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ACKNOWLEDGMENTS First, I would like to express my heartfelt gratitude to Ass Prof. Dr. Nguyen Dinh Tho, the supervisor, for instructing me to find out the study direction, fact finding, document search, data processing and analysis, problem solving, etc. Owing to his valuable instructions, I completed this master’s thesis. In addition, during my study and research, I received much interest and highly valuable suggestions and support from my lecturers, colleagues, friends and relatives. I would like to convey my sincere thanks to: My lecturers in the FBA6 Program - International School - Vietnam National University, Hanoi for teaching me useful knowledge in the two academic years, The Board of Leaders of the Center for Credit Control and Business Support - Vietnam Technological and Commercial Joint Stock Bank (Techcombank) and my friends and colleagues for encouraging and supporting me in my study and research. Author Le Thi Hong 1 ABBREVIATIONS Techcombank: Vietnam Technological and Commercial Joint Stock Bank CB: Commercial Bank B: Bank PCF: People’s Credit Fund CI: Credit Institution SOCB: State Owned Commercial Bank JSCB: Joint Stock Commercial Bank FLC: Financial Leasing Company FC: Finance Company FDI: Foreign Direct Investment SBV: State Bank of Vietnam VAMC: Vietnam Asset Management Company C: Collateral C: Customer AE: Approval Expert HO: Head Office BCS: Business Control and Support CD: Credit Document AD: Asset Document CSE: Customer Service Expert CC: Credit Contract MC: Mortgage Contract CM: Credit Management T24: Loan, asset and disbursement management system 2 LIST OF TABLES AND GRAPHS Graph 1: Population structure in age Graph 2: Market share of credit and asset in commercial bank models Graph 3: Growth of Outstanding loans - Mobilization - Total assets Graph 4: Outstanding individual customers Techcombank Graph 5: Number of individual customers through the years Graph 6: Outstanding loan pattern by products Graph 7: Outstanding loan by business clients Graph 8: Outstanding loans to business customers by type of business Graph 9 : Outstanding loan by granting credit time Graph 10: Bad debt by loan group Graph 11: Fluctuation in the ratio bad debt per total loan Model 1: Five competitive forces of Porter Model 2: The model of organizational structure of Techcombank Model 3: Diagram of Techcombank strategy Model 4: Credit management organization in Techcombank Model 5: Process of credit issued in Techcombank Table 1: Some indicators of operation of Techcombank Table 2: Outstanding loans to business customers by type of business Table 3: Credit outstanding loan by loan time Table 4: Revenue collection Table 5: Off-balance sheet bad debts of Techcombank Table 6: Bad debt by loan group Table 7: The ratio of bad debt per total loan 3 TABLE OF CONTENTS ACKNOWLEDGMENTS CHAPTER 1 – OVERVIEW OF THE RESEARCH PROBLEM........................................…7 1.1. Necessity of the research problem…................................................................................…7 1.2. Overview of the research ..……………………………………………………………….… 8 1.2.1. Background in Vietnam ..……………………………………………………………….... 8 1.2.2. Application of the Basel Capital Accord in risk management...... …………………….. 8 1.2.2.1. Basel Capital Accord …………………………………………………………………… 8 1.2.2.2. Basic points of Basel I and Basel II …………………………………………….…..… 10 1.2.2.3. Application of Basel II in Vietnam ……………………………….…………….…..…13 1.3. Research objective …..…………………………………………………………….….…… 14 1.4. Research scope and methods. ………………………………………..……………….…... 15 1.4.1. Research scope. ………………………………………………………………………….. 15 1.4.2. Research methods. …………………………………………............…………..…….….. 15 1.5. Contribution by the thesis……………………………………………………………….…15 1.6. Thesis outline... …………………………………………….............…………………..… 15 CHAPTER 2: OVERVIEW OF MACROECONOMIC ENVIRONMENT AND COMMERCIAL BANKING SECTOR IN VIETNAM……………...………………............ 16 2.1. Macro factors which have impact on the banking sector…………...……………….….. 16 2.1.1. Political environment and the State’s policies.... ………………..................……….…. 16 2.1.2. Economic environment……………………………………………………………….…. 16 2.1.3. Cultural and social environment………………......................……...……………….…. 17 2.1.4. Technology environment ……………………………………………...………………… 18 2.2. Commercial banks in Vietnam......……………………....………………..........……….....19 2.2.1. Actual state of commercial banks in Vietnam........………………………..…...........… 19 2.2.2. Overview of credit activities in commercial banks …………...………......................…22 2.3. Five competitive force model application to Commercial banks......................................23 2.3.1. Five competitive force model.. ……………………………………………......................23 2.3.2. Enhancing the competitiveness of commercial banks in Vietnam.................................26 2.3.2.1. Facts of the competitiveness of commercial banks in Vietnam................................... 26 4 2.3.2.2. Solutions to enhance the competitiveness of commercial banks in Vietnam........... 27 CHAPTER 3: INTRODUCTION OF TECHCOMBANK AND CREDIT RISK MANAGEMENT IN TECHCOMBANK………………………............................................. 28 3.1. The history and development of Techcombank …………………………………....….....28 3.2. Organizational Structure…………………………………………………………..........…31 3.3. Techcombank's goal in the coming period. ………………………………………............32 3.4. Techcombank's business operations in the period from 2008-2012.................................33 CHAPTER 4: CREDIT RISK MANAGEMENT IN TECHCOMBANK..............................36 4.1. Credit operations at Techcombank. …………………………………………..…..............36 4.1.1. Credit perspective in Techcombank ……………………………………………….…... 36 4.1.2. Credit performance in Techcombank ………………………..……………………….. 36 4.1.2.1. Outstanding loans under customer ………………………………………….…..…… 36 4.1.2.1.1. Individual customers ………………………………………………………..……… 36 4.1.2.1.2. Enterprise client.. ……………………………………………………….....................38 4.1.2.2. Credit outstanding loan by term limit…………………………………..….................40 4.1.2.3. By credibility ……………………………………………………………………..……. 42 4.2. Credit risk management at Techcombank ………………………………………………. 42 4.2.1. Techcombank's view on credit risk ………………………………………..…………… 42 4.2.2. Risk identification……………………………..…………………………….…………… 42 4.2.2.1. Liquidity risks ……………………………………………………….………....……… 42 4.2.2.2. Interest risk ………………………………………………………………….....……… 43 4.2.2.3. Foreign exchange risk ……………………………………………………………...…. 43 4.2.2.4. Credit risk ……………………………………………………………………………... 43 4.3. The indicators of credit risk assessment ……………………………………………….… 43 4.3.1. Revenue collection ……………………………………………………...………………. 43 4.3.2 Bad debt …………………………………………………………………………………...43 4.4. The process of granting credit in Techcombank …………………….……………..…… 47 4.4.1. The organizational structure of credit management ……………………………….…. 47 4.4.2. Process of credit issue .. …………………………………………….................................50 4.5. Credit risk cause at Techcombank …………………………...................………….… 56 4.5.1. Regrading customer ……………………………………………………..……………....56 5 4.5.2. Regarding the bank ………………………………………………………….………..… 56 4.5.3. Regarding collateral …………………………………………………………………..… 57 4.5.4. Regarding business environment …………………………………………...…….…… 57 CHAPTER 5: RESOLUTION AND PROPOSAL TO IMPROVE RISK MANAGEMENT IN COMMERCIAL BANKS………………………………………………………………….. 58 5.1. Risk precautions for commercial banks... ……………………..…....................................59 5.1.1. Credit analysis ………………………………………………………………………...….59 5.1.2. Diversify the risk... …………………………………………….........................................59 5.1.3. Transfer of risks ………………………………………………………………………….59 5.1.3.1. Buy insurance for a loan ………………………………………………………..…….. 60 5.1.3.2. Loan under co-funding …………………………………………………………….…. 61 5.1.4. Look for more information on loans ………………………………….……...................62 5.1.5. Improve the level of credit ………………………………………….…….......................62 5.1.6. Develop a ranking system ………………………………………….....…...................… 63 5.1.7. Apply science and technology ………………………………………………………….. 64 5.1.8. Restructure credit operations ………………………………………….............…......…64 5.2. Corrective measures when risks occur ………………………………………………...... 64 5.2.1. Debt exchange …………………………………………………………………………… 64 5.2.2. Debt reduction …………………………………………………………………………... 64 5.2.3. Remission ……………………………………………………………………………....… 65 5.3. The State legal environment ……………………………………………........................…65 CONCLUSION 6 CHAPTER 1 – OVERVIEW OF THE RESEARCH PROBLEM 1.1. Necessity of the research problem Credit is one of the main business activities which contribute greatly to revenues of commercial banks, especially Vietnamese commercial banks in general and Vietnam Technological and Commercial Joint Stock Bank (Techcombank) in particular. For this reason, credit risk management is a major task of Vietnam Technological and Commercial Joint Stock Bank (Techcombank). However, in addition to contributing greatly to commercial banks, credit is risky. Credit risks often have adverse effects on commercial banks such as cost increase, revenue decrease and financial position and prestige worsening. Credit risks at a high level result in new risks such as insolvency (this risk can cause bankruptcy) or negative transfer effect in the banking field. During the past years, credit activities of Techcombank have contributed significantly to the country’s economic development. The Bank has been more interested in the control of the credit growth rate and the concentration on the efficiency of credit activities; the credit procedure is more and more compliant with international standards. Nevertheless, the delinquency ratio and the bad debt ratio in the total of debit balances are still at a high level. There are many shortcomings in customer analysis and evaluation, which results in a lack of efficient support in making decisions on loan and debt collection. The cause is that credit risk management is not really good and credit risks have not been identified, measured, assessed and strictly controlled and have not been in conformity with international practices and requirements of economic integration. At present, Vietnam Technological and Commercial Joint Stock Bank (Techcombank) attaches special importance to credit risk management. The efficiency of such management is being improved to ensure sustainability instead of consequence addressing with bad preventiveness, inclining toward qualitative factors, specific measurement of credit risks, etc. From the above-mentioned facts, I selected the thesis title “Credit risk management in Commercial Banks, contact at The Technology Commercial Bank – Techcombank”. This thesis systematizes credit risk basics and clarifies the importance of credit risk management in business activities of commercial banks. In addition, the thesis finalizes the system of solutions to the enhancement of credit risk management for the purpose of improving the efficiency of business activities of Vietnam Technological and Commercial Joint Stock Bank (Techcombank). 7 1.2. Overview of the research 1.2.1. Background in Vietnam From 2008 to 2012, loan activities developed strongly in Vietnamese commercial banks. In a short period of time, there was a considerable increase in the loan balance at credit institutions by means of credit products, services and channels. After just 1-2 years, bad debts at various levels occurred at most commercial banks, which has a negative impact on the bank system in particular and the economy in general. This is resulted from many subjective and objective factors. However, the thesis only mentions the cause from uncontrolled credit activities. As known, credit is a main business activity which contributes greatly to revenues of commercial banks. Only revenues from credit activities can compensate deposit costs, reserve costs, business and management costs, capital costs, tax costs, and investment risk costs. The more the economy develops, the more credit activities of commercial banks increase and the more credit types are diversified at commercial banks. Besides, credit activities are always potentially risky and changed according to changes in the economic environment. It is very difficult to manage and prevent credit risks. Credit risks can occur anywhere and anytime. If not promptly identified and settled, credit risks will cause other risks to commercial banks. It is necessary for us to learn about important characteristics of credit risks. 1.2.2. Application of the Basel Capital Accord in risk management 1.2.2.1. Basel Capital Accord In 1974, the Basel Committee on Banking Supervision (BCBS) was established by a group of central banks and banking supervision agencies of 10 developed countries (G10) in Basel City, Switzerland with a view to preventing a series of banks from going bankrupt in the 1980s. Now, the Committee’s members are representatives of central banks or banking supervision agencies of the countries, namely the United Kingdom, Belgium, Canada, Germany, the Netherlands, the United States, Luxembourg, Japan, France, Spain, Sweden, Switzerland and Italy. The Committee meets four times per year. The Secretariat of the Basel Committee was set up on the basis of proposal by the Bank for International Settlements in Basel. The Secretariat consists of 15 members, who are professional banking supervisors assigned temporarily by the member credit and financial 8 institutions. The Committee and its subcommittees are ready to give professional advice to banking supervision agencies of all countries. The Committee has no banking supervision agency and its conclusions are not legally binding on banking supervision. Instead, the Committee only builds and promulgates banking supervision standards and instructions. In addition, the Committee introduces the best practical reports in the hope that organizations will use such reports on the basis of the most proper arrangements for their countries. The Committee encourages the use of general approaches and standards without interference in banking supervision techniques applied by the member countries. The Committee makes reports to governors of central banks or banking supervision agencies of G10 countries. On such basis, the Committee seeks support for its initiatives. Standards embrace a wide range of financial matters. An important target of the Committee is to narrow the international supervision gap by using the two basic principles, namely (1) the supervision of foreign banks after establishment and (2) good supervision. In order to achieve this target, the Committee has promulgated a lot of documents in relation to such supervision since 1975. In 1988, the Committee decided to introduce a capital measurement system which is known as the Basel Capital Accord or Basel I. This system offers a credit risk measurement framework with 8% minimum capital. Basel I is common not only in the member countries but also in most of the other countries where banks operate internationally. In 1996, Basel I was amended with many new points. However, there are still many shortcomings in the Accord. In order to overcome shortcomings in Basel I, in June 1999, the Basel Committee proposed a new capital measurement framework with the main three points, namely (i) minimum capital requirement on the basis of Basel I inheritance, (ii) the supervision of the internal assessment process and sufficient capital of financial institutions, and (iii) the efficient use of information for the purpose of making the market discipline healthy as a supplement to banking supervision efforts. On 26th June 2004, the New Basel Capital Accord (Basel II) was officially promulgated. Summary history of the Basel Capital Accord: (1) In 1988, the Basel Capital Accord (Basel I) was introduced and came into effect from 1992. (2) In 1996, Basel I was supplemented with market risks (came into effect on 01st January 1998). (3) In June 1999, a framework of the 9 New Basel Capital Accord was proposed with the First Consultative Package - CP1. (4) In January 2001, the Second Consultative Package - CP2. (5) In April 2003, the Third Consultative Package - CP3. (6) In the 4th quarter of 2003, a new version of the Capital Accord (Basel II) was finalized. (7) In January 2007, Basel II came into effect. (8) In 2010, the transformation process was terminated. 