improving credit limit system in Vietcombank

CONTENTS
ABBREVIATIONS .................................................................................................................... 4
LIST OF TABLES ...................................................................................................................... 5
LIST OF CHARTS ..................................................................................................................... 7
INRODUCTION ....................................................................................................................... 11
Chapter 1 ................................................................................................................................... 14
THEORETICAL FRAMEWORKS ON CREDIT LIMIT AT COMMERCIAL BANKS ..... 14
1.1Bank Credit ...................................................................................................................... 14
1.1.1Definition ................................................................................................... 14
1.1.2Characteristics of bank credit ...................................................................... 15
1.1.3Roles of bank credit ................................................................................... 16
1.2Credit limit system in commercial bank ......................................................................... 19
1.2.1Definition of credit limit system .................................................................. 19
1.2.2Roles of credit limit system ......................................................................... 19
1.2.3Basis for credit limit system ........................................................................ 21
1.3Factors effecting credit limit system in banks ................................................................ 34
1.3.1External factors .......................................................................................... 34
1.3.2Internal factors ........................................................................................... 36
Chapter 2 ................................................................................................................................... 38
CREDIT LIMIT SYSTEM AT VIETCOMBANK ................................................................. 38
2.1Overview of Vietcombank and its performance ............................................................. 38
2.1.1Introduction to Vietcombank ...................................................................... 38
2.1.2Vietcombank’s major performance indicators .............................................. 43
2.2Credit activities at Vietcombank ..................................................................................... 45
2.2.1Overview of credit operation at Vietcombank .............................................. 45
2.2.2Credit policies in Vietcombank ................................................................... 48
2.2.3Credit activities .......................................................................................... 50
2.2.4Types of credits .......................................................................................... 56
2.3Credit limit system at Vietcombank ............................................................................... 58
2.3.1Structure of the system ................................................................................ 58
2.3.2Regulations of credit limit system ................................................................ 62

2.3.3Procedure for approving credit limits ........................................................... 62
2.3.4Process of determining the credit limit ........................................................ 63
2.3.5Process for credit coring and rating customer at Vietcombank ....................... 70
2.4Assessing credit limit system at Vietcombank .............................................................. 79
2.4.1. Achievements ........................................................................................... 79
2.4.2. Limitations ............................................................................................... 81
2.4.3. Causes of limitations ................................................................................. 82
Chapter 3 ................................................................................................................................... 86
PROPOSED SOLUTIONS TO IMPROVE CREDIT LIMIT SYSTEM AT
VIETCOMBANK ..................................................................................................................... 86
3.1.Orientation of VCB’s credit activities ............................................................................ 86
3.1.1.Orientation ................................................................................................ 86
3.1.2.Objectivities of VCB’s credit activities to 2012 ........................................... 86
3.2.Solutions to improve credit limit system at VCB .......................................................... 88
3.2.1.Improve structure of VCB .......................................................................... 88
3.2.2.Improve credit policies ............................................................................... 90
3.2.3.Improve credit scoring and rating ............................................................... 92
3.2.4.Improve information technology systems .................................................... 93
3.2.5.Strengthen human resources ....................................................................... 94
3.3.Recommendations .......................................................................................................... 94
3.3.1.Recommendation to related agencies .......................................................... 94
CONCLUSIONS ...................................................................................................................... 97
REFERENCES ......................................................................................................................... 98
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ACKNOWLEDGEMENT
First of all I would like to express the profound gratitude to my supervisor
Assoc.Prof.Dr. Nguyen Van Dinh for his valuable advice and comments on my
research work. I am sincere thank to his for kindly accepting my proposal to be my
supervisor.
I am grateful to professors for giving me advices and comments from step of

presenting outline of thesis. It is the column of helping me to complete successfully
my thesis. I would like to give my special thanks to my colleagues at the working
place, the Joint Stock Commercial Bank for Foreign Trade of Vietnam
(Vietcombank) – Thanh Cong branch for their valuable supports cooperation
throughout my study.
In addition, I would like to thank all professors in NEU Business School for
their knowledgeable lectures, who have kindly given me their helpful feedback to my
research and inspiring me to deliver the report today.
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ABBREVIATIONS
CAR Capital adequacy ratio
CEO Chief executive officer
CIC Credit information center
FDI Foreign direct investment
GSO General statistics office
H.O Head office
IT Information technology
L/C Letter of credit
ROI Return of investment
ROA Return on assets
ROE Return on equity
BOD Board of director
SBV State bank of Vietnam
SMEs Small and medium enterprises
VCB Vietcombank – Joint Stock Commercial Bank for Foreign
Trade of Vietnam
WTO World trade organization
4
LIST OF TABLES
ABBREVIATIONS .................................................................................................................... 4

