1247 Credit risk management for personal banking at Vietnam Prosperity Joint Stock Commercial Bank– Ben Thanh Branch 2021.docx

MINISTRY OF EDUCATION AND TRAINING

STATE BANK OF VIETNAM

BANKING UNIVERSITY OF HO CHI MINH CITY

DOAN HOANG MINH

CREDIT RISK MANAGEMENT FOR PERSONAL
BANKING AT VIETNAM PROSPERITY JOINT STOCK
COMMERCIAL BANK– BEN THANH BRANCH

GRADUATION THESIS
MAJOR: FINANCE AND BANKING
CODE: 7340201
SUPERVISOR
PH.D. LE THI ANH DAO

HO CHI MINH CITY, 2021


MINISTRY OF EDUCATION AND TRAINING

STATE BANK OF VIETNAM

BANKING UNIVERSITY OF HO CHI MINH CITY

DOAN HOANG MINH

CREDIT RISK MANAGEMENT FOR PERSONAL
BANKING AT VIETNAM PROSPERITY JOINT STOCK

COMMERCIAL BANK– BEN THANH BRANCH

GRADUATION THESIS
MAJOR: FINANCE AND BANKING
CODE: 7340201
SUPERVISOR
PH.D. LE THI ANH DAO

HO CHI MINH CITY, 2021


ABSTRACT
Credit risk has always been a vicinity of concern not only to bankers but to all in the
business world because the risks of a trading partner not fulfilling his obligations in
full on the due date can seriously jeopardize the affairs of the other partner.
At the VPBank, credit risk management is always the top concern of the managers
accompanying credit development. Even though operational profit and credit
development achieved numerous excellent outcomes from 2018 to 2020, overdue
debt is high and continuously increases over time, which is a significant worry for
the Bank.
The objective of this study is to have a clearer picture of VPBank's credit risk
management, thereby making comments on the advantages and disadvantages of
risk management at the Bank along with recommendations for the Bank, VPBank,
the State Bank, and the Government.
In this light, the study undertook based on a combination of credit risk theory, credit
activity analysis, and the current situation of credit risk management at VPBank Ben Thanh Branch from 2018 to 2020. As a result, solutions to reduce credit risks
had offered to improve personal credit risk management at the Bank.


DECLARATION OF AUTHENTICITY

This thesis is the author's research work, the research results are honest, in which
there is no previously published content or content made by others except for source
citations in the thesis.

Ho Chi Minh City, September 2021

Doan Hoang Minh


ACKNOWLEDGE
No one walks alone on the journey of life. Apart from my efforts, the success of any
report depends largely on the encouragement and guidelines of many others. This
study bears on the imprint of many people. I take this opportunity to express my
gratitude to the people who have has been instrumental in the completion of this
study.
First and foremost, I would like to convey my heartfelt appreciation to my advisor,
Ph.D. Le Thi Anh Dao, for her unwavering support of my research, as well as her
patience, inspiration, enthusiasm, and immense knowledge. Her advice was
invaluable throughout this study's research and writing. I couldn't have asked for a
better advisor and mentor for my studies.
Besides my advisor, I would like to give special thanks to all teachers at the Faculty
of Finance and Banking - Banking University of Ho Chi Minh City, who have
imparted extensive knowledge as well as hands-on experience for me during my
studies at school, as well as creating conditions for me to develop my strengths.
I also appreciate and sincerely thank the managers and all staff at Vietnam
Prosperity Commercial Joint Stock Bank - Ben Thanh Branch for welcoming me as
an intern and for their assistance and guidance. Thank you for your passionate
assistance in facilitating practical interaction, gaining experience, and providing the
required knowledge.
Last but not least, I would like to thank my family, who always have spiritual

support, and friends who have always been a source of encouragement and support
for me during the study.