1.2.2.2. Basic points of Basel I and Basel II: Basel I: - Purpose of Basel I: Ensuring the stability of the whole international bank system; Establishment of an equal international bank system to reduce unfair competition among international banks. - Standards of Basel I: (1) Ratio of capital to risk - “Cook ratio”: This ratio is developed by BCBS for the purpose of strengthening the international bank system. The ratio is initially applicable to international banks, but afterwards applicable to more than 100 countries. According to this standard, banks must retain an amount of capital at least equivalent to 8% of the basket of assets, which is calculated using various methods and depends on their risk level. Capital adequacy ratio (CAR) = Mandatory capital/Risk-weighted asset (RWA) On such basis, a bank with the best capital is a bank with CAR > 10%, proper capital in case of CAR > 8%, lack of capital in case of CAR < 8%, obvious lack of capital in case of CAR < 6%, and serious lack of capital in case of CAR < 2%. (2) Tier 1, tier 2 and tier 3 capital: The basis achievement is that Basel I internationally defines bank capital and capital adequacy ratio. Basel I specifies: Tier 1 capital ≥ Tier 2 capital + Tier 3 capital. Tier 1 capital includes reserve capital and provisions for loans, including owners’ equity, reserves (retained profits), minority interest at subsidiary companies with consolidated financial statements, and goodwill. Tier 2 capital (Supplementary capital) includes unreported retained profits, provisions for asset revaluation, general provisions/provisions for debt collection failure, mixed capital, loans with preferential terms, and investments in financial subsidiary companies and other financial institutions. Tier 3 capital (for market risks) = Short-term loan 10 (3) Risk-weighted assets: RWA = Total (Assets x Risk level classified for each asset in the balance sheet) + Total (Debts x Off-balance sheet risk level) Basel I divides risk weights into 4 levels: nation 0%; banks 20%; enterprises 100%. Risk weights don’t reflect risk sensitivity. - Shortcomings of Basel I: After credit risks were established in 1988, the Basel Committee paid attention to market risks to respond to the incremental business activities of commercial banks and in 1996, Basel I was amended for the purpose of including capital costs for market risks. However, there are still many shortcomings in Basel I. One of the main shortcomings is that Basel I does not mention a type of risk which is more and more complicated and increasing – operational risks (no requirements for provisions for operational risks). In addition, there are other shortcomings such as non-classification based on risk types, no benefits from diversification, etc. Basel II: - Targets of Basel II: Improving the quality and stability of the international bank system; Creating and maintaining a level playing field for international banks; and Intensifying the acceptance of stricter practices in credit risk management. The first two targets of Basel II are main targets of Basel I. The last target is new, reflecting a sign of gradual change from ratio-based adjustment (only a part of the new framework) to adjustment much more based on internal data, practices and models. - Basel II uses the concept “Three columns”: (1) Column I: Mandatory capital assurance. The capital adequacy ratio (CAR) is still 8% of the total risky assets as mentioned in Basel I. However, risks are measured according to the main factors for commercial banks, namely credit risks, operational risks and market risks. Compared with Basel I, there is great amendment in the calculation of capital costs for credit risks, there is small amendment in the calculation of capital costs for market risks, but there is new introduction of operational risks. According to Basel II, risk weights are divided into many levels (from 0% to 150% or more) and are very sensitive to classification. (2) Column II: With regard to banking policy making, Basel II supplies policy makers with “tools” which are better than Basel I. This column mentions a framework of solutions to 11 risks with which commercial banks cope such as system risks, strategy risks, reputational risks, liquidity risks and legal risks. Basel II refers risks of all such types collectively to as residual risks. Basel II emphasizes four principles of review and supervision. First, commercial banks should have procedures for the evaluation of sufficient capital according to the list of risks and have proper strategies for the maintenance of such capital. Second, supervisors should review and evaluate the determination of internal capital levels and bank strategies and should supervise and ensure the compliance with the minimum capital ratio. Supervisors should carry out some proper supervisory tasks if they are not satisfied by results of such procedures. Third, they should recommend commercial banks to assure capital which is higher than the specified minimum capital. Fourth, they should interfere in the initial phase in order to ensure that bank capital does not decrease less than the specified minimum capital and can ask commercial banks to give prompt amendment if capital is not more than the minimum capital. (3) Column III: It is necessary for commercial banks to properly publicize information in conformity with market principles. Basel II offers a list of requirements for information publication by commercial banks from information about capital structure and capital sufficiency to information about commercial banks’ sensitivity to credit risks, market risks, operational risks and procedures for the evaluation of such risks. Commercial banks are requested to operate more transparently and ensure provisions for more types of risks and therefore, reduce risks. Advantages of Basel II compared with Basel I: - Structure and contents: Basel I focuses on only one solution to risk management which is “minimum capital requirement”. Basel II focuses more on internal solutions of banks and the evaluation of inspection, supervision and discipline based on market principles. For this reason, country managers have more powers because it is necessary for them to evaluate banks’ sufficient capital with the consideration of specific risk characteristics. - Flexibility: Basel I provides for one choice for all banks. Basel II is more flexible. Basel II offers a list of measures and solutions for use by country managers and banks. - Risk sensitivity: Risk measurement by Basel I is too preliminary. Basel II is more sensitive to risks through sensitivity of capital requirements for incremental risk levels and the detail compulsory promulgation of risk sensitivity and risk policies. 12 - Risk weights: Basel I classifies risk weights from 0 to 100 and gives more preference to countries of the Organisation for Economic Co-operation and Development (OECD). Basel II classifies risk weights from 0 to 150 or more and offers no privileges including internal and external decentralization. - Techniques for credit risk reduction: Basel I only gives support and assurance. Basel II recognizes techniques for better risk reduction and gives more techniques such as support, assurance, credit derivatives and position netting. 1.2.2.3. Application of Basel II in Vietnam: Most managers in Vietnam support general targets of Basel II and believe that this framework will offer more encouragements for the improvement of risk management as well as other changes for the supplementation of their supervision targets. To get access to Basel II requires complicated techniques and relatively high costs. For some countries where the bank system is developing such as Vietnam, the application of Basel II has many difficulties and challenges and requires much time. However, with the tends of international economic integration and open-door policies for financial and banking markets with many new banking services, the application of Basel II in Vietnam is very urgent for the purpose of strengthening operations and risk reduction for commercial banks. Since Vietnam joined the WTO, the State Bank of Vietnam and credit institutions have had many efforts in the finalization of the legal system in the fields of money and banking as well as the improvement of management capacity, especially risk management capacity of commercial banks in compliance with international practices and standards. On such basis, the gradual application of standards of Basel II has received special importance, especially after the global financial and economic crisis during the last time. The State Bank of Vietnam promulgated a new regulation on safe assurance ratios in activities of credit institutions (the Circular No. 13/2010/TT-NHNN dated 20th May 2010) and is prompt to promulgate a new regulation on debt classification and provision extraction and use for the addressing of credit risks in activities of credit institutions. This is an important step in the gradual application of Basel II standards in Vietnam. With regard to credit institutions in Vietnam, Basel II has a great impact on the strengthening of management capacity, especially risk management. In addition to compliance with compulsory regulations of the State Bank of Vietnam, credit institutions try their best to 13 improve their risk management systems depending on specific activities of each bank and gradually get access to standards of Basel II. Although Basel II is considered as an importance mechanism for the enhancement of reforms and the consolidation of all management tasks in the financial field, the current financial crisis shows shortcomings of Basel II. A remarkable shortcoming of Basel II is the lack of requirements for liquidity capital costs, too reliance on credit classification agencies and cyclic nature. Recently, leaders of economies in G20 has urged the Basel Committee to give solutions to the improvement of the quality and quantity of capital of banks and limit liquidity requirements (Basel III) so that banks respond more efficiently to a crisis and prevent financial crisis without support from governments. According to the draft proposed in G20, by the end of 2012, Basel recommends that countries should apply new standards for capital and give more flexible solutions to encourage banks to make changes. 1.3. Research objective Vietnam Technological and Commercial Joint Stock Bank (Techcombank) is one of the banks of which credit activities develop and dominate the commercial bank system. Therefore, in order to maintain and expand the position on the credit market through credit products and activities, Techcombank continues to improve product and service quality together with credit control mechanisms to assure safe credit growth. This is also the main target of Techcombank. Based on this strategy, the research objective is credit risk management at commercial banks and consideration of the case of Techcombank. The thesis studies basic theory of credit risk and credit risk management of commercial banks with a view to clarifying nature and factors which affect credit risk management. The thesis evaluates the actual state of credit risk management at Vietnam Technological and Commercial Joint Stock Bank (Techcombank) and finds out achievements and shortcomings at Techcombank. The thesis proposes solutions to the strengthening of credit risk management at Vietnam Technological and Commercial Joint Stock Bank (Techcombank) The thesis gives answers to the main questions: i. Why are credit activities important to commercial banks? ii. What are current credit activities at commercial banks? 14 iii. Why do credit activities come with credit risks? iv. What are types of credit risks? v. How does Techcombank control credit risks? vi. What solutions are used to improve the quality of credit quality and reduce loan risks? 1.4. Research scope and methods 1.4.1. Research scope The research object is risk management at commecial banks and consideration of the case of Techcombank. The research is carried out on the basis of Techcombank’s data in the period 2008-2012. 1.4.2. Research methods The thesis is based on the two aspects of theory and practice during credit activities at Techcombank. The thesis applies some subjects such as economics, statistics, risk management, etc. to analyze and give solutions to credit activities. On the basis of the methodology of dialectical materialism and historical materialism, methods which are used for the research include data collection and synthesis method, statistical method, and economic comparison and analysis method. 1.5. Contribution by the thesis To State management: The research result contributes to the State’s improvement of legal policies and regulations on credit activities of commercial banks and giving proper measures for commercial banks in relation to credit activities and risks. To Techcombank: The thesis helps Techcombank revaluate shortcomings and their cause in its risk management. Recommendations given by the thesis are significant to Techcombank in particular and Vietnamese commercial banks in general in the control and restriction of credit risks. In addition, research result helps improve the system of solutions to the strengthening of credit risk management for the purpose of enhancing business efficiency of Techcombank. To next studies: The research result contributes to the consolidation of theoretical basis for research in credit risks and credit risk management at commercial banks. The thesis systematizes basics of credit risks, clarifies the importance of credit risk management in business activities of commercial banks. 1.6. Thesis outline In addition to the introduction and conclusions parts, the thesis consists of the following contents: Chapter 1: Introduction Chapter 2: Overview of macroeconomic environment and commercial banking sector in Vietnam 15 Chapter 3: Introduction of Techcombank and credit risk Chapter 4: Credit risk management in Techcombank Chapter 5: Resolution and proposal to improve risk management in commercial banks CHAPTER 2: OVERVIEW OF MACROECONOMIC ENVIRONMENT AND COMMERCIAL BANKING SECTOR IN VIETNAM 2.1. Macro factors which have impact on the banking sector 2.1.1. Political environment and the State’s policies The political environment and legal corridor of a country have a direct impact on business activities in general and the banking sector in particular. Political stability will promote the relationship with partners. Thus, before making relationship with partners, credit institutions should study and comply with the Government’s regulations, customs and laws directly related to credit activities. In many cases, political and legal factors are criteria that credit institutions must comply with when they select operation method. In 2014, the Government keeps on focusing macroeconomic stabilization, inflation control and competitiveness improvement to make a remarkable contribution to business development. Besides, foreign direct and indirect investment are forecasted to increase in 2014 and import and export activities are also expected to go up to facilitate production activities of domestic enterprises. This is a motive for credit institutions to establish their own development orientation. Banking interest rate remains at an appropriate level and this partly reduces interest expenses of customers as well as promotes the development of banking products and services. The above favorable conditions are bases for commercial banks to improve and develop a new credit system to suit the market economy. Legal documents and provisions transparently issued by the State such as Law on credit institutions, the Civil code, and legal corridor enable commercial banks to self-orient their operation. 