LIST OF TABLES ...................................................................................................................... 5
LIST OF CHARTS ..................................................................................................................... 7
INRODUCTION ....................................................................................................................... 11
Chapter 1 ................................................................................................................................... 14
THEORETICAL FRAMEWORKS ON CREDIT LIMIT AT COMMERCIAL BANKS ..... 14
1.1Bank Credit ...................................................................................................................... 14
1.1.1Definition ................................................................................................... 14
1.1.2Characteristics of bank credit ...................................................................... 15
1.1.3Roles of bank credit ................................................................................... 16
1.2Credit limit system in commercial bank ......................................................................... 19
1.2.1Definition of credit limit system .................................................................. 19
1.2.2Roles of credit limit system ......................................................................... 19
1.2.3Basis for credit limit system ........................................................................ 21
1.3Factors effecting credit limit system in banks ................................................................ 34
1.3.1External factors .......................................................................................... 34
1.3.2Internal factors ........................................................................................... 36
Chapter 2 ................................................................................................................................... 38
CREDIT LIMIT SYSTEM AT VIETCOMBANK ................................................................. 38
2.1Overview of Vietcombank and its performance ............................................................. 38
2.1.1Introduction to Vietcombank ...................................................................... 38
2.1.2Vietcombank’s major performance indicators .............................................. 43
2.2Credit activities at Vietcombank ..................................................................................... 45
2.2.1Overview of credit operation at Vietcombank .............................................. 45
2.2.2Credit policies in Vietcombank ................................................................... 48
2.2.3Credit activities .......................................................................................... 50
2.2.4Types of credits .......................................................................................... 56
2.3Credit limit system at Vietcombank ............................................................................... 58
5
2.3.1Structure of the system ................................................................................ 58
2.3.2Regulations of credit limit system ................................................................ 62

2.3.3Procedure for approving credit limits ........................................................... 62
2.3.4Process of determining the credit limit ........................................................ 63
2.3.5Process for credit coring and rating customer at Vietcombank ....................... 70
2.4Assessing credit limit system at Vietcombank .............................................................. 79
2.4.1. Achievements ........................................................................................... 79
2.4.2. Limitations ............................................................................................... 81
2.4.3. Causes of limitations ................................................................................. 82
Chapter 3 ................................................................................................................................... 86
PROPOSED SOLUTIONS TO IMPROVE CREDIT LIMIT SYSTEM AT
VIETCOMBANK ..................................................................................................................... 86
3.1.Orientation of VCB’s credit activities ............................................................................ 86
3.1.1.Orientation ................................................................................................ 86
3.1.2.Objectivities of VCB’s credit activities to 2012 ........................................... 86
3.2.Solutions to improve credit limit system at VCB .......................................................... 88
3.2.1.Improve structure of VCB .......................................................................... 88
3.2.2.Improve credit policies ............................................................................... 90
3.2.3.Improve credit scoring and rating ............................................................... 92
3.2.4.Improve information technology systems .................................................... 93
3.2.5.Strengthen human resources ....................................................................... 94
3.3.Recommendations .......................................................................................................... 94
3.3.1.Recommendation to related agencies .......................................................... 94
CONCLUSIONS ...................................................................................................................... 97
REFERENCES ......................................................................................................................... 98
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LIST OF CHARTS
ABBREVIATIONS .................................................................................................................... 4
LIST OF TABLES ...................................................................................................................... 5
LIST OF CHARTS ..................................................................................................................... 7
INRODUCTION ....................................................................................................................... 11
Chapter 1 ................................................................................................................................... 14

