Đề tài Precluding and reducing solutions to credit risk at Quang Trung branch of Vietnam Bank of Investment and Development

INTRODUCTION Falling in line with the common trend of the world economy, Vietnam economy also gets positive achievements in recent years. Whereas, the banking industry playing the role as vessel circulations in the economy, has been contributing much in the process of renovation. Commercial banks are the important link in the operating process of the economy. Commercial banks are a combined industry, are currency and credit center, and the level to encourage the development of the economy. Therefore, the quality and the growth level of the capital and capital lending activities will have great impacts on the sustainable growth of the companies in particular, and on the overall economy in general. Vietnam economy starts integrating into the world economy and participating in world and regional economic organizations such as ASEAN, WTO, and AFTA. These events have become the opportunities as well as the challenges for both the enterprises and the whole Vietnam economy. Integration leads to the severe competition among domestic and international companies. Sharp rivalry also leads to the risks in production process of the companies. The companies’ risk is the banks’ risk as well. Nowadays, credit risk is becoming a bulging problem and become the worry of commercial banks. As the result, “safe” must be the top principle in precluding risk. Especially, preventing credit risk is one of the important tasks of commercial banks in Vietnam. The bank that has efficiently risk precluding methods will ensure capital security and has advantage in competition in credit market. Risk preventing is also the urgent issues of banking industry in Vietnam. In the past few years, activities of commercial banks must operate in accordance with market mechanism and innumerable credit risk, bringing about losses to the banking industry and the entire economy. Many commercial banks and credit organizations has very huge unprofitable debt ratio, even some banks must be bankrupt unless there is interference from the government. Concerning about risks, particularly credit risk in banking industry and Quang Trung branch of Vietnam Bank of Investment and Development during my internship, so I choose the below topic: “Precluding and reducing solutions to credit risk at Quang Trung branch of Vietnam Bank of Investment and Development” Beside the introduction and conclusion part, the special subject is presented in three main chapters: Chapter 1: Overview of risk, significance of precluding and reducing risk in credit relationships Chapter 2: Methods of precluding and reducing credit risk in Quang Trung branch of Vietnam Bank of Investment and Development Chapter 3: Solutions to precluding and reducing credit risks at Quang Trung branch, BIDV Although having many efforts in studying and researching through books and newspapers as well as gathering documents and figures during my internship at the bank, but limited time and narrow awareness cause unavoidable shortcomings. I am looking forward recommendation from the officers of the bank and the lecturers so I can have a thorough grasp of knowledge serving my future job. Chapter 1: Overview of risk, significance of precluding and reducing risk in credit relationships Risk and risk classification in credit relationships 1.1.1. Definition of risk Risks are problems that accidentally damage people or assets of one or some objects in the society. In the economy, risks are considered the losses which enterprises have to accept when doing business. Trading in currency- credit field, the banks must admit that too. In reality, it has been proved that the risks of dealing in currency are the riskiest ones. Credit risks are the losses that the banks must approve of in lending activities. The reason is stated that credit “is a person lends or promises to lend the capital to the others, uses the signature like a guarantee, or a deposit to prove that money is collected “. 1.1.2 Kinds of credit risks Every industry has to cope with risks in the process of production and business. But no others must admit as big risks as the banking industry. Risks of commercial banks are very diversified and complicated. The reasons may come from the banks, from customers, from objective issues, or from the government’s administrative mechanism. In general, there are following risks: interest risk, capital risk, exchange risk, payment risk, and risk of unable to pay. Interest risks: “are the risks that the bank must bear when the market interest varies.” Consequently, when the interest changes the bank possibly deals with risks. When the interest is too low, enterprises tend to borrow much but it is difficult for the bank to mobilize capital. Hence, their action scope is narrowed, and the revenue will reduce. In contrast, when the interest is too high, the bank has more mobilized capital yet it is stagnant. It is explained that the bank can not lend money at too high interest rate. That leads to unavoidably losses for the bank. Capital risk: is represented in two aspects: + Redundant capital: commercial banks are the enterprises that earn revenue by the method “borrow to lend” when the current capital is very little. The bank’s main capital is the capital mobilized from the inhabitants, from economic organizations, and from other credit organizations. Therefore, because of some reasons, the redundant capital is not lent or changed into other profitable assets. As a result, the bank will suffer losses in charging borrowing fee whereas not receiving income. + Lack of usable capital: this risk happens when the bank does not satisfy the customers’ demand for borrowing and investing, even not meet the customers’ demand for liquidating. This kind of risk arises from the exchange function of capital using period and the bank’s capital. Besides, political issues, price variation, and the decreasing reputation promote people to withdraw their money in the bank. Hence, the bank’s liquidation is threatened. If the bank had changed all their assets into money to pay but no result, then, the bankrupt risk is considerably high. Capital mobilizing risk: + Happens when the bank mobilizes much capital but they can not lend or slowly lend to customers. - Credit investing risk: + The customers who have dealt with business risks can not pay the bank money. + The economies that get difficulties also cause risk to the bank + The credit officers carelessly appraise the lending project. 