2.1.2. Economic environment During 2010-2012 period, the world economy in general and Vietnamese economy in particular continuously faced difficulties in spite of recovery trend at the end of 2012. Like other countries, Vietnam could not avoid impacts of the global economic crisis, public debt crisis in Europe and this prevented Vietnam from achieving important macroeconomic criteria. Economic 16 growth in Vietnam tended to decrease, GDP of Vietnam in 2010, 2011 and 2012 were 6.78%, 5.89% and 5.03% (the lowest GDP in the last five years) respectively. Vietnamese economic growth mainly depended on investment expansion using low-cost laborers with poor workmanship and low productivity, high energy and natural resource consumption. In theory, growth is based on three factors including capital growth, labor growth and productivity growth. In fact, with low investment effectiveness in recent years, the economic growth of Vietnam was mainly based on capital growth, including domestic investment and foreign investment attraction. Total investment capital of the economy was at high level and total annual investment capital in recent years has accounted for about 40% of GDP. In 2011, inflation reached a peak in April (3.32% compared to that of the previous month) and this showed a high inflation rate in 2011 which was more than 10%. However, inflation rate tended to go down afterwards. Consumer Price Index (CPI) in May, 2011 of Vietnam decreased to 2.21% compared to that of the previous month, thus, inflation rate in the first five months was 12.20% in comparison with that of December, 2010. Although this was a high inflation rate, the most important thing was that inflation tended to decrease in the following months. In the last three months of 2011, CPI increased by 0.4% 0.5% compared to that of the previous month. This change came from increase in material price in the world which resulted in adjustment of domestic petroleum price and increase in domestic product and service price. Besides, implementation of Resolution 11 made progress, especially decrease in public investment which accounted for 10% of total investment of the society. Inflation rate of 2011 was 18.58%. This showed decrease in purchasing power as well as belttightening in spending of the inhabitants whereas the economy has not recovered. In 2012, FDI made a remarkable decrease with a slump in registered investment capital (went down by 22.4%) and performance capital (went down by 4.9%) in comparison to those in 2011. According to business environment report in 2012 of the World Bank, Vietnam decreased six levels in competitiveness criteria and this showed that Vietnam was losing attraction of an export-oriented economy based on low-cost laborers. 2.1.3. Cultural and social environment Population: Vietnam is the thirteenth and the third most populated countries in the world and in the Southeast Asia, respectively. Population growth has slightly gone down, however, 17 population scale is large and population density of Vietnam is one of the highest density in the world Graph 1: Population structure in age Female Male Percentage Source: General Statistics Office of Vietnam The graph shows that total number of laborers above 15 years old in 2012 is 52.58 million. Thus, high number of people in working age supplies abundant working forces for the economy in many sectors and fields. People’s qualification has improved and development policies have focused on employment, improvement of business operation quality, sector diversification and labor structure transfer from agricultural sector to industrial and services sector. Population scale in the country as well as in each region has been well performed. The more the economy develops, the higher income people earn, the more attention people pay to life quality improvement. Thus, with funding products of banks, people can meet their life demand whereas banks can diversify products and promote their business operation. 2.1.4. Technology environment Along with integration with the region economy and the world economy, science technology sector of Vietnam has continuously developed. Science - technology sector has made an important contribution to effective receipt, management, adaptation and exploitation of foreign technologies. Thus, technology level of some production and service sectors has remarkably improved and some products have higher competitiveness. In banking sector, science and technology application to business operation in recent years has got attention from the State Bank of Vietnam based on actual demand such as international payment system, payment services 18 through ATM, POS and online banking development. Banks have developed and expanded some products such as Mobile banking, Internet banking, mPayment, etc to help customers access banking products. Besides, technology application to specialized divisions in banks such as appraisal, risk management, customer management division has also helped banks to decrease labor expenses, increase productivity and make objective and proper decisions on their operation. 2.2. Commercial banks in Vietnam 2.2.1. Actual state of commercial banks in Vietnam After 25 years of reform, credit institution system of Vietnam has gained some important achievements and made contribution to reform and development of the socialist-oriented market economy during transition period. Safety, stability of credit institution system decides stability of the financial system and plays an important role in macroeconomic stabilization. Credit institution system has supplied a huge amount of capital to industrialization, modernization process, promoted investment, made rapid economic growth, created jobs and contributed to performance of social policies of the State in recent years. Besides, banking sector is one the leading sector in marketing opening and international integration. Some remarkable achievements include: - Two-level bank system with various ownership (the state, collectives, join-venture, 100% foreign capital, joint stock), type (commercial bank, development bank, policy bank, branch of foreign bank, 100% foreign-capital bank, financial company, financial lease company, people’s credit fund, microeconomic organization) and scale (large, medium and small/micro). The number of credit institution has rapidly increased. Until now, credit institution system has rapidly developed in quantity, financial scale and activities, including one bank for social policies, five commercial banks of the State and joint stock commercial banks under control of the State, 37 joint stock commercial banks, 50 branches of foreign banks, five 100% foreign-capital banks, five joint venture banks, 18 financial companies, 12 financial lease companies, one central people’s credit fund, over 1000 people’s credit fund at grass-root level and a microfinance organization. - Financial capacity and operation scale of credit institution have rapidly increased. Existence of many credit institutions with various scales has made favorable conditions for meeting various demands on banking services. Diversification of credit institutions is appropriate to characteristics of an economy with many economic sectors, various ownership types, multi- 19 sectors and various customers (FDI enterprise, trans-national company, small and medium enterprises, state owned enterprise, group and corporation, individual and household, etc). Diversification of banking service demand and customer objects decide diversification of credit institution system of Vietnam Graph 2: Market share of credit and asset in commercial bank models CREDIT MARKET SHARE ASSET MARKET SHARE SOCB SOCB ISCB JSCB FLC FLC FC FC PCF PCF Source: General Statistics Office of Vietnam Thus, credit institution system plays an important role in supplying capital to socio-economic investment and development, especially to industrialization, modernization process, infrastructure development, poverty reduction and social welfare improvement. With such important role and scale, safety, soundness and effectiveness of credit institution system are important factors to the stability of the national financial system and the micro-economy. - Competitiveness and banking service supply capacity have been continuously improved to meet demand of the economy better. Banking management and technology system have been step by step reformed in accordance with international regulations and standards. Banking services have not been limited to capital mobilization and credit supply services. Many modern banking services have been deployed such as payment cards, online banking services, foreign currency trading, investment banking operation, etc. Banking network has been expanded nationwide to facilitate people and enterprises to conveniently access banking services. Besides physical 20 distribution channels such as transaction points, branches and transaction offices, electronic distribution channels have rapidly developed. - Market opening and international integration in banking sector have been strengthened: Banking service market of Vietnam has been remarkably liberalized with high opening level and high penetration of foreign banks. Banks of Vietnam have also participated international and regional financial market step by step. Until now, most large banks in the world have commercial presence in Vietnam and some banks of Vietnam have presence in foreign countries also (Laos, Cambodia, Myanmar, China and Germany). However, the “outbreak” in scale and diversification of banking sector recently causes potential risks and direct impacts on safety and soundness of commercial bank system. Banking activities possess potential risks and when such risks accumulate and become serious due to impacts of external factors such as macroeconomic instability, crisis of the world economy, securities market and/or real estate market crisis or internal factors such as inappropriate risk management, incomplete credit process, risky investment, poor qualification and morality of bank staff, etc, collapse of banking sector is unavoidable. At present, Vietnamese bank system is facing more and more risks, typically: Credit risk: On one hand, meeting high capital demand for business operation of enterprises and people whereas business capital is mainly based on bank system results in “hot credit”. However, when the economy slowly develops and borrowers face difficulties, credit risk will be more likely to occur, especially in case banks carelessly issue credit without fully making provisions for credit risk. In particular, attraction of real estate and securities market recently have made commercial banks focus too much on capital supply to such risky markets and this remarkably contributes to develop “bubble” of real estate and securities. On the other hand, some newly-established commercial banks with small scale need to rapidly increase credit and asset scale as well as meet profitability demand of shareholders and rapidly become commercial banks with large scale and experiences. Thus, such banks strengthened credit growth to about dozens percent annually, including credit issue to sectors with high risk, regardless of regulations on capital safety and risk management. Liquidity risk: Because outstanding loan and asset growth of some commercial banks are too high whereas their capital is limited, liquidity of such banks is low, even there is no liquidity. To ensure liquidity, such banks accept interest rate on inter-bank market up to 20-30% per year 21 although re-discount interest rate issued by the State Bank of Vietnam is 13% per year. Liquidity risk is associated with term risk when most mobilization capital has short-term, even, extremely short-term, however, commercial banks issue credit in all terms with a large rate for medium and long-term credit. Interest rate risk and foreign exchange risk: Macroeconomic instability, especially high inflation rate and belt-tightening policies to restrain inflation cause interest rate risk to commercial banks. Large and sudden change in interest rate, both for mobilization and lending, and administrative interest rate management measures regularly put commercial banks in passive situation. Commercial banks try their best to increase mobilization interest rate or remain lending interest rate at high level to prevent interest rate fluctuation. Business operation of some commercial banks is not unstable and business disciplines are not strictly complied and this makes gaps for criminals to illegally utilize. Besides, because dollarization has been slowly handled and total deposit in foreign currencies accounts for over 20% of total deposit, even goldenization occurs with ineffective use of hundreds of tons of mobilized gold, commercial banks are likely to face foreign exchange risk and gold price risk. Such fluctuations have serious impacts on safety of debit and credit assets of commercial banks. Thus, Vietnam must re-structure bank system in particular and financial system in general to prevent system risk before collapse of a financial organization leads to system collapse like the world financial economic crisis. 2.2.2. Overview of credit activities in commercial banks At present, bad debt ratio in commercial banks is reaching an alarm level. This comes from lending activities and fast credit growth without control of commercial banks. However, published information bad debt and bad debt ratio in commercial bank system in not united. Governor of the State Bank of Vietnam said that ratio of bad debt to total outstanding loan of commercial banks was about 10% whereas Inspectorate of the State Bank of Vietnam said that bad debt ratio of commercial banks was 8.6%, equivalent to over 200,000 billion VND. Besides statistics supplied by the State Bank of Vietnam, according to National Financial Supervision Commission, bad debt ratio was 11.8%, equivalent to 270,000 billion VND. So bad debt ratio of Vietnamese banks is a mystery, however, bad debt ratio must be a large number. 22 The situation that failure of commercial banks in controlling business operation leads to bad debt tends to increase. Bad debt, regardless of high or low ratio, has been having negative impacts on monetary management policies of the State Bank of Vietnam, on capital circulation in the economy and on safety, business effectiveness of commercial banks. When bad debt has not been completely handled, restructure of bank system in Vietnam will not be effective. However, macroeconomic achievements of Vietnam possess some risks: (i) Total demand of private sector is poor and vulnerable by negative impacts (ii) It is probable that competent authorities must loosen fiscal and monetary policies to increase poor demand of the private sector. (iii) Structure reform progress may be delayed and this makes GDP growth low and unsustainable. Decrease in inflation rate enables the State Bank of Vietnam to loosen interest rate regulations to increase demand of the private sector; however, credit growth is slow. Reports indicates that credit activities become “inactive” when banks suffering more pressure from high bad debt ratio are afraid of more risks and intend to remove some financial leverage. Low credit demand shows low business confidence in the private sector. Mr. Bert Hofman, World Bank's Chief Economist for the East Asia and Pacific Region said that: “In other countries, to handle bad debts in banks, competent authorities must not accept or tolerate negligence in making provision for bad debt of banks. Or to remove bad debts from banks and assign other agencies to handle bad debts, for example, VAMC in Vietnam. I cannot recommend what Vietnam should do because I don’t know actual scale of bad debt in Vietnam, however, bad debts are preventing Banks and economies from developing. If selected, banks should self handle bad debts with the above strict management policies from the state. 2.3. Five competitive force model application to Commercial banks 2.3.1. Five competitive force model Michael Porter, the leading competitiveness strategy maker in the world, made a theoretical framework to analyze competitiveness. He modelled business lines and thought that all business lines are impacted by five competitive forces. Strategy makers who are finding superior advantages than competitors can use this model to understand deeply about context of the business line that they are operating. 