THEORETICAL FRAMEWORKS ON CREDIT LIMIT AT COMMERCIAL BANKS ..... 14
1.1Bank Credit ...................................................................................................................... 14
1.1.1Definition ................................................................................................... 14
1.1.2Characteristics of bank credit ...................................................................... 15
1.1.3Roles of bank credit ................................................................................... 16
1.2Credit limit system in commercial bank ......................................................................... 19
1.2.1Definition of credit limit system .................................................................. 19
1.2.2Roles of credit limit system ......................................................................... 19
1.2.3Basis for credit limit system ........................................................................ 21
1.3Factors effecting credit limit system in banks ................................................................ 34
1.3.1External factors .......................................................................................... 34
1.3.2Internal factors ........................................................................................... 36
Chapter 2 ................................................................................................................................... 38
CREDIT LIMIT SYSTEM AT VIETCOMBANK ................................................................. 38
2.1Overview of Vietcombank and its performance ............................................................. 38
2.1.1Introduction to Vietcombank ...................................................................... 38
2.1.2Vietcombank’s major performance indicators .............................................. 43
2.2Credit activities at Vietcombank ..................................................................................... 45
2.2.1Overview of credit operation at Vietcombank .............................................. 45
2.2.2Credit policies in Vietcombank ................................................................... 48
2.2.3Credit activities .......................................................................................... 50
2.2.4Types of credits .......................................................................................... 56
2.3Credit limit system at Vietcombank ............................................................................... 58
2.3.1Structure of the system ................................................................................ 58
7
2.3.2Regulations of credit limit system ................................................................ 62
2.3.3Procedure for approving credit limits ........................................................... 62
2.3.4Process of determining the credit limit ........................................................ 63
2.3.5Process for credit coring and rating customer at Vietcombank ....................... 70
2.4Assessing credit limit system at Vietcombank .............................................................. 79

2.4.1. Achievements ........................................................................................... 79
2.4.2. Limitations ............................................................................................... 81
2.4.3. Causes of limitations ................................................................................. 82
Chapter 3 ................................................................................................................................... 86
PROPOSED SOLUTIONS TO IMPROVE CREDIT LIMIT SYSTEM AT
VIETCOMBANK ..................................................................................................................... 86
3.1.Orientation of VCB’s credit activities ............................................................................ 86
3.1.1.Orientation ................................................................................................ 86
3.1.2.Objectivities of VCB’s credit activities to 2012 ........................................... 86
3.2.Solutions to improve credit limit system at VCB .......................................................... 88
3.2.1.Improve structure of VCB .......................................................................... 88
3.2.2.Improve credit policies ............................................................................... 90
3.2.3.Improve credit scoring and rating ............................................................... 92
3.2.4.Improve information technology systems .................................................... 93
3.2.5.Strengthen human resources ....................................................................... 94
3.3.Recommendations .......................................................................................................... 94
3.3.1.Recommendation to related agencies .......................................................... 94
CONCLUSIONS ...................................................................................................................... 97
REFERENCES ......................................................................................................................... 98
8
ABBREVIATIONS .................................................................................................................... 4
LIST OF TABLES ...................................................................................................................... 5
LIST OF CHARTS ..................................................................................................................... 7
INRODUCTION ....................................................................................................................... 11
Chapter 1 ................................................................................................................................... 14
THEORETICAL FRAMEWORKS ON CREDIT LIMIT AT COMMERCIAL BANKS ..... 14
1.1Bank Credit ...................................................................................................................... 14
1.1.1Definition ................................................................................................... 14
1.1.2Characteristics of bank credit ...................................................................... 15
1.1.3Roles of bank credit ................................................................................... 16

1.2Credit limit system in commercial bank ......................................................................... 19
1.2.1Definition of credit limit system .................................................................. 19
1.2.2Roles of credit limit system ......................................................................... 19
1.2.3Basis for credit limit system ........................................................................ 21
9
1.3Factors effecting credit limit system in banks ................................................................ 34
1.3.1External factors .......................................................................................... 34
1.3.2Internal factors ........................................................................................... 36
Chapter 2 ................................................................................................................................... 38
CREDIT LIMIT SYSTEM AT VIETCOMBANK ................................................................. 38
2.1Overview of Vietcombank and its performance ............................................................. 38
2.1.1Introduction to Vietcombank ...................................................................... 38
2.1.2Vietcombank’s major performance indicators .............................................. 43
2.2Credit activities at Vietcombank ..................................................................................... 45
2.2.1Overview of credit operation at Vietcombank .............................................. 45
2.2.2Credit policies in Vietcombank ................................................................... 48
2.2.3Credit activities .......................................................................................... 50
2.2.4Types of credits .......................................................................................... 56
2.3Credit limit system at Vietcombank ............................................................................... 58
2.3.1Structure of the system ................................................................................ 58
2.3.2Regulations of credit limit system ................................................................ 62
2.3.3Procedure for approving credit limits ........................................................... 62
2.3.4Process of determining the credit limit ........................................................ 63
2.3.5Process for credit coring and rating customer at Vietcombank ....................... 70
2.4Assessing credit limit system at Vietcombank .............................................................. 79
2.4.1. Achievements ........................................................................................... 79
2.4.2. Limitations ............................................................................................... 81
2.4.3. Causes of limitations ................................................................................. 82
Chapter 3 ................................................................................................................................... 86
PROPOSED SOLUTIONS TO IMPROVE CREDIT LIMIT SYSTEM AT

