493/2005 and Decision 18/2007 and must notify the results of debt classification to the credit institutions participating in the syndicated loan. In case the borrower has one or several debts at the credit institution participating in the syndicated loan classified into a debt group that is not in the same debt group as the syndicated loan classified by the credit institution as the focal point, the credit institution participating in the syndicated loan shall reclassify the entire outstanding debt (including the outstanding debt of the syndicated loan) of the syndicated borrower into the debt group classified by the focal point credit institution or the credit institution participating in the syndicated loan, depending on which debt group has higher risk.
- For group 2 debts, credit institutions need to classify them as bad debts when one of the following cases occurs: there are adverse developments that negatively impact the customer's business environment and field; the customer's debts are classified by other credit institutions into debt groups with higher risk levels if information is available); the customer's ability to repay the debt is continuously reduced or has large fluctuations in the direction of reduction; the customer does not provide complete, timely and honest financial information as required by the credit institution to assess the customer's ability to repay the debt.
1.1.4 Some principles for limiting and handling bad debt
To limit and handle bad debt, banks often apply basic principles in bad debt management (according to Basel II).
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asel Committee on anking upervision
- The C was established in 1944 by a group of central banks and supervisors from the G10 developed countries in Asel, Switzerland, to try to prevent the series of bank failures of the 1900s. The Asel Committee only develops and publishes broad supervisory standards and guidelines, and recommends best practice reports in the expectation that individual institutions will widely adopt them through detailed arrangements that are most appropriate for their own national systems. In this way, the Committee encourages the adoption of approaches and
common standards without attempting to interfere with the supervisory techniques of member countries. The ASEL Committee has issued a set of principles on non-performing loan management which essentially sets out principles in credit risk management as well as non-performing loan management, ensuring efficiency and safety in credit granting activities. These principles focus on the following basic contents:
- Building a suitable credit environment (3 principles) :
Principle 1 : Determine the Board of Directors' responsibilities in credit risk including bad debt
Principle 2 : Identify the board of directors' responsibilities in credit risk
including bad debt
Principle 3 : Banks need to identify and manage credit risks, including bad debt, in all their products and activities.
Principle 1, Principle 2, Principle 3 require the Board of Directors to periodically approve credit risk policies, review credit risks and develop a strategy throughout the bank's operations, bad debt ratio, risk tolerance level... The General Director is responsible for implementing the directions approved by the Board of Directors and developing policies and procedures to detect, measure, monitor and control bad debts in all activities, at the level of each credit and the entire investment portfolio. Banks need to identify and manage credit risks in all their products.
- Implement healthy credit granting (4 principles) :
Principle 4 : Banks need to conduct credit activities according to standards appropriate to the target market and a thorough understanding of borrowers.
Principle 5 : Banks need to establish an overall credit limit at the level of each customer and related customer groups.
Principles 6 and 7 : Banks need to establish clear credit procedures for approving new credit as well as adjusting and extending existing credit.
Principles 4, 5, and 6 require banks to operate within clearly defined sound credit granting criteria. Banks should establish credit limits for each type of borrower and group of borrowers to create different types of risks that can still be tracked in the business accounting books, on and off the balance sheet. Banks should have clear procedures for approving new credits as well as amending, extending, restructuring, and refinancing existing credits. Credit granting should be done on the basis of fair dealing between the parties.
- Maintain a proper credit management, measurement and monitoring process (10 principles) :
Principle 8 : Banks must have a system to regularly monitor and manage credit portfolios with different risks.
Principle 9 : Banks must have a system to monitor the status of individual loans including reserves and provisions.
Principle 10 : Banks are encouraged to develop and use an internal assessment system to manage credit risks, including bad debt.
Principle 11 : Banks must have information systems and analytical tools to help management measure credit risks, including bad debt.
Principle 12 : Banks must have a system to monitor the overall composition and quality of credit.
Principle 13 : Banks must assess significant changes in economic conditions when evaluating credits.
Principle 14 : Banks must establish a system for independent and regular assessment of credit risk management processes, including bad debt.
Principle 15 : Banks must ensure that the credit approval function is appropriately managed, credit risk (including bad debt) is at a level compatible with prudential standards and within the limits permitted by the bank.
Principle 16 : Banks need to have a system to identify and promptly handle problem loans, including bad debts.
Principle 17 : Supervisors conduct independent assessments of the bank's strategies, policies, procedures and compliance with respect to credit granting and credit risk management, including non-performing loans.
Principles 1 through 2 require banks to have an up-to-date management system for their credit risk portfolios, and to have a system for monitoring the condition of each credit exposure, including the adequacy of provisions and reserves. Banks are encouraged to develop and use an internal credit rating system in credit risk management. Banks need information systems and analytical techniques to measure credit risk in all on- and off-balance sheet activities; there must be a system for monitoring the structure and quality of the entire credit portfolio; there must be a system for early remediation of bad loans, and management of problem loans. Banks' credit risk policies should specify how to manage problem loans and bad debts. Huynh Thi Huong Thao, 2014 .
1.2 Overview of factors affecting bad debt at commercial banks
1.2.1 Research in countries around the world
1.2.1.1 Beatrice Njeru Warue's Research
“The Effects of ank pecific and Macroeconomic Factors on Nonperforming Loans in Commercial anks in Kenya: A Comparative Panel Data Analysis”
The study was conducted at the University of Kenya, Kenya. The aim of the study was to explore the relationship between bank-side factors and macroeconomic factors and demonstrate how these factors impact on bad debts in commercial banks.