23 Model 1: Five competitive forces of Porter POTENTIAL COMPETITORS Threat of new entrants Bargaining power of suppliers INDUSTRY SUPPLIERS CUSTOMERS COMPETITOR Bargaining power of buyer Threat of substitute services SUBSTITUTE PRODUCTS A According to Michael Porter, competitive level on the market in any production industries is impacted by five competitive forces as follows: * Power of Suppliers Power of suppliers shows the capacity of making decisions on their transaction conditions to enterprises. Weak suppliers may accept terms of enterprises which reduce cost and increase profit in production whereas strong suppliers may put pressure on production industry by some methods such as setting high material selling price to share profit of the industry. Some factors deciding power of suppliers include: - Concentration level of suppliers. Power of suppliers will be extremely great if their concentration level is high. If a supplier of an enterprise must compete with many other suppliers, it is likely to accept unfavorable terms because the enterprise may rapidly order goods from other suppliers. Thus the supplier must accept price squeeze. - Input standardization level. Standardized input improves competitiveness among suppliers and decrease their power. - Change cost of suppliers. The higher this cost is, the more unfavorable terms enterprises must accept because transfer from a supplier to another one costs enterprises a huge amount. - Consolidation possibility between supplier and production unit. The higher this possibility is, the greater power of supplier is. 24 * Substitute Products Products in commercial banks are similar in characteristics as well as application, thus it is popular for customers to use substitute products from a bank to other banks. Existence of substitute products will result in high competition level among commercial banks and require commercial banks optimally improve and reform their products, services to attract customers. Establishment of non-banking organizations threatens advantages of commercial banks in supplying new financial services as well as traditional services. Such intermediate financial institutions supply customers with differentiated products, more various choices and make banking market expand more. For example, customers may purchase life insurance instead of deposit in banks to get insurance right and interest. This is certain to decrease market share development of commercial banks. * Threat of new Entrants Potential competitors are commercial banks which have not been established but are likely to compete in the future. Penetration possibility depending on penetration barriers is shown by reactions of current competitors that can be predicted by new competitors. According to Michael Porter, there are six main penetration barriers including: - Economic advantage in scale: Commercial banks with large scale can reduce cost per product unit. This causes unfavorable conditions and competition difficulties to such commercial banks. - Product differentiation: It takes commercial bank a lot of time and money to make a product which is more advantageous than current products. - Capital and cost requirements: When operating in the industry, commercial banks must have legal capital, necessary investment capital and related conversion cost. - Legal policy is the legal corridor for commercial banks to make business strategies and plans under legal provisions and fairly compete. * Bargaining Power of Buyers Customers always require lower price and better service quality. Pressure from customers comes from: When the number of buyers is low, great power of buyers can set the price and force product price to decrease and this makes profit of the industry decrease accordingly: 25 - When buyers buy a large number of products and the number of buyers accounts for a high percentage of output of sellers. - When customers have full public and transparent information on banks, they will make transactions with banks which bring the highest benefits to them. This will require banks to effectively operate, increase profit as well as retain customers * Competitors Current competitors in the sector are commercial banks with strong standing on the market. Competition characteristic and level among current competitors depend on the following factors: - The number of competitors: The higher the number of competitors in the sector, the higher competition level is. However, competitors with high scale and strength are more likely to dominate activities of the sector. - Growth of the sector. In case growth of the sector is slow and an enterprise expands its scale, increase market share and access market of other competitors, competition pressure will increase. - High fixed cost and warehousing cost: Commercial banks have high fixed cost and are under pressure of capital return so they regularly increase product output and this results in decrease in selling price and increase in competitiveness. - Poor product differentiation and variable cost. Current competitors have impact on business strategy of a commercial bank in the future as well as motivate commercial banks to continuously increase capital, reform technology, improve product and service quality to have competitive advantages. 2.3.2 Enhancing the competitiveness of commercial banks in Vietnam With administrative ability limited at present, commercial banks in Vietnamese facing two huge risks, which have a profound influence on the economy. This fact requires each bank itself to constantly improve its administrative ability to compete not only with domestic banks but also with international credit institutions. 2.3.2.1 Facts of the competitiveness of commercial banks in Vietnam - Indicators of capital mobilization and structure capacity: The ability to mobilize and structure capital is one of the criteria for evaluating business capacity of commercial banks (CBs) in aspect of capital mobilization and credibility in the marketplace. Good capital mobilization capacity is the ability to dominate and expand the market share of commercial banks through various 26 products to attract deposits from customers. Furthermore, when large-scale capital and logical structure will allow commercial banks to develop business activities such as loans, investments and other financial services. Capital mobilization capacity is determined by the scale and growing rate of capital over time. -Asset structure: The scale, structure and quality of assets are critical to the survival and development of the bank. Asset quality is a synthetic indicator which reflects management quality, payment capability, profitability and sustainability prospects of a bank. - Capital structure: The capital is a prerequisite to license for a bank into operation, ensuring the viability and growth of that bank. As stipulated by law, the scope of operations and business of a bank depends on the scale of their own capital. Own capital is the basis for calculating the safety limit in the business of banking, the issue of bank capital management becomes a legal requirement in the interest of the public. - Payment capability: A basic criterion for assessing the quality and safety during the operations of a bank. Therefore, to ensure payment capability, banks have to maintain a certain ratio of assets in the form of liquid assets, especially assets with high liquidity such as cash, deposits in the Central Bank and other liquidity reserve instruments. In addition, banks must also focus on improving the quality of assets, building a rational portfolio of assets which are capable of converting into cash quickly and recover debts on time to meet the requirement to pay customers or perform the obligations undertaken. - Profitability: Profit is a synthetic indicator reflecting the business performance as well as to assess the sustainability of a bank. Operational efficiency and profitability of the bank has a close relationship with each other. When considering the profit indicator, we need to analyze profitability in relation to other management indicators, such as the degree of liquidity, an acceptable level of risk, asset structure and long-term growth prospects of banks. In analyzing and assessing the profitability of the bank, we can measure by many different criteria such as: Rate of return on assets (ROA), return on equity capital (ROE), return on total revenue, profit per share. These indicators reflect the profitability of net assets. In other words, every unit on average assets used during the period creates how many units of profit after tax. 2.3.2.2 Solutions to enhance the competitiveness of commercial banks in Vietnam 27 To enhance the competitiveness of the commercial banking system in Vietnam and promote the healthy development and sustainability of the banking sector in the coming period, the article provides the following key solutions: -Firstly, increasing the size of the charter capital: The most important factor to ensure safety coefficient of minimum capital as prescribed by the State Bank and also ensure safety for the operation of the bank itself in the process of credit operations. The capital increase will allow banks to invest in the technology development, human resource training and the expansion of distribution channels. These are also the indispensable elements to regain the competitiveness of Vietnam's commercial banks. -Secondly, investing into the technology development: In the modern competitive environment, technology is an important factor affecting the success of the bank. Along with the increase in equity, commercial banks need to upgrade the investment in the modern technology development which is capable of linking in the system, to improve the competitiveness in the tendency of commercial banks increasingly having fierce competition... - Thirdly, enhancing the quality of human resources Recruitment: To maintain meritocracy employment policies to recruit people who have enough faith and enough talent to undertake the increasingly requiring work of the current banking system. Training: There are policies to encourage officials and employees to self-study to enhance their own professional qualifications; nominate talented administrators for learning working methods , organization and management in developed countries around the world. -Fourthly, strengthening cooperation with foreign banks: In the context of deeper economic integration, Vietnam's commercial banks need to step up cooperation with foreign banks to learn management, administration and the application technology software. This will help banks better control transaction security and stability. CHAPTER 3: INTRODUCTION OF TECHCOMBANK AND CREDIT RISK MANAGEMENT IN TECHCOMBANK 3.1. The history and development of Techcombank Vietnam Technological and Commercial Joint Stock Bank, commonly known under the name Techcombank is now one of the biggest joint-stock commercial banks in Vietnam. Since 28 established in September 27th1993 with an initial capital of only 20 billion dong, the Bank has continuously flourished with outstanding business achievements and has been repeatedly recognized as a prestigious financial institution with the title of best Bank in Vietnam. Today, with the support of strategic shareholder HSBC, we have a stable and strong financial background with total assets of over 158 897 billion (as the end of 2013). Through three strategic business areas: Personal Financial Services, Banking Services for small and medium business, Wholesale Banking and Transaction Banking, we provide financial products and services to meet the diverse needs of many different client segments. That probably is why more than 3.3 million personal customers and 45.368 corporate customers have selected Techcombank as a financial partner. In 2008, in the context of the financial crisis, the global economic slowdown is an objective cause affecting production and business situation of the clients as well as lending activities of Techcombank. So delinquency index, bad debts of Techcombank also change in the period of 2008-2013. These outstanding achievements of Techcombank over the years. It was founded in 1994 with charter capital of 51.495 billion initially with a starting branch as Ho Chi Minh Techcombank branch. By 1998 it officially moved its headquarters to the building Techcombank, 15 Dao Duy Tu, Hanoi with a charter capital of 80.020 billion. By 2007 with the total assets of nearly $ 2.5 billion, Techcombank became the bank having the second largest transaction network in commercial joint-stock banks with nearly 130 branches and transaction offices by the end of 2007. Also in 2007 HSBC rose its contribution capital to 15% and directly supported in the operation of Techcombank. Techcombank had already profound changes in its structure, with the formation of the cooperation client service Sector, establishing credit Management and risk Management Sector, completing structure of the banking Services and personal finance Sector. It also upgraded T24R06 core banking system. This is the boom year of card service with the total number of cards issued reached 200,000 cards of all kinds. It became the first and only Vietnam bank recognized achievements in the application of technology and forerunner in market development solutions by Financial Insights and awarded " Top Trade Services 2007" - award for the typical enterprise, operating in 11 fields on Trade Services that Vietnam committed to WTO membership awarded by the Ministry of Industry and Trade. It implemented the program "mystery Client" to assess quality of the services of traders and trading 29 point of Techcombank. It launched a series of new products such as the lottery savings program "Send Techcombank, winning Mercedes" Family Accumulate protection Savings, consuming credit, the products for businesses as Sponsor suppliers; products based on high technology as F @ st i-Bank, the products of Money account management of stock investors, F @ st S-Bank and E-Payment Gateway providing online payment solutions for the e-commerce website F @ stVietPay. Through 21 years of operations, Techcombank with the accumulation of knowledge and experience, along with a network of branches spread over 43 provinces, Techcombank has strengths and advantages in understanding and meeting the needs of financial banking services for clients across the country. Consolidated profit before tax for Techcombank in 2014 reached 1,417 billion, up 61.35% compared with 2013 and reached nearly 120% of the annual plan. Total operating income rose 25.83% over the previous year. The Bank has continued to maintain investment in developing human resources, technology platform and infrastructure, while implementing a number of initiatives to reduce costs in a sustainable way. Total income increased while operating expense controlled rationally helped cost / income proportion (C / I ratio) fall sharply from 60% in 2013 to 48% in 2014. Total assets of the bank in December 31st2014 rose 10.71% during the year, reaching 175 915 billion dong, equivalent to 103% of the annual plan. Capital Adequacy Ratio (CAR) was at 15.65%, higher than the safe level of 9% as prescribed by the central bank. Outstanding loans to clients in December 31st2014 reached 80308 billion dong, up 14.28% over the same period in 2013; Lending rate on deposit at 61.1%. Notably, through the implementation of initiatives NPLs combined with continuing the improvement of risk management policies according to international standards, and being prudent in risk provisioning, the ratio of bad debts in Techcombank has plummeted about 2.38%. Raising capital from residents increased 9.55% and reached 131,438 billion in 31/12/2014. Techcombank continues to invest in developing the network of branches and transaction offices with a total of 313 branches and transaction offices, 1,231 ATMs. The Bank has also pioneered to develop modern sales channels to increase convenience for customers as F @ St Mobile applications with the convenience of quick money transfers via social networks. Currently, the Bank has grown personal customer numbers relatively large from 3.3 million customers at the end of 2013 to 3.7 million customers at the end of 2014. 30 With the optimistic assessment of economic growth and the recovery of the market, in 2015, Techcombank will continue to actively invest in capacity building to enhance the quality of products and services, in order to maintain its status as a the leading bank in Vietnam. 3.2. Organizational Structure Model 2: The model of organizational structure of Techcombank The bank’s operating model based on: * These laws stipulated by Vietnam national Laws and regulations relating to the operations of the Bank * Regulations of the Vietnam State Bank for Vietnam Credit Institutions * Leadership team combining local and overseas banking experts Board of Directors, authorized by the General Meeting of Shareholders commits its role and responsibility as representatives of Techcombank. Board of Directors operates through monitoring, reviewing and providing guidance in the process of setting strategic direction. Board of Directors established the Committee to implement assigned tasks effectively. The Committee was organized to improve the Board’s capacity and develop diverse profession of senior leaders in the Bank. In 2014, Techcombank paid attention to capacity of team work of the Executive Board on the basis of promoting individual skills of each member in the common interests of the bank. The 31 organizational structure was maintained in the tendency of a stable banking business and operation while continuing to develop new initiatives fitting with the local culture and international practices. 