VIETCOMBANK ..................................................................................................................... 86
3.1.Orientation of VCB’s credit activities ............................................................................ 86
3.1.1.Orientation ................................................................................................ 86
3.1.2.Objectivities of VCB’s credit activities to 2012 ........................................... 86
3.2.Solutions to improve credit limit system at VCB .......................................................... 88
3.2.1.Improve structure of VCB .......................................................................... 88
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3.2.2.Improve credit policies ............................................................................... 90
3.2.3.Improve credit scoring and rating ............................................................... 92
3.2.4.Improve information technology systems .................................................... 93
3.2.5.Strengthen human resources ....................................................................... 94
3.3.Recommendations .......................................................................................................... 94
3.3.1.Recommendation to related agencies .......................................................... 94
CONCLUSIONS ...................................................................................................................... 97
REFERENCES ......................................................................................................................... 98
INRODUCTION
1. Rationale of the research
Expanding credit activities is one of the most important requirements of a fast
growing economy and commercial banks need to maintain and improve their
competitive positions. However, expanding credit means increasing risk in credit
activities of banks. Credit limit system is designed to help commercial banks settle
the conflict between growth target and risk management.
Bank for Foreign Trade of Vietnam is one of the leading commercial banks in
Vietnam with constantly increasing total assets, loans and equity. As other commercial
banks, designing and maintaining a credit limit system is crucial to Vietcombank’s
development,
Although Vietcombank has already implemented its credit limit system and credit
activities clearly and uniformly but a lot remains to be done for the final purpose of the
perfection of this system.
Therefore, the author decided to choose the theme ‘’improving credit limit

system in Vietcombank’’ in order to find out some feasible solutions for the bank.
2. Objectives of Research
This study aims at finding out Vietcombank’s issue, the weaknesses and
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recommends solutions to improve its credit limit system. This objective will be
achieved by performing the following tasks:
- To summarize major aspects of credit limit system in a commercial bank and
the basis to design this system
- To analyze and evaluate current status of credit limit system of Vietcombank
- To propose some solutions to improve credit limit system at Vietcombank
3. Research Methodology: Survey/short interview
The research will cover fact, concepts; techniques and approaches explored
from credit limit
in identifying problems and therefore find out necessary solutions
for
Vietcombank. The research also gives a quantitative and qualitative analysis of
this
application process
To find out disadvantages of credit limit system, I chose one company; use
secondary data such as financial report, introduction of the company, information of
company on website, newspaper…to evaluate all qualitative and quantitative indicators.
I also have short interviews with manager or transaction staff of the company to get
more and confirmed information before giving out final decision.
4. Scope and Limitation
Credit limit system in Vietcombank applied for all kind of customers such
as: financial institutions, enterprises, households and individuals. In this thesis,
the scope of credit limit system in banking only focuses on customers which are
enterprises to analyze then issue recommendations to improve credit limit system
in Vietcombank.
The research refers to theoretical frameworks on Credit scoring and rating