1.1.3. Definition of credit risk in banking activities Risks in credit trading of the bank are the financial losses because the customers borrowed capital from the bank do not pay on time, and not keep their commitment. Credit risk can be defined as the potential losses which the bank must bear when lending customers without being paid on schedule. It means that when the bank provides credits to each customer, the forecasted income from the profitable assets may not be fully-returned in both quantity and time- limit. To sum up, credit risks are the problems that happen in credit trading process, causing the losses of capital and reputation (or brand name) for the commercial banks. In central planning economy, risks in banking industry are generally ignored. All the banks were the State-owned Commercial Banks. So the losses were subsidized by the government by methods such as releasing more money and tight money management. But when stepping into the market economy, competition is a vigorous catalyst. Consequently, economic posting is mainly independent. This originates the potential of losing liquidation and bankruptcy. In changing business environment, the stability of the enterprises is only relatively. Hence, when the customers get trouble, the same situation with the bank is easy to understand. Realizing credit risks will help the banks to find out efficiently preventing methods, and then they have more efficient business result. Credit risks are diversified and sophisticated. It could be when the bank has stagnant capital, lacks of usable capital, unequal ratio of lent capital and mobilized capital, guaranteed asset risks or risk of not taking back debts. In this paper, credit risks are examined in the situation that the bank can not recover debts, being called bad debts. For principal and interest debts, credit risks may occur in four cases. It is when the bank can not recover the interest on schedule. Depending on each case, the bank enters in the accounts with different items such as hanging interests and overdue debts. When not being paid on time, risks are at the low level and posted as arising hanging interests. If the bank can not collect the interests, risks are posted as hanging interests, except the case that the bank remitted that item. If the bank can not reclaim the capital on time, it will cause bad debts. Yet this item is not regarded as absolute loss of the bank. Because for some reasons, enterprises slowly refund the principal but they still pay all after the contracted period. If this debt can not be paid, the bank will highly deal with credit risks. Credit risks remain in many forms. Those forms always vary. The result is that the bank is unable to recover. In the beginning, enterprises may slowly pay the interest and then slowly pay the principal. It really makes the bank at risk. But the credit risks are not always shown through all the above forms. There is the situation that enterprises pay interests but do not pay the principal. So the bank only posted it as arising bad debt and then changed it into unrecoverable bad debts. The above cases are only general ones. When researching credit risks, people usually pay attention in the danger of risks such as hanging interest and arising bad debts. Frozen hanging interests and actual debts are usually examined to solve the problem and to infer lessons. Expressions and criteria to determine credit risks. Expressions Qualitative expressions of credit risks: + The economy is receded + Customers rarely borrow + Customers slowly pay back + Bad debts when the economy is growing. All the signs of credit risks can be arranged in the following groups: Group 1: group of symbols related to managing methods of the customers. Regularly change the structure of managerial system or operating board Managerial system and operating board are always different about the goal, manage and operate dogmatically or dispersedly Methods of customers’ formation have the following features: + Being formed by Board of Directors or Managing Director with a little or inexperienced. + Board of Directors or Managing Director of big enterprises extremely deeply interfere into everyday problems + Lack of caring about the shareholders’ benefit and creditors’ benefits + Regularly transferring employees + Bad goal defined planning leads to the appearance of temporary debts Familial management Dispute over the managing process Unreasonable managing costs Group 2: Group of symbols related to priority in business Syndrome of big contracts: Customers are impressed by a famous customer who will be able to depend on: Board of Directors decide to cut down their revenue, in order to get that big contracts Syndrome of beautiful products: not timely or being obsessed by one product but not others. Unreasonable urgency such as not timely launching the products out, unrealistic period of business Group 3: Group of symbols related to the technical and commercial issues Difficulties in developing the products Changes in the market: exchange rate, interest; changing tastes; update new technologies; loss of suppliers and many rivals Highly customers’ temporary products Traits of cutting down the repairing and replacing costs Group 4: Group of symbols related to handling information of finance and accounting Insufficiently prepare financial data or slowly submit financial statements Conclusions of financial analyzing show that: + Unbalanced growth of regular debt rate + Decreasing cash capacity + Increasing in revenue but decreasing or no interest + Improper charter capital + Quantity of goods grow faster than the revenue + Losing activities + Planning to pay the debt but the capital is not enough + Wrongly posting fixed assets + Beautify the balance sheet by creating intangible assets Group 5: Other non- financial symbols that credit officers can easily realize as the followings: Ethical issues, even business people’s appearance also expresses some symbols Seriously degradation of customers’ business establishment Stores contain many spoilt and obsolescent Criteria of measuring credit risks These are the problems that all the managers concern about. Good risk measuring make the precluding and reducing risk process easier. Criteria of measuring include: Overdue debts: Gross overdue debts Overdue debts rate= * 100 Gross debts Low overdue debts rate proves that the credit quality is high. When absolute numeric value of the overdue debts goes down, if the gross debts increase then overdue debts rate has not reflected the nature of credit. - Classification according to time period, there