Kenya. The study found that macroeconomic factors affecting NPLs include: real GDP, lending interest rates, and inflation. Bank-specific factors include: credit risk management practices, bank structure, and quality management factors. The study data were collected from 44 commercial banks in Kenya for the period 15 to 2009.
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Research results show :
Research results between macroeconomic factors and bad debt through bank scale
Real GDP and bad debt have an inverse and significant relationship at banks.
large, small and medium sized banks. This means that the fall in real GDP increases bad debts at Kenyan commercial banks.
The lending interest rate and bad debt are found to have a positive and significant relationship at large banks. However, at small banks, this relationship is not significant. This shows that bad debt at small banks does not respond to changes in interest rates.
Inflation is found to have an inverse relationship with bad debt at large banks. The study also found that the relationship between inflation and bad debt at small and medium sized banks is insignificant.
Research results between macroeconomic factors and bad debt through bank ownership type
In addition, the study also shows that at state-owned and joint stock banks, real GDP and bad debt have an inverse and significant relationship. However, this relationship is not significant among foreign banks in Kenya. Thus, a decrease in real GDP increases bad debt at Kenyan commercial banks.
The lending interest rate and bad debt are considered to have a positive and significant relationship in the ownership types of state-owned banks, commercial banks, and
shares and foreign banks. This implies that as lending rates fall, bad debts at Kenyan commercial banks fall.
Inflation is found to have an inverse relationship with bad debt in joint stock banks. The study also shows that there is no significant relationship between inflation and bad debt in local and foreign banks.
Research results between bad debt and bank quality management indicators (return on total assets ROA and return on capital employed ROCA) through bank size
Return on assets ROA and bad debt have a negative and significant relationship in large and small banks. However, this relationship is not significant in medium sized banks. This means that good management of good quality indicators in large and small sized banks reduces bad debt.
Return on total capital employed ROCA and bad debt have an inverse and significant relationship with bad debt at banks.
Research results between bad debt and bank quality management indicators (return on total assets ROA and return on capital employed ROCA) through bank ownership type
The research results show that: at state-owned banks and joint-stock banks, ROA has a negative and significant relationship with bad debt. At foreign banks, this relationship is not significant.
With ROCA, the research results are similar to ROA.
In summary, the study has discovered that bank factors affect bad debt at a higher level of significance than macro factors. Therefore, the study also recommends that in order to effectively manage bad debt, commercial banks need to study and focus on bank factors.
1.2.1.2 Research by Sofoklis D. Vogiazas and Eftychia Nikolaidou
“Investigating the Determinants of Nonperforming Loans in the Romanian Banking System: An Empirical Study with Reference to the Greek Crisis”
The study was conducted at the Southeast European Research Center in 2011. The aim of the study was to explore the factors affecting non-performing loans in Romanian banks.
In Romania, most of the banks are owned by foreign banks, especially Greek banks. About 30% of commercial banks in Romania are owned by Greek banks. Therefore, when the Greek financial crisis occurred, many banks in Romania were also affected. And that is an important factor affecting Romania's bad debt.
1.2.1.3 Research by Mabvure Tendai Joseph, Gwangwava Edson, Faitira Manuere, Mutibvu Clifford, Kamoyo Michael
“Non Performing loans in Commercial anks: A case of CZ ank Limited In Zimbabwe”
The study was conducted at Chinhoyi University of Technology, Zimbabwe. The aim of the study was to explore the factors causing non-performing loans in Zimbabwean commercial banks through a case study of CBZ Bank, the largest bank in Zimbabwe.
The study results show that bad debts are caused by internal and external factors. Within CBZ Bank, the internal factors are poor credit policies, weak credit analysis capabilities, poor credit management capabilities, and weak risk management capabilities. The study specifically emphasizes on external factors that affect bad debts such as natural disasters, government policies, and borrower integrity.
1.2.1.4 Research by Wondimagegnehu Negera
“Determinants of Non Performing Loans: The case of Ethiopian loans” The study was conducted at the University of North Africa in 2012.
Research content: The main objective of the research is to identify the factors related to banks that cause bad debts. To achieve this objective, the research collected data from bank employee surveys, interviews with high-ranking bankers and collected data from banks in Ethiopia.
Research has shown that limited capacity of credit assessors, limited resources of the organization as well as unavailable data sources of the country leading to inaccurate lending decisions are the causes of bad debt.
In addition, improper debt collection monitoring in credit management is also considered a cause of bad debts.
Unhealthy competition among banks with high lending pressure is also a factor causing bad debt.
1.2.2 Research in Vietnam
1.2.2.1 Research by Huynh Thi Thu Hien
“Analysis of factors affecting bad debt of commercial bank branches in Vinh Long province”
The study was conducted based on a survey of bank loan customers, then using an inary Logistic regression model to analyze the factors affecting bad debt of commercial bank branches in Vinh Long province.
The analysis results show that bad debt of commercial banks in Vinh Long province is affected by the following factors:
- Loan interest rate: has a direct relationship with bad debt. This means that the higher the loan interest rate, the greater the possibility of bad debt.
- The amount of money customers borrow: is directly proportional to the bank's bad debt. This means that the higher the loan amount, the greater the possibility of bad debt. However, this relationship is only economically significant, not statistically significant.