Solutions to prevent and handle bad debt at Mekong Development Joint Stock Commercial Bank - 2

LIST OF DRAWINGS

Figure 2.1. Organizational model of MDB 33

Maybe you are interested!

• Solutions to reduce overdue debt and bad debt at Vietnam Joint Stock Commercial Bank for Industry and Trade in Ho Chi Minh City - 2
• Current Status of Bad Debt Handling at Mekong Development Joint Stock Commercial Bank:
• Bad Debt Management Vietnam Joint Stock Commercial Bank for Industry and Trade
• Bad debt management at Vietnam Joint Stock Commercial Bank for Industry and Trade - Thang Long Branch - 14
• Analysis and proposal of solutions to expand retail activities at Military Commercial Joint Stock Bank - 1

Figure 2.2. Revenue structure in 2010 and 2011 of MDB 34

Figure 2.3. Shortened credit process handbook for individual customers of MDB ...

................................................................ ................................................................ .............................. 47

Figure 2.4. MDB's simplified credit process manual for corporate customers 48

Figure 2.5. Individual customer scoring process 53

Figure 2.6. Scoring process for business households 54

Figure 2.7. Enterprise customer scoring process 55

INTRODUCTION

1. Urgency of the topic:

Credit is the most important activity of commercial banks, accounting for the highest proportion of total assets and bringing in large income for banks. However, credit is also the activity that brings the highest risk to banks. Credit risk is reflected in bad debt, which has a negative impact on the business results of banks. Finding out the factors affecting bad debt and then proposing solutions to limit bad debt is the issue that banks are most concerned about.

Over many years of formation and development, Mekong Development Joint Stock Commercial Bank has continuously innovated in both quality and quantity, contributing to the development of the banking system. However, the credit activities of this bank still contain certain risks, reflected in the aspect of bad debt. Therefore, the requirement to minimize bad debt is the top goal in credit risk management in particular as well as the business operations of Mekong Development Joint Stock Commercial Bank in general.

Based on the above reasons, the author chose the topic "Solutions to prevent and handle bad debt at Mekong Development Joint Stock Commercial Bank" as a contribution to bad debt management at this bank.

2. Research objectives:

- Summarize general theory on preventing and handling bad debt.

- Analyze and evaluate the current status of bad debt prevention and handling at Mekong Development Joint Stock Commercial Bank.

- Proposing solutions to prevent and handle bad debt at Mekong Development Joint Stock Commercial Bank.

3. Research objects and scope:

- Research object: bad debt issues and bad debt prevention and handling at Mekong Development Joint Stock Commercial Bank.

- Scope of research: bad debt and factors determining bad debt of Mekong Development Joint Stock Commercial Bank in the period from 2010 to 2014.

4. Research method:

The thesis uses the analytical, interpretive and inductive research method to clarify the research problem.

5. Practical significance of the topic:

The research results of the topic have contributed to practice as follows:

- Systematize and summarize basic theories on preventing and handling bad debt in commercial bank business activities.

- Point out the current situation of bad debt prevention and handling at Mekong Development Joint Stock Commercial Bank.

- Proposing solutions to prevent and handle bad debt at Mekong Development Joint Stock Commercial Bank.

6. Structure of the thesis: In addition to the introduction and conclusion, the thesis consists of 3 chapters: Chapter 1: Overview of bad debt prevention and handling at commercial banks.

Chapter 2: Current status of bad debt prevention and handling at Mekong Development Joint Stock Commercial Bank.

Chapter 3: Solutions to prevent and handle bad debt for Mekong Development Joint Stock Commercial Bank.

CHAPTER 1

OVERVIEW OF BAD DEBT PREVENTION AND HANDLING AT COMMERCIAL BANKS

1.1. Credit risk and bad debt in commercial banking operations:

1.1.1. Credit risk:

One of the main activities of banks is lending, so credit risk is a very important factor. Credit risk is the biggest risk and occurs frequently. Credit risk can reduce the bank's profits, even bankruptcy.

1.1.1.1. Concept of credit risk:

Credit is an economic category that appears and exists in many different social forms. Economic development is the premise for the emergence of different forms of credit relations such as state credit, commercial credit, and bank credit. Up to now, there has been no consensus in giving a complete and unified concept of credit.

According to popular concept, credit is the provision of financial resources by the lender to the borrower, in which the borrower will repay the finance to the lender within an agreed period and usually with interest. Because this activity gives rise to a debt, the lender is also called the creditor, the borrower is called the debtor.

Credit risk arises in the event that a creditor fails to collect the full principal and interest of a loan from the debtor.

In the banking sector, credit risk is a type of risk that arises during the credit granting process of the bank, manifested in reality through the customer's inability to repay or repay the debt late to the bank. (Tran Huy Hoang, 2012).

1.1.1.2. Credit risk classification:

Based on the cause of occurrence, credit risk is divided into transaction risk and portfolio risk.

