Some Solutions to Enhance Credit Risk Management in Lending to Small and Medium Enterprises at Vietnam Joint Stock Commercial Bank for Industry and Trade

Vietinbank – Dong Hai Duong Branch and build credit risk management goals in lending to SMEs at Vietinbank – Dong Hai Duong Branch by 2025 as follows:

(i) Ensure that Vietinbank – Dong Hai Duong Branch’s lending activities to SMEs are within the limits of monitorable risks. Specifically: growth in outstanding loans to SMEs reaches 25-30%/year, bad debt ratio for SMEs is below 2%/total outstanding loans to SMEs.

(ii) Ensure Vietinbank – Dong Hai Duong Branch operates stably and effectively in a market economy with many fluctuations and always present risks like today:

+ Have a credit policy for SMEs to achieve the goal of balancing profits and risks, ensuring growth and sustainable development according to international practices;

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+ Build a suitable SME credit portfolio for each period: Diversify risks in the investment portfolio by choosing industries and fields with the potential for effective and sustainable development;

+ Build and strengthen a professional model, with a specialized department serving the SME segment;

+ SME credit growth goes hand in hand with credit quality control, resolutely not lowering lending standards: Promote lending to SME customers in line with annual business goals, compete flexibly on interest rates, increase cross-selling of products and focus credit on customers with healthy financial status, and pay back bank loans fairly. In addition, focus on lending to SME customers in priority areas such as rural agriculture, export, supporting industry; high-tech application enterprises... according to the Government's policies and the direction of the State Bank;

+ Innovate and develop banking technology to support lending and loan management activities for SMEs: Upgrade corebanking system, integrate loan origination, asset management and loan management systems to further enhance, develop risk warning reporting system.

3.2. Some solutions to enhance credit risk management in lending to small and medium enterprises at Vietnam Joint Stock Commercial Bank for Industry and Trade - Dong Hai Duong Branch in the period 2020 - 2025

3.2.1. Risk identification solution

3.2.1.1. Strengthen information collection

Currently, the situation of asymmetric information and lack of transparency in capturing information about SMEs customers is one of the difficulties that Vietinbank - Dong Hai Duong Branch is trying to overcome. Information on CIC is very limited, not meeting the needs of searching and accurately reflecting the situation of SMEs at the time SMEs need to borrow capital. Credit information is not enough to make risk prevention forecasts, so this information is not really effective in serving the work of credit appraisal for SMEs. Therefore, it is necessary to build an information system through:

+ Vietinbank – Dong Hai Duong Branch needs to have a specialized department to collect information. Each employee can be assigned to a specific area to focus on improving the efficiency of information collection.

+ Vietinbank – Dong Hai Duong Branch needs to expand the collection of information from many sources, from agencies such as tax authorities, Department of Natural Resources and Environment, local authorities... or take advantage of collecting information from mass media, from domestic credit rating companies.

+ Credit officers need to select and reprocess information: is that information reputable and reliable?

+ Strengthen the storage and updating of SME customer information throughout the system so that all branches can share important information as a basis for better classification, evaluation, analysis and scoring of SMEs.

3.2.1.2. Consider and pay due attention to the management of SMEs credit portfolio at Vietinbank - Dong Hai Duong Branch

Managing the SME credit portfolio is an important part of credit risk management in lending to SME customers to detect and warn of risks early, helping to actively support in improving the efficiency and safety of lending to SME customers. A SME customer loan portfolio is not diverse.

The form of lending subject, field, lending industry, loan type... may potentially contain major risks that, if they occur, may exceed Vietinbank's ability to handle.

– Dong Hai Duong Branch. Therefore, managing the SME credit portfolio at Vietinbank – Dong Hai Duong Branch needs to meet the following criteria:

+ The loan portfolio for SMEs customers must be suitable to the scale and potential of Vietinbank - Dong Hai Duong Branch.

+ Vietinbank – Dong Hai Duong Branch must specifically develop a credit portfolio structure: identify industries, target SMEs customers/customer groups or those that need to limit lending.

+ It is necessary to diversify the structure of the SMEs credit portfolio, limiting the concentration of outstanding loans on a number of industries/sectors, customers/groups of SMEs customers. Diversifying the SMEs credit portfolio aims to lend to many SMEs in many different economic sectors and industries, avoiding too much concentration on a narrow field. This helps reduce fierce competition for small market shares and avoids the risk of changes in State policies when restructuring some economic sectors. In addition, Vietinbank - Dong Hai Duong Branch must avoid lending too much to an SME, always ensuring that lending is at a certain ratio compared to the total capital of the SME to prevent unexpected credit risks for that SME.

