Current situation of credit activity and solutions to the credit crisis at the military commercial bank the period of 2005 2007

INTRODUCTION
1. Rationale
Risks are an inevitable issue in any business in which the more profit a business can
bring out, the more risky it is. In the banking sector in which money is the key
goods, if risks, in general, or credit risks, in specific, occur, it is believed to be such
diversified forms and far-reaching scale that it can distort and adverse the business
achievements. Therefore, there has been great concern about credit risk
management nowadays.
In the early 1990s, the collapse of the credit collective societies and the bankruptcy
of banking based loan enterprises is a proof for the incompetent credit system that
was not nimble enough with the transitional economy. In another word, policy-
driven lending practice throughout 1990s and limited credit assessment skills in the
wake of rapid credit growth, led to the accumulation of non-performing loans. To
address this concern, the Vietnam government embarked on an important overhaul
of the banking system through a multi-year restructuring and recapitalization
program. Although a host of adjustments has been implemented, a credit risk is a
tricky issue for the banks to deal with. Nowadays, given the current global financial
crisis that brings many financial institutions to its knee and ravages every economic
sector, Vietnam cannot step outside the overwhelming trend.
A commercial Military bank, though newly founded, achieved great success in its short
life span. Yet, credit risk continues to be the leading source of problems. As the result, I
chose “Current situation of credit activity and solutions to the credit crisis at the
Military commercial bank the period of 2005-2007” as the title for my thesis.
2. Scope of the study
Due to the restriction of knowledge as well as the late release of annual report 2008,
in this thesis, the author only concentrates on the situation of credit and the
management of credit risk of MB during 2004-2007
3. Objectives of the study
The objectives of the research study are:
- To identify the factors which make MB vulnerable to credit risk
- To determine the difficulties or problems in MB’s credit management

- To provide recommendations for the MB and implication to the Vietnamese
authorities with a view to improve the credit quality
4. Methodology
The author took advantage of 2 information sources : primary sources which was
collected from diligent observation during the author’s internship and secondary
sources from newsapaper, the internet, the company’s catalogue and annual report,
together with the record of department of credit management., the author made an
analysis on the data collected to bring out the most exact assessment and solution.
5. Structure
The thesis includes three parts. The first part named " theoretical background’”
which gives you the basic knowledge about the banking system in Vietnam, the risk
types that any commercial bank must confront and specific information about credit
risks-its signal and its characters.
The second chapter is “The current situation of credit at MB” which embodies the
financing activities, credit offerings as well as my own evaluations on those
activities. Besides, in this chapter, I also mention the current measures being used to
minimize the credit risks.
After analyzing the situation to grasp the overall picture of credit activities and
credit risks, chapter 3 named “Suggestions to prevent and minimize the credit
risks”, I would like to make some recommendations to MB. With the aim to reach a
synchronized set of measures I also make implications to the government, State
bank and local authority.
CHAPTER 1: THEORETICAL BACKGROUD
1.1. Overall the Vietnamese banking system
Different from other Western countries where there are three types of banks: state
bank, commercial banks and investment banks, Vietnam legislation system
acknowledge two main types of banks: state bank and commercial bank.
Table 1.1. Vietnamese banking system
Each country only has one and only Statebank. The main function of
Statebank of Vietnam is to issue note as well as to manage, implement and

supervise the monetary policy. State bank is also the last resort for commercial bank
in case it is on the verge on bankruptcy. However, according to Vinacapital
assessment, unlike other State bank of other countries, Vietnam’s Statebank also
takes part in money trading as the main shareholder of six state-own commercial
bank, which, therefore, more or less, resulted in the inequality in competition
between state-own commercial banks and other banks.
Commercial banks’ main function is the bridge among individuals and
corporate in which they inject idle money to the place of demand. More
specifically, commercial bank accept deposits( liabilities) which include current
account and term account and make loans (credits) which is composed of personal,
commercial and real estate loans. The spread between mobilized interest and the
lending interest a huge profits that commercial banks can reap at the cost of
increasing risk such as credit risks, operational risks and liquidity risks. Perceived
from the definition, commercial banks in Viet Nam are comprised of: 38 licensed
joint-stock urban banks, 5 state-own commercial banks, 33 branches of foreign
banks and five joint-venture banks. The representative offices of foreign banks do
State bank
Urban
joint-stock
banks (38
licensed
Represent
ative
offices of
foreign
Joint-
venture
banks (5
banks)
State-own

