Views on Bad Debt of Commercial Banks:

eligible goods, types of credit, terms and conditions of credit.

Principle 5: Banks need to establish credit limits for each customer and group of borrowers to create different types of credit risks that can be compared and tracked in the accounting books.

Credit limits are important in managing a bank's credit risk profile. To be effective, they should be mandatory and not customer-specific.

Principle 6: There should be clear procedures for approving new credits as well as amending, extending and refinancing existing credits, and assigning responsibility to relevant staff in the credit process to ensure sound credit decision-making.

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Principle 7: Credit should be granted on the basis of fair dealing between the parties. In particular, credits to related companies and individuals should be approved on an exceptional basis, carefully monitored and appropriate controls should be put in place to eliminate risks. In this case, moral hazard may arise in the credit granting process.

Credit extension should be carried out according to specific and clear criteria and procedures. This should create a system of documents to enhance the making of correct credit decisions.

The third group includes principles for maintaining an appropriate credit management, measurement and monitoring process, which includes six principles:

Principle 8: Banks should have a system for keeping their credit risk portfolios up-to-date.

Principle 9: Banks should have a system for monitoring each credit, including determining the adequacy of credit risk provisions.

Principle 10: Banks should develop and use an internal credit risk rating system in managing credit risk. This is a useful means of differentiating the credit risk of a bank's potentially risky products. Given its importance in determining credit quality, the system should be consistent with the nature, size and complexity of the bank's activities.

Principle 11: Banks should have information systems and analytical techniques to measure credit risk in all on-balance sheet and off-balance sheet activities.

Principle 12: Banks should have a system for monitoring the structure and quality of their entire credit portfolio.

Principle 13: Banks should take into account future changes in economic conditions when assessing individual credits and the credit portfolio, and should assess the level of credit risk under complex conditions.

The fourth group includes principles for ensuring a credit risk control system, including three principles:

Principle 14: Banks should establish a system for regular, independent evaluation of their credit risk management processes. The results of the evaluation should be reported directly to senior management.

Principle 15: Banks should establish systems and strengthen internal controls and other activities to detect areas of weakness in credit risk management, and promptly report violations of policies, procedures and credit limits to senior management.

The objective of credit risk management is to maintain the bank's credit risk within certain limits set by the board of directors and management. The implementation of credit risk control

Internal controls will help ensure that credit risks do not exceed acceptable levels for the bank.

Principle 16: Banks should have a system for early remediation of bad loans and management of problem loans.

The final group on credit risk monitoring:

Principle 17: Supervisors should conduct an independent assessment of the bank’s credit-granting strategies, policies, and procedures and the ongoing management of the bank’s portfolio. They should then inform the bank’s management of any systemic weaknesses, excessive risk concentrations, the classification of problem loans, and the estimated additional provisions and implications for the bank’s profitability.

(Source: author's own synthesis from Basel II appendix)

1.1.2. Bad debt of commercial banks:

1.1.2.1. Views on bad debt of commercial banks:

When a loan cannot be recovered or there is a risk that the principal and interest cannot be recovered, it is called a bad debt. In fact, there is no global standard to define bad debt. Many diverse views coexist.

Basel Committee's concept of bad debt:

The Basel Committee does not provide a specific definition of non-performing loans. However, in its guidelines on common practices in many countries for credit risk management, the Basel Committee defines that a loan is considered non-performing when one or both of the following conditions occur: the bank considers the borrower incapable of fully repaying the loan when the bank has not taken any action to try to collect; the borrower is more than 90 days past due. Based on this guideline, non-performing loans will include all loans that are 90 days past due and show signs of non-payment by the borrower.

The Basel Committee also mentioned that impaired loans will occur when the possibility of collecting payments on a loan is impossible. The loss value will be recorded by reducing the loan value through a provision and will be reflected in the bank's income statement. Thus, interest on these loans will not be accrued and will only appear in the form of actual cash received.

International Accounting Standards (IAS):

International banking accounting standards often refer to loans as impaired rather than nonperforming. Accounting standard IAS 39, recommended for application in some developed countries in early 2005, indicates that objective evidence is required to classify a loan as impaired. In the case of impaired loans, the recorded assets will be reduced due to the losses caused by the quality of bad loans.

Basically, IAS focuses on the ability to repay a loan regardless of whether it is overdue for less than 90 days or not overdue. The method of assessing the customer's ability to repay is usually the method of analyzing future discounted cash flows or rating the customer's loan. This system is considered accurate in theory, but practical application is difficult.

The concept of bad debt of the International Monetary Fund (IMF):

In its Guidelines for Calculating Financial Soundness Indicators for Countries, the IMF defines non-performing loans as follows: “A loan is non-performing when payments of principal or interest are 90 days or more past due; when interest payments that are 90 days or more past due have been capitalized, restructured, or delayed by agreement; or when payments are less than 90 days past due but there are clear signs that the borrower will not be able to repay the loan in full (borrower default). Once a loan is classified as non-performing, it or any replacement loan should be

classified as bad debt until the time the debt must be written off or the principal and interest of that loan are recovered or a replacement loan is recovered.

From the above definitions, we can see the similarity in the perception of bad debt among financial institutions around the world. Accordingly, a debt is considered bad debt when it shows one or both of the following signs: overdue payment of principal and interest; when the borrower is considered by the bank to be unable to repay the debt. The nature of bad debt is a loan that the bank determines cannot be recovered and is removed from the list of receivables of the bank.