at commercial banks and the actual credit limit system in Vietcombank. After
analysis, the research will show some problems in VCB then give some
recommendations to improve.
The research also refers to actual Vietcombank credit activities and the role
of credit performance to business operation.
Nowadays, changes in banking business are very fast but the policies and
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regulations of officers, State-banks and Vietcombank can not be changed
immediately. So sometimes, these hinder the Vietcombank’s business. Besides, the
innovation of credit products is more flexible and modern so the type of enterprise is
changing and becoming more difficult to measure. Therefore, creditors and managers
need to improve their skills, find more useful methods to measure, score and rate
them accurately.
5. Structure of the thesis
The thesis consists of three main chapters as follows:
Chapter I: Theoretical frameworks on Credit limit at Commercial bank
Chapter II: Credit limit system at Vietcombank
Chapter III: Proposed solutions to improve credit limit system at Vietcombank
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Chapter 1
THEORETICAL FRAMEWORKS ON CREDIT LIMIT AT
COMMERCIAL BANKS
1.1Bank Credit
1.1.1 Definition
Credit relationship is established and existed as objective demands of capital
circulation process to tackle excess or, deficiency of capital that often occurs in the
economy.
A credit is a legal contract where one party receives resource or wealth from
another party and promises to repay him on a future date along with interest. In
simple terms, a credit is an agreement of postponed payments of goods bought or

loan. With the issuance of a credit, a debt is formed. (10)
In other definition, credit is a temporary transfer of value (assets) from the
owner to the user in a certain period of time, Users have to return a larger value on
due date. There are three categories of credit: temporary transfer of value, limit time
and reimbursement.
There are many types of credit such as state credit, business credit, personal
credit and bank credit. In which bank credit is transferring assets (capital) between
banks with other entities in the economy. In this relationship, the bank has role as
borrowers (debtors) and role as the lender (creditor). This is an indirect relationship
where the depositor, through the intermediary role of banks, invests capital on who
need.
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Bank credit is operation that the bank agree to client use assets (in cash,
property or reputation) the principle of repayment by granting loans, discounts
(rediscount), financial leasing, guarantee bank and other operations.(21)
Distinguishing the credit and lending: any transferring right of temporary using
(with repayment) assets is reflected credit relations, this relation is reflected in the
forms: granting loan, discount, guarantee and leasing. Thus, credit is broader than
loan but granting loan is the most important activity and accounts for the largest
proportion in credit activities of commercial banks. Therefore, the term credit and
loan is mixed and is often used interchangeably.
1.1.2 Characteristics of bank credit
Bank credit bases on trust. Banks only grant loans if they are trust in using loan
for right purposes, in efficiency of project, and ability in repaying (principal and
interest) on due date of customers.
Credit is a transferring asset in a limited period. Banks are financial intermediaries
''borrowers to lenders’’, so all bank credits must have duration to ensure repayment
mobilize capital. To determine a reasonable period of loan, the bank must base on term
of capitals and process of capital rotation of borrowers. If the bank has much stable long-
term capital, it can grant long term loans. On the other hand, term of loans must be

matched with the rotation cycle of borrower for repayment on due date. If the banks
determine the loan period must be less than the rotation period of capital for borrowers,
the customers do not have enough resources to pay debts on due, this cause difficulties
for customers. Conversely, if the term is longer than rotation cycle of customers,
customer use loans improperly, this cause credit risk for banks.
Credit must be repaid on the principle of principal and interest. Refund value
must be greater than original value, this means in addition to refund the original
value, the customer must pay the bank an interest, and this is the price of the using
loans. Interest amount is always more than 0, this offsets operating costs, generates
profits for banks and, reflects the nature of bank business.
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Credit operation is potential high risk of the bank. Attracting credit depends not
only on customers, but also on the business environment, this beyond the control of
clients such as fluctuations in prices, interest rates, exchange rates, inflation, rising
economy, markets, natural disasters ... When customers have difficulties in repayment
because of changing business environment, the bank get credit risk.
Credit must be based on the commitment to refund unconditionally. Process
granting loan places on the basis of strict legal grounds such as credit contracts,
agreements for a loan, collateral contract, guarantee ... that the borrower must commit
to a return unconditionally to the bank on due date.
1.1.3 Roles of bank credit
As any other business, one of main objectives of a bank is to make ‘’profits’’
for its shareholders out of the services provided to the public.
And how does a bank make profits?
As you all know, the principal business of a commercial bank is to receive money
from customers either on current account or on deposit account. The money thus deposited
will form a cash base for granting credit to other customers for various reasons. In both
cases, interest is involved. However, the rate of interest charged on advances is higher than
that applied to deposit accounts. The difference between interest earned and paid
represents profit made by the bank. This is the main source of income for a bank. Of

