The Role of Risk Management in Credit Activities at Commercial Banks

The model structure is summarized as follows: Given variables Xj (j = 1..p), find r orthogonal variables Yk (k = 1..r), which have the form:

Yk =uk1X1 + uk2X2 + ... + ukpXp In which: uk is the load factor

So that this variable r can preserve as much of the individual differences reflected through p - the original variable.

The factors (Yk) obtained from the model solution also receive the combination coefficients of the variables.

This model only synthesizes from target variables, so it is necessary to combine with the above model results for each target variable, from which it is possible to calculate for each customer a unique score with factors confirmed to have an impact on the customer's status in the relationship with the bank.

c. Evaluation of mathematical modeling methods

- Advantage: The mathematical model shows the level of influence of the indicators specifically and accurately. This is an important basis for commercial banks to evaluate and classify customers.

The mathematical model completely eliminates the subjectivity imposed on the ranking results, allowing customers to be evaluated objectively.

Mathematical models are a means to help experts confirm or deny the hypothesis put forward in assessing the impact of indicators on the results of internal credit risk management at commercial banks.

The cost of implementing the mathematical modeling method is low and

much simpler than the expert method.

 Limitation: A single but very important limitation that commercial banks need to pay attention to when applying this method in internal credit risk management is that the mathematical modeling method is completely dependent on the input data source. Therefore, the quality of internal credit risk management can only be achieved when and only when the information source is truly accurate and reliable.

2.2.3. The role of risk management in credit activities at commercial banks

2.2.3.1. For credit activities

Economists say: the business activities of the commercial banking system are “risky businesses”. In fact, the monetary and credit business has the potential to

leading to very high risks. Therefore, credit risks of any commercial bank can cause great risks to the economy. More seriously, if the risk occurs at a large level, the bank's capital is not enough to compensate, available capital is lacking, brand value decreases rapidly and can lead to bankruptcy. Therefore, preventing and limiting credit risks is a necessary task for commercial banks.

2.2.3.2. For loan customers

Consulting and analyzing risk signs in the process of reviewing and appraising loan applications, with their risk prevention measures, commercial banks have not only minimized losses but also helped customers avoid risks related to each individual customer such as: Liquidity risk; risks in fulfilling commitments to other customers, commitments to the bank, thereby avoiding risks in business operations for customers brought about by bank loans.

2.2.3.3. For the economy

In a market economy, the business results of banks reflect the performance of the economy. Meanwhile, the business activities of banks have a great influence and impact on economic components from individuals, households, economic organizations to other credit institutions. Therefore, the banking system will be affected by domino effects along with the risks of economic components. 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, preventing and limiting credit risks is not only a matter of survival for banks but also an urgent requirement of the economy, contributing to the stability and development of the whole society.

2.2.4. The role of XHTDNB in ​​credit risk management at commercial banks.

According to the Basel Committee on Banking Supervision (2005), “Bad Debt Management is the process of developing and implementing strategies, credit management and business policies to achieve the goals of safety, efficiency and sustainable development; including strengthening measures to prevent and limit the occurrence of bad debts, along with measures to handle bad debts that have arisen,

thereby increasing revenue, reducing costs and improving the quality and efficiency of commercial banks' business operations in both the short and long term" [4].

Therefore, to prevent credit risks, it is necessary to solve the following issues: (1) Build a credit risk management model; (2) Build an early warning system for bad debts; (3) Implement a good credit management process; (4) Identify risks related to borrowers; (5) Conduct customer scoring and debt classification; (6) Complete the credit control and inspection system; (7) Strictly implement the policy of provisioning and risk handling; (8) Apply other credit risk measurement tools.

Of the 8 measures above, measures (2), (4), (5), (8) are all applied in XHTDNB activities. This can be considered one of the most important measures, helping commercial banks to classify customers and make accurate, objective lending decisions, and effectively manage risks.