commerci
al bank (6
banks)
Branches
of foreign
banks (33
branches)
Rural
joint-stock
bank
not perform commercial function because its main function is to make market
research and to supervise the projects, which are sponsored by foreign institutions.
Based on Vinacapital’s report 2007, although four main state-own
commercial banks account for nearly 70% capital market, their market share
gradually shrinks by 0.5% per year due to the accelerating competitions from the
joint-stock banks and foreign banks. Yet, three state-own banks still holds the
largest assets in which Agribank is VND 15,000 billion, Viettinbank is VND 9,000
billion and BIDV is VND 7,500 billion. In 2008, Vietcombank with VND 4,430
billion capital went public to be the largest joint-stock commercial bank, yet, SCIC
hold more than 90% of share total.
While the total asset of 37 joint-stock banks is about VND 30 billion which
means each bank only possess about 1 billion VND. This fact restrains their lending
activity due to insufficient capital. Besides, Vinacapital’s judgment shows that
Vietnamese banking market lacks tranquility which is manifested by the fact that a
bank must count on relationship to borrow idle money from other banks on the inter
–banking market rather than its competence.
1.2. Banking risks
1.2.1. Def of risk and banking risk
When doing business, beyond your expectation, you have to face with risks.
However, if the incoming risks are anticipated to some extends, company would

minimize losses from the risks. So what is risk? Risk is defined as the mishap that
results in damage or the certain mishap that is related to unexpected event. Risk is
considered as the cause and the result of ineffective business activities. Standing
against risk, there are two options for enterprises: being eliminated or striving.
Banking risks are those likely-happened events which deal a heavy blow on banking
expense, profit, reputation as well as asset. Unlike other business, the commercial
not only compete with others on the expertise field but also on relations with
customers. Therefore, the risks a bank has encountered also double.
1.2.2. Classification of banking risks
It is obvious that banking risks can be categorized by various criteria. However,
because this thesis is about to analyze the credit risk of Military Bank, it would be
appropriate to classify risks based on the activity scope. There are seven types of
banking risks:
a. Credit risk
Credit risk is defined as the potential that a bank borrower fail to meet its
obligations in accordance with specified terms in the credit agreement.
b. Price fluctuation
c. Interest risk
Interest risk occurs when interest has to be modified beyond expectations, which
leads to the decline in spread between mobilized interest and lending interest. This
cause of risk may lie in the fluctuation of the market interest at the certain time. It
also the result of the long-term imbalance in the equity and investment or using a
fixed interest rate for the medium and long-term lending project.
d. Foreign exchange risk
This type of risk adheres to the foreign exchange variation which may result in the
loss value or added value for foreign-currency loan that put bank or lender at
jeopardy.
e. Liquidity risk
In finance, liquidity risk is the risk that a given security or asset cannot be traded
quickly enough in the market to prevent a loss (or make the required profit).