TABLE OF CONTENTS
INTRODUCTION..................................................................................................... 1
OVERVIEW OF RESEARCH SITUATION, THEORETICAL
BASIS ON CREDIT RISK AND CREDIT RISK MANAGEMENT.......................5
1.1. Bank credit activities....................................................................................... 5
1.1.1. The concept of bank credit........................................................................ 5
1.1.2. Credit classification.................................................................................. 5
1.1.3. Concept of personal credit........................................................................ 7
1.1.4. Features of personal credit........................................................................ 7
1.2. Credit risks in banks........................................................................................ 8
1.2.1. Concept of credit risks.............................................................................. 8
1.2.2. Classification of personal credit risk......................................................... 9
1.2.3. Factors of credit risk................................................................................. 9
1.2.4. Credit risk measurement......................................................................... 12
1.3. Credit risk management................................................................................. 15
1.3.1. Concept of credit risk management......................................................... 15
1.3.2. Credit risk management procedure.......................................................... 15
CONCLUSION CHAPTER 1...................................................................................... 22
CURRENT SITUATION OF personal CREDIT RISK
MANAGEMENT AT VPBANK - BEN THANH BRANCH.................................. 23
2.1. Overview of VPBank - Ben Thanh Branch................................................... 23
2.1.1. General introduction about VPBank....................................................... 23
2.1.2. General introduction about VPBank Ben Thanh Branch......................... 24
2.1.3. Organizational structure, functions, and tasks of VPBank - Ben Thanh
Branch............................................................................................................... 25
2.2. Business performance of VPBank - Ben Thanh Branch in the period of 2018 2020..................................................................................................................... 26

2.2.1. Overall assessment of VPBank's business results - Ben Thanh Branch. .26
2.2.2. Loan mobilization of VPBank – Ben Thanh Branch............................... 28
2.2.3. Credit activity at VPBank - Ben Thanh Branch......................................30


2.3. Current situation of credit risk management for personal customers of
VPBank - Ben Thanh Branch................................Error! Bookmark not defined.
2.3.1. Credit risk management organizational structure at VPBank..................31
2.3.2.Credit activities of personal customers at VPBank – Ben Thanh Branch32
2.3.3. Overdue debt and risk provision for personal customers at VPBank – Ben
Thanh Branch.................................................................................................... 35
2.4. Current situation of credit risk management for personal customers at
VPBank - Ben Thanh Branch............................................................................... 38
2.4.1. Credit risk identification......................................................................... 38
2.4.2. Credit risk measurement......................................................................... 39
2.4.3. Credit risk monitoring and control.......................................................... 43
2.4.4. Credit risk financing................................................................................ 44
2.5. Assessing the current situation of credit risk management of personal
customers at VPBank - Ben Thanh Branch.......................................................... 46
2.5.1. Achievements.......................................................................................... 46
2.5.2. Limitations.............................................................................................. 47
2.5.3. The cause of the limitations.................................................................... 48
CONCLUSION OF CHAPTER 2................................................................................ 52
SOLUTIONS TO IMPROVE PERSONAL CREDIT RISK
MANAGEMENT AT VPBANK - BEN THANH BRANCH..................................53
3.1. General orientation on credit development at VPBank.................................53
3.2. Orientation to develop credit activities of personal customers at VPBank Ben Thanh Branch............................................................................................... 54
3.3. Credit risk management solutions at VPBank - Ben Thanh Branch..............54
3.3.1. Fully execute and review the credit procedure on a regular basis...........54
3.3.2. Enhance exploitation of customer relationship management systems

(CRM)............................................................................................................... 55
3.3.3. Improve the quality of staff..................................................................... 56
3.3.4. Strengthen appraisal and assessment for new loans................................ 56
3.3.5. Set up risk provisions for bad debts, overdue debts and actively handle
bad debts and overdue debts............................................................................. 57


3.4. Some other recommendations....................................................................... 57
3.4.1. Recommendations for VPBank............................................................... 57
3.4.2. Recommendations to the State Bank of Vietnam.................................... 59
3.4.3. Recommendations to the Government.................................................... 60
CONCLUSION OF CHAPTER 3................................................................................ 61
Conclusion............................................................................................................... 62


LIST OF ABBREVIATIONS
No

Abbreviations

Definition

1

VPBank

2

SMEs

Small and medium enterprises

3

EAD

Exposure at Default

4

PD

5

LGD

6

EL

Expected Loss

7

CIC

Credit information center

8

CRM

Customer relationship management

9

eKYC

Electronic know your customer

10

FATCA

Foreign Account Tax Compliance Act

Vietnam Prosperity Joint-Stock Commercial Bank

Probability of Default
Loss Given Default


LIST OF TABLES
Table 2-1 - Business performance of VPBank – Ben Thanh Branch in 2018 - 2020
...................................................................................................................................26
Table 2-2 - Loan mobilization of VPBank – Ben Thanh Branch in 2018-2020.......28
Table 2-3 - Credit activity of VPBank – Ben Thanh Branch in 2018-2020.............30
Table 2-4 - Loan classification by term of VPBank – Ben Thanh Branch in 20182020......................................................................................................................... 33
Table 2-5 - Loan classification by type of loans of VPBank – Ben Thanh Branch in
2018-2020................................................................................................................ 34