2.3. XHTDNB by market segment of commercial banks

2.3.1. Concept of XHTDNB by market segment

Based on the concept of internal liquidity of a commercial bank mentioned in the section

2.2.1. Terminology of XHTDNB: “XHTDNB is a tool that uses an information system exploited from the customer side to analyze and evaluate the ability to repay both principal and interest when the customer has a loan transaction with the bank.”

The concept of market segmentation is given in section 2.1.2.2 Market segmentation: “Market segmentation is the division of the total bank customers into smaller customer groups with similar needs for products and services; customs, culture, habits, interests; asset size; capital mobilization or borrowing potential…”

Combining the concept of internal credit rating and the concept of market segmentation above, we can come up with the concept: Internal credit rating by market segmentation is the ranking and evaluation of the repayment ability of customers when establishing a credit relationship with a commercial bank based on a system of criteria built in accordance with the nature and characteristics of customers in each market segment suitable for the business activities of that bank.

2.3.2. Characteristics of XHTDNB by market segment

Different from the current XHTDNB system that commercial banks in Vietnam and around the world are using, the XHTDNB system by market segment has the following characteristics:

Firstly , the internal credit risk management system is built on the basis of market segmentation within commercial banks.

Second, the XHTDNB system has a system of evaluation criteria suitable for customer groups in the same market segment.

Third , different index systems for different market segments.

In reality, each region and area has a very different level of education, level of science and technology, level of awareness. For example: If we take the assessment index of the highest educational level in the city, it is PhD; in some localities, the highest index is university. Therefore, in reality, the general assessment of the same criteria for all customers with different living conditions, economic, political and social conditions does not accurately reflect the level of risk or debt repayment ability of customers.

2.3.3. The role of market segmentation for commercial banks

2.3.3.1. In credit risk management

As analyzed, the activity that accounts for the largest proportion of capital and has the potential to bring the greatest profit to commercial banks in Vietnam today is credit activity. However, this activity is always associated with high risks. To help commercial banks increase the efficiency of investment capital, one of the very effective methods that commercial banks are currently trying to implement is to build and perfect the internal credit rating system.

Dividing customers from a large market into smaller, more homogeneous markets will help banks manage customers more effectively. Through collecting and analyzing data from customers, commercial banks can assess the payment ability and risk level of each customer's loans relatively accurately. From the results of XHTDNB by market segment, banks have solutions, decide on investment levels, treatment plans and specific policies and

suitable for each market segment, thereby minimizing risks for credit activities of commercial banks.

2.3.3.2. In customer management

Market segmentation creates conditions for commercial banks to manage customers more conveniently. Customers managed in groups not only support banks to improve the efficiency of credit activities but also are an effective tool to improve the efficiency in assessing customers' needs for other products and services of the bank. This is also an important goal that any commercial bank wants to achieve. Through the information of registered and updated customers, banks can clearly identify which customers have been served by the bank to the maximum in terms of product and service needs; which customers still have a lot of potential; which customers must increase or decrease their credit limit to avoid liquidity risks for the customers themselves. From there, solutions are proposed to approach potential customers; closely monitor customers with many potential risks; and provide effective advice to help customers improve the efficiency of bank loans.

2.3.3.3. In policy making

Based on the segmented customer market, commercial banks can research and develop policies for each market segment. For example:

- Credit policy: Depending on the rating results, the bank can set limits and provide additional products and services. On the one hand, it increases revenue for the bank and on the other hand, it increases convenience for customers.

- Fee policy: Through the results of the XHTDNB market segmentation, the bank is fully capable of recognizing the advantages, limitations, potentials... of each customer group. Therefore, introducing a suitable fee policy will create conditions for the bank to serve customers better and customers will have more suitable payment conditions.

- Policy on collateral: The main goal of credit risk management by market segment is to support commercial banks in managing credit risks. In credit activities, collateral is an indispensable content when considering and appraising a loan. When customers have been scored by market segment, it means that the bank has full information to decide on collateral policies for each customer group in order to manage investment capital well.

