Download 1.1. Necessity of the research problem

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