However, with regard to the banking term, liquidity risk is the sudden surge of
withdrawals that can leave the financial institution in the condition of liquidating its
assets in a short period at low price.
To survive in that situation, commercial banks have no option but borrow cash from
inter-bank market or Statebank’s injection
f. Operation risks
Operation risk is inevitable for any type of business. The larger scale the bank is,
the more types of service it offers, the riskier a bank may take. These risks emerge
from non-financial issues such as technology (ATM breakdown), employees (staff’s
morality), customer relations (contractual dispute), and capital assets (destruction of
flood or drought)
g. Legal risk
Legal risks take their roots from the uncertainty in interpretation of contracts, laws
and regulations. As the results, commercial banks can get so confused that they may
follow one rule, which is against the other rules.
h. Reputation risk
However, credit risk is still the major cause of bank failures due the fact that
approximately 90% bank’s revenue generated from the credit activities. Therefore,
the effective management of this risk is central to a commercial bank’s
performance.
1.3. Credit risks of a commercial bank
Banks activities often involves in all economic periods, thus, dangers that are
exposed to the economy as a whole are believed to be the dangers to banks as well.
Although each bank has different considerations for credit risk management, it is
hardly denied that credit risk is an inherent part of banking activities.
1.3.1. Def of credit risk
Credit risk is defined as the likelihood of loss the financial institutes suffer in
their banking activities due to customer’s default on their commitment or
customer’s inability to perform their commitment. (article2, resolution
493/2005/QD-NHNN, released on 22/04/2005)

Credit risk is often involved in the credit activity-the most important activity
to determine whether bank can bear fruit from its wise lending or suffer loss from
the bad debts. No matter how hard bank tries to analyze the borrower’s capacity, it
hardly foresees all possible scenarios. Not mention to the credit staff’s competence,
borrower’s capacity may be altered due to unexpected events. Therefore, the risk is
inevitable, yet, what is needed to do is how to minimize it.
1.3.2. Types of credit risks
When a due loan is not performed or the clients’ business appears to deteriorate,
banks stand at the verge of credit risk. Realizing which loan is likely to make the
bank run through the credit risk is a need; the State Bank of Vietnam promulgated a
decision on loan classifications and provisioning for bad debts of credit institutions.
Under the resolution 493/2005/QD-NHNN, released on 22/04/2005, amended on
25/4/2007, loan portfolio falls into specific categories as follow:
Table 1.2. Credit risk classification
Rating
group
Name Description Provision
Group 1 Standard Undue debt whose principle and interest
are assessed to be fully recovered when they
become due.
0%
Group 2 Special
mention
Debts overdue for less than 90 days and
rescheduled debt is no longer due
according to scheduled term
5%
Group 3 Substandar
d

Debts overdue between 91 days and 180
days and rescheduled debt is over due for
less than 90 days according to scheduled
term
20%
Group 4 Doubtful
and bad
debt
Debts overdue between 181 days and
360days and rescheduled debt is over due
between 91 days and 180 days according to
scheduled term
50%
Group 5 Lost-
liquidation
Debts overdue between 361days and
rescheduled debt is over more than 180
days according to scheduled term
100%
Debts can be upgraded or downgraded based on the assessment of the credit
institutions of the ability of the borrower to pay. An overdue or non-performing
loan is defined as a loan classified under group 3, 4, 5. In Vietnam, MB is one of the
first movers in applying the policy on customer rating which issued under Article 7,
decision no 493/2005/QD-NHNN dated 22/04/2005. This policy would help MB
manage effectively risks in credit activates in particular and the whole performance
of the bank in general.
1.3.3. Cause of risks
1.3.3.1. Objective causes
Credit activities probably have direct and massive impacts on the economy and in
return, they are influenced by the objective factors from society. Thus, every

commercial bank should realize the cause of those risks.
Firstly, the political issue and legal systems likely affect the business
activities as a whole and credit activities in specific. Government policy is the
macro economic policy compiled of the fiscal policy, monetary policy and other
foreign policy. The effect of those policies often deals great impact on GDP,
employment, inflation and foreign exchange rate. It is shown that every changes in
the macro policy resulted in the verification in interest rate, exchange rate and credit
condition which causes the instability in monetary business and heavily take its toll
on the commercial banks. Besides, legal system, which is cumbersome and
nontransparent, apparently lags behind the speed of development of banking
system; yet, this legal requirement for borrowing is so instable that the borrower
hardly takes grasp of. Those factors contribute to put bank into jeopardy.
Secondly, risks in the commercial bank likely come from the economic
environment associated with the nature of Market mechanism, inflation, foreign
exchange rate, interest rate and unemployment rate. The market mechanism
including the competition rules, supply-demand rule and price rule is considered as
the invisible hand controlling all business transaction. When customers find the
interest rate and customer-care service of one bank less appealing, they will rush to
banks that are more attractive. This means, in a short of time, they lost their
competiveness- they loss an enormous amount of mobilized money, then, they
cannot afford their lending activities, they stand a risk of credit. Similarly, when the
economy grows at fast pace, enterprises thrive positively and generate high
earnings; it is obvious debt collections of commercial banks are probably easier and
bad debts are mitigated. In contrast, in the time of economic downturn, high
inflation, unemployment accompanied by strict monetary policy will pose
significant threats to all enterprises as well as the bank. In that spot, credit risk is
somewhat unavoidable.
The third is risk that a bank rarely foresees and take control of force majeure.
Flood, drought, earthquake, conflagration are natural disaster that can blow an
enterprises’ achievement at the blink of eye. Due to those disasters, the need for a