+ Vietinbank – Dong Hai Duong Branch needs to establish a plan for short-term, medium-term, and long-term lending to SMEs. Lending to SMEs customers has many different terms to ensure the balance of short-term, medium-term, and long-term capital to help Vietinbank – Dong Hai Duong Branch avoid interest rate risks as well as avoid falling into a liquidity crisis due to capital imbalance.

+ Vietinbank – Dong Hai Duong Branch when lending in different currencies must also determine an appropriate ratio between lending in Vietnamese Dong and lending in foreign currency to both satisfy the capital needs of SMEs and avoid the risk of exchange rate changes.

+ Vietinbank – Dong Hai Duong Branch must regularly analyze and evaluate the structure of the SMEs credit portfolio, debt quality, promptly detect signs of risks in the SMEs credit portfolio: detect trends, signs of high credit concentration; strengthen monitoring of customers/customer groups, industries/fields with risks.

Large outstanding loans have a significant impact on the quality and growth of branch outstanding loans.

3.2.2. Risk measurement solutions

The Branch needs to clearly and promptly identify the authority to score and rank customers. Among the customers who have credit relationships with the Branch, there are customers who are granted credit or have their Credit Limit determined through the Risk Management Department at the Head Office, so the scoring and ranking of these customers will be carried out at both the Head Office and the Branch. Therefore, the Branch needs to pay special attention to prioritizing the completion of the scoring and ranking of these customers first.

Because the Branch is responsible for the input information and the Credit Rating scoring results will directly affect the Branch in setting up provisions and bad debt ratio, the auditor and controller performing the Credit Rating scoring must ensure that the information entered into the internal Credit Rating system is accurate, reasonable, consistent with the records, documents and actual situation of the customer during the scoring period.

Payers and controllers must be managed by access codes, in which, payers are officers of the debt management department, customer department, credit risk management department responsible for entering complete and accurate information into the system. Controllers are leaders of the debt management department, customer department, credit risk management department responsible for reviewing the information entered into the Internal Credit Rating system of payers.

- In addition to the quality of the customer itself, the ranking results depend on:

+ Fully filled out information includes financial and non-financial information.

+ Information is updated regularly.

+ Choose the right positioning information (industry, ownership, audited, etc.).

+ Coordination between customer service department and debt management department.

Realize the importance of establishing a quarterly scoring routine: Ensure full scoring of all customers with credit relationships at the Branch,

Avoid missing customers that are downgraded, affecting customers and the branch's debt classification results.

Start managing customer information now, especially updating it regularly.

Credit rating is an effective and scientific tool in credit risk management, preventing bad debts from arising through quantifying assessments and making appropriate decisions. Banks need to periodically revise, supplement and improve the internal credit rating system and maintain it continuously to be able to accurately assess the situation of customers and loans, as a basis for building customer policies on credit limits, applying appropriate forms of loan guarantees, and credit orientations for each customer. Completing the internal credit rating system is and will be one of the key tasks to improve credit quality.

3.2.3. Risk control solutions

• Closely manage the pre-, during- and post-loan monitoring process of credit officers:

(i) Disburse in accordance with the approval of the competent authority deciding on lending to SMEs, ensuring that the use of loan capital has full and valid documents proving the purpose of using the loan capital;

(ii) Closely monitor the loan use process of SMEs in accordance with the characteristics of each loan and each customer. The loan use inspection needs to be carried out on-site, recorded in a loan use inspection report and can combine many different inspection methods (direct inspection of SMEs, indirect inspection from other information sources) to improve the quality of the inspection, including inspection of collateral assets to promptly detect risks and take measures to handle them. In addition, banks need to increase information exchange about SMEs in the same industry to promptly detect industry risks, partner risks, etc.;

(iii) Closely monitor the cash flow of SMEs: Regulations on cash flow from the loan plan must be transferred to an account opened at the bank and used to repay the bank even when the loan has not yet reached the maturity date. In the case of cash disbursement for agricultural business, credit officers are required to:

The user must check the goods in the warehouse and check the accounting books to ensure that the quantity of goods corresponds to the amount of money the bank has disbursed.

• Strengthen internal audit work:

(i) Vietinbank - Dong Hai Duong Branch needs to further strengthen internal inspection and control to search for and detect potential risks, unstable trends and promptly detect lack of control in lending activities to SMEs customers, in order to ensure the safety of the branch's business operations;

(ii) In addition to conducting periodic inspections, internal audit work needs to focus on and increase the frequency of inspections on different topics to evaluate the implementation of credit policies and procedures and assess the ability to manage debt as well as debt collection. Internal audit work needs to constantly strengthen and innovate inspection methods, flexibly apply inspection measures depending on each time, SMEs, inspection purposes, but also need to focus on industries and fields that are potentially risky;

(iii) Develop a development strategy for the internal audit department: It is necessary to clearly define the tasks of internal audit through charters, regulations, and control rules, thereby developing a general strategy for the internal audit department;

(iv) Staff in the internal audit department must regularly attend training courses to improve their professional skills and sense of responsibility in inspection activities. The selection of staff for the audit department should be organized through public examinations instead of transferring from one department to another as is currently happening to improve the quality of staff .