2.4. Current status of internal credit risk management by market segment at Vietnamese commercial banks, lessons learned

2.4.1. The formation and development process of internal credit risk management according to market segments at Vietnamese commercial banks

2.4.1.1. Period of implementing centrally planned economy (1952 -1988)

After the successful resistance war against France, the North entered into economic restoration and construction under a centralized planning mechanism with a subsidized nature that governed all economic relations. After the complete liberation of the South in 1975, the centralized planning mechanism was applied throughout the country. The banking system is a one-level system: the Bank performs both the functions of a central bank and a commercial bank.

In the planning mechanism, enterprises are assigned by the state to plan the quantity of goods produced; supply all input materials and purchase all manufactured goods. Therefore, enterprises often encounter few risks in production, so repaying debts to banks is often less difficult. During this period, banks are not interested in credit risk management. The internal credit risk management system in Vietnam has not yet been established.

To classify good and bad businesses based on business results during this period, the Council of Ministers issued Decision 172/HDBT/1982. This Decision had positive impacts on bank credit activities. Banks relied on this Regulation to make lending decisions. Credit quality was given more attention.

Thus, in this period, because credit risk is insignificant, the analysis and evaluation of internal credit risk at banks has not been given due attention.

2.4.1.2. The period of gradual economic transition to a market mechanism (from 1989 to present)

The 6th National Party Congress decided to transform our country's economy into a market economy, developing a multi-sector commodity economy with a socialist orientation. Following the Resolutions of the 7th, 8th and 11th National Congresses, they were consistent and affirmed the path of innovation in that direction. Implementing the Resolution of the 6th National Party Congress, the Council of Ministers issued Decree 53/HDBT dated

On March 26, 1988, the banking system officially changed its operations from a one-tier model to a two-tier model: the State Bank system and the specialized banking system. On May 24, 1990, the State Council issued the Ordinance on the State Bank of Vietnam (Order No. 37/LCT/HDNN8) clearly defining the functions and tasks of the State Bank, which is a fundamental transformation of banking operations, creating favorable conditions for the development of the banking system and credit institutions. On June 16, 2010, based on the 1992 Constitution of the Socialist Republic of Vietnam as amended and supplemented, the National Assembly promulgated the Law on Credit Institutions No. 47/2010/QH12 replacing the Law on Credit Institutions No. 07/1997/QH10 of 1997. The promulgation of a series of legal documents has created a solid legal corridor for banking activities in general and for risk management activities in particular.

The State Bank of Vietnam has issued many regulations to control and manage the bad debt situation at commercial banks such as: Circular No. 02/2013/TT-NHNN on debt classification (effective from June 2014; establishment of VAMC (Vietnam Asset Management Company) to contribute to quickly handling bad debt, improving financial health, minimizing risks for credit institutions, enterprises and promoting reasonable credit growth for the economy. However, the risk ratio of commercial banks tends to increase gradually, especially from 2009 to 2013. According to independent rating organizations as well as other economists, the bad debt level officially announced by commercial banks is much lower than the reality. According to economic experts, the average bad debt ratio of commercial banks can exceed 10%.