3.3. Techcombank's goal in the coming period Objectives Techcombank set out in the future are to become the best bank and leading enterprise of Vietnam and become a financial partner being selected and most reliable for customers through the ability to offer full products and diversified financial services and based on the customer always being considered as the focus. It also provides its employees with a good working environment with many opportunities for capacity development, contributing value and building a successful career. It gives shareholders the attractive and lasting benefits through the implementation of a strong and quick business strategy in parallel with adoption of corporate governance practices and strict risk management according to international standards. Model 3: Diagram of Techcombank strategy Lodestar for the goals set out, the Bank committed to: - Customers are above all, emphasizing that we value every customer and strive to bring products and services to best meet customer needs. - Continuous improvement means that we were good but can always be better, so we will never stop learning and improving. 32 - The spirit of collaboration means that we trust in our colleagues and cooperate to jointly offer the best thing for the bank. - Human resources development means that we facilitate employees to maximize the capacity of each individual and reward for the deserving achievement. - Commitment to act means that we always make sure that the job committed must be completed. 3.4. Techcombank's business operations in the period from 2008-2012 In 2008 the banking sector in general and in particular Techcombank faced many adverse changes in the economy such as high inflation, the business situation of enterprises and household businesses being difficult, the decline of the real estate market and stock market. Rising interest rates lead to charges of banks and enterprises increasing. In 2009 the macroeconomic policies of the State (including the stimulus program) were to promote efficiency, so the economy gradually stabilized and developed, Structure between fields was quite consistent with economic and societal conditions of the province. Besides, in 2009, real estate prices, the price of gold, dollar, gasoline and building materials rose highly ... making it difficult for businesses and consumers having a credit relationship with the bank. Deposit interest rates constantly changed, especially in the last months of year affecting the mind of the depositors. Capital mobilization grew slowly while investment loan demand increased highly. Before the complicated situation from the financial and monetary markets, Techcombank was subject to significant influence, but thanks to the correct policy in the direction and management of the Bank’s leaders and always following closely the direction of the State Bank and the Banking sector, Techcombank directed and timely adjusted business operations aligned to the sector and the country. Results of operation of Techcombank over 5 years are as follows: Table 1: Some indicators of operation of Techcombank Indicator 2008 2009 2010 2011 2012 Total assets 59,360 92,534 150,291 180,531 179,943 Mobilized capital 29,779 45,678 123,358 136,781 150,633 Outstanding loans 26,342 56,740 52,928 63,451 68,261 Profit before tax 1,600 2,146 2,743 4,221 1,018 (Source: The Balance Sheet of Techcombank over the years 2008-2012) 33 Graph 3: Growth of Outstanding loans - Mobilization - Total assets Billion dong 200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2008 2009 2010 Total assets Outstanding loans 2011 2012 Year Mobilized capital Benefit before tax Through the table and graph above, we can see the quite effective and stable business situation over the years. Total asset size currently brings competitive advantages for Techcombank working capital compared to other banks Capital Mobilization Operation Capital Mobilization is an activity that is significant and always placed top in the business strategy of the bank, because we must have stable funding to ensure continuity of business operations to proceed normally, increase the autonomy for the bank. The situation of raising capital has tended to increase over 3 years: 2009 up 25% over 2008; 2010 deposits increased by 13% compared to 2009. Thus over the last 3 years, the source of Techcombank deposits had a great growth thanks to the mobilization of various forms enriched with active measures such as expanding the network of savings goals, combining mobilizing savings with the money transfer service, billing, attracting payment deposits of economic organizations, savings deposits of residents, issuing bonds, valuable papers with the type of term and annuity deposits by strong local and foreign currency 34 highly convertible to pay wages and some services via ATMs.In2009, high growth rate was due to that from the first months of year Techcombank had focused on raising capital for drastically spirit, accepting competition for stability and growth in capital, Techcombank had applied the flexible interest rate incorporating with the deployment of capital mobilization forms issued by Techcombank. The results were the capital growth from the early months of the year and regular growth in other months. In 2010 capital mobilization growth rate decreased from the previous year, caused by the emergence of many joint-stock commercial banks, with more flexible forms of mobilization and effective promotion policy, leading to market share Techcombank descending. Besides, the central bank adjusted the exchange rate USD / VND so people had minds of holding dollars, the price of gold increased volatility affecting the capital mobilization. Despite the slower growth compared to 2009, overall funding Techcombank had steady growth and gradually made initiative for credit investment in Techcombank. Credit Operation Credit operations are the mainly profitable activity for the banks. Techcombank always appreciates this operation as a leading business strategy. The development of the branch network, the increase in the number of customers, the efficiency in the work of raising capital ... is creating favorable conditions for the development of credit operations at Techcombank. The results of outstanding growth over 5 years show the achievement of the activeness in searching client, professional service style and continuous diversification of credit products. Service Operation With profound awareness of social services in the low-risk revenue and sustainability in banking activities, the development of banking services has been fueled and thoroughly to each unit in the system to serve better customer demand for both quality and quantity. Techcombank service activities in recent years have been focused and continuously diversified. With remittance payment services, remittances development and diversification of the type, the Bank collaborated with many companies such as Money remittance GRM, Coinstar Money transfer, Ria Financial Services .... Underwriting services, domestic and international payment operations increasingly have efficiency, card business activities are also promoted; the Bank strives to deliver innovative, modern, safest products to clients. 35 In recent years although there is competition with other banks, Techcombank has maintained a high growth rate. In the structure of net service, revenue accounted underwriting revenues 54.2%. This is the advantage of Techcombank policy should continue with appropriate customer targeting stable revenue guarantor. 2010 focused on implementing the program of retail products supplied by Techcombank, thus creating retail service revenues. CHAPTER 4: CREDIT RISK MANAGEMENT IN TECHCOMBANK 4.1. Credit operations at Techcombank 4.1.1. Credit perspective in Techcombank Credit is the relationship based on principles borrowed and repaid with profit; it satisfies the needs both 2 sides, showing a relationship of equality and mutually benefit, agreement, transparency. Credit relations established permanently and developed with the market economy over time, in stages. And since that time, credit forms have developed under each condition varied socioeconomic background detail. 4.1.2. Credit performance in Techcombank 4.1.2.1. Outstanding loans under customer Techcombank has 2 forms of credit granted mainly for private clients and businesses. Each of these objects, the Techcombank provides products and services for different needs of each client. 4.1.2.1.1. Individual customers Before the difficulties and uncertainties of the economy in 2012, the sector of Individual Finance Service continued paying attention to customer having good and premium income, timely responding before the changes and challenges of the market, seizing every opportunity to grow. To 2012, the number of customers and loans of personal financial services increased strongly. 36 Graph 4: Outstanding individual customers Techcombank Outstanding loans(billion dong) 18.397 2010 22.234 2011 27.532 2012 Source: Annual Report in Techcombank The year of 2012 witnessed a strong growth of the retail banking sector. Compared with 2011, the number of Visa cards issued increased by 202.5%, from 126 571 to 382 930 cards, and the number of retail customers increased by 20.5% to 2,806,534 customers. Graph 5: Number of individual customers through the years CLIENT NUMBER 2,806,534 2,328,549 1,767,642 Người 2010 2011 2012 Source: Annual Report in Techcombank The Bank's goal is to provide lending services to meet the individual needs of each client in accordance with the requirements of prudent risk management. Statistics show that the outstanding loans increased by 23.8% compared with the same period last year thanks to structuring lending products of the Bank. The rate home loans on total retail loans dropped to 77.7% from 57% last year. This reflects a shift in customer demand from borrowers of real estate 37 into productive activities and services. The products are provided mainly for individual customers mainly include: - New house products - Consumption loan products - Business loan products - Overdraft products - Other products Graph 6: Outstanding loan pattern by products Other 22% Overdraft 7% New house 57% Business loan 8% Consumption loan 6% Source: Techcombank annual report 4.1.2.1.2. Enterprise client The Bank has decided to divide all existing clients and potential business clients in three distinct market segments according to annual sales and charter capital, including i) Big Enterprise, ii) Medium Enterprise, iii) and Small and Medium Enterprise. NHBB Group is responsible for two first customer segments, and the Enterprise Client Group is responsible for the final segment. After conducting group division, the Bank has created differences in products and services for each segment and establish organizational structures to bring the customer value position at best for all clients in each target segment. TCB has decided to join the Banking Transaction Banking and Financial Institutions in a block NHBB to enhance product 38 development capabilities and the ability to provide products and services with uniform quality. Despite being not affiliated with NHBB, Treasury and Financial Market Group will continue to coordinate closely with the NHBB Group to ensure that clients can access products manufactured by Capital and Financial Market Group. In addition to segmenting clients by Annual sales, the lending ratio of enterprise clients also reflects the situation of the economy. Graph7: Outstanding loan by business clients Agriculture, Forestry and Fisheries Warehousing, transport and communications Trade, production and processing Construction, real estate Others 6,390 8,783 5,390 Million 24,141 22,993 19,706 5,174 874 5,097 2,114 31,683 24,465 4,665 2,060 21 2010 2011 2012 Source: Techcombank annual report As can be seen from the graph, outstanding loans belonging to groups and business real estate accounted for the majority and increased over the years. Table 2: Outstanding loans to business customers by type of business: Type of enterprise 2012 2011 Million VND % Million VND % State Enterprise 3.362.776 4,93% 2.939.365 4,63% Company Lmt. 19.536.824 28,62% 18.838.640 29,69% 16.401.844 24,03% 16.789.830 26,46% 591.643 0,87% 719.780 1,13% Joint stock company Foreign-invested 39 enterprise 619.971 0,90% 1.499.470 2,36% Other 27.748.384 40,65% 22.664.380 35,73% Total 68.261.442 100% 63.451.465 100% Private enterprise Source: Techcombank annual report Graph 8: Outstanding loans to business customers by type of business 30,000,000 25,000,000 State enterprise 20,000,000 Company Lmt 15,000,000 Joint stock campany 10,000,000 Foreign-invested enterprise Private Enterprise 5,000,000 0 2011 2012 4.1.2.2. Credit outstanding loan by term limit Short-term loans: The loans have a loan term to 12 months. The purpose of this type is usually to finance investments in liquid assets of the companies, and the short-term expenditure needs of individuals. Medium-term loans: The loans have a loan term from 12 months to 60 months. The purpose of this type of loan is to finance fixed assets. Medium-term loans are mainly used for the procurement of fixed assets, renovation or improvement of machinery equipment, business expansion, construction with small projects and fast recovery time. Long term loans: The loans have a loan term from 60 months. The purpose of this type of loan is usually to finance the investment projects, housing construction, equipment and means of transportation of large scale. 40 Table 3: Credit outstanding loan by loan time Year Indicator 2011 2012 Million % Million % Short-term loans 35.586.745 56,08% 36.446.276 53,39% Medium-term loans 10.619.444 16,74% 16.425.411 24,06% Long term loans 17.245.276 27,18% 15.389.755 22,55% Total loans to clients 63.451.465 100% 68.261.442 100% Source: Techcombank Graph 9: Outstanding loan by granting credit time Million 70,000,000 60,000,000 50,000,000 Short-term 40,000,000 Medium-term 30,000,000 Long-term 20,000,000 Total outstanding loans 10,000,000 0 2011 2012 In customer lending activities of Techcombank, the short-term lending sector accounts for the largest proportion and tends to increase over the years. Specifically, in 2011 the total shortterm lending to customers was 35,586,745 million VND, increasing to 36,446,276 million VND in 2012, an increase of more than 859,531 million VND, while for medium and long term, this index has the increasing trend over the recent years. Specifically, in 2011, total loans and long- 41 term for the customer was 27,864,720 million VND, rising to 31,815,166 million VND in 2012, an increase of more than 3,950,446 million VND compared to 2011. 4.1.2.3. By credibility According to this index, lending can be divided into the following types: - Loans without guarantees (unsecured): A type of loan without collateral, pledge or guarantee the 3rd person based solely on borrowers’ own credibility to decide whether to lend or not. - Loan with guarantees: A type of loan based on the loan guarantee as mortgage or pledge of any other 3rd party. This guarantee is the legal basis for the Bank so as to add an additional debt second collection to the first source debt collection. 4.2. Credit risk management at Techcombank 4.2.1. Techcombank's view on credit risk - Credit risk is the event that occurs in the credit activity, causing adverse effects on the business activities of the bank. - Credit risk is the risk arising when one or both parties in the credit agreement can not afford to pay for the others. For commercial banks, credit risk arises in cases where banks cannot collect the full principal and interest of the loan, or the payment of principal and interest is not on time. - Credit risk is not only limited to lending activities but also includes many credit–related activities of banks such as: underwriting activities, foreign trade financing, financial leasing ... 