course a bank also makes its profits from buying and selling foreign exchange,
commission/fees charged for services provided and income from investments.
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It may be unfair to say that a bank gives credit simply to make profit for itself.
In many ways bank lending promote the economic growth of a country. For example,
companies who want to expand their business or who are in need of additional
working capital can approach their bankers for assistance. Also, bank can adopt a
credit policy that wills encourage industrial development and investments, thereby
creating employment opportunities and improving the standard of living. As
purchasing power is increased, people will stimulate further economic growth.
You may perhaps have another question: how much of the customers’ deposits
can a bank lend out?
Obviously banks cannot lend out all the money deposited with it because they
have to make provision to meet customers’ request of withdrawing the whole or part
of their money on demand or at a fixed future time. On the other hand, we cannot
leave too much money lying idle as this will not generate any profit. It is therefore
important that banks should carefully employ bank’s resources and maintain a
reasonable spread of them among the various forms of assets, advances and
investments so as to obtain the maximum profit.
It’s necessary to take a look at the role of credit in the capitalist economy
For the economy
The fundamental role of bank credit for the economy is to transfer capital from
the people (individuals, households, companies and governments) that have capital
surplus (due to spending less than income). Loan capital is not only for businesses but
also for consumer demands. Why is transferring capital from saver to users important
to the economy? The answer is that savers often have not many investment
opportunities. Thus, transferring capital between entities in the economy would have
been congested without banks’ existence. Therefore, transferring capital channel
through banks takes an important role in promoting efficiency of the economy.
Bank credit is not limited only on the traditional function which is transferring

capital but also expanded on allocating effectively allocation of financial resources in
the economy. Through bank credit, capital is transferred from people who lack of
17
efficient investment projects to those who have efficient investment projects but lack
of funds. The result is growing the economy, creating jobs and increasing labor
productivity.
Capital bank invested in the credit lines, key sectors helps promoting
development, modernization, efficiently of those sectors.
Bank credit contributes to circulating currency, commodities, regulating market,
controlling value money and expanding economic exchanges between countries.
Bank credit brings huge revenues to the state budget through income taxes and
interest from capital investment of the government.
Bank credit is transmission fund channel to agriculture, rural areas, poverty
reduction, political stability and social.
For customers
First, bank credit meet promptly demand for quantity and quality capital for
clients. With advantages such as safe, convenient, fast, accessible and able to meet
the large capital requirements, bank credit satisfy various needs of customers.
Second, bank credit helps investors capturing business opportunities, expanding
production, improving of individual life.
Third, bank credit constraints customer repaid principal and interest during the
fixed term as agreement. Thus, this force clients attempt most of their ability to use
loans effectively, speed up the process of reproduction, profitable business and ensure
debt repayment obligations to the bank.
For banks
First, credit is traditional activities, accounting for the largest proportion of total
assets and bring major source of income for banks (from 70 to 90%). Although the
proportion of credit activities tends to decrease, but bank credit is always professional
using the most important capital of the bank.
Second, via credit activities that banks diversify the portfolio assets minimize risk.

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Third, through credit activities, the bank expanded types of services such as
payment, deposit, foreign currency trading, consulting...
1.2Credit limit system in commercial bank
1.2.1 Definition of credit limit system
A credit limit is the maximum amount of credit that a financial institution or other
lender will extend to a debtor for a particular line of credit cần cắt bỏ đoạn trong ngoặc
như hôm trước đã thao luận. For example, the maximum that a credit card company will
allow a card holder to borrow at any given point on a specific card.
Credit limit system of a bank is a set of credit limits which apply to various
customers or various groups of customers.
These limits are based on a variety of factors ranging from an individual's
ability to make interest payments, an organization's cash flow and/or ability to repay
the principal, to the credit standards employed by the lender. A credit limit is also
based on the borrower's recoverable assets in the event of default.
Credit limits are most often seen by consumers in the form of revolving lines of
credit known as credit cards. They are also used in the extension of open account
credit terms from business to business. Other examples include home equity lines of
credit, residential mortgages/owner-occupier home loans with redraw facilities, a
commercial line of credit or a Bank guarantee. The limit imposed in most cases is
fixed for the life of the product, except in the case of credit cards that may be raised
upon application by the card holder or offer by the card issuer.
1.2.2 Roles of credit limit system
Credit activities are one of the main activities of commercial banks. Each bank
has a credit procedure and the most important step is the evaluation of whether or not
granting loan. To make a decision whether or not a loan, credit officers use a lot of
financial and non-financial information. However, each credit officers interested in a
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different aspect of the business, the assessment is correct or not depends very much
on qualification and experience of credit officers. If credit officers well qualified, the