certain goods can be changed which makes the firm doing business in that field
goes bankrupt.
1.3.3.2. Subjective causes
a. Customers
With regards to the individual customers, there is a wide range of reasons
that constitute their default on their debts. For example, they suddenly get fired
from their jobs, then, have no financial resource to pay off a debt or debtor faces
unpredictable problems such as an accident, severe illness. A customer’s default can
be spawn from his failure in using lending fund.
With regard to the corporate customers, the causes seem more complicated.
Running a business, a firm has to face its own difficulties which originate from the
nature of market, more specifically from supply and demand. For example, it has to
import the raw materials at a very high price; however, in the response to the harsh
competition, it has to maintain the selling price at certain level, which only
generates sufficient profit for its operations. Sometimes, in a certain period, the
imported raw materials become so scarce that the enterprises cannot implement the
contract. Subsequently, its prestige is shaken and its ability to pay off the debt is
questionable. In addition, the firm may face non-financial problems such as the
lame management skills, the economic slowdown or the plunging purchasing
power. In short, the above-mentioned causes can cause such great loss on firm’s
revenue that they hardly pay off their debt, there are, they are considered as the
reason for credit risk of commercial bank.
b. Banks
The causes that take its root from the customers, to some extend, are
inevitable and uncontrollable; however, the causes from the banks’ own nature are
predictable and manageable. Therefore, it is advisable for the commercial banks to
take notice to the causes in order to eliminate every possible threat.
Firstly, many credit risks resulted from its credit staffs. They are not
qualified enough to analyze, evaluate and estimate the return on equity of the deal
that they sponsor. Besides, the morality of those officials is a question. Epco-Minh

Phung is a typical case of the credit staff’ complicity to the customer which dealt a
heavy blow on the whole economy at the loss of 670 billion VND.
Secondly, banks often do not abide their self to the agreement of lending
requirement. It is reported that in the year of 2006, the total bank’ loan of some
banks exceeded 10% its chartered capital in which Eximbank was 74% and
Sacombank is 48%. Whereas, offering a large amount of money to a small number
of customers put the bank at risk if those customers fail to pay off their debts.
Thirdly, credit risk can be built upon lack of supervision after granting credit. The
borrowers can use loan for their own business which is different from their
commitment in the deal, therefore, there is less likely that they can refund the due
principle and interest.
1.4. Signal to realize credit risks caused by the corporate customers
A first group of signal is relation between corporate and bank. It fails to pay interest
at due date and has to ask for extend the maturity date. Besides, it has to short-term
loan for long-term business activities. It accepts the unprecedentedly high interest
rate while its deposit balance plummets. Sometimes, a firm pays its monthly interest
on the basis of unexpected earning, for example, selling premise, machine or
equipment.
Secondly, commercial signal should be aware of. For example, a firm faces
difficulties in developing a product into the market. The product’s quality decline in
the line with the dramatically decrease in sale volume while the number of
competitors increase. A firm has to cut its maintenance expense and it encounters a
lot of difficulty in paying salary to its staff. . Besides, interest clash between the
members in the board of directors emerges at such a frequent rate that powers are
changing hand often. The corporate cannot find any security company to underwrite
its securities. Alternatively, the market price of its shares plummets.
Third is the signal involved in accounting and financing figure. A company
pitches a variety of excuses to delay presenting the financial report to bank.
Sometimes, its financial report can reveal some irrelevant points, for example, the
shrink of available cash, increase in revenue but decrease in interest after tax; fraud

