Solutions From The Activities Of Vietnam Asset Management Company (Vamc)

Vietnam 2016 took place on June 18-19, 2016, compared to banks in the Asian region, the Vietnamese banking system's investment in information technology is still quite modest. In the current conditions, the daily payment demand is increasing, the young customer segment is expanding and the internet has become too popular, commercial banks need to quickly change and update new technology to be able to compete in the market. The construction of an internal credit rating system as mentioned above also requires new information technology to meet the requirements. In addition, the use of modern machinery and technology in reviewing and evaluating loans and bad debt status also helps avoid subjective assessments by humans, helping banks promptly take appropriate measures, thereby limiting risks for banks.

5.2 Solutions from the activities of Vietnam Asset Management Company (VAMC)

Since its establishment in 2013, VAMC has played a significant role in purchasing and handling bad debt, contributing to bringing the economy's bad debt ratio down to below 3% by the end of 2016. However, it is still difficult to avoid shortcomings in the organization's operations as well as barriers in the legal and regulatory framework for VAMC's operations and the bad debt trading market:

- VAMC's charter capital is still too low compared to the current bad debt figure, even though it was raised from 500 billion to 2,000 billion in 2015. According to the Project on Restructuring Credit Institutions in conjunction with Bad Debt Settlement for the 2016-2020 period approved on July 19, 2017, in the 2017-2018 period, VAMC will increase its charter capital from 2,000 billion to 5,000 billion VND. And in the 2019-2020 period, VAMC's charter capital will be further increased to 10,000 billion VND. If this project is successfully implemented, it will partly help VAMC have more financial resources and means to increase the efficiency of its bad debt trading activities.

Maybe you are interested!

- Current regulations and legal procedures in debt trading and settlement, land ownership, etc. are still complicated, causing delays and limitations for VAMC.

in the process of handling bad debts. Specifically, the 2015 Civil Code has removed the right to seize collateral, causing difficulties for VAMC when it cannot proactively seize collateral if the owner deliberately resists. In this case, VAMC has no choice but to file a lawsuit in court, which costs more money and time to handle bad debts. Therefore, allowing VAMC to seize collateral to speed up the progress of handling bad debts is absolutely necessary. In addition, bad debts that credit institutions sell to VAMC are overdue debts that are difficult to recover, including many bad debts with real estate as collateral, however, it is very difficult for VAMC to fully meet the transfer conditions according to the Law on Real Estate Business, affecting the progress and effectiveness of handling bad debts. It is necessary to issue a specific regulation document for VAMC on the conditions and procedures for transferring real estate projects as well as handling this type of collateral to support the speed of handling the above bad debts.

- VAMC is a non-profit organization. VAMC does not have to set aside provisions and pay interest when buying back bad debts with special bonds, nor is it under pressure to handle bad debts, because if VAMC cannot handle them, credit institutions will have to buy them back and handle them themselves. In fact, the amount of bad debts that VAMC handles and recovers is not much. As of early 2017, VAMC has only handled about 20% of the bad debts it bought back. It can be seen that the efficiency of VAMC's operations is not high. Therefore, the State Bank needs to clearly divide the responsibilities of each party in handling bad debts to avoid the situation where bad debts are purchased and then left there, which both prolongs the handling time and makes the bad debt situation more serious, becoming a burden on the economy. The clear division of responsibilities will also motivate VAMC to fulfill its bad debt handling obligations and reduce pressure on commercial banks.

5.3 Solutions from the Government and the State Bank

5.3.1 Stabilizing the macroeconomic situation

A stable macro economy is the basis for an economy to develop effectively. To achieve this, it is necessary to have synchronous coordination and reasonable management of fiscal policy, monetary policy and exchange rate stability. Based on the results of the research model, when the economy grows well, the GDP growth rate is higher, that is, businesses produce and operate effectively, creating stable revenue, the bad debt ratio of the economy will decrease. Interest rates also need to be adjusted in accordance with market developments, creating conditions for businesses and people to access capital to maintain and expand production activities as well as serve daily consumption needs, thereby increasing productivity and increasing aggregate demand of the economy, contributing to promoting economic development. In addition, the exchange rate policy should continue to be operated in a managed floating direction, allowing the exchange rate to follow the market's foreign currency supply and demand, and should only intervene when the market has unusual fluctuations that cause negative impacts, ensuring the competitiveness of export enterprises, stabilizing the international trade balance and national foreign exchange reserves, thereby stabilizing the macro economy and reducing the bad debt ratio.

