As above, the customer relations department will be responsible for meeting and receiving customer requests, providing information to the credit risk assessment and management department. The establishment of credit limits determined on the basis of credit rating will be carried out independently by the credit risk management department, ensuring objectivity when providing credit products. The credit risk management department also monitors the use of loans, checks collateral, disbursement conditions, etc. to detect signs of risk as well as provide timely intervention measures. Thus, the credit risk assessment process is carried out comprehensively and continuously before, during and after lending, helping to improve the effectiveness of credit risk management.
- Establish a problem debt management department from Head Office to branches, a specialized department for handling secured assets.
- Early establishment of ALCO Committee with the function of managing all assets of Vietnam Bank for Agriculture and Rural Development.
Third , train the staff in charge of risk management. Provide training on necessary knowledge of risk management according to international practices for the staff in charge of risk management in conjunction with the roadmap for implementing projects and application software programs.
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Improve the quality of risk measurement tools and continue to apply new risk measurement tools. Establish and separate business groups such as: risk management, credit management, asset/liability management, financial management - accounting, human resource management, liquidity management, technology management, business strategy management and marketing.
Compliance with credit regulations is a mandatory requirement and has a decisive impact on the credit quality of the bank. Therefore, it is necessary to strengthen internal and independent credit inspection activities. Internal credit inspection activities must be carried out periodically and suddenly to detect errors and warn of signs of violations. Inspection can be carried out through cross-checking between branches in the system to reduce the pressure on personnel for internal inspection work. Every year, an internal inspection plan must be developed for all branches in the system to detect and take timely measures to prevent violations of procedures and regulations.
control, avoid serious consequences and then handle it later, it will be very costly for the bank.
Credit risk control is carried out on two aspects: Controlling each loan and monitoring the credit portfolio.
- Monitor each loan regularly to detect early warning signs for timely corrective action. The internal credit scoring system is used to assess the status of the borrower, a credit control tool, so the internal credit scoring system needs to be compared between periods to monitor and detect signs of possible deterioration of the credit and customer status. Control of each loan is also carried out through:
+ Review and analysis of financial statements should be conducted regularly to evaluate the performance of loan customers.
+ Visit and inspect customers: To determine the existence and actual condition of the factory, machinery, equipment, collateral and verify the quality and accuracy of financial reports.
- Overall control of the Credit Portfolio to assess the quality of the Credit Portfolio in accordance with the bank's risk management strategy. This requires periodic and regular analysis and assessment of the Credit Portfolio to be able to take timely measures to avoid the bank from having to bear adverse activities in credit operations.
4.3.2. Perfecting the identification, assessment and classification of bad debts
The most important content in the work of bad debt management is the identification, assessment and classification of debt. Commercial banks that do this well can prevent and limit the occurrence of bad debts and have appropriate treatment plans.
As assessed in chapter 3, the identification, assessment and classification of bad debts at the Vietnam Bank for Agriculture and Rural Development in the past have been subjective and have not fully exploited the strengths of the qualitative method. This has led to debts not being assessed honestly and accurately, debts with bad risks have not been detected to have appropriate handling plans, and risk provisions have not been fully set aside. During the time
In the future, banks need to develop a mechanism to identify bad debts based on the requirement to regularly classify debts and identify the risk of debt group transfer of credits.
To do this, banks need to solve basic problems:
Complete internal credit rating system according to Basel II standards.
Credit ratings must be based on the bank's own historical statistics for each customer to calculate the risk measures of probability/likelihood of default (PD); possible loss due to default (LGD) and risk of default (EAD) for these customers; and at the same time, apply necessary adjustments based on expert opinions. Only then will credit ratings truly be a tool to limit risks in credit activities and a basis for pricing according to the bank's risks and classifying debts according to two criteria: debt age and credit rating of the debt. Debt classification according to international standards may change the published rate of bad debt figures, but it is a necessary requirement for managers to see a clearer picture of the bad debt picture and from there, to have appropriate response solutions.
Perfecting the organizational model in compliance with corporate governance principles
The quality of customer ratings depends largely on the organizational model and human resources of the bank itself. Therefore, perfecting the organizational model in the direction of complying with the principles of corporate governance, ensuring clear separation of responsibilities between relevant departments in risk management; avoiding conflicts of interest is the core issue to minimize bad debts arising in credit activities. Supervising the implementation and application of credit ratings in operations to minimize risks to ensure that the credit rating system is constantly improved and improved in quality, requiring upgrading the information technology system to ensure the system operates effectively. Periodically or suddenly checking compliance with credit rating regulations, ensuring the quality of input information to prevent errors due to unintentional or intentional customer rating based on the subjective opinions of one or a group of people, distorting the rating results, leading to substandard lending decisions.