Transaction risk is a form of credit risk that arises from limitations in the transaction and loan approval process, customer assessment. Transaction risk has three main components: selection risk, guarantee risk and operational risk. Selection risk is the risk related to the credit assessment and analysis process, when the bank chooses ineffective loan options to make lending decisions. Guarantee risk arises from security standards such as the terms of the loan contract, types of collateral, guarantors, methods of guarantee and the loan amount based on the value of the collateral. Operational risk is the risk related to loan management and lending activities, including the use of risk rating systems and techniques for handling problem loans.

Portfolio risk is a form of credit risk that arises from limitations in the management of the bank's loan portfolio, divided into two types: intrinsic risk and concentrated risk. Intrinsic risk comes from factors, unique characteristics, and characteristics within each borrower or economic sector. It comes from the operating characteristics or capital usage characteristics of the borrower. Concentrated risk is the case where the bank concentrates too much lending capital on a number of customers, lending to too many businesses operating in the same industry or economic sector; or in the same geographical area; or the same type of high-risk loan.

1.1.1.3. Characteristics of credit risk:

Credit risk is inevitable: credit risk always exists and is associated with credit activities. Accepting risks is inevitable in banking activities. Banks need to evaluate business opportunities based on the risk-benefit relationship.

to find opportunities to achieve, benefits worthy of the accepted level of risk. The bank will operate well if the level of risk that the bank bears is reasonable, controllable and within the scope of the bank's financial resources and credit capacity.

Indirect credit risk: credit risk occurs after the bank disburses the loan and during the process of using the customer's loan. Due to the asymmetric information situation, the bank is usually in a passive position, the bank often knows the information later or knows inaccurate information about the customer's difficulties and failures and therefore often has delayed reactions.

Credit risks are diverse and complex: this characteristic is reflected in the diversity and complexity of the causes of credit risks as well as the developments and consequences when risks occur.

1.1.1.4. The need for credit risk management at commercial banks:

Bank credit is the basic, regular and most profitable activity for banks. Besides, bank credit activities also contain many risks. Credit risk is the biggest type of risk, which occurs frequently and causes serious consequences. Credit risk is not only caused by the subjective factors of the bank, but also by customers. Therefore, the credit risk of the bank is not only an arithmetic progression but can be a multiplier of the risk of the economy.

For the bank itself, when a risk occurs, the bank's business profits will first be affected. If the risk occurs at a small level, the bank can compensate with risk provisions (recorded in expenses) and with its own capital, but it will directly affect the bank's ability to expand its business. More seriously, if the risk occurs at a large level, the bank's capital is not enough to compensate, available capital is lacking, customer confidence is reduced, which of course will lead to the risk of bankruptcy.

bank. Therefore, credit risk management is a necessary task for commercial banks.

For the economy, in a market economy, banking activities are related to many economic sectors from individuals, households, economic organizations to other credit institutions. Therefore, the business results of banks reflect the production and business results of the economy and of course it depends greatly on the production and business organization of enterprises and customers. Risks that occur lead to instability in the monetary market, causing difficulties for production and business enterprises, negatively affecting the economy and social life. Therefore, credit risk management at commercial banks is not only important for the banks themselves but also an urgent requirement of the economy, contributing to the stability and development of the whole society.

1.1.1.5. Principles of credit risk management according to Basel II:

Credit risk management is the process of developing and implementing strategies and policies to manage credit activities to achieve the goals of safety, efficiency and sustainable development. At the same time, it is necessary to strengthen preventive measures, limit and reduce overdue debts and bad debts in credit activities, thereby increasing revenue and reducing costs for the bank.

More specifically, credit risk management must aim to reduce credit risk and increase the safety level of banking business, through policies and measures to manage credit activities scientifically and effectively. In addition, credit risk management must ensure compliance with state regulations and laws.

Principles of credit risk management according to Basel II:

To ensure efficiency and safety in credit granting activities, the Basel Committee has issued 17 principles on credit risk management. These principles are

In fact, it has become an international standard practice in the banking system, playing an important role in credit risk management of commercial banks worldwide.

The first group includes principles for establishing an appropriate credit risk environment, including three principles:

Principle 1: The Board of Directors is responsible for approving and periodically (at least annually) reviewing the bank's credit risk strategy and policies. This strategy should reflect the bank's credit risk tolerance and the bank's expected return.

Principle 2: The bank's senior management should be responsible for implementing the credit risk strategy approved by the board and for establishing policies and procedures to identify, measure, monitor and control credit risk. These policies and procedures should address credit risk across all of the bank's activities, both at the individual credit level and at the portfolio level.

Principle 3: Banks should identify and manage credit risk in all their products and activities. For new products and activities, banks should develop appropriate risk management and control measures before they are introduced or implemented and must be approved by the Board of Directors.

The second group includes principles for operating under a sound credit granting process, including four principles:

Principle 4: The bank's credit granting criteria must be clear, and must indicate the target market. At the same time, the bank must have a clear understanding of the borrower as well as the purpose and structure of the credit.

Establishing sound, clearly defined credit criteria is critical to credit approval. These criteria should clearly identify the type of customer.