3.2.4. Risk management solutions

3.2.4.1. Moving towards debt classification and risk provisioning based on credit rating results

Performing debt classification and risk provisioning for SMEs is a solution to help banks build a credit risk reserve fund to compensate for losses when risks occur. In the recent past, credit risk management in lending to SMEs at Vietinbank - Dong Hai Duong Branch has mainly applied debt classification according to the quantitative method because the Vietnam Joint Stock Commercial Bank for Industry and Trade has not yet

Strengthening its own internal credit rating system. The basis for setting up provisions and assessing the quality of loans to SMEs customers is based on 5 debt groups as prescribed by the State Bank. The above situation leads to shortcomings, provisioning is not really accurate, and problem debts are still hidden in the loan portfolio for SMEs customers. The goal set for the Vietnam Joint Stock Commercial Bank for Industry and Trade is to strengthen the internal credit rating system to help classify debts and set up risk provisions more accurately and in line with the actual situation of the loan.

3.2.4.2. Handling problem debts with a quick and decisive motto through choosing appropriate debt handling measures

+ Maintain and develop the debt collection department: Currently, Vietinbank - Dong Hai Duong Branch has a branch debt collection department, but it only consists of 2 members specializing in managing problem debt files from arising functional departments. However, due to the large number of problem debt files of the Retail Block related to pepper in Dong Hai Duong area, the debt management department has not been able to go deep into its expertise. From there, it is proposed that the Director of Vietinbank - Dong Hai Duong Branch be the head of the debt collection department, assigning responsibilities to each member in handling the loan. Specifically, the debt collection department will analyze each SME customer, each collateral asset to propose a specific debt settlement plan based on the characteristics of each SME and each lending location. Every week and every month, the debt collection department meets to review the debt settlement progress, review the debt collection results of each member, and propose measures and debt settlement plans for the following week and month.

+ Fast and decisive debt settlement: To achieve this, the branch must always review debts, including group 1 debts, to detect unusual signs, and must be determined and combine different measures to quickly recover debts. In case the SME loan is too complicated, the branch can report to the head office to receive support from relevant departments.

+ Choose appropriate debt settlement measures: Work specifically with SMEs, analyze and evaluate the current situation, causes of problem debt, analyze the financial situation, cooperative attitude of SMEs, thereby building appropriate debt settlement plans or combining many different debt settlement plans.

+ Take advantage of the support of relevant agencies: In the process of handling problematic debts, the branch needs to seek the support of the Court, the enforcement agency and relevant agencies. In case of having to file a lawsuit to recover debt, it is necessary to closely follow the court to speed up the trial process. Create a good relationship with the enforcement agency to speed up the seizure of assets, auction to recover principal and interest. In addition, it is necessary to create a close, cohesive relationship with local agencies to receive support in finding information and customers to handle " debt " .

3.2.5. Other solutions

3.2.5.1. Improving the quality of human resources

Human resources are the central factor, determining the effectiveness of all business activities in general and the effectiveness of lending to SMEs in particular of the bank. Improving the quality of human resources will not only help reduce costs but also improve the effectiveness of credit risk management in lending to SMEs. To achieve this, the Bank needs to perform well the following tasks:

+ Recruitment: Recruitment information needs to be transparent to create conditions for all potential candidates to participate. Avoid giving priority to children in the industry, relatives even though they do not meet the recruitment standards. Vietinbank - Dong Hai Duong Branch needs to have policies to attract staff with management capacity, experience from other banks, high-quality human resources trained from prestigious schools in other countries.

+ Personnel training: Vietinbank - Dong Hai Duong branch needs to focus on improving the professional qualifications as well as the risk management ability of credit officers. Vietnam Joint Stock Commercial Bank for Industry and Trade needs to regularly open training courses to improve professional skills for participating branches. Take advantage of information technology to organize live-meeting and E-learning to help branches be proactive in training. Periodically, there must be inspections to evaluate the quality of personnel: reward officers with high results and have a retraining plan for officers who have not met the requirements. Regarding professional ethics, Vietinbank - Dong Hai Duong branch is required to regularly educate officers, monitor and remind their officers, and periodically evaluate the ethics of officers. Vietinbank - Dong Hai Duong branch also needs to pay attention to the work of regulations.

Some Solutions to Enhance Credit Risk Management in Lending to Small and Medium Enterprises at Vietnam Joint Stock Commercial Bank for Industry and Trade - Dong Hai Branch

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