To complete the credit rating system at the Vietnam Bank for Agriculture and Rural Development, it is necessary to first complete the organizational model and personnel because the quality of internal credit rating depends largely on the main human resources of the Vietnam Bank for Agriculture and Rural Development. The Vietnam Bank for Agriculture and Rural Development must develop in accordance with the principles of corporate governance: ensuring clear separation of responsibilities between relevant departments in risk management and avoiding conflicts of interest (separation of front-middle-back functions). The organizational model must pay special attention to the decentralization of functions (independence and cross-control) and separation between control circles (circle 1: business units; circle 2: risk control department and circle 3: internal audit department) to ensure independent and objective ratings. In addition, to meet new requirements, towards credit risk management standards according to Basel II, credit rating officers must be specialized in their profession and have a good understanding of economic mathematics to apply econometric models in risk analysis and management.
The risk management capacity of banks is reflected in the internal credit rating of customers. The internal credit rating system (credit ratings) or credit rating, credit scoring... for customers is the core of the credit risk management system and plays a very important role for commercial banks. According to the provisions of Article 4 of Decision 493/2005/QD-NHNN dated April 22, 2005 on debt classification and risk provisioning: within 3 years from the effective date of this decision, credit institutions must develop an internal credit rating system to support debt classification, support credit approval and debt classification according to international standards and practices. However, after 10 years, only a very few credit institutions have implemented this (BDIV, MB). As a commercial bank with a large credit scale, Vietnam Bank for Agriculture and Rural Development needs to apply an internal credit rating system to support credit approval and debt classification, overcoming the limitations of the current customer scoring system.
Next, the Vietnam Bank for Agriculture and Rural Development needs to complete the credit rating method according to the basic or advanced internal approach (FIRB or AIRB) according to Basel II standards. Credit rating must be based on the bank's own historical statistics for individual and corporate customers, to calculate the risk measures PD, LGD, EAD for the subjects.
This, and at the same time, apply necessary adjustments based on the opinions of experts. Only then will credit rating truly be a useful risk-limiting tool in credit activities and a basis for risk assessment of the Vietnam Bank for Agriculture and Rural Development.
The internal credit rating system according to international practices requires synchronization of information technology infrastructure and database. The Vietnam Bank for Agriculture and Rural Development needs to build a synchronous customer information system, capable of storing multidimensional and historical data. The data entry work of related departments (mainly from the branches of the Vietnam Bank for Agriculture and Rural Development) must be updated and fully stored. This is also the premise for the Vietnam Bank for Agriculture and Rural Development to promote the provision of better and more professional banking services to potential customers.
Once the internal credit rating system has been built, the Vietnam Bank for Agriculture and Rural Development must monitor its implementation and practical application, ensuring that the system operates effectively, that relevant departments strictly comply with assigned procedures and responsibilities, and minimize unintentional or intentional errors in assessing customers' financial capacity based on subjective opinions.
In addition, the Vietnam Bank for Agriculture and Rural Development must build a regular assessment system for its branch system. The branch credit rating of the Vietnam Bank for Agriculture and Rural Development is self-built based on quantitative and qualitative criteria. Quantitative standards such as: average total outstanding credit, credit growth rate, total debt/total capital mobilized from customers, total bad debt/total outstanding debt, increase/decrease in bad debt/total outstanding debt, credit operating income/credit operating expenses, outstanding medium and long-term loans/total outstanding debt, outstanding loans secured by assets/total outstanding debt, risk provisions/total outstanding debt, amount recovered after risk handling/total risk handling debt... Qualitative criteria such as: credit management level; management experience and seniority; number of credit officers; proportion of credit officers with college, university, postgraduate degrees and number of years of work; Number of times and extent of staff violating regulations or exceeding requirements...
Building reasonable credit assessment standards for the system of branches at all levels helps to decentralize credit management of Vietnam Bank for Agriculture and Rural Development scientifically, and at the same time determine the standard loan limit for each branch.
In addition, this is also the basis for the headquarters to make periodic decisions on transferring staff, rewarding or punishing fairly its branches.