Table 2-6 - Debt classification for personal customers of VPBank – Ben Thanh
Branch in 2018-2020............................................................................................... 35
Table 2-7 - Bad debt and overdue debt ratio for personal customers of VPBank –
Ben Thanh Branch in 2018-2020............................................................................. 36
Table 2-8 - Risk provision for personal customers of VPBank – Ben Thanh Branch
in 2018-2020........................................................................................................... 37
Table 2-9 - VPBank Internal Credit Rating System for Personal Customers...........40
Table 2-10 - VPBank Internal Credit Rating System for Collaterals.......................41
Table 2-11 - VPBank Internal Credit Rating Result................................................. 42
Table 2-12 - Risk Provisioning Levels..................................................................... 44

LIST OF FIGURES
Figure 2-1 - Organizational structure of VPBank – Ben Thanh Branch..................25


1

INTRODUCTION
Credit activities at banks have always been playing a
1. Rationale

vital role in the stable development of an economy,
serving as an intermediary with the task of transferring
loan between individuals or organizations, promote
investment activities, develop production and business,
and import and export activities, as well as play a key
role in repelling and regulating inflation. Banking credit
operations, particularly banking risk management, are
one of the most strictly monitored fields, both globally
and in the country, due to their major responsibilities.

The economy is suffering from numerous negative
effects, because of a stressful and extended epidemic
scenario, commercial operations, production, import, and
export are all halted, increasing concerns about the
problem of bad debt in the economy. In this
circumstance, credit risk management is a major priority
at all banks.
At the end of 2020, although there were many
fluctuations in the world and domestic economies,
affecting the debt settlement process, many commercial
banks surprised the market when they sharply reduced
the bad debt ratio which falls below 1%. Typically, some
prominent banks can be named such as Joint Stock
Commercial Bank for Foreign Trade of Vietnam
(Vietcombank) has the bad debt over total outstanding
loan ratio of only 0.6%. Besides, Vietnam Joint Stock
Commercial Bank for Industry and Trade (VietinBank)
also achieved good results. The result is very positive
when the ratio of bad debt over total outstanding loan of
the Bank at the end of 2020 is 0.94%. In addition, the
bad debt ratio at Vietnam Technological and Commercial
Joint Stock Bank (Techcombank) is at a rate of only


2

0.5%.
Accordin
g to the
forecast

of

the

Securities
Analysis
Center of
SSI (SSI
Research)
, the onbalance
sheet bad
debt

in

2021 will
remain
unchange
d
compared
to 2020.


Particularly, only Vietnam Prosperity Commercial Joint Stock Bank (VPBank) still
tops the table in debt ratio when in 2019, the bad debt over total outstanding loan
ratio of this bank was at 3.42%. In 2020, although VPBank's default governance
risk has become more effective, when bad debt is checked well, the consolidation
level (according to Circular 02) remains below 3%, reaching 2.9% at the end of
2020. The variation in factor risk signals at banks is increasingly diversified,
especially in the economic situation being affected by the pandemic. Reality poses

and asks to find suitable solutions to improve risk management at Vietnam
Prosperity Commercial Joint Stock Bank in order to contribute to improving
competitiveness, ensuring the existence and development of the Bank. That is also
the

reason

why

I

decided

to

choose

the

resource

"CREDIT RISK

MANAGEMENT FOR PERSONAL BANKING AT VPBANK – BEN THANH
BRANCH” as my graduation thesis.
2. Research related to the topic
In the process of implementing this project of credit risk management, I have
consulted several related research papers as follows:
Master thesis in Economics by author Nguyen Thi Kim Oanh (2017) on the topic:
"Risk management at Vietinbank - Hoan Kiem branch, current situation and

proposed solutions". The thesis has systematized the theoretical basis of credit and
credit risk management for personal customers, thereby understanding and
evaluating credit risk management activities for personal customers at Vietinbank Hoan Kiem branch. On that basis, the study has pointed out the remaining
limitations in risk management at banks, thereby proposing appropriate measures to
improve credit risk management for customers. personal goods at the branch.
Master thesis in Economics by author Nguyen Thi Ngoc Diep (2018) on the topic
"Credit risk management at National Commercial Joint Stock Bank". The author
has presented an overview of the basic concepts of credit, credit risk, experience in
risk management of the National Commercial Joint Stock Bank. In addition, the


author also gives an overview of the credit operation model as well as credit risk
management at National Commercial Joint Stock Bank (NCB)
Master thesis in Economics by author Pham Thi Thuy Hang (2018) on the topic
"Some solutions to limit credit risk at Vietnam Joint Stock Commercial Bank for
Industry and Trade, Branch 1 in Ho Chi Minh City". Focused on research on
qualitative and quantitative indicators using Moody's and Standard & Poor's
methods as well as focused on Basel principles in risk management at Joint Stock
Commercial Bank for Industry and Trade, Branch 1, Ho Chi Minh City.
The above studies have systematized the theoretical bases of credit, credit risk,
credit risk management methods, analyzed the current situation and proposed
solutions to improve the limitations of credit risk management in accordance with
the characteristics of each commercial bank. Based on those references, I can
synthesize, analyze, and make better judgments in the process of implementing my
graduation thesis.
3. Objectives of the research
General objective:
-