fixed assets or over-valued assets.
The fourth is about the collateral. The price of collateral is hardly assessed
and its liquidity is low. There are some legal disputes over the ownership of the
collateral. The above signs manifests the apparently unsafety of a collateral, then, it
needs to put under scrutiny.
1.5. Criteria for evaluating credit risks
The ultimate goal of credit risk management is to minimize potential credit risk at
an acceptable level to the bank. In order to assess risks properly, commercial banks
must have the ability to measure risks. Banks often take into account helpful ratios
including bank ratios and obligator’s ratios to estimate credit risks.
1.5.1. Bank criteria
Minium capital aquedacy ratio ( capital safety ratio): credit institution shall
maintain a minimum ratio of 8% between owner’ capital and total risk bearing
asset.
Credit limit to customers: Under the regulation of State bank, each commercial
bank formulate internal policy with criteria to determine credit limits applicable to
single customer and group of related customers. The total loan balance of
commercial bank to single customers shall not exceed 15% of its own capital. The
total loans and guarantees balance of commercial bank to single customer shall not
exceed 25% of its capital. The total loan balance; and combined loans and
guarantees to institutional customer shall not exceed 50% and 60% respectively.
Liquiditiy ratio (composed of the current ratio and quick ratio) : This ratio show the
solvency and liquidity of commercial bank. Credit institution shall ensure the ratio
25% between the quick asset and liabiltiy due within the following month, and a
ratio of 100% between the quick asset and liabiltiy due within seven working day.
Maxium of short-term mobilized funds used to finance medium and long- term loan:
40% to commercial banks and 30% for other credit institutions.
The overdue debt ratio. “Debt” refers to the loan bank granted to its borrower.
Overdue debt ration= total overdue debt/ total outstanding debt
Perceived from the equation, the higher this overdue debt ratio is, the greater credit

risks a bank might experience. In this case, bank may suffer from increasing cost of
supervising and controlling debt collection, more importantly, the loss of other
loans to customers who has better payment’ capacity.
The default debt ratio: The bank will run the risk of credit activities if this default
debt ratio is high. Default
Default debt ratio= outstanding default debts/ total outstanding debts
Risk provision ratio: A risk provision is the additional amount of money reserved
for the purpose of dealing with losses caused in credit activity.
Risk provisions ratio= the amount of money reserved for losses/ total outstanding
debts
If t bank spends too much on this served fund for risk, its operational cost will
probably increase, thus, reducing its profit. The high rate of risk provision ratio may
indicate the bank’s poor quality in credit activity.
1.5.2. Borrower criteria
Commercial banks often use quantitative models to assess credit risk, particularly
the probability of default of the borrower. On of the most prevailing used is the liner
discriminate model, which is known as a part of Z- credit scoring models. The
models will help risk managers wither calculate a “score” representing the
borrower’s probability of default or sort those into different default risk categories.
By selecting and combining borrowers’ various economic and financial indicators,
bank official may be capable of establish factors which are important in explaining
risks in credit activity, screening out bad loan application and calculating reserves
needed to meet estimated future loss. Subsequently, bank released timely policy
towards different group of borrowers.
Linear discriminant model-Z-credit scoring model
A banker must apply different objective economic and financial approaches to
different groups of customers. For individual customers, economic indicators
include income, assets, age and occupation. For corporate customers, cash flow and
financial ratios, such as debt to total assets ratio, overdue debt to total debt are the
keys factors. Because the scope of this thesis is corporate customers in MB, the

author took an example considering the discriminant model developed by E.I
Altman for publicly traded manufacturing firm in the United States. The
discriminant model divides borrowers into high or low default risks groups based on
the various financial ratios of the borrower (X
j
) and the significance of the ratios.
Z=1.2X
1
+1.4X
2
+3.3X
3
+0.6X
4
+1.0X
5
In which
X
1
: working capital ratio (working capital/ total assets)
X
2
: Retained earnings to total assets ratio
X
3
: Earnings before interest and taxes to total assets ratio
X
4
: Market to book value ratio (market value of equity/book value of long-term
debt)