Build an updated, efficient and reliable customer information system
In the current era of information explosion, collecting all sources of information accurately and promptly plays an important role in the appraisal work to prevent bad debts from arising. The credit risk prevention information system ensures both specialization among departments and does not lose the ability to grasp and control information of the credit risk management department. Therefore, the Vietnam Bank for Agriculture and Rural Development needs to establish an information system and ensure the provision of complete, accurate and timely information for appraisal work to respond appropriately to the market. Timely grasping of related information such as: Product consumption market; supply of raw materials, fluctuating trends of unstable factors, fluctuations in market prices, reputation of borrowing enterprises, etc. will help the appraisal work achieve good quality, thereby preventing bad debts from arising. Important information needs to be updated periodically by the customer relations department and then forwarded to the credit risk management department for analysis and evaluation. This allows the new model to operate smoothly.
Information on customer history, based on which customers are ranked and classified, is a very important basis for considering lending. When commercial banks are not supported by an effective, highly reliable, and updated information system as a basis for lending decisions, the risk of bad debt increasing is inevitable. For example, businesses are operating at a loss, have a weak financial situation, have tax arrears, borrow from many commercial bank branches, appropriate capital from customers, have long-term partner debts, etc., but if the information disclosure regime is not strict and the information is incorrect, that company can still be considered a good customer and the bank's lending decisions will inadvertently increase bad debt, even create overdue debt, debt that cannot be recovered.
Strengthen the network of collecting and processing customer information to improve the quality of project appraisal. Banks need to regularly contact customers as well as customer management agencies (Ministries, Corporations, etc.) to obtain accurate information about the current business situation of the bank.
Customers, future development potential, take that as one of the most important bases for making credit decisions.
In addition, the Vietnam Bank for Agriculture and Rural Development needs to strengthen the system of information, data and network security. Building a system of information, data and network security combined with research and construction of data transmission lines, linking with the national information network to create a proactive position for the bank.
In addition, it is also necessary to develop a "data warehouse" and complete a comprehensive information analysis system, ensuring the provision of accurate and reliable information sources to relevant professional departments. To do this, it is necessary to have the support of the State Bank and the connection and sharing of information between banks. Comprehensive cooperation between the State Bank and banks as well as between banks in building and sharing business information databases is the shortest way to complete the information system and reduce information exploitation costs in the most reasonable way.
Completing the basis for measuring and evaluating debt quality
Effective measurement of bad debt requires estimating the expected loss ratio and the probability of default of customers, on the basis of which the bank will develop a pricing policy and set up provisions to cover losses for each loan, each customer and the entire loan portfolio. In addition, the bank can also calculate the unexpected losses and the related default coefficient of individual loans in a loan portfolio for customers.
To accurately assess and classify customers, banks must collect past and present risk data from various sources. Building a loss database is the leading factor in establishing and implementing an effective and reliable bad debt management system. To do this, Vietnam Bank for Agriculture and Rural Development needs to soon build a database system, even reconstruct past data to accelerate the process of debt classification and risk management according to international standards. To build a complete and reliable loss database, Vietnam Bank for Agriculture and Rural Development needs to focus on the following solutions:
First , all departments need to be involved in loss data collection activities. In addition, a loss data collection process needs to be established and formalized. This process needs to be flexible enough to update information sources and accurately reflect operational risk exposures as the business environment changes. This process needs to be widely communicated and consistent throughout the banking industry.
Second , based on the collection of internal and external risk and loss data, the Vietnam Bank for Agriculture and Rural Development must store customer data for at least 3 years and the data quality must be strictly controlled to ensure the accuracy of calculations.
Third , the Vietnam Bank for Agriculture and Rural Development must classify the level of bad debt management from low to high importance in its operations and determine appropriate reporting levels. At the same time, it must provide methods or ways to assess and control bad debt at different levels (leadership, management or staff level...). The assessment and control of bad debt must take place regularly and be applied to the entire system.
A frequently used tool in NPL management is scenario analysis. The benefits of scenario analysis are to assist management in extracting the necessary information for operational activities, continuously improving NPL management processes, and implementing proactive risk monitoring to supplement future loss data analysis.
To determine the scenario, the Vietnam Bank for Agriculture and Rural Development needs to take into account the prerequisites. What has happened recently? What is likely to happen under current conditions, what is likely to happen in the future. What is the estimated probability? What are the most likely losses? What risks need to be considered in the worst case? Measures to reduce these risks... With the selected scenarios, the Vietnam Bank for Agriculture and Rural Development estimates the operational risk on the basis of the entire business activities of the entire division, and at the same time, reviews the extent to which major losses can occur. Based on that, the Vietnam Bank for Agriculture and Rural Development will calculate or adjust the risk value and allocate operating risk reserve capital according to the appropriate method guided in Basel II.