4.2.2. Identification of risk Risks in banking activities include the predictable risks (on stable portfolio,...), unpredictable risks derived from external causes (such as the economic development situation in general, ...), the underlying cause (from the staff,...). These include a few specific types as followed: 4.2.2.1. Liquidity risks Liquidity risk is the risk that commercial banks lack funds or short-term assets available to meet the needs of depositors and borrowers; specifically, liquidity risk is the risk that the bank lacks the funds to meet the requirement to pay deposits to depositors, pay loans when mature that commercial banks have borrowed, insufficient funds for disbursement for the credit contract agreed upon, ... This risk arises mainly from the trend of the bank's short-term deposits and long-term loans that often occurs when the depositors withdraw money from bank faster than borrowers who are 42 ready to pay loans. This deficiency is also interpreted as a lack of reserves in commercial banks or cannot raise funds from sources outside. 4.2.2.2. Interest risk Interest risk is the potential change in net interest income and market value of bank capital arising from changes in interest rates or interest risk is the risk of changes in market interest rates causing the profitable assets of commercial banks to decrease the value. Thereby, as we see, interest risk is the damage to net income and market value of equity of a credit institution, derived from changes in market interest rates. Interest risk associated with the structure of varying duration between assets and liabilities and market interest rate fluctuation. Due to the average capital mobilization duration and the average loan term often has a big difference; specifically, the common loan term of commercial banks usually lasts more than capital mobilization duration, so when market interest rates increase, the cost of mobilizing capital rises faster than income growth of loans with the fixed interest rate, reducing the bank's net income. Besides, the difference between the form of deposit rates and lending rates puts commercial banks at interest rate risk; specifically, while lending primarily with fixed interest rate and mobilizing capital with floating interest rates, market interest rates go up, making input costs rise faster than income; as a result, net interest differential decreases... 4.2.2.3. Foreign exchange risk Foreign exchange risk is a foreign exchange risk for open economies. In particular, such risks occur due to fluctuations in interest rates, inflation,... In different countries, the opportunities to make investments in currencies are different, causing exchange rate fluctuations; and due to the maintenance of exchange rate lower than necessary rate. 4.2.2.4. Credit risk Credit risk is the financial losses that happen when a counterparty does not fulfill the financial or contractual obligations to a bank including the non performance of debt settlement whether it is principal or interest debt when it is mature. 4.3. The indicators of credit risk assessment 4.3.1. Revenue collection 43 Revenue collection is a coefficient that reflects debt recoverability of credit staff, it also demonstrates the ability and desire to repay of borrowers. The higher this coefficient is, the better the ability to repay of borrowers and the easier the credit staff finds it to recover the debts. Table 4: Revenue collection Loan Revenue Outstanding Loan Revenue collection RC/LR (%) 2011 65.639 63.452 19,739 31% (Source: Techcombank) Unit: million VND 2012 150.684 125.262 65,882 53% In 2011, it could be seen that, revenue collection of Techcombank was not high because Techcombank had experienced an overheated growth period and the economy was instable. Stepping over 2012, revenue collection increased dramatically although during the year both loan revenue and outstanding loan increased, compared with 2011. This is the result of risk management policy and strategy of the bank in a very unfavorable situation for the collection of debt, particularly the economic crisis considerably affected customer's repayment ability. However, to assess more accurately the quality of credit operations at Techcombank, we will assess by considering incurred debt groups that are classified by the decision 18 of the State Bank while paying attention to bad debt. 4.3.2. Bad debt In the credit business, the most important thing after the disbursement is recovering the debt (including principal and interest) that the customer has borrowed. Therefore, the issue of tracking and controlling of the bank debt is particularly concerned to avoid credit risk. So the State Bank has issued decision 18, in which the loan was categorized into 5 groups with different levels of risk to help banks to easily control and manage the incurred debts to collect debt in the best way. - Loan goup 1: standard debts are debts that are in repayment duration or overdue less than 10 days. - Loan goup 2: Debts overdue from 10 days to 90 days. - Loan goup 3: Debts overdue from 90 to 180 days. - Loan goup 4: Debts overdue from 181 to 360 days. 44 - Loan goup 5: Debts overdue than 360 days. So bad debt belongs to group 3, 4, and 5. This is a direct indicator of credit quality. The higher this index is, the more risk of collection of debt for bank lending. Because bad debt is highly irrecoverable because of the decline of repayment ability of the clients that leads to delay in loan repayment to the bank. Table 6: Bad debt by loan group Group Group 1- Standard Debt Group 2- Debt that needs notice Group 3- Substandard Debt Group 4- Doubtful Debt Group 5- Bad Debt Total 2012 Million VND 64.415.288 % 94,37% 2011 Million VND 57.104.413 % 90,00% 2.005.682 2,94% 4.553.396 7,18% 108.330 848.623 883.519 68.261.442 0,16% 1,24% 1,29% 100% 927.476 623.731 242.449 63.451.465 1,46% 0,98% 0,38% 100% (Source: Techcombank) Graph 10: Bad debt by loan group 80,000,000 70,000,000 60,000,000 Group 1 50,000,000 Group 2 Group 3 40,000,000 Group 4 30,000,000 Group 5 Total 20,000,000 10,000,000 0 2011 2012 It can be seen that, the major part of total outstanding loan of Techcombank is group 1 and group 2, in which debt group 1 takes up the highest proportion. To explain this, under the 45 Decision18, if the loans are restructured in terms of repayment duration, debts which are still in repayment duration and overdue less than 10 days are classified as debt group 1. About bad debt, it can be seen that the arising speed of these debt groups is fairly high. The debt group 3 in 2012 decreased by 1,3% compared to 2011, and the debt group 4 in 2012 increased by 0,26% compared to 2011, while the debt group 5 continued to increase. We also know that all the bad debts that Techcombank is facing come from the loan for the purpose of transferring property. The property market is a market in which there are always potential risk factors in addition to the serenity of the market in 2011, which made investors lose money, affecting the ability to pay debts to the Bank. * The ratio of bad debt per total loan. Table 7: The ratio of bad debt per total loan. Indicator Total loan Bad debt Bad debt/total loan Unit: million VND 2012 68.261.442 1.840.472 2,69% 2011 63.451.465 1.793.656 2,82% Source: Techcombank Graph 11: Fluctuation in the ratio bad debt per total loan. % Bad debt/Total loan 100% 80% 60% 40% 20% 0% 2011 2012 % Bad debt After two-year operation, the proportion of bad debts incurred in Techcombank has increased slightly, but the percentage of bad debt to total loans is very low. This shows that credit management policies at Techcombank are prompt and accurate enough to minimize the risks. However, it should be noted that the increase in the bad debt ratio is a warning sign that if in 2012 the economic situation has no positive changes, it is difficult for Techcombank to avoid 46 bad debts. Especially the group 5 is an irrecoverable debt group when repayment duration exceeds 365 days. 4.4. The process of granting credit in Techcombank 4.4.1. The organizational structure of credit management Model 4: Credit management organization in Techcombank Board of director Audit and risk Estate management unit Management GENERAL unit DIRECTOR RISK MANAGEMEN T GROUP Credit risk Credit management Appraisal and Approval Credit Policies Secure assessment & estate management Credit supervision and bad debt management 47 In recent years, Techcombank has actively improved framework of credit risk management system to meet international standards and practices. The bank’s task of risk management is done mainly by risk management unit with requirements to ensure evaluation and control of risks in a range from credit, market and operational risk to the risks involving in the type of business, in accordance with the operation particularities of Techcombank network. In 2011, the risk management unit has cooperated closely with Audit and Risk Committee ARCO (under Board of directors), to take part in asset management committee debt - ALCO (under Executive Board) to consider the adjustment in time, regularly on risk management. Besides, each business sector has a risk analytical and evaluation department to specialist skill that deployed by function. The risk control by concentrating direction combines multistage arrangement to ensure that Techcombank has proper and adequate assessment for risks that may be faced to develop appropriate prevention policies. • Credit risk management policy Credit risk management is a center in activities of commercial bank. To manage credit risk in an overall way in Techcombank system, Techcombank's credit policy must be a guideline of action, approaches and resolve issues that are built from the fundamental, healthy rules. • Business development Business development is a process of products and services marketing of the Bank for existing customers and new customers. To do business development with uniformity, efficiency and consistency as well as the contribution of healthy credit culture in the bank, Techcombank requires implementing the following regulations: - Develop business with a specific plan - Arrange and monitor the implementation of the business plan to ensure that the objectives have reached. - Coordinate with the involved divisions in the preparation, organization and monitoring of the plan implementation. - Comply with the Bank’s general provisions relating to business development • Credit analysis Credit analysis plays an importance role in efforts to manage risks effectively. Basic function of credit analysis is to identify and assess risk level that relates to the supply of credit. To implement 48 it, the credit analysis must show all kinds of risk to customer and the bank. The principles of Techcombank are as follows: - Credit analysis requires a processing (checking, evaluation and analysis) of information that provided by customers and not merely get information from customers. - Fulfill the evaluation and assessment for all constituents that create risks relating to the loan. - Use evaluation, analysis and assessment results in order to make suitable risk reduction measures. • Loan structure Loan structure is the confirmation of conditions and terms that the Bank may provide a credit to customers. The conditions of interest rate, payment period, and loan guarantee and limited terms should be determined accordingly with the lending policy of the bank in relation to the various risks. The regulations of Techcombank are as follows. - Understand the purpose of the loan, repayment sources, steady levels of repayment source and duration to determine the suitable credit products: type, circulation limit medium and long term ... - Determine the payment ability and the obligation in accordance with loans - Determine ways to monitor loans and maintain customer relation - Comply with lending standards as regulated in the valid documentations of Techcombank. • Approval Loan approval is the last stage in the loan structure. There is a common standard regarding approval procedure, approval structure, approval competence for all banks. This depends on many factors such as strategic orientation, organizational structure, management capacity... Regulations of Techcombank are as follows: - Base on evaluation and reevaluation results to make an approval decision. - Comply with the regulations of Board of Directors and General Director. - Ensure the consistence as well as the implementation of rules and regulations of the bank at all approval levels. - Do not create bottlenecks in the approval cycle for documentations at all levels. • Make a credit agreement and mortgaged contract Principles are proposed: - Make a credit profile that is a work to be done immediately after the loan is approved. 49 - The recognition of guaranteed assets is considered as completion after completing the legal procedures as stipulated by Techcombank and the State Bank. - The preparation/storage of credit profile must comply with the current rules/regulations of the banks. • Keep track of the loans • Deal with problem loans Principles of Techcombank - Apply all measures to recover loans before considering the liquidation of guaranteed assets. - Solve strictly with problem loans. - Coordinate with the relevant units in dealing with problem loans. - Comply with the provisions of the laws and regulations of Techcombank. In 2011, the policy of credit risk management is controlled, updated by Techcombank under the market situation, particularly a series of important documents have been improved and issued: credit risk for businesses and individuals, credit policy, loan and guarantee regulation, regulation on credit approval, credit granting process for some business and some credit directions to control credit risk for industries that account a large proportion in Techcombank, risk management unit has also completed a method of building of credit ranking system for medium and small customers. 4.4.2. Process of credit issue From 2008 to present, credit process of Techcombank is applied under risk management model of HSBC. The focus from the approval stage to control after loanfor some credit loans that help bank manage risk issues and plan credit policy for each period. 50 Model 5: Process of credit issued in Techcombank IMPLEMENTATION UNIT IMPLEMENTATION PROCESS Customer staff Market, contact with customer, collect records. Evaluation staff – Appraisal Checking, evaluating the Company guaranteed assets Approval expert assess – Approval and as assessment Assessment Company Appraisal expert - Appraisal and making approval Under headquarters report approval Level approval expert and Approval expert–Under assignment headquarters approval Checking staff and Prepare credit and asset profile business system - Under head office approval Customer staff in branch and Sign credit and asset profile branch Manager Asset accounting and Checking staff and disbursement business system - Under Monitor loan management and head office Assistant staff- Under final checking customer Debtsettlement staff – Classify debt, monitor and treat Debtsettlement center debt and customer care 51 * Instruct loan procedure and receive record At branches and transaction offices, when customers have demand for loans will be received and instructed on procedures, conditions and all kinds of necessary papers, documents. This is done by customer care staff. * Evaluate loan documents and make statement After receiving enough loan applications from customer such as identification card, family record book, business license, certificate of tax registration, decision on appointment of legal representative, ...), customer care staffsend the valuation company to appraise the mortgaged assests if it is morgaged. And credit record will be transferred to evaluation specialist –approval center under headquarters. The evaluation specialist willcheck legal record (check customer’s loan - payment history to assess the credibility of customer, and check the financial capacity of customer through the financial reports provided by customer (this information will be analyzed and calculated the target groups as: The ability to make a profit, ability of exploitation and use of assets, financing capital structure and ultimately solvency of customer) to thereby accurately assess the financial capacity of customer, and analyze loan plan on the following aspects: if production and business planis suitable for production and business tasks as registered or not? feasibility and effectiveness of the plan is expected, if the source of repayment for loan plan is appropriate and secured? The evaluation of the capital borrowing plan to achieve high efficiency that requires the evaluation specialist must have strong professional and a certain