Lending secured by savings books, promissory notes or other valuable papers issued by other credit institutions to customers who are legal owners of such valuable papers.
Loans according to limits: The bank will meet the capital needs of individual customers implementing production and business plans with regular capital needs.
Other types of retail lending
1.2.3 The role of personal credit
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For banks:
A bank is an intermediary financial institution in the economy, with the main activity being to mobilize deposits from residents and socio-economic organizations to make loans to the economy. The bank's lending activities must ensure that all related costs are covered and a necessary profit is generated for the bank's business to be profitable and grow. For personal credit, it is a loan portfolio with attractive interest rates, especially consumer loans, which often have higher interest rates than business loans. Moreover, the number of personal loans is large, so the risk will be dispersed, so income from lending to individual customers is a significant source of income and can offset operating costs.
In addition, when commercial banks cooperate with businesses that trade in goods such as household electronics to help consumers buy goods on installments, this helps banks increase their customers and avoid the risk of customers using capital for the wrong purpose.
On the other hand, when providing financing to individual customers, banks can diversify their investment portfolios because production needs and especially consumer needs of customers are always diverse. Therefore, banks can diversify their investment portfolios and can increase income while spreading the risks that may be encountered in credit activities.
For customers:
For individual customers borrowing capital for production and business purposes:
Banks provide capital to finance production and expand business operations.
For consumers: are direct beneficiaries. When living standards improve, income increases, people increasingly have the need to renovate their homes, shop or travel. However, they are not always able to satisfy these needs. Due to limited financial capacity, they cannot immediately have a large amount of money to satisfy those needs but must accumulate. In many cases, people can enjoy when they are old. Consumer loans have helped customers solve that problem, helping to combine current needs with future payment ability to improve their own quality of life.
For the economy:
Through providing credit to customers, banks have directly or indirectly promoted the development of production and business. By lending production and business to individual customers and households, banks refinance the private economic sector and households, promoting the development of this economic sector. On the other hand, as we know, production, circulation and consumption are a process in which there is a close connection. Production of products to serve consumer demand, so consumption stimulates production, which is the goal that production aims for. To promote production, consumption must be promoted. Through consumer loans, banks have contributed significantly to stimulating the economy, creating conditions to promote the production and business process of the economy.
Through providing credit to consumers, banks contribute to improving the quality of life, creating conditions for labor reproduction, improving working capacity and efficiency of the work they undertake.
In addition, by collaborating with construction and electronics businesses to allow customers to buy goods on installments, the bank has helped these businesses sell their goods and have capital to continue reproducing and expanding production.
1.3 Personal credit risk of commercial banks
1.3.1 Concept and nature of personal credit risk
Concept of personal credit risk:
Personal credit risk is the possibility of unexpected losses for the bank due to individual or household borrowers not paying on time, not paying, or not paying in full principal and interest.
The nature of credit risk
Personal credit risk occurs during the process of banks granting credit to individual customers. When carrying out any financing activity, banks try to analyze the borrower's factors to ensure the highest level of safety. And in general, banks only decide to lend when they feel safe. However, no talented banker can accurately predict the problems that will occur. The ability to repay loans of many customers can be changed due to many reasons. Moreover, many bank officers are not capable of performing appropriate credit analysis. Therefore, credit risk is inevitable, objective, can only be prevented, limited but not eliminated. After carefully analyzing the possibility of risks, banks must know how to accept risks, so accepting risks also means taking risks but not recklessly, lacking in consideration and calculation. Therefore, expected risks are always determined in advance in the bank's general strategy.
1.3.2 Classification and causes of personal credit risks
1.3.2.1 Classification of personal credit risk
Personal credit risk
No profit
on time
No return on investment
on time
No collection
enough profit
Not enough capital (loss)
capital)
Credit risk in general and personal credit risk in particular occur when borrowers fail to repay interest and principal on time and in full. Based on the current credit risk management method, we can also divide KHCN credit risk into four levels according to the risk level.
Personal credit risk
Not collecting interest on time
Not receiving capital on time
Not enough profit
Not enough capital (loss of capital)
Interest accrued
Overdue debt arising
1. Freezing interest
2. Interest exemption
1. Irrecoverable debt 2. Debt cancellation
Interest on loan
born
Overdue debt
arise
1. Freezing interest
2. Interest exemption
1. Irrecoverable debt
2. Debt forgiveness
Figure 2.1: Diagram of personal credit risk classification ( Source: [1, page 12]).
1.3.2.1.1. Failure to collect interest on time:
The lowest level is when the borrower fails to pay the interest on time, then the Bank will transfer that interest to the accrued interest item. This form of risk is classified as low risk because except for the case where the customer wants to default on the debt or misappropriate the capital, most of it comes from the imbalance in the customer's debt collection and repayment period.
1.3.2.1.2. Failure to collect capital on time:
When the capital is not collected on time, the situation seems to be more serious, partly due to the loss of a large amount of loan capital. At that time, the Bank will transfer that capital debt to the overdue debt item. This item arises at the maturity date of the credit contract. However, this is not the actual loss of the Bank because the customer's business progress may be slower than the plan proposed to the Bank.
1.3.2.1.3. Not getting enough profit:
When the Bank does not collect enough interest, the situation becomes more serious. The customer's business may be so inefficient that it cannot pay the Bank enough interest. At that time, the Bank must transfer this interest to the frozen interest account and may even have to waive interest for the customer.