evaluation results are exact and reduce risks for banks and vice versa. This also
causes difficulties in the approval of managers. In addition, there is no basic for
evaluation what maximum amount that can be offer for a customer. Therefore, to
create unity in the evaluation of credit, banks have built a system of grading and
credit ratings. On that basis the bank built a total limit for each customer based on the
ability of the enterprise, based on the maximum rate that credit officers may have
grounds to consider loans. Besides, credit limit help branches are active in lending in
the limit.
Commercial banks apply credit limit system as a method to manage risk
according to international standards.
In operation of credit, there are two levels of risk in general: (i) overall risk for
customers, and, (ii) risk of specific transactions. Overall risk is understood as
business losses, inability in repaying debts. Transaction risk means that transaction is
not effective. In business, company does a lot of transactions. Risks of a transaction
may not lead to overall risk, but if overall risk occurs, the system will offer all risks.
Credit limits focus to overall risk, not to transaction risk. Therefore, the credit
officers must still assess the risks of specific transactions in each granting loans.
However, the credit limit helps credit officers do not repeat overall risk assessment of
customers.
From management point of view, roles of credit limit are as follows:
Control overall risk for customer:
Previously, each professional departments asses risk of their customer by
themselves. For example, credit limit for lending of credit department is independent
to credit limit for L/C free deposit of Trade finance department. There fore,
customer’s information is distributed.
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In nature, all credit products from lending to opening L/C-free deposit brings
risk for the bank.. So it is necessary to having a measure to manage all aspects of
risks, and credit limit is one of important measure.
Enhance collectivity, objectivity in credit activities:

The bank empowers self-determination to people who have ability to decide
granting loan or not (director or deputy director of branch). The decentralization is
creating a proactive and flexible for credit department when working with clients, but
also contains certain risks because decisions of individuals are not comprehensive,
objective.
To solve this problem, the bank first determine maximum credit for each
customer (is credit limit). Credit limit is approved by board of credit, not by any
individuals. In determined credit limit, manager of branch can decide on his ruling.
Thus, the integration of the individual judgments on the credit limit to ensure safety
and objectivity of individual’s decisions
Expand initiative of branch in credit activities to meet flexible needs of
customers.
In determined credit limit, the branch can pre-determined actively possible level
of transactions for their customers (as evaluation of the branch), does not depend on
customers request officially or not. All credit limits are exceeded authority, the
branch must submit to head office for approving
Depend on credit limit, the branch can approach needs of customers actively,
even refuse customers that are not good.
1.2.3 Basis for credit limit system
To determine credit limits in a credit limit system, the first step and also the
most important step is credit scoring and rating. Credit scoring and rating counts to
70% workload in the process of determining the credit limit
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Credit limit system includes credit scoring system and credit rating system.
After determining the class of business, based on equity, collateral, field of the
business, credit officers can determine credit limit for customers.
1.2.3.1. Credit scoring
Credit scoring
A statistical technique used to determine whether to extend credit (and if so,
how much) to a borrower. Credit scoring is often considered more accurate than a

qualitative assessment of a person's credit worthiness, since it is based on actual data.
When performing credit scoring, a creditor will analyze a relevant sample of people
(either selected from current debtors, or a similar set of people) to see what factors
have the most effect on credit worthiness. Once these factors and their relative
importance are established, a model is developed to calculate a credit score (a number
indicating how credit-worthy the applicant is) for new applicants. The officer inputs
applicant-specific information for each variable in the model, and can thus find out
how credit-worthy he/she is. Developing a credit scoring model is usually a time-
consuming, complicated process given that creditors often have to look at a large
sample and consider many different variables. Thus, these models are usually
developed at the firm level as opposed to the individual credit office level. Some of
the factors considered when developing a credit scoring model are outstanding debt,
the number of credit accounts maintained, age, income, credit history, etc. As
required by the Equal Credit Opportunity Act, a credit scoring model cannot consider
race, sex, marital status, national origin, or religion. If age is considered, the analysis
should be such that older people are given equal consideration in a credit application.
(311)
Lenders, such as banks and credit card companies, use credit scores to evaluate
the potential risk posed by lending money to consumers and to mitigate losses due to
bad debt. Lenders use credit scores to determine who qualifies for a loan, at what
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interest rate, and what credit limits. The use of credit or identity scoring prior to
authorizing access or granting credit is an implementation of a trusted system.
Credit scoring is not limited to banks. Other organizations, such as mobile
phone companies, insurance companies, employers, and government departments
employ the same techniques. Credit scoring also has a lot of overlap with data
mining, which uses many similar techniques.
Describes methods of credit scoring
Credit scoring is a method to assess credit risk of customers through evaluating
all information of customer. Criteria are applied differently to different types of