knowledge in different production and business fields to obtain the accurate assessment of the feasibility as well as effectiveness for each plan. In addition,appraisal expert must also update customer information on internal credit scoring software to ensure objectivity in the review of customer behavior. After obtaining the results of valuation and appraisal report, it will be transferred to the expert to approve in accordance with rank and regulations of the Bank. Approval expertsare the people who havequalification, knowledge and experience in risk operation. * Loan decision and inform customer After experts agree to approve a loan, customer care staff is responsible to inform the approval results of the bank. If customer agrees with the approval of bank will move to text step for preparation of document. * Make credit and property record 52 Records will be transferred to the credit control and business support unit to conduct contract drafting. Business support staff – Headquarters support Center will check legal document ofborrower as well as assets and conducting credit profile preparation (including credit contract, debt receiving contract) and asset documentation (credit contract, registration of security transaction ....). Support professional must understand the legal rules and regulations of the banking on forms, the policy of interest rate, repayment .... to draft the contract. After the draft is completed, it will be sent to the controller– Headquarters support center to check again before returning the branch. * Receive and complete the signing of credit, assets Based on the approval and documents that sent to the branch, customer care staff will contact with support unitunder the branche to notaryand mortgage assets as prescribed. Simultaneously branch leadership will sign a credit and assets document with customer. When the customer has completed the legal procedures for the guaranteed assets, support unit will receive and protect the mortgaged or pledgedassets as prescribed. * Disbursement After the assets and disbursement record is completed, customer care staff transfers records to the controller under headquarters support center to control records before disbursement. After the records are controlled will be transferred to credit fundunder headquarters support center to account andstore assets in disbursement system of customer. Credit management unit is responsible to account in accordance disbursement document and exactly as prescribed. * Customer’s loan withdrawal Branch will perform customer’s withdrawal from disbursement account and checkexpenditure methods in accordance with the proper purpose of capital using. * Recordkeeping After 7 days of disbursement, customer care staff will perform to handover to support unit – operational center to maintain a credit record (original) and other relevant documents to comply with the regulations. * Check and monitor a loan - principal and interest receivable After customer’s disbursement is completed, customer care staff will regularly monitor customer repayment situation and term of liabilities through T24 or list of due principal debt and interest. Customer care staffis responsible to make a notice of principal debt and interest, at the same tine 53 to remind and urge customer for repayment and propose treatment rmethod as customer hasinstable signs in the payment or changes affecting the loan. Customer care staff checks regularly the use of loans and the production and business situation, financial situation, income and debts of customer after the disbursement to ensure loans are used for the right purpose. When checking, staff must makea inspection record (under the form). If customer who use loans for improper purposes or the operational situation negatively affects the repayment capacity of the customer, the staff has to make a statementto report and propose settlement method to submit the competent authorities to review and sign the statement. * Restructure the repayment period When the restructuring of repayment term is proposed (extension or adjustment of repayment period), the customer must send a written request (under the form) to the bank as specified in the Credit Agreement. Pursuant to this written request, the staff will conduct surveys and assessment of financial situation and operations of customer, then making a statement for customer’s appraisal, which analyzes the production and business situation, source of repayment and the reasons to extend/adjust the repayment period and the proposals to agree or disagree, Deputy Director in charge/credit Council will approve (order of extension record/adjustment of payment like steps on lendingdecision and notify the results to the customer). Deputy Director in charge/credit Board approve debt rescheduling/adjustment of repayment period according to the approval that signed on submission or making Meeting Minutes (under the form). In case the extension/adjustment of repayment period is agreed, the minutes of meeting must specify: deadline extended, renewed interest rate, method of payment during the extension/change of term/payables per term. After receiving approval, credit management officialupdates and adjuste the change in BDS system and establish Annex of Credit Agreement on the changes and supplementions (under the form). * Transfer overdue In the cases: the debt is due that the customer cannot pay and is not agreed to extend the debt/adjust repayment period; or have a decision on recovery of debts before maturity but within 10 days the customer has not paid enough debt, the staff will make a appraisal report for customer onconsisderation of overdue to submit the highercompetent authorities for approval (after one day only that the customer fails to pay due debt, T24 system will automatically switch to overdue debt) 54 * Sue and recover a bad debt Based on customer profile relating to overdue debt that provided by credit staff,customer care staff/debt settlement unit will perform the recovery in accordance with the functions and duties ofcustomer care staff/debt settlement unit. Customer care staff/debt settlement unit will use debt settlement measures such as reminding (the adoption of reminding measures to customersthat claim measures have not applied); Sue (it is a debt recovery measure by taking legal proceedings that begin stage of claim until completion of enforcement for debt recovery); Handling of guaranteed asstes; and other measures such as: Transfer debt to another bank, sell debt for debt trading institutions ... * Exemption and reduction of interest When customers have difficulty in paying interest and request for exemption, reduction of interest, the staff will receive document (including repayment plan and debt repayment commitment; document to prove its cause, property damage rate; financial difficulties; financial statements until the lastest time). Then, staff will check the validity of documents, information and data are provided and compared them with reality, make a statement for interest exemption or reduction and other relevant documentsto submit the competent authorities. The submission must clearly indicate the process of lending, debt collection and applicable measures; level of property loss and financial difficulties of customer; and proposals of interest exemption and reduction. After the loan documents considered bythe competent authorities and has suggested the interest exemption and reduction, staff will submit to Deputy Director/credit council (like the orders of lending decision and notify the results to the client). After receiving the response of Deputy Director/Credit Council on exemption, reduction of interest, customer care staff will notify credit management staff to apply exemption and reduction of interest on T24 system. * Liquidation -final settlement of loan Loan documents will be liquidated when customer make full payment of loans, interest and other involved costs. Transaction staff will recover the last pricipal, interest, fees, ... on loan account of customer. As well as receivables on this loan accountto determine and settle the loan. 55 When customers have suggested to clear property, credit staff will receive, check the customer's outstanding and make a written request for clearing assets in the form and submit to competent authorities for approval. After receiving a written request for clearing assets, credit staff will conduct procedures of clearing assets. Credit staff will check the customer’sprocess of payment on all balances (principal, interest, fees, claims, ...) 4.5. Credit risk cause at Techcombank 4.5.1. Regrading customer. - In the market economy, businesses must suffer from severe competitions and to survive, businesses must do its utmost in social complex relations. However, the risk is always unavoidable as mentioned above: primaryrevenue of banks from businesses through credit operations; therefore the operation of enterprises have tremendous influence to operations of the bank and business risks of the business also directly affect the credit risk of banks. Enterprise risk occurred as follows: + Business objective risk: Disaster, fires, earthquakes ... This is a force majeure that is unpredictable. + Itself is defrauded or sufferred from the business’s customers. - Besides above cases, the risk iscame from the weakness of the business itself. The tough competition in the market will always request the businesses totry its bestbecause if there is any errors in the method of economic management as well as financial management it will cause a loss, bankrupt for the business and affect the repayment capacity of the business. 4.5.2. Regarding the bank - The risk in banking activities: the possibility of loss reduces income, equity or limited ability to achieve business goals of Bank. - Risk in business strategy: the risk that does not response timely to changes of business environment due to wrong business strategies, improper implementation of business strategy led to income losses and affect the ability to achieve business goals. - Risk in operation: the risk is due to internal processes as prescribed incompletely or erroneously, by man, system or external factors. 56 - Risk in liquidity: the risk that banks can not afford to perform the obligations when arising financial obligation or the bank has ability to perform the due obligation but suffered major losses to perform this obligation. - Interest rate risk on the banking book is the risk of adverse changes in interest ratethat affectsthe list of financial assets, financial instruments in the banking book. - During the loan, bank officials made false credit rules, or due to the weak qualification that has no ability to appraise complex projects, limited professional qualifications so it does not catch up with themarket changes and that weaknesses have created clearancesfor customer toappropriate the bank capital. - Besides, it is competitive factor in the market economy. Banks have forgotten their duty to ensure safety but run after profit policies. Ignoring the rules of risk prevention, in correctingthe principles of lending and project evaluation. It is a risk policy in business because it will bring big losses if a risk occurs in business operations. - The training of bank staff is not synchronized, not meet the requirements of business tasks in new period, the level of credit staffs is limited both professional and knowledgeable of market changes. - The Bank does not perform or its performance is not effective in credit guarantee, the borrower does not meet the conditions for collateral, pledge and guarantee but the banks loan. Besides, there are some degenerate credit officers colluded with customers to increase asset values for the purpose of big loan. While collateral is minor but it is a guaranteed source of second debt collection when customers can not afford to pay the debt by the first collection source. Therefore, the valuation of collateral is also a factor affecting to the bank risk. 4.5.3. Regarding collateral Upon receipt of collateral, incorrect assessmentor ability of assetsauction, not estimate the decreasing of its value so the asset is sold by order of the court, it cannot recover all capital. 4.5.4. Regarding business environment - Economic environment: economic environment strongly impacts the bank’s business areas as well as the businesses in economy. When the economy grows steadily, enterprises get a lot of profits and have more ability to pay debts to the bank. Conversely, when the economy goes into recession, instability has made business have more difficulties in production activities, its trading is delayed, reduced purchasing power and goods are stored. That affects to the debts of the bank. 57 Besides, the macroeconomic policies affect operations of the bank. The government will have more priorities to the law, business conditions in the sector that encouraged and developed by the government and vice versa. Due to the economic policies of the government that has reduced to bank customers from the areas are not encouraged and developed by the State. - Political and social environment: a stable political &social environment will facilitate investors’sdevelopment. This is also a condition to attract investment from businesses. Conversely, if the unstable political and social environment, the business can not be assured to develop and risks may happen any time for the business as well as the banks. - Legal environment: If a country built a clear and the effect legal framework will attract many investors. It is inevitable in market economy. And vice versa, if a weak legal frameworkcreat many gaps causing the ploy, deceptive situation and damaging each other since it affects the solvency for banks, even directly defraud toappropriate the bank funds. Thus, in the market economy, because of market fluctuations, the different causes of the economy impact on business activity as well as bank itself to raise the problems in credit relation that affect credit relationship to develop under a negative direction, bad effects to business activities of commercial banks is inevitable or in other words: Risk happened to be inevitable factor in all credit operations of commercial banks, the risk often give banks to face many difficulties both finance and banking services. So, it is necessary to prevent risks. Risk elimination cannot implement, but prevention and limitation of risk can do by the businesses and the Bank. Preventing and limiting risks that helpscommercial banks recover its capital, increase capital, business expansion and income growth as well as business activity of banks will effectively enhance the Bank's goodreputation to customers, whereby the Bank can expand their business and promote their role for the development of the economy. CHAPTER 5: RESOLUTION AND PROPOSAL TO IMPROVE RISK MANAGEMENT IN COMMERCIAL BANKS Enhance risk self resistance is the best way to prevent and mitigate risks for the banks. In other words, the ability of risk self-resistance states the capacity "risk resistance" in the bank certain degree for business activities. Because business contained risks so business entity will have to accept some risks. The greater risk, the higher profits, so when the "control" of large risks (through risk management activities soothe caused damage is minimized) business entities have 58 more opportunities to improve and enhance sustainable profit.Keep and improve its risk selfresistance is a way to receive and counteract the big risks, thereby maximizing profit in business. When ability of risk self-resistance of entities is not strong enough to prevent the large risks, thereby the risk impact will happen. In this case, if having a combination between risk identification, assessment of the level of risk and proposal of risk solution will help risk prevention activities effectively. Thus risk self resistance is seen as the first barrier to prevent the risk penetration. The risk identification, assessment and proposals are the second barrier to limit risks harm has penetrated in the first barrier. The principle of "prevention is better than cure" is shown in this paragraph. 5.1. Risk precautions for commercial banks Facing with risk is inevitable when aiming the target is looking for profit. If the profit wants to obtain, the risk must be controlled and limited. The following measures are principles that often applied to reduce the risk: 5.1.1. Credit analysis This is the imperative professional work that banks must perform before signing any credit contract, it helps the commercial banks in the process of evaluating for customer accurately. Scoring system is based on the following basis: + Customer target for each customer + For each product + Collateral for loans + Each period .... 