1.3.2.1.4. Not collecting enough loan capital:
The worst case scenario occurs when the bank fails to collect enough loan capital and the bank has lost its capital. At this point, the bank will transfer the debt to the category of irrecoverable debt or write it off, which is considered as closing an ineffective credit contract.
The above are four forms that help commercial banks recognize credit risks and have solutions. However, not all the time when encountering credit risks, banks have to go through the four cases above (see Figure 1A). There are cases where customers pay interest in full and on time but in the end cannot repay the principal to the bank. Therefore, when studying credit risks, people often focus on cases where there is a risk of credit risk, such as interest suspension and especially overdue debt. In other cases, interest suspension or debt that cannot be recovered is considered a real risk, so it is often considered to resolve the consequences and draw lessons.
1.3.2.2 Causes of personal credit risk
In a credit relationship, there are two participants: the lending bank and the borrower. However, this credit relationship exists in a specific time and space, subject to the control of certain specific conditions that we call the business environment, and this is the third subject present in the credit relationship. Therefore, credit risk comes from three participants in the credit relationship, in which credit risk comes from the business environment is called risk due to objective causes; risk comes from the borrower and the lending bank is called risk due to subjective causes.
1.3.2.2.1 Objective reasons:
+) Economic environment
Currency trading is a special type of business, very sensitive, strongly affected by factors of the domestic and world economy. In recent times, the economy of our country as well as some countries in the region have had fluctuations that have had a significant impact on the banking industry. Any fluctuations in the economy will also affect the operations of the Bank. Like a natural individual, whether the Bank is "healthy" or not also depends a lot on whether the economic environment is stable or not.
+) Legal environment:
In today's market economy, legal factors are the conditions that ensure business activities, especially credit activities of commercial banks. However, if the legal environment is not complete and consistent, it will cause difficulties and disadvantages for both businesses and banks. Changes in mechanisms, policies, and planning of the State and authorities at all levels can also lead to risks when customers use their loans.
1.3.2.2.2 Subjective causes:
+) Risks due to causes from the borrower:
Firstly, due to customers using capital for the wrong purpose, not having goodwill in repaying the loan. Most customers when borrowing capital from banks have options
specific and feasible business plan. The bank will consider that business plan before making a decision to lend. In reality, customers can defraud the bank by using the loan capital for the wrong purpose, wrong business target, wrong plan as stated, so they cannot repay the debt on time or cannot repay the debt. For example, customers can borrow short-term capital but use it to purchase fixed assets and real estate, which can lead to not repaying the debt on time...
Second, due to the customer's weak business management ability and lack of business sense, they cannot make their business plan effective, so it is very difficult to repay the bank loan. In addition, if the customer is defrauded in business or the partner has a risk, the bank will also have difficulty in collecting the debt on time.
Third, customers who commit fraud and intentionally deceive the bank are shown through providing inaccurate information, or providing incomplete information, concealing information about themselves such as: income, property ownership, possibly submitting inaccurate financial reports, intentionally providing false data, not accurately reflecting the actual production and business situation and financial situation of the unit. Loans based on such fake information can easily lead to risks for the bank.
+) Risks due to causes from the lending bank:
Firstly, the risk is due to the bank not having a clear lending policy, suitable to the economic situation. The customer's lending policy is the guideline for the bank's credit activities. A unified, clear, complete and correct lending policy will help credit officers identify their tasks, improving the efficiency of credit activities. On the contrary, when the lending policy is incomplete, not suitable to the economic situation and the bank's capacity, it will cause credit activities to go astray, leading to granting credit to the wrong subjects, causing credit risks for the bank.
Second, due to the arrangement of staff lacking ethics and professional qualifications. The collusion of some bank staff with customers to falsify loan documents, or raise the value of mortgaged or pledged assets too high compared to reality to withdraw money from the bank.
The ethics of the staff is one of the most important factors to solve the problem of limiting credit risks. An incompetent staff can be further trained, but an ethically corrupt staff who is good at professional skills is extremely dangerous when assigned to credit work.
The professional qualifications of credit officers greatly affect the quality of credit, limitations in the ability to analyze and evaluate projects; limited market knowledge and social knowledge can lead to lending without being able to assess whether the project or plan is feasible.
Third, due to the lack of supervision and management after lending. Banks often have the habit of focusing a lot of effort on pre-lending appraisal while neglecting the process of checking and controlling capital after lending. When banks lend, the loan must be actively managed to ensure that it will be repaid. Debt monitoring is one of the most important responsibilities of credit officers in particular and of banks in general. Monitoring the activities of borrowers is to comply with the terms set out in the credit contract between the customer and the bank in order to find new business opportunities and expand business opportunities. However, in the past, commercial banks have not done this job well. This is partly due to the psychological factor of bank officers being afraid of causing trouble for customers, partly due to the outdated information management system serving businesses, not providing timely and complete information that commercial banks require.
Fourth, the cooperation between commercial banks to limit risks is not really effective. This cooperation arises from the need to manage risks for the same customer when this customer borrows money from many banks. In financial management, the debt repayment capacity of a customer is a specific number, with its maximum limit. If due to lack of information exchange, leading to many banks lending to the same customer to the extent of exceeding this maximum limit, the risk is shared equally among all without leaving any bank.
Fifth, banks focus too much on profits, expecting high profits.