X
5
: Total asset turnover ratio (sales/total assets)
Stated from that formula, the higher the value of Z, the lower the default risk the
borrower may pose to the bank. Therefore, low or negative values of Z may be the
evidence of relatively high default risk class of borrowers. Besides, discriminate
analysis model produce a switching point, Z=1.81, which is the average difference
between the Z scores of a defaulting firm and a non-defaulting one.
For example, providing that the financial ratios of a borrowing firm be: X
1
=0.1,
X
2
=0, X
3
=-0.3, X
4
=0.1 and X
5
=0.2, Z score is calculated as follows:
Z=1.2(0.1)+1.4(0)+3.3(-0.3)+0.6(0.1)+1 (0.2)
Z = 1.33
In this case, the firms’ Z score is 1.33 which is less than 1.81, meaning that the
company belongs to the high default risk group. Therefore, the bank should not
make loan to this borrower until it improves its earnings.
Although, this model is straightforward and this calculation is made simply, there
are several shortcomings. The first one is this model only reflects two extreme cases
of borrowers: default and no default, but there are a wide range of risks in the real
world. The second problem is that constant variables estimated in the model are not
always the same due to changing real financial conditions of borrower as well as of

the economy. In addition, the model has ignored the important, hard to quantify
factors, such as reputation of the borrower and long-term relationship between
banks and their debtors, which may play a crucial role in the default or no default
decision.
1.6. Impact of credit risks on commercial banks’ activities
It is widely known that profit and risk are parallel factors in any business activities,
particularly in trading currencies. Business entities which can earn a hug profit,
such as commercial banks and credit institutions, in turn, have to take considerable
credit risks.
1.6.1. Credit risks decrease commercial banks’ profit
The main source of Vietnam commercial banks’ earnings is from credit activities.
Therefore, when any type of credit risks occurs, this will directly affects banks’
benefits. For example, banks may have difficulties in collecting debts from overdue
credits but at the same time, they still have to pay interest for mobilized capital from
customers’ deposits or savings. It is widely understood that greater risks in credit
activities will lead to banks’ lower competence in making payment. On the other
hand, if a bank is able to manage credit risks, it will have a sufficient source of
money to meet its operational cost as well as additional expense and even to expand
this business scale.
1.6.2. Credit risk damage banks’ prestige
A bank with high level of credit risks is said to have ineffective operation and
limited capability for providing banking products and services. Once a bank has bad
reputation as unsuccessful credit risk manager, it probably loses people’s trust and
becomes an unreliable business partner for both domestic and international banks.
Consequently, it will be hard for bank not only to attract capital from the public but
also to maintain its competitiveness in the market.
1.6.3. Credit risks may be the main cause of banks’ insolvency
When the level of credit risks dramatically soars beyond expectation, a threat of
bankruptcy is undoubted. A bank run the risk of insufficient cash to pay off for its
operation cost and for the customer’s withdrawals due to enormous non-performing