5.1.2. Diversify the risk It means that the lending activity towards to the diversity that the consequences of the lending activities are not closely related to each other, which eliminates some of the risk. Diversification makes profit when the loans or other credit activities toward the adversarial consequences because the diversification can happen easily. - Diversification of credit list: This is the best measure in the dispersion of credit risk. Banks should divide his money into various types of credit investments, many different industries as well as many customers in different geographical areas. This has expanded the scope of credit operations for the banks, strengthen their reputation, achieve the purpose of risk diversification. 59 To achieve this the bank should outline some appropriate business strategies on the basis of the following issues: + Invest in many different economic sectors to avoid competition from other credit institutions in the struggle of market share in the narrow range under a number of growing sectors, as well as avoid the risks by the State policies with the aim to limit the activities of a certain number of lines in the plan to restructure certain economic sectors. + Invest in many manufacturing and business objects, different kinds of goods, avoid focusing on production of products, especially the products are not essential that is not encouraged by the State or products have appeared on the market too much. + Avoid lending too much for a customer, always ensuring a certain loan percentage in total capital for customer to avoid dependence and unexpected risks of that customer. Currently, the State Bank has also issued regulations on lending under Decision No. 1627/2001/QD-NHNN which states that "total loans for a client is not exceeded 15% of equity under this credit institution, excepting for the loans from the funds entrusted by the Government, organizations and individuals. In case, the capital demand of a customer exceeds 15% of the equity of credit institution or customer who wishes to mobilize capital from various sources, the credit institution syndicated under the provisions of the Vietnam State Bank. + Loans with different types of time to ensure a balance between the short-term, medium term, long term loans, ensure the steady development and avoid credit risks due to changes in market interest rate. + Create a proper ratio between loans in VND and foreign currency loans to meet the needs of customer and avoid credit risks due to changes in exchange rates. Measures to diversify the investment list as mentioned above has the advantage that helps the bank spread its credit risk in an active way, however, the diversification of the excessive credit list will have disadvantages such as: management will be difficult, spend a lot time in investigation, assessment, analysis, evaluation for customers, increase the cost of inspection and supervision ... and reduce chance to get high profit. 5.1.3. Transfer of risks Although there is a risk in activities, the investor can limit risks in its business by transferring risk to other subjects (such as insurance companies) by buying insurance, or bearing the risks or selling the risks. In lending operations, the Bank has some borrowers with some risk, if banks 60 refuse loans they will lose these customers, so banks have implemented risk transfer under the following forms: 5.1.3.1. Buy insurance for a loan - In social life, "insurance" is a concept that is commonly used to refer to one of the effective measures for risk diversification. Credit insurance is also an important measure to share risk in credit activities for the banks. Credit insurance can take under various forms such as insurance for lending, property insurance and mortgage insurance. Can refer to some form of insurance that has implemented by some countries as follows: + Customers borrow credit capital to take part in buying credit insurance. When customers fall into unemployment, bankruptcy ... or no ability to repay bank loans, the insurance company will pay. This is a measure of credit risk management that needs to be concerned, especially in operating conditions for the banks in Vietnam. So far, a small number of banks in Vietnam use credit insurance to manage risk prevention for themselves and especially for individual customers. + Bank buys insurance directly from professional insurance organization and will be compensated for losses if facing risk in losing credits. + Insurance to collateral - This method has some advantages as credit risk happens, it can overcome in the best way for such risks, however, the disadvantage of this method is the bank must pay amount firstly while many people tend to appreciate immediate benefits over the long-term benefits, in addition, the insurance industry in our country has not really developed to build confidence for customer soak lot of banks as well as customers are not interested in buying and using credit insurance. 5.1.3.2. Loan under co-funding It is a form that many banks lend for one customer who has a project with large capital requirement or a lot of risks. In fact, some businesses have very large borrowing requirement that a bank cannot meet, it is often invested in large projects and difficult to determine the level of risk that may occur. In this case, banks are linked together to appraise the project, lend and share risks that ensure the rights and obligations of each party. - This is a form of credit that is not really popular with commercial banks in Vietnam. Partly it is due to the complexity of this kind, other due to having some problems in the agreement between 61 the banks relating to interests and responsibilities in the cooperation process. This is the advantage of this measure. - Currently, the State Bank of Vietnam has issued regulations on co-financing loan as legal basis for the promotion of such activities. To perform effectively this form of credit, banks must have a sense of cooperation, and should have a main bank that will be responsibility for agreement between them, this role can be delegated to the State Bank or provincial People's Committee or the city to implement. + Buy risk: It is a form to transfer to entities that can bear risk tolerance. In the case of high-risk loans, banks can hardly stand it if risks occur, the banks will "sell" loans to larger banks or other financial intermediaries to entitle a commission fee. 5.1.4. Look for more information on loans The lending decision based on a lack of information that leads to uncertain consequences. If getting more information about the loans, the bank will have better estimations and can reduce risk. 5.1.5. Improve the level of credit Qualification of credit officer decides the loans are safe and effective or not so that the qualification improvement for credit staff means that the risk of loans is minimized. In the techniques to reduce or limit the risks as mentioned above, the transfer of risk, risk sale or bear the risk is a way to transfer all or a part of the risk for equities that have ability to bear. These equities with their special function can eliminate risks or reduce them to a minimum. Enhance the role of internal examination and control: The internal inspection and control in credit operation is an extremely important tool. Usually, through control activities that can detect, prevent and rectify errors in the process of implementation of credit operations. Besides, control operation is also find and prevent moral hazard that caused by credit officers. To enhance the role of the control work and limit credit risk, the following measures should be implemented: Strengthen the qualified staff that has experience in credit operation to supplement to the internal control unit. Regularly training and improving the professional qualification, legislation for control staffs. In the process of checking of credit activities, some staffs can be enhanced directly from the credit department or the appraisal and credit management to coordinate together. It is necessary 62 to define responsibilities for control staff, have encouragement regulation to enhance the sense of responsibility in control operation. Constantly improve and innovate methods of test, apply flexibly test measures depending on each time, object and purpose of the inspection. 5.1.6. Develop a ranking system * The risk ranking is amended and updated regularly: In recent years, development of internal credit ranking system in some credit institutions is one of the basic and effective risk management tools. It is developed by credit institutions in building ineffective credit environment and made the appropriate credit policies to each customer. It is also a tool to help financial institutions to assess the entire credit list, determine reasonably and accurately credit loss rate for each product or field or economic sector. However, this system so far is applied by credit institutions separately, ranking result for each customer has not yet linked to other important elements of credit as security assets (collateral) for loans. Besides, the manage ment of collateral in credit institutions is still limited, can be listed as: The credit institutions have not developed evaluation and scoring system for the collateral; no database system focused on collateral across the system; not control the accuracy of the collateral parameters in calculating the reserve and capital refunding ratio as required by the State Bank. To overcome the above drawbacks, the building of ranking system associated with guaranteed property with specific criteria is an essential task for the screening and management of customer collateral before, during and after the loan. Besides, the construction of this system with features closely associated with the system of internal credit rating will help the credit institution evaluate accurately, more carefully to credits as well as the value can be recovered in the future in case the debt is not paid. This is a completely new measure to improve for the credit institutions and may consider comprehensive customer as well as their loans, like effective and overall evaluation, governance to credit quality in each bank financial institutions. * Benefits from deploying customer’s collateral in credit institutions. The evaluation and grading of collateral helps the credit institutions estimate precisely and carefully the value can be recovered in the future when the client cannot pay the debts and contribute to reducing of unforeseen losses arising from credit operations. 63 System with screening function of collateral under the minimum criteria before lending will reduce the legal risks due to lack of property records or the operational risk arising in the process of receiving of collateral for customer. Collateral ranking result will be combined with the results of internal credit rating to support in credit decision-making. The management of the collateral after lending helps credit organizations track systematically and collect the held collateral in order to be able to make appropriate management measures when having fluctuations in the market and minimize the risks arising from the fluctuations relating to the collateral. On the basis of the collateral management system after lending, policies of credit risk management will work more effectively through appropriate reflection of the degree of collateral damage; allocation of appropriate collateral for each loan. System of collateral tracking management will help credit institutions built up a database of collateral for the entire system. The collateral data base is a base to support the valuation of collateral correctly and uniformly in the credit granting process. Database of collateral is an important base for building computational models for expected loss rate in credit operations. Combine with the system of internal credit rating under credit institutions to calculate credit risk provisions, capital adequacy ratio, as well as other reports required by the State Bank. 5.1.7. Apply science and technology By building the system for assessing loans and lending decisions more objectively and application of modern software systems to offer customers graded index as well as suggestions related to lending decisions. 5.1.8. Restructure credit operations Specialization should be implemented by involved units in the process of credit granting to ensure independence in decision making. 5.2. Corrective measures when risks occur Risks are inevitable problems in the field of currency trading with imbalance information in the market economy. So when the risks happen, the banks must have remedies to its business activities are ongoing. These measures are: 5.2.1. Debt exchange 64 It is due debts but customers do not have the financial ability to repay bank loans so customers come together to exchange the debts into debt maturities with the conditions agreed by lender and client. 5.2.2. Debt reduction As the customer's loans in term or maturity but customers face majeure risks such as natural disasters, floods, droughts or pandemics like H5N1 ... make customers fall in weak financial condition and unable to fully pay the loan. Bank could reduce part of the loan to facilitate the customer repay the bank loan. 5.2.3. Remission These are customers loans due date or expire, the bank has used two measures but the customer cannot pay the debt or the policy of the government specify forgiven for customers who face the risks and cannot be overcome such as floods, earthquakes, tsunamis ... to social stability and life for the people and the objects cannot resist this. 5.3. The State legal environment In recent years, many shortcomings still exist that suggest that laws and related bylaws should be improved to create a solid legal environment for banking activities especially completion of legislation document system concerning the disposal of collateral sale of the initiative to create more problems for banks in handling the collateral when the borrower is no ability to pay the debt or unwilling to repay. There are solutions to restructure the economy, promote investment activities, strengthen and develop the financial system, stock market and banking system. Complete and improve the capacity of advisory with the national financial supervision committee to help the government run the macro economy in general and the banking and financial market in particular. Continue to direct the relevant ministries in issuing a common certificate relating to land and housing use right in order to facilitate the bank when receiving collateral and liquidation sale of the mortgaged property. Complete the regional planning with a reasonable economic structure in order to maximize the comparative advantages of each locality and to avoid inefficient production and investment, it is also a basic to Techcombank to build a long-term credit scheme. Which Techcombank will focus capital investment on sectors that have a comparative advantage in provinces to reduce risk and promote local economic efficiency. 65 CONCLUSION Thus, all business operations contain potential risks. If not accept the risks you cannot create new investment and business opportunities. Business operations of commercial banks as well as other business activities cannot avoid risks. Therefore, risk management is an indispensable requirement set out in the existence and development of the Bank. So if the bank wants its risk management is effectively, the banks should use flexible measures of risk management to achieve the goals of the bank as well as minimize the possible risks. 66 References list 1. Law of Credit Institutions by the X National Assembly approved on 29/06/2010 and the Law amending and supplementing a number of articles of the Law on Credit Institutions dated 29/06/2010. 2. Bank Magazine (2011,2012,2013) 3. Bank Times (2011,2012,2013) 4. Monetary and financial magazines (2011,2012,2013) 5. Annual report of Techcombank 2010 6. Annual report of Techcombank 2011 7. Annual report of Techcombank 2012 8. Press release on the results of monetary policy operation and banking activities in 2014, orientation to management solutions in 2015 9. Website: http://www.techcombank.com.vn 67