1.1.2.2. Criteria for measuring and evaluating bad debt:

To measure and evaluate bad debt, each country with different development of banking system and financial market will have different criteria. But in general, the common criteria often used by commercial banks in measuring bad debt is that banks will divide outstanding loans into 5 groups: standard debt, debt that needs to be monitored, substandard debt, doubtful debt and bad debt. In which, bad debt is debt in the last 3 groups, that is, including substandard debt, doubtful debt and bad debt, specifically as follows:

Standard debt group: are debts overdue less than 90 days and there is no doubt about the ability to pay.

Debt group that needs to be monitored: are debts that are overdue for less than 90 days and customers with difficult financial prospects.

Substandard debt group: is debt overdue from 90 to 180 days; debt has been restructured and the customer's financial situation may not be able to repay the debt.

Doubtful debt group: is debt overdue from 180 to 360 days; has the possibility of loss and is unlikely to be fully recovered based on current conditions.

Bad debt group: are debts overdue for more than 360 days and loans that are definitely not recoverable.

Bad debt of banks is the total outstanding debt belonging to the groups of substandard debt, doubtful debt and bad debt. The risk level also increases in order of these debt groups.

1.1.2.3. Causes of bad debt: Objective causes:

Natural environment: Loans in general and agricultural loans in particular are often affected by objective causes such as natural disasters, storms, floods, fires, crop failures, epidemics, etc. These are objective causes due to changes in the natural environment that have caused the failure of borrowers, leading to bad debts. This cause is beyond the control and desire of both commercial banks and borrowers. This is the cause of unavoidable risks.

Economic environment: If the economic environment is not really developed, competition in the market is not really equal, the speed and level of economic development are not high, it will lead to individuals and businesses not having strong enough financial potential. On the other hand, with continuous changes in macroeconomic policies such as changes in interest rate mechanisms, exchange rates, import-export policies, changes in infrastructure construction planning, changes in financial mechanisms, land use mechanisms, etc., it also directly affects the production and business activities of individuals, organizations and businesses, causing these subjects to fall into a passive position, thereby indirectly affecting the debt quality of these subjects at commercial banks.

Legal environment: The inadequate legal environment for banking activities is an important cause contributing to bad debt. The inadequacy and overlap of laws will make relevant agencies confused in handling disputes over collateral.

Ensuring that accounting and auditing regulations are not strong enough to implement will make the data not have a solid basis for loan appraisal.

Weakness in customer business operations: The financial capacity of the business is not high, directly affecting the business efficiency. On the other hand, the weak management and operation capacity of the business owner borrowing capital also leads to ineffective business operations, thereby affecting the ability to repay bank loans.

Customer ethics: Some businesses intentionally report inaccurate financial data, causing errors in credit appraisal and granting, leading to difficulties in debt collection from banks. Or the businesses themselves lack awareness in the issue of using borrowed capital and repaying debt, not worrying, not caring about the debt to the bank even though the business has financial capacity. Some businesses have the idea of taking advantage of loopholes in the law to intentionally use capital for the wrong purpose of making a profit, borrowing without the intention of repaying the debt.

Subjective causes:

These are causes originating from the banks themselves. It could be due to poor credit policies, laxity in inspection and supervision, or issues related to the quality of banking human resources.

Credit policy: An incomplete, inconsistent and inconsistent credit policy will lead to granting credit to the wrong subjects, posing potential risks to the bank. On the other hand, to attract customers and gain market share, many commercial banks have skipped some steps in the credit process, simplified lending mechanisms, and arbitrarily lowered customer evaluation standards.

Inspection and control organization: The task of inspection and control is to detect early violations in lending activities to prevent risks. However, if the organization, inspection and control of commercial banks is too weak and

Laxity will lead to untimely detection and handling of violations and abuses in lending activities, and thereby bad debt.

Quality of bank staff: Credit officers are the ones who directly deal with customers, grasp the characteristics as well as the quality of customers and loans. A part of credit officers with poor qualifications cannot fully assess the potential risks related to loans, which will gradually lead to wrong lending decisions and a very high risk of bad debt. Some officers of the commercial banking system have degraded qualities, professional ethics, and lack of steadfastness, so they have taken advantage of their assigned work to collude with debtors, exploiting loopholes in the law to illegally enrich themselves, causing damage to assets and capital. In addition, the management capacity of the bank's management board is not good, mistakes in lending decisions lead to prolonged poor credit quality. In addition, the problem of moral hazard also occurs when bank leaders have beneficial relationships with customers.

1.1.2.4. Impact of bad debt:

Bad debt always goes hand in hand with credit activities according to the relationship between profit and risk and is the result of an imperfect credit relationship. Therefore, when making a loan, the bank must determine the risk of bad debt. The bank needs to determine what is the appropriate bad debt ratio, what ratio begins to negatively affect the bank's operations. When bad debt is at a high level, it will cause serious consequences for the bank and if it occurs on a large scale, it can cause a crisis for the economy.

The main impacts of bad debt on the economy and banking operations are as follows:

For commercial banks:

Reduced bank profits: bad debt reduces bank revenue. In addition, bad debt causes many costs such as: