licensing.

Activities of policy making and legal documents

The Banking Supervision Agency advises and assists the Governor of the State Bank in formulating and promulgating under its authority or for the Governor of the State Bank to submit to competent authorities for promulgation policies and legal documents on the organization, operation, safety of banking operations, banking inspection and supervision, deposit insurance, and on anti-money laundering and anti-terrorist financing within the scope of management responsibility of the State Bank.

Licensing activities

The State Bank Inspectorate advises and assists the Governor of the State Bank and the State Bank Branch Inspectorate and Supervision Agency advises and assists the Director of the State Bank Branch (in case the Director of the State Bank Branch is delegated and authorized by the Governor of the State Bank) to perform:

Granting, amending, supplementing, and revoking licenses for establishment and operation of credit institutions, licenses for establishment of foreign bank branches, licenses for establishment of representative offices of foreign credit institutions, other foreign organizations with banking activities, and other types of banking operation licenses;

Granting and revoking licenses to operate credit information service provision activities for organizations;

Confirmation of registration of the Charter of the credit institution;

Approve the purchase, sale, division, separation, consolidation, merger, conversion of legal form, dissolution of credit institutions and foreign bank branches; approve the list of candidates to be elected or appointed as members of the Board of Members, members of the Board of Directors, members of the Supervisory Board and General Director (Director) of credit institutions, except for personnel of commercial banks with 100% charter capital owned by the State, personnel nominated or introduced by the owner of the State capital portion at a State-owned joint stock commercial bank with more than 50% charter capital; approve the candidate to be appointed as General Director (Director) of a foreign bank branch; approve the establishment, termination, dissolution of branches, representative offices, domestic public service units, branches, representative offices and other forms of commercial presence abroad of credit institutions; approve the establishment, acquisition of subsidiaries and affiliated companies of credit institutions; Approve capital contribution and share purchase of credit institutions; approve other issues regarding governance, organization, finance and operation as prescribed by law that must be approved or permitted by the State Bank;

Handling issues related to the organization, administration and management of credit institutions and foreign bank branches to contribute to ensuring that credit institutions and foreign bank branches operate healthily, safely and in accordance with the provisions of law;

Rights and responsibilities of the representative of the State capital owner at a State-owned credit institution as prescribed by law;

Develop, organize, monitor and implement projects and plans to consolidate, rectify and restructure credit institutions and foreign bank branches;

The SBV's TTGSNH agency decides on some of the above regulations according to the decentralization and authorization of the Governor of the SBV (SBV - Activities of inspection and supervision of the banking sector).

Branch inspects, supervises and handles violations with Transaction Offices:

- Organize the implementation of inspection, supervision and handling of violations in the operations of credit institutions and banking operations of other organizations in the area according to the regulations of the State Bank and the law .

- Advise and assist the Director in reviewing and deciding on special control of credit institutions in the area under the Governor's authorization and legal regulations.

- Organize inspection, supervision and handling of violations in compliance with the State Bank's regulations on interest rates, exchange rates, compulsory reserves and other monetary policy tools for credit institutions and other relevant organizations and individuals in the area to implement monetary policy and banking activities, effectively serving the socio-economic development tasks of the locality.

- Implement anti-corruption work, practice thrift, and fight against

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