The Need to Improve Credit Quality

Time segmentation is important to banks because time is closely related to the safety and profitability of credit as well as the repayment ability of customers. Including:

Short-term credit: is credit with a term of less than 12 months and is used to compensate for the shortage of working capital of businesses and short-term spending needs of individuals.

Medium-term credit: The term of medium-term credit is usually not fixed. Previously, the term that the State Bank of Vietnam gave for medium-term credit was from one to three years. However, currently, to meet the borrowing requirements of enterprises, the State Bank of Vietnam stipulates the term of medium-term credit is from over 1 year to 5 years. In the world, there are countries that stipulate this term up to 7 years. Medium-term credit is mainly used to purchase fixed assets, renovate or change equipment, technology, expand business, build new projects of medium and small scale to serve life, production... In agriculture, medium-term credit is mainly for investment in objects such as agricultural machinery, building industrial gardens such as coffee, cashew, rubber...

Long-term credit : is a type of credit whose term is longer than medium-term credit. This type of credit is provided to meet long-term needs such as building houses, equipment, large-scale means of transport, building large factories and plants, infrastructure development investment projects, etc.

1.1.5.3. According to the level of loan security

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Unsecured credit is a type of credit that does not have collateral, pledge or third-party guarantee.

Secured credit is a type of loan that banks only lend when customers have collateral, pledges, or a third party to guarantee.

1.1.5.4. Other classification methods

In addition to the above classification methods, depending on the requirements of the bank, credit can be classified according to the credit granting objects: individual customers, economic organization customers; according to the purpose of use: consumer loans, production and business loans,...

Classifying credit in different ways helps banks easily manage credit activities and related activities such as liquidity management, risk management, etc., and at the same time have strategies to develop credit activities.

1.2. Credit quality of commercial banks

1.2.1. Concept of bank credit quality

Product and service quality is a very broad and complex category, reflecting a synthesis of technical, economic and social contents. Due to its complexity, there are currently many different concepts of product quality. Each concept has a scientific basis and aims to solve certain goals and tasks in reality.

Up to now, the definition of credit quality is still controversial. Because this is a very abstract concept and its standards are always changing in one place or another, at one time or another. But it can be understood: "Credit quality is the quality of bank loans". Based on the above quality concepts, we can understand bank credit quality as follows: Bank credit quality is a criterion reflecting the level of meeting customer requirements in credit relations, the level of ensuring safety or limiting capital risks, increasing bank profits, being suitable and serving socio-economic development.

In addition, from the customer's perspective, we can understand: Quality credit is bank loans that meet the needs of businesses in a timely and adequate manner, and that capital is used for business purposes and effectively to create a larger amount of money that is capable of covering costs, capable of paying principal and interest to commercial banks, and bringing profits to businesses.

To understand credit quality, we need to understand a credit.

is considered to be of quality when it satisfies the following basic requirements:

- Is the bank able to recover the loan?

- The bank not only recovers the principal amount of the loan but also recovers

receive the full amount of interest on time as per the credit contract.

- That credit ability not only brings income to the bank, but also creates favorable conditions for borrowers to carry out their plans. Continue to develop and maintain long-term relationships with banks and customers.

There are also other requirements at a higher level, for example, the credit creates conditions for the development of an industry or field that the state is encouraging to develop. It is a key industry of the economy, and at the same time has the ability to avoid other risks that may occur. However, due to certain limitations, it is impossible to demand too much for credit quality in market conditions. Our country is still an underdeveloped country with many economic difficulties, and many unavoidable risks may occur.

In short, improving credit quality is an activity aimed at achieving basic requirements on top of some other specific requirements. All are aimed at the goal that any commercial bank must set, which is to ensure profitability, while ensuring the safety of investment capital as well as the ability to complete the customer's plan.

Thus, credit quality needs to be considered under the following three main perspectives:

- From the perspective of the bank's business operations , credit quality is the amount of credit that is guaranteed to be safe, used for the right purpose, in accordance with the bank's credit policy, repaying principal and interest on time, bringing profits to the bank with low operating costs, increasing the bank's competitiveness in the market, making economic relations healthy, serving the bank's growth and development.

- From the perspective of customer benefits , quality credit is suitable for the customer's purpose with reasonable interest rates and terms, simple and convenient credit procedures, attracting many customers while still ensuring credit principles.

- For the economy, quality credit must support legal business and consumption activities, contribute to production and circulation of goods, solve employment problems, build socio-economic infrastructure, exploit potential in the economy, promote the process of capital accumulation and concentration for

production, well resolving the relationship between credit growth and economic growth.

1.2.2. The need to improve credit quality

Credit quality is a comprehensive economic indicator, which is important for both macro and micro economic management.

On a macro level, the quality of bank credit has a significant impact on the production and circulation of goods and services, job creation, exploitation of economic resources, etc. Policy makers and agencies operating the banking and financial system, based on the general goals of the economy in each specific period, set different goals for credit activities and credit quality, in which good management of credit quality means solving the problem of the relationship between credit growth and economic growth.

On the micro level, banks set many goals to ensure credit quality management requirements, including two basic goals:

- First, minimize credit risks based on identifying and controlling risks.

In a market economy, credit provision is the basic economic function of banks. For most banks, credit balances usually account for 65-80% of total assets depending on the development of the economy and credit income also accounts for 45-60% of total bank income. However, risks in banking business are also mainly concentrated on credit portfolios. When banks fall into serious financial difficulties, the main cause often arises from credit activities. Therefore, minimizing credit risks based on identifying and controlling risks when providing credit obviously becomes the main and indispensable goal of credit quality management. The target of bad debt ratio to total outstanding debt according to international standards of Vietnamese commercial banks is to reduce it to below 2% within the next 10 years.

- Second is to provide good credit products to customers.