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• Pre-tax Profit of Bidv Tien Giang in the Period 2011-2015 zt2i3t4l5ee zt2a3gsnon-credit services, joint stock commercial bank zt2a3ge zc2o3n4t5e6n7ts At that time, the Branch had to set aside a provision for credit risks, which reduced the Branch's income. Chart 2.2. Pre-tax profit of BIDV Tien Giang in the period 2011-2015 Unit: Billion VND 140 120 100 80 60 40 20 0 63.3 80.34 89.29 110.08 131.99 2011 2012 2013 2014 2015 Profit before tax (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) However, through chart 2.2, it can be seen that BIDV Tien Giang's profit is still increasing continuously, and its operating efficiency is currently leaking. This is a contribution of non-credit services, and this service segment will be increasingly focused on growth by BIDV Tien Giang to ensure the highest profit safety because credit activities have many potential risks. At the same time, focusing on developing non-credit services is consistent with one of the contents of restructuring the financial activities of credit institutions in the project "Restructuring the system of credit institutions in the period 2011-2015" approved by the Prime Minister in Decision No. 254/QD-TTg dated March 1, 2012 [14]: "Gradually shifting the business model of commercial banks towards reducing dependence on credit activities and increasing income from non-credit services". 2.2. Current status of non-credit service development at BIDV Tien Giang. 2.2.1. BIDV Tien Giang has deployed the development of non-credit services in recent times. Along with the development of the Head Office, BIDV Tien Giang's products and services are constantly improved and deployed in a diverse manner to ensure provision for many different customer groups in the area: individual customers, corporate customers, and financial institutions. Typical services are as follows: Payment services, treasury services, guarantee services, card services, trade finance, other services: Western Union, insurance commissions, consulting services, foreign exchange derivatives trading, e-banking services,... 2.2.1.1. Payment services: In accordance with the Prime Minister's Project to promote non-cash payments in Vietnam [15], banks in Tien Giang province have continuously developed payment services to reduce customers' cash usage habits through card services and electronic banking services such as: salary payment through accounts, focusing on developing card acceptance points, developing multi-purpose cards, paying social insurance by transfer, paying bills through banks, etc. Chart 2.3. Net income from payment services in the period 2011-2015 Unit: Million VND 6000 5000 4000 3000 2000 1000 0 3922 4065 4720 5084 5324 2011 2012 2013 2014 2015 Net income from payment services (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) Along with the technological development of the entire system, BIDV Tien Giang has a payment system with a fairly stable transaction processing speed, bringing many conveniences to customers. The results of observing chart 2.3 show that the income from payment services that the Branch has achieved has grown over the years but the speed is not high and the products are not outstanding compared to other banks. Domestic payment products such as: Online bill payment, electricity bills, water bills, insurance premiums, cable TV bills, telecommunications fees, airline tickets, etc. bring many conveniences to customers. Regarding international payment, this is an indispensable activity for foreign economic activities, BIDV Tien Giang is providing international payment methods for small enterprises producing agriculture, aquatic food and seafood that have credit relationships with banks in industrial parks in Tien Giang province such as: money transfer, collection, L/C payment. 2.2.1.2. Treasury services: BIDV Tien Giang always focuses on ensuring treasury safety and currency security, always complies with legal regulations, and minimizes risks in operations such as: counting and collecting money from customers, receiving and delivering internal transactions, collecting from the State Bank (SBV) or other credit institutions, receiving ATM funds, bundling money, etc. BIDV Tien Giang's treasury service management department is always fully equipped with modern machinery and equipment such as: money transport vehicles, fire prevention tools, money counters, money detectors, magnifying glasses, etc. to ensure absolute safety in treasury operations, immediately identifying real and fake money and other risks that may affect people and assets of the bank and customers. In addition, implementing regulation 2480/QC dated October 28, 2008 between the State Bank of Tien Giang province and the Provincial Police on coordination in the fight against counterfeit money, in the 3-year review of implementation, BIDV Tien Giang discovered, seized and submitted to the State Bank of Tien Giang province 475 banknotes of various denominations and was commended by the Provincial Police and the State Bank of Tien Giang province [17]. Chart 2.4. Net income from treasury services in the period 2011-2015 Unit: Million VND 350 300 250 200 150 100 50 0 105 122 309 289 279 2011 2012 2013 2014 2015 Net income from treasury services (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) However, as shown in Figure 2.4, income from treasury operations is not high and fluctuates. Specifically, in the period 2011-2013, net income increased and increased most sharply in 2013, then in the period 2013-2015, there was a downward trend. This fluctuation is due to the fact that fees collected from treasury services are often very low and can even be waived to attract customers to use other services. 