customers
Credit scoring for three different types of customers: financial institutions,
enterprise and individuals. This thesis refers to scoring enterprises
Principal of credit scoring enterprise:
- If point of customer is between two level, chose higher point
- Ranked point is result of the initial point and weight.
Using credit scoring system
Scoring division
Credit officers are those who are responsible for credit scoring and ranking
customers.
Manager is in charge of controlling credit scoring and ranking customer.
Results of credit ratings:
The rating is used for credit purposes:
- Define credit limit
- Refuse or accept granting loan, duration, interest loan and collateral
- Assess current status of customers
- Manage credit list and extract credit risk reserve
Credit scoring and ranking enterprise
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Type of ownership
Type of ownership affects quite a lot of ability to payable of enterprise.
Enterprises can be divided into four groups:
o State-owned enterprise
o Private enterprise
o Mixed owned enterprise
o Enterprise owned by individuals and organizations abroad.
All type of enterprises has their own advantages and disadvantages, but in
general, depending on the characteristics of each economy that type has different
strengths. Vietnam is an example. Vietnam’s economy is affected by former regime
of the planned economy which used to get all support from the State. These priorities

are expressed through preferential policies; financial support by the State ...
Enterprise that is guaranteed by state has a lot of advantages. But it does not mean
other businesses do not have their advantages. Joint venture or 100% foreign
investment enterprise that have entered Vietnam market have many advantages as
machinery, modern technology and supporting by the Government through encourage
policies to open investment. These businesses work often more effectively than state-
owned enterprises. In addition, private enterprise develops not equally. This fact
arises from ability of leaders capital invested in businesses, further more because they
received little support from the state. This type of enterprise is less favorable than
most others.
So type of business impact performance business, it also affects to payable
principal and interest. There are impacts not only due to the preferential policies of
the state but also the subject of business. The subject is more important, the safety of
loan is higher. Considering to type of ownership helps bank evaluate in each period,
enterprises which have advantages get higher corresponding points. This is a
necessary criterion in the process of grading business.
Business fields
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In current market economy, number of active enterprises is not small. Enterprises
are variety in skill, kinds of goods, business cycle, and level of risk…Therefore, to
evaluate customer accurately, banks also need to arrange enterprises that have similar
features to same group. This arrangement helps banks see the potential of each
enterprise in each specific period. This outlook comes from the characteristics of each
economy. Each country select different direction of development depends on its
strength. Developing countries focus on trade on commerce, services and industry. For
developed countries, agriculture is always key sector economy. The choice depends
greatly on the social, geographic characteristics each country, as well as the
development strategy that the State selected.
In parallel with the identification of key sectors of each country, it also needs to
understand the development trend of countries, particularly in transition countries. In

a transition economy, enterprises are in sector that State set development goals have
many advantages. Singapore is an example. Before 2002, the strength of the
Singapore is tourism and information technology, but from 2002 to date, Singapore
gradually shifted to biotechnology, a new and potential sector. This is a right
direction. With this conversion, the biological research center in Singapore is invested
with high capital, improved infrastructure, and procurement of machinery. In the near
future, biotechnology surely becomes strength of this country. So loans granted for
customers in biology field are safer. Of course banks score these companies higher
than others
The question arises: is dividing enterprises into groups in credit scoring
necessary? The answer is yes. Key or basic sector are supported by the State.
Moreover, enterprise in key sector is in favorable conditions. If the State doses not
invest in key sector, fail of this sector impact to overall economy. So in credit
scoring, dividing enterprise into groups is necessary. Bank builds a frame score for
businesses. But this frame needs to change in each period.
Scale of equity
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