loan which is on the verge of lost- liquidate.
1.7. Measures to minimize and prevent credit risks
1.7.1. Make a credit policy
Credit policy is the nuts and bolts of any bank credit activities which play a role of
directing and supervising all activities in the proper norm. This policy should be in
written form with detailed steps to fulfill the expected targets: offering highly
valued loan with high ROE, providing various type of credit packet in response to
market demand and customers’ financial wealth. The credit policy needs to be
modified for different circumstances.
1.7.2. Diversify services and maintain the relation with close customers
The peak and trough of market has great influence on banking business, thus,
diversifying services which means putting eggs into various baskets, bank can
disperse the risks and improve its mobility under the market fluctuation. In its wake,
banks are able to preserve its chartered capital and sustain its earnings.
Collecting and screening information of new clients often cost a lot of time, money
and efforts. This is not to mention to the morality risk bank might confront.
Therefore, besides expanding the customers’ network, it is vital for the bank to
maintain the relation with close customers who bank acquire mutual understanding
to put their trust in.
1.7.3. Assess credit risk
There is the indispensible step in order to answer two questions: can customers
settle the balance? Moreover, will customers settle the balance? On the normal
basis, CAMPARI criteria, which are the shorthand of character, ability, margin,
purpose, amount, repayment, insurance; are used to analyze all customers-related
information.
In term of “character”, bank will assess customer’s character through face-to –face
interview as well as the relation of clients with banks and clients’ partner. Whereas,
“ability” refers to the ability to manage financial activities in the previous years.
“Margin” is the lending interest which is either fixed interest or flexible interest or
mixed interest. It is easily seen that the more risky the business is, the high lending

interest is expected. In fact, only when banks take grasp of the “purpose” of the
lending do they offer the loan. They often research the relevance of the stated
purpose in the lending dossier with the client’s presentation to see whether the loan
is necessary for the customers’ development. Prior to giving an explicit “Amount”
or the value of loan, research into the cash circulation and cash availability via
customer’s annual report is advisable. To evaluate the “repayment” ability, bank
calculate the total amount including principal and interest that the customer are
expected to pay at due date, the earnings of clients. The last criterion is “insurance”.
Banks see whether customers’ loan is guarantee by collateral or third party to assess
client’s trust-worthiness.
Besides CAMPARI criteria, some banks use “5C” criteria which are character,
capacity, ash, collateral and condition. In 5C criteria, bank pays more attention to
the market fluctuation that might influence the borrowers’ financial wealth.
In short, credit staff always in two minds between: risks are at acceptable or not and
benefit can compensate for the risk they might suffer, thus, they need to weigh
every criteria to give the wisest decision.
1.7.4. Build risk-ranking system
Level of credibility and the ability to perform debtor’s obligation will determine the
ranking of that credit package which is regarded as necessary to response
immediately to the suddenly emerging issue related to the loans. Because ….is
considered being in the line with current national regulations and international
agreement, it is used widely in the commercial banks systems.
CHAPTER 2: THE CURRENT SITUATION OF
CREDIT ACTIVITIES AT MB
2.1. Overall view of MB
2.1.1. Foundation and achievements
Established in November 4, 1994, MB has been affirmed its position and prestige
as one of the leading commercial bank in Vietnamese financial market. The
chartered capital of MB is VND 2,000 billion and is expected to increase to VND
7,300 billion by the year of 2010 in the pursuit of being the large-scale financial

group.
In 2004, MB issued shares to public, which valued VND 20 billion. In this year,
MB issue Active Plus card. The year 200 witnessed the deal between MB,
Vietcombank and Viettel in making payment through ATM. While in 2006, to
improve banking technology, MB entered into the deal with Temenous, a
Switzeland software company. MB also cooperated with CIDO to enhance its risk
management. Besides, MB, in this year, issued VND 220 billion transferable
bonds.
By the end of 2007, 65 branches were opened nationwide with 2000 staffs while
in 2008, there were 100 branches with 3000 staff. This figure shows the effort and
determination of MB in achieving its objectives. MB is one of the banks that have
the largest correspondent bank relationship in Vietnam with more than 700
correspondent banks in 75 nations and territories.
MB always pays much attention to the renovation and application of banking
technology in a bid to serve the business management and develop the advanced
banking service network. At present, it has connected computer network from the
Head quarter to almost all branches nationwide and provided a system of banking
services including e-telegraphic transfer, international credit card, ATM,
international payment by SWIFT. MB has been sufficient to provide modern and
advanced banking services and products, which are convenient to all domestic and
foreign customers.
Standing as the leading commercial bank in Vietnam, MB has done its best to get
many encouraging achievements and made a considerable contribution to the
development of the national economy.
2.1.2. Mission
MB tries its best to build a committed and well-qualified staff in order to give the
clients the wisest financial package at competitive cost with the most satisfaction.
2.1.3. Vision
MB aims at achieving position as one of the leading commercial banks in
Vietnam, especially in the urban region and of high prestige in the international