2.2.1.3. Guarantee and trade finance services: BIDV Tien Giang, thanks to the advantages of the province and the favorable location of the Branch, has continuously focused on developing income from guarantee services and trade finance. Chart 2.5. Net income from guarantee and trade finance services in the period 2011-2015 Unit: Million VND 14000 12000 10000 8000 6000 4000 2000 0 5193 5695 2742 3420 8889 3992 11604 12206 5143 5312 2011 2012 2013 2014 2015 Net income from guarantee services Net income from Trade Finance (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) Through chart 2.5, we can see that BIDV Tien Giang's income from guarantee services and trade finance has grown over the years. The reason is: Among BIDV Tien Giang's corporate customers, the construction industry is the industry with the highest proportion of customers after the trading industry, this is a group of customers with potential to develop guarantee services. The second group of customers is corporate customers in the fields of agricultural production, livestock and seafood processing with high import and export turnover in the area. are the target of trade finance development. In addition, BIDV Tien Giang also focuses on continuously developing these customer groups to increase revenue for many other products and services in the future. 2.2.1.4. Card and POS services: As a service that BIDV Tien Giang has recently developed strongly, it can be said that this is a very potential market and has the ability to develop even more strongly in the future. Card services with outstanding advantages such as fast payment time, wide payment range, quite safe, effective and suitable for the integration trend and the Project to promote non-cash payments in Vietnam. Cards have become a modern and popular payment tool. BIDV Tien Giang early identified that developing card services is to expand the market to people in society, create capital mobilized from card-opened accounts, contribute to diversifying banking activities, enhance the image of the bank, bring the BIDV Tien Giang brand to people as quickly and easily as possible. BIDV Tien Giang is currently providing card types such as: credit cards (BIDV MasterCard Platinum, BIDV Visa Gold Precious, BIDV Visa Manchester United, BIDV Visa Classic), international debit cards (BIDV Ready Card, BIDV Manu Debit Card), domestic debit cards (BIDV Harmony Card, BIDV eTrans Card, BIDV Moving Card, BIDV-Lingo Co-branded Card, BIDV-Co.opmart Co-branded Card). These cards can be paid via POS/EDC or on the ATM system. In addition, with debit cards, customers can not only withdraw money via ATMs but also perform utilities such as mobile top-up, online payment, money transfer,... through electronic banking services. In order to attract customers with card services, BIDV Tien Giang has continuously increased the installation of ATMs. As of December 31, 2015, BIDV Tien Giang has 23 ATMs combined with 7 ATMs in the same system of BIDV My Tho, so the number of ATMs is quite large, especially in the center of My Tho City, but is not yet fully present in the districts. Basic services on ATMs such as withdrawing money, checking balances, printing short statements,... BIDV ATMs accept cards from banks in the system. Banknetvn and Smartlink, cards branded by international card organizations Union Pay (CUP), VISA, MasterCard and cards of banks in the Asian Payment Network. From here, cardholders can make bill payments for themselves or others at ATMs, by simply entering the subscriber number or customer code, booking code that service providers notify and make bill payments. Chart 2.6. Net income from card services in the period 2011-2015 Unit: Million VND 3500 3000 2500 2000 1500 1000 500 0 687 1023 1547 2267 3104 2011 2012 2013 2014 2015 Net income from card services (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) Through chart 2.6, it can be seen that BIDV Tien Giang's card service income is constantly growing because the Branch focuses on developing businesses operating in industrial parks, which are the source of customers for salary payment products, ATMs, BSMS. Specifically, there are companies such as Freeview, Quang Viet, Dai Thanh, which are businesses with a large number of card openings at the Branch, contributing to the increase in card service fees [25]. Table 2.6. Number of ATMs and POS machines in 2015 of some banks in Tien Giang area. Unit: Machine STT Bank name Number of ATMs Cumulative number of ATM cards POS machine 1 BIDV Tien Giang 23 97,095 22 2 BIDV My Tho 7 21,325 0 3 Agribank Tien Giang 29 115,743 77 4 Vietinbank Tien Giang 16 100,052 54 5 Dong A Tien Giang 26 97,536 11 6 Sacombank Tien Giang 24 88,513 27 7 Vietcombank Tien Giang 15 61,607 96 8 Vietinbank - Tay Tien Giang Branch 6 46,042 38 (Source: 2015 Banking Activity Data Report of the General and Internal Control Department of the Provincial State Bank [21]) Through table 2.6, the author finds that the number of ATMs of BIDV Tien Giang is not much, ranking fourth after Agribank Tien Giang, Dong A Tien Giang, Sacombank Tien Giang. The number of POS machines of BIDV Tien Giang is very small, only higher than Dong A Tien Giang and BIDV My Tho in the initial stages of merging the BIDV system. Besides, BIDV Tien Giang has a high number of cards increasing over the years (table 2.7) but the cumulative number of cards issued up to December 31, 2015 is still relatively low compared to Agribank, Vietcombank, Dong A (table 2.6). div.maincontent .content_head3 { color: black; font-family:"Times New Roman", serif; font-style: normal; font-weight: bold; text-decoration: none; font-size: 14pt; } div.maincontent .p { color: black; font-family:"Times New Roman", serif; font-style: normal; font-weight: normal; text-decoration: none; font-size: 14pt; margin:0pt; } div.maincontent p { color: black; font-family:"Times New Roman", serif; font-style: normal; font-weight: normal; text-decoration: none; font-size: 14pt; margin:0pt; } div.maincontent .s1 { color: black; font-family:"Courier New", monospace; font-style: normal; font-weight: normal; text-decoration: none; font-size: 14pt; } div.maincontent .s2 { color: black; font-family:"Times New Roman", serif; font-style: italic; font-weight: normal; 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• Credit risk management for personal loans at Nam A Commercial Joint Stock Bank - Quang Ninh Branch - 13
• Credit risk management for personal loans at Nam A Commercial Joint Stock Bank - Quang Ninh Branch - 2
• Solutions to Improve Credit Risk Management Capacity, Specialize Bad Debt Handling Activities
• Current Status of Risk Management in Credit Activities at Saigon Commercial Joint Stock Bank, Da Nang Branch in the Past Time