To learn the theory and reality of personal credit risk management at

VPBank - Ben Thanh Branch.

Specific objective:
-

To understand the current situation of personal credit risk management at
VPBank - Ben Thanh Branch.

-

Assess the achievements and limitations of personal credit risk management
at VPBank - Ben Thanh.

-

Proposing and recommending a number of measures to improve personal
credit risk management at VPBank - Ben Thanh.

4. Research questions
The research questions that must be answered to clarify the above objectives:




How is personal credit risk management at VPBank - Ben Thanh Branch
performed? What are the achievements and limitations?



How to improve personal credit risk management at VPBank - Ben Thanh

Branch?

5. Research Methods
The topic uses a variety of research methods to take advantage of each methodology
as well as analyze the data more effectively, including descriptive statistics method,
synthetic analysis method, comparative methods, and expert method. Moreover, the
data collected in the topic is mainly secondary data from various sources, such as
financial statements, business operation result statements, documents, and policies
of VPBank – Ben Thanh Branch, research works, reference books, journals, and
legal policies of the Government related to credit risk management.
6. Structure of the thesis
The thesis includes three chapters:
Chapter 1: Overview of research situation, theoretical basis on credit risk and credit
risk management
Chapter 2: Current situation of personal credit risk management at VPBank - Ben
Thanh branch
Chapter 3: Solutions to improve personal credit risk management at VPBank - Ben
Thanh Branch


OVERVIEW OF RESEARCH SITUATION,
THEORETICAL BASIS ON CREDIT RISK AND CREDIT RISK
MANAGEMENT
1.1. Bank credit activities
1.1.1. The concept of bank credit
Bank credit, according to Bui Dieu Anh (2020), is a transaction between two
entities in which the credit grantor (bank or other credit institution) transfers an
asset to the credit recipient (enterprises, individuals, or other entities) on the
condition that both principal and interest are repaid.
Bank credit has four basic characteristics:

-

Transactional assets in bank credit are diverse, which can be in the form of
currency, real assets, or signatures

-

Risks in bank credit are inevitable and cannot be eliminated

-

Full repayment of principal and interest is the essence of credit in general
and bank credit in particular

-

Repayment in bank credit is unconditional

1.1.2. Credit classification
Bank credit can be classified into several categories based on various criteria, each
having a particular administrative function.
Credit classification by the purpose of using loan
- Credit for production and business includes all credits to finance production
and business. Borrowers can be businesses, economic organizations, economic
households, etc.
- Consumer credit includes credits to meet the needs of buying houses, cars,
spending, personal/household activities, etc.
- Credit to other financial institutions is usually financed by large credit
institutions/banks to small credit institutions to meet part of their loan needs.

Credit classification by term
- Short-term credit includes credits with a term of 12 months or less, the main
purpose of which is to finance seasonal working loan shortages and short-term
consumption.
- Medium-term credit includes credits with a term of more than 12 months to
60 months (5 years), the purpose is usually to finance fixed assets
- Long-term credit includes credits with a credit period of more than 5 years
with the same purpose as medium-term credit.
Credit classification by credit-granting method
- Direct credit is credit formed directly in the relationship between the Bank
and the borrower (the Bank directly learns and analyzes the borrower before
accepting credit, the two parties reach an agreement, and the credit contract is
signed)
- Indirect credit is credit made by the Bank based on the redemption of undue
debts on sale paper, commercial paper, and so on.
Credit classification by the nature of security and creditworthiness of the
borrower
-

Secured credit is a type of credit made based on security measures following
the provisions of the Civil Code (mortgage, pledge, guarantee, entrustment,
etc.)

-

Unsecured credit is a type of credit made based only on the creditworthiness
of the credit recipient, economic efficiency, and ability to repay the loan
from the cash flow of the loan plan or project without loan security measures
attached.