are arising risks: + Less than 180 days + Greater than 180 days + Greater than 360 days Classification of unpaid debts and unrecovered debts Classification of guaranteed and unguaranteed risks Number of customers having Overdue debts Ratio of customers = * 100 having bad debts Gross numbers of customers Having credit relationship Losing capital situation: Losing capital Debts Ratio of losing capital = * 100 Gross debts Bad debts situation: Bad debts Ratio of bad debts = * 100 Gross debts Unrecoverable debts: Unrecoverable debts Ratio of unrecoverable debts = * 100 Gross overdue debts Significance of precluding and reducing risks in credit relationships Precluding and reducing risks in credit relationships will help the bank avoid bad consequences. Those kinds of credit risks not only affect on the bank itself but also on the economy. Therefore, precluding and reducing credit risks has a very important significance. For the bank: Risks directly impact the revenue of the bank. If the risk is at low level, the bank can use its profit or its capital to make up. But if it is a big risk, the bank can not use its profit to compensate, it will be bankrupt. For this reason, precluding and reducing credit risks helps the bank prevent and minimize damage, stabilize profit, maintain economic security, and maintain prestige and brand. In doing credit business, prestige and brand is extremely important, directly affect customers’ behavior. For the customers: A bank that is good at preventing and reducing credit risks will positively influence on customers. The bank has created its prestige and brand name. The customers will consider the bank as a reliable address to deposit money as well as to borrow money. For all business activities, the customers are always important ones. The same situation is in the credit- banking activities. When the bank is free from risk, customers will trust more and choose the bank as their partner more. In the situation of integrating into world economy, there will be many international banks enter and compete. A free- risk bank will leave the customers belief- it is very important. For the economy: Credit and banking are sensitive financial business activities. So it directly influence on the social economy. If the bank preclude and reduce risks then the cash flow will circulate normally. It will not cause redundancy as well as deficiency. The economic security will be ensured. When the risk occurs, customers will be puzzled. They will simultaneously withdraw money. Thus, the bank will be lack of capital. The reason is the bank chiefly mobilizes capital from customers. Then organizations who want to borrow capital also get trouble. In fact, economic organizations form an economy. When those organizations are in trouble, it will have given impacts on the social economy. Chapter 2: real situation of credit risks at Quang Trung branch, BIDV. 2.1.1. Objective and necessity 2.1.1.1. Necessity - BIDV, Quang Trung Branch was established on the basis of upgradation of Quang Trung transaction bureau, under the Transaction center (I) Bank for Investment and Development of Vietnam – the first unit of the system of Bank for Investment and Development of Vietnam to deploy the Project of Modernization of the payment system and the modernization of the banking system, hence it has a lot of advantages and experience in supplying products, services and deployment of retail banking profession, as well as in organizing operation according to the 1-door transaction model, applying technology and business norms of a modern bank. However, according to the present regulation of the State bank and the Charter of Organization and Operation of Bank for Investment and Development of Vietnam, the transaction centers do not have underlying branches; meanwhile, in administration, execution in the past few years, Bank for Investment and Development of Vietnam always defines the activities of Transaction center (I) not only bears the characteristic of a commercial bank but also perform the function of a capital transfer center, payment center, the place to train source officers for the system, and this is also the place to deploy the pilot application of products, services and new technology of Bank for Investment and Development of Vietnam before applying them to the whole system. As a result, Quang trung Transaction Bureau was upgraded and split a part of Transaction center (I) so that Transaction center (I) can continue to perform its above-mentioned characterized function, at the same time, establishing Quang Trung Branch to pay deep professional attention to developing retail banking profession, becoming a glowing point, standard model for the whole system is very urgent and necessary. - The foundation of BIDV, Quang Trung Branch is suitable to the progress of implementing the Project for restructuring, connecting with the comprehensive renovation process, aiming for sustainable development, ensuring the suitable growth rate to effectively serve the socio-economic development of the country; as well as developing the tradition to serve investment and development, diversifying customers of every economic level, developing to improve the quality of Banking products and services, improving the system security efficiency, meeting the demand of the market mechanism and the integration route, being key to the construction of multi-function, firm and strong financial corporation in the future. 2.1.1.2. Objective Being one of the major State commercial bank of Viet Nam, with nearly half a century of operation and development, Bank for Investment and Development of Vietnam has had much higher effort, with very encouraging success, contributing actively to the cause of construction and development of the country’s economy. With the purpose to improve, expand the operation network, increase prestige, the image of Bank for Investment and Development of Vietnam to customers and domestic and foreign credit organizations, the separation, improvement of Quang Trung transaction bureau into BIDV, Quang Trung Branch (Level 1 branch) with the main function is to perform retail banking professions will contribute to overcome shortcomings in operation scale; improving the capabilities of finance, management, technology, and the staff qualifications. Together with several Branches and Transaction bureaus available in Hanoi, Ho Chi Minh City and cities, large urban centers, industrial parks which share the same function. BIDV, Quang Trung Branch will become one of the nucleus to build a chain of “supermarkets” of bank