Chart 2.2: Bad debt ratio of Vietnamese commercial banks from December 31, 2004 – December 31, 2014

Source: Summary report of State Bank's activities, Finance Magazine.vn

Faced with the urgent need to tighten credit risk management, the State Bank of Vietnam has encouraged commercial banks to proactively develop and implement credit risk assessment. The State Bank of Vietnam has issued a number of documents such as: Decision No. 57/2002/QD-NHNN dated January 24, 2002 on piloting the project of analyzing and rating corporate credit; Decision No. 493/2005/QD-NHNN dated April 22, 2005 on debt classification, provisioning and use of credit risk provisions.

XHTDNB was first mentioned in the content of the analysis project, XHTD enterprises. In Decision No. 57/2002/QD-NHNN, the State Bank of Vietnam allowed the Credit Information Center to implement customer rating by business sector such as: Enterprises in the agricultural, forestry and fishery sector; trade and service sector; construction sector; industry sector. Ranking by scale such as: Large scale; medium scale; small scale.

Under the direction of the State Bank, a number of state-owned commercial banks in Vietnam have implemented credit rating activities such as: Vietnam Joint Stock Commercial Bank for Industry and Trade in 1994, Vietnam Investment and Development Bank has organized enterprise classification since 1995, 1998 (according to document No. 493/NHĐT on enterprise classification standards by scoring method); Agribank issued notice No. 1963/NHNo dated August 18, 2000 on customer classification; and started building a credit rating system since the end of 2009, officially implementing credit rating in November 2011; The scoring of XHTDNB at Vietcombank is carried out according to Official Dispatch No. 117/QD-VCB.CSTD dated March 17, 2010 on the promulgation of the XHTDNB system and Official Dispatch No. 410/QD-VCB.CSTD dated September 16, 2010 on the promulgation of the XHTDNB scoring process... Up to now, many commercial banks have completed the construction and have been permitted by the State Bank to apply XHTDNB.

Each commercial bank is different, the internal XHTDNB model is built with many different indicators. The internal XHTDNB system is built for a number of customer groups such as: Corporate customers; household/individual business customers; individual customers; customers who are financial institutions. For businesses, commercial banks have also built a system of indicators according to industry and business scale. Some commercial banks such as VCB, ... do not have an internal XHTDNB system for some groups.