5.3.2 Strengthening inspection and supervision of credit institutions

This is an important and urgent solution of the State Bank for credit institutions in general and commercial banks in particular. The State Bank needs to develop a specific, detailed and unified process and standards for inspecting and supervising the safety of banking operations. This is the legal basis for the State Bank to rely on to detect and prevent cross-ownership, abuse of management and executive rights, and major shareholder rights to manipulate the operations of credit institutions. At the same time, it is necessary to combine comprehensive inspection and micro-inspection, and evaluate the results of inspection and supervision based on the application of information technology systems. On the other hand, the State Bank also needs to build its own early warning system for risks from recognizing changes in the currency market, fluctuations in the operations of the commercial banking system to prevent potential systemic risks and prevent the risk of violating the law by credit institutions and foreign bank branches. An important factor in the process of improving the quality of inspection and supervision is

People. The State Bank develops the inspection and supervision team not only in terms of quantity and capacity but also in terms of professional ethics, along with perfecting the infrastructure to serve the inspection and supervision of the commercial banking system in the new context.

5.3.3 Issue unified regulations on debt classification and provisioning

The State Bank needs to complete and supplement legal documents related to unifying regulations on debt classification and provisioning. In fact, the State Bank has issued many legal documents on provisioning and bad debt settlement applicable to credit institutions in general and commercial banks in particular, including foreign bank branches, such as: Decision 493/2005/QD-NHNN accompanied by Directive 05/2005/CT-NHNN, Decision 18/2007/QD-NHNN and Circular 14/2014/TT-NHNN issued to amend and supplement Decision 493/2005, Circular 02/2013/TT-NHNN, Circular 09/2014/TT-NHNN amending and supplementing Circular 02/2013... showing the efforts from the State Bank in the process of perfecting regulations on debt classification and provisioning, but overall, they are still not consistent and unified. Starting from 2012, when bad debt began to explode strongly, the tightening of debt classification and provisioning received special attention from the State Bank, built through basic criteria such as: specific provisioning levels, bad debt classification by subject, field of operation, time limit for buying and selling bad debt for VAMC, time for making provision after transferring debt groups... when applied synchronously to all credit institutions and need to be closely monitored, especially for commercial banks during the implementation process.

5.3.4 Develop and perfect a management mechanism in accordance with Basel II international standards

In order to narrow the gap in risk management of the system compared to commercial banks in the world, the State Bank of Vietnam has made efforts to apply Basel international standards. Currently, the State Bank of Vietnam is still relying on Basel II to develop related legal documents such as: Decision 457/2005/QD-NHNN, Circular 13/2010/TT-NHNN, and is currently applying Circular 36/2014/TT-NHNN. Especially in the documents regulating risk management, the coefficient

CAR (minimum capital adequacy ratio) is increased to strengthen the safety of risky assets for the entire banking system. In addition to legal documents, the State Bank also carries out macro-level reforms such as restructuring weakly performing banks by merging or being acquired by banks with stronger financial capacity, selecting suitable banks to pilot Basel II capital and risk management. These are solutions to help the banking system gradually approach Basel more closely. However, the State Bank needs to have a specific and appropriate roadmap in terms of time to build a strict legal framework when applying Basel II, in order to have a basis for thorough preparation for Basel III. In addition, the State Bank needs to classify commercial banks to have a direction to apply Basel II in accordance with the capital scale and market share of each commercial bank. The State Bank must also regularly quantify risk management models of the banking system and environmental factors affecting risk management. By using quantitative models, the State Bank can detect weaknesses of commercial banks in terms of financial capacity and capital safety, thereby finding solutions to check the quality of risk management of each commercial bank.

5.4 Limitations of the thesis and future research directions

5.4.1 Limitations

The thesis only analyzes some macroeconomic factors and internal factors of banks that affect credit risk based on the results of previous studies. In fact, credit risk is also affected by many other factors such as economic cycles, political regimes of each country, management policies and regulations of the State Bank on debt classification and provisioning, natural conditions such as natural disasters, storms, floods, droughts, etc. that the thesis cannot measure and analyze.