For customers, a good credit product is a credit that promptly and appropriately satisfies customers' capital needs in terms of scale, term, interest rate, etc.

Good credit products do not necessarily mean low interest rates or easy loan access. In modern banking, following best practices, loan provision processes are built with high scientific nature, simple procedures but still ensure risk control principles, especially in credit decision making. How to make credit decisions, approve or disapprove, handle timely or untimely is an extremely important job. It not only affects the customer's operating process, but also affects the bank's reputation and the quality of the credit. In addition, good credit products are reflected in the bank's customer support mechanisms and policies that come with the credit, such as payment services, financial consulting, management support, etc. In fact, customers are willing to accept credits with high interest rates but with good support services.

By providing a perfect credit product quality system, we will create customer trust, attract more customers while still ensuring credit principles.

Achieving the above two major goals has basically solved the problem of the relationship between risk and profit in bank credit activities.

1.2.3. Indicators for assessing bank credit quality

The credit quality of each bank is assessed through many different indicators, each indicator will reflect a certain aspect. Moreover, standing in different positions with different rights and obligations will have different systems of indicators for assessment. Within the scope of this thesis, I would like to present only some basic indicators for assessing the credit quality of a commercial bank, these indicators are assessed from three perspectives: the lender (bank), the borrower (customer) and the general social perspective.

1.2.3.1. Assessment of the Bank's credit quality from the borrower's perspective

- Cost of borrowing (interest on loan)

The cost or price of a product or service is the primary criterion that customers are concerned about when approaching any product or service. The simple reason is: price is often directly related to and proportional to the quality of the product or service, thereby affecting the effectiveness of each business plan. For bank credit services, the price here is the loan interest rate and fees (if any) of the loan.

In a specific bank, the price (interest rate) of different loans is not exactly the same, it depends on the level of potential risk (according to the bank's assessment) of each loan. In the overall banking industry based on competition between commercial banks, the credit service interest rates of banks are often not the same, it depends on two factors:

+ Deposit interest rate: Banks with low input costs (low deposit interest rates) will usually have lower lending interest rates. Meanwhile, deposit interest rates depend on the branch network as well as the reputation and image of each bank in the market. Usually, large-scale banks with a long history of operation and reputation often have an advantage in attracting input capital.

+ Main customers of banks: large banks have an advantage in choosing customers, and when they have chosen good customers with low risk, of course the lending interest rate is also correspondingly low. Meanwhile, small or newly established banks often have to accept loan projects with higher risk, and when input costs are high and lending to high-risk projects, the interest rate that the bank lends will certainly be higher.

Therefore, to reduce lending interest rates, attract more customers, more feasible plans and projects, and minimize risks for banks, banks need to minimize input costs (mobilization interest rates). To do that, banks need to constantly build their image and reputation in the eyes of customers.

- Average time to approve a loan

In addition to the cost factor (interest), the time to meet the demand is also a criterion that customers are very interested in, because in today's fiercely competitive market economy, this criterion sometimes determines the success or failure of a business.

business plan. Therefore, this criterion greatly affects the choice of bank for customers to borrow capital. Therefore, to avoid losing good customers and improve credit quality, banks need to pay close attention to this criterion, and make efforts to find solutions to simplify loan procedures and reduce loan approval time while still ensuring credit safety for the bank.

- Diversity of Bank credit types

From the unified viewpoint on the concept of bank credit: Bank credit quality is the best response to customer requirements in credit relations. This means that in order to improve credit quality, in addition to other factors, banks need to pay special attention to the diversity of credit products. With the development of the economy as it is today, customers' credit needs are increasingly diverse and rich, therefore, in order to improve credit quality, to meet the increasingly diverse needs of customers, banks need to continuously research to create a diverse set of credit products, meeting all reasonable credit needs of customers.

1.2.3.2. Assessment of the Bank's credit quality from the lender's perspective

- Credit growth rate

Credit growth rate

Credit balance for the year compared

Original year credit balance

This indicator shows the credit scale of the Bank and through comparison between different periods, the Bank will evaluate the credit growth rate of the Bank. Based on a highly stable credit process, the increase or decrease in outstanding credit balance partly indicates whether the credit quality of the Bank is improving or decreasing. If the outstanding credit balance of a Bank increases steadily and stably over the periods, it proves that the credit activities of the Bank are developing well, the quality of loans has created trust for the Bank's management - those who consider and approve loans.

- Credit balance ratio

Industry credit balance ratio

Industry credit balance

=Total outstanding credit

This indicator shows the position and role of each type of credit in the overall credit activities of the Bank. Thereby, it can be assessed whether the Bank's credit activities are too concentrated or have not considered any type.

This is one of the important indicators reflecting the credit quality of a bank. Obviously, no bank wants to have loans that are extended, so the higher this indicator is, the worse the credit quality of the bank is and vice versa.

- Ratio of overdue debt to total credit balance

Overdue debt is understood as debt that is due for payment but not paid on time and the customer does not have a written request for debt extension or has a written request for debt extension but is not approved by the Bank.

Overdue credit balance ratio

Overdue credit balance

= Total outstanding credit

This is an indicator that represents the potential risks in the ability to recover principal and interest that the Bank is facing. The higher this indicator, the worse the credit quality of the bank and vice versa.

Currently, according to Decision 493/2005/QD-NHNN dated April 22, 2005 of the State Bank on debt classification, provisioning and use of reserves to handle credit risks, overdue debt is divided into 4 groups:

+ Debts requiring attention: Debts overdue less than 90 days, debts with restructured repayment terms within the restructured debt term and other debts as prescribed.

+ Substandard debt: is debt overdue from 90 to 180 days and restructured debt with overdue repayment period of less than 90 days according to the restructured term and other debts as prescribed.

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