Credit classification by type of credit
The Law on Credit Institutions of Vietnam stipulates that banks can perform various
forms of credit extension including lending, discounting, guarantee, factoring, and
financial leasing to customers who are organizations and individuals


-

Lending is a form of credit-granting, in which the borrower assigns or
commits to hand over to the customer a sum of money to use for a specified
purpose within a certain period as agreed upon with the principle of
repayment of principal and interest.

-

Discount is the purchase with a term or purchase with recourse to the
beneficiary's negotiable instruments and other valuable papers before
maturity.

-

Bank guarantee is a form of credit extension, whereby the Bank commits to
the recipient guarantee that it will fulfill financial obligations on behalf of the
customer when the customer fails to comply with the obligation agreed upon
the commitments.

-

Factoring is a form of credit-granting to a seller or a purchaser through an

acquisition with the right to recourse to receivables or payables arising from
the sale of goods.

-

Financial leasing is a form of medium and long-term credit-granting based
on an asset lease contract, whereby the lessor buys the asset at the lessee's
choice and signs a contract for the lessee to use it for a certain period.

1.1.3. Concept of personal credit
According to Tran Huy Hoang (2007), personal credit is a form of credit-granting in
which the borrower is an individual for consumption purposes or to support
production and business. Individuals can be small traders, farmers,

small

businesses, students, representatives of households to sign credit contracts on behalf
of the family, etc.
1.1.4. Features of personal credit
First, the loan quantity is little, but the number of loans is enormous. This is
attributable in part to the low value of products and consumption; on the other hand,
most borrowers have made earlier investments in valuable assets, so they approach
banks for the aim of supporting personal spending. Despite the tiny amount of this


loan, the overall size of bank lending is extremely significant due to a huge number
of clients requesting personal credit loans.
Second, the cost of personal loan management is expensive since banks spend a
significant amount of time and human resources studying and gathering information
on applicants before reaching a loan approval decision. Furthermore, because

personal credits are modest in value but big in number, banks find it difficult to
handle them.
Third, personal credit carries a high level of risk since individuals' and families'
financial situations might change quickly depending on their employment or health
status. Personal credit lending evaluation based on little information, soften
encounters trouble. Personal information is frequently as confusing as corporate
financial records, which are typically kept private.
Fourth, personal credit can generate substantial profits for banks. Because of the
high cost and risk of personal credits, banks usually set interest rates on personal
loans higher than on other types of lending. Because the return on each personal
credit is high in various cases, the overall return generated from this activity is
considerable in terms of the Bank's total income.
1.2. Credit risks in banks
1.2.1. Concept of credit risks
According to Joel Bessis (2010), Credit risk is the most important risk in banking. It
is the risk of a counterparty defaulting on payment obligations. Following
regulations and the literature on credit risk, credit risk splits up into several “credit
risk components”: default risk; migration risk; exposure risk, which designates the
uncertainty with respect to the future value of the amount; subject to loss at the
unknown time of default; “loss given default” (LGD), or “loss under default,” is
usually less than the amount due because of recoveries arising from third party
guarantees or collateral (assets pledged to the lender); counterparty risk is a specific


form of credit risk that is encountered with derivative products, which can shift
from one counterparty to the other.
According to the Basel Committee (2000), Credit risk is the ability that a borrower
or partner fails to meet its obligations under the terms agreed. The risk of loss to a
bank is the Bankruptcy of the contractual party, in which the Bankruptcy is defined
as any serious breach for contractual obligations upon repayment of debt and

interest.
According to Ho Dieu (2001), personal credit risk is a type of financial risk group,
which is potential losses generated when granting credit to a personal customer.
More particularly, individual borrowers fail to pay their contractual debts associated
with each bank credit granted to them.
1.2.2. Classification of personal credit risk
There are several approaches to classify credit risk depending on the research aim
and criteria. Personal credit risk is classified into the following categories,
according to Nguyen Minh Kieu (2009):
-

Risk of overdue repayment (loan backlog risk): as a credit risk, when a
borrower fails to meet his or her contractual debt payback obligations,
including principal or interest, or both principal and interest.

-

Risk of repayment incapacity (Risk of partial or whole loan loss): as a credit
risk when a borrower is unable to reimburse. The Bank is therefore unable to
recover the loan, and an irrecoverable debt is established.

1.2.3. Factors of credit risk
Credit risk is caused by a variety of factors, both objective and subjective. The
primary objective reason is the political, legal, and commercial environment, as
well as the borrowers themselves. Subjective factors come from inside the Bank,
such as a lack of transparency and a comprehensive credit policy, as well as the
credentials of managerial personnel, etc.