Research data is limited to 28 joint stock commercial banks and 2 state-owned commercial banks because some commercial banks do not publicly disclose their financial reports and the data in the financial reports are not continuous and consistent from 2008 to 2016 because during this period, some banks restructured or merged. The research period is within 9 months.

The period from 2008 to 2016 is also a limitation of the thesis because this period is not long enough to clarify the impact of factors on credit risk. In addition, the thesis only focuses on the research object of Vietnamese commercial banks without including foreign bank branches in Vietnam due to data limitations of these foreign banks.

5.4.2 Future research directions

The study can be expanded by adding to the model the non-financial variables mentioned above such as economic cycle, political regime, credit policy, human factors, natural conditions, etc. to have a more specific and detailed view of the causes of credit risk, not just focusing on macroeconomic factors and internal factors of banks. In addition, it is possible to conduct comparative studies of factors affecting credit risk in Vietnam and countries in the Asian region to see how in each country with different economic conditions and management systems, these factors will have different impacts on credit risk, thereby having more effective policies in preventing credit risk.

CHAPTER 5 SUMMARY

From the current situation of credit risk in Vietnam in chapter 3 and the research model results in chapter 4, the thesis has proposed a number of solutions and proposals for each subject participating in credit risk management activities to overcome existing problems, limit credit risks, specifically reduce the bad debt ratio for the following years, helping the macro economy develop stably and sustainably.

CONCLUDE

At present, we are in the early stages of the 5-year socio-economic development plan 2016 - 2020, preventing and limiting credit risks, specifically reducing bad debt levels and increasing the ability to manage credit risks of commercial banks, is a necessary and important task to create a premise and foundation for sustainable development of the economy in the following years. According to the initial research objectives, based on the fundamental theory of credit risk and the results of previous studies, the thesis has pointed out a number of factors that can affect credit risks (represented by the bad debt/total outstanding debt ratio) of Vietnamese commercial banks in the period from 2008 - 2016. Specifically, macroeconomic factors affecting credit risks include GDP growth rate, real interest rates and exchange rates; Internal factors of banks such as ROE, operating cost efficiency and non-interest income also affect the bad debt ratio of Vietnamese commercial banks. From the research results, the thesis also proposed a number of solutions and recommendations to increase the effectiveness of credit risk management, limit the increase of bad debt in the future, contributing to stabilizing the macro economy.

Although I have tried my best in the process of research and study, due to the limitation of time and data collection, the thesis still has some shortcomings. Therefore, the author hopes to receive comments from teachers and friends to help improve the research in the future.

REFERENCES

English Documents

- Ahmad, N.H., Ariff, M. (2007). Multi-country study of Bank Credit Risk determinants. International Journal of Banking and Finance, Vol.5, p.135-152.

- Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev. Econ. Stud, 58, 277–297

- Asquith, P., Gertner, R. & Scharfstein, D. (1994). Anatomy of financial distress: An examination of junk-bond issues. The Quarterly Journal of Economics, Vol.109, p.625-658.

- Aver, B. (2008). An Empirical Analysis of Credit Risk Factors of the Slovenian Banking System. Managing Global Transitions, Vol.6, p.317-334.

- Berge, TO, Boye, KG (2007). An analysis of banks' problem loans.

Economic Bulletin, Vol.78, p.65–76.

- Berger, A.N., & DeYoung, R. (1997). Problem and Cost Efficiency in Commercial Banks. Journal of Banking and Finance, Vol.21, p.849 – 870.

- Chaibi, H. & Ftiti, Z. (2015). Credit risk determinants: Evidence from a cross-country study. Research in International Business and Finance, Vol.33, p.1-16.

- Castro, V. (2013). Macroeconomic determinants of the credit risk in the banking system: The case of the GIPSI. Economic Modeling, Vol.31, p.672 - 683.

- Fainstein, G., Novikov, I. (2011). The Comparative Analysis of Credit Risk Determinants in the Banking Sector of the Baltic States. Review of Economics and Finance, Estonia.

- Hasan, I. & Wall, L.D. (2003). Determinants of the loan loss allowance: some cross-country comparisons. Bank of Finland Discussion Papers, Finland.

- Honohan, P. (1996). Diagnosing banking system failures in developing countries. Economic and Social Research Institute, London.