market, yet ensures the stable and highly effective operations and sustainable
development
MB is persistently pursuing its development strategy: to concentrate on the close
customers, large corporation and economic group, pay more attention to the
medium and small size firm, develop the service for individual customers, expand
the activities on the financial market and focus on investing activities. Besides,
MB ensures the balance, security and profitability; expand and improve quality as
well as competitive capacity of banking-services; focus on re-training the skill of
the banking staff; improve banking technology, reinforce financial capacity.
In conclusion, the core values not only lie in the tangible asset but also in the
intangible one that are treasured by all staffs. They are teamwork, trustworthy,
customer care, creative, professional and performance-driven.
2.1.4. Staff structure
Table 2.1. Staff structure at MB
Due to the scope of the author’s study that focuses on the credit activities at MB,
the role and function of Internal checking department, Credit committee, risk
Shareholders
Board of
control
R&D Dept
Board of Directors
General Manager
System management
Bloc
Trading-support Bloc
Credit committee
Trading Bloc
Risk management bloc.
-Risk management
-Credit management

- Loan collection
Legal Dept
Investment
Communication Dept.
General Planning Dept
Manage and Develop
Branches Dept
Administrative and
quality control dept.
- -Facilitate and manage
asset
- -Quality control
- -Contact centre
Trading-support dept
-International payment
- Payment center
- Business-support
Private customers
SMEs
Large-scale enterprises and
financial institutions
TREASURY
Accounting and
Financial Dept.
Politics education
Dept.
Technology Dept.
HR Dept.
Southern
representatives’ offices

Auditing
Dept.
Senior
committee
Internal checking Dept
Source: annual report 2007
management bloc and trading bloc draw the author’s attention.
The trading bloc is assigned to do research on market and customers, from which
they suggest their customers suitable credit package. Moreover, they are required to
keep a close eye on customers’ business performance as well as the volatility of
market.
The internal checking is mainly responsible for checking all documents and
dossiers, from which flaws are probably found to be eliminated timely in an effort
to ensure the safety of MB’s business.
Credit committee is in charge of assessing the credit-worthiness of large projects,
most importantly, evaluating the value and legitimation of collaterals. Besides, this
committee develops a scheme to value the collaterals in accordance with the current
social- economic environment.
Risk management bloc will periodically re-value the collateral, instantly checking
the business performance of borrowers and propose timely measures to alleviate
potential risks. Concurrently, this bloc makes plan of tackling and colleting undue
loans.
2.2. The current situation of credit activity at MB
The year 2007 witnessed the dramatically soaring in global oil which reached its
peak of 100 USD per barrel. Besides, the mortgage crisis in the US which was
spilling over into every nuance of any business has caused multitude of difficulties
to Vietnamese financial and monetary market. Furthermore, the national economy
was exposed to new challenges. The excess of import over export was so huge that
the balance of trade was in dire deficit. The foreign direct investment (FDI) reached
its record, though being a growth engine, posed threat to foreign exchange rate and

means of payment. In addition, the inflation hit its record of 12.6 % reported by the
national department of statistics. As the result, the State Bank practiced the tight
monetary policy, demanding all banks to double it minimum required reserve and
constraining the security lending. In lieu of those challenges, MB made a great
stride as the result of clear-sighted restructuring and direction
2.1.1. Capital Mobilization
Figure 2.1: Mobilization structure of MB (2005-2007)
Unit: million VND
Year
Indicators
2005 2006 2007
Amount Amount Amount
1.Total capital
mobilization
7,427,712 100 11,822,417 100 25,156,444 100
2.Form of capital
mobilization
Deposit 7,118,998 96 11,483,849 97 22,777,771 90
Loan 308,714 4 118.,68 1 385,673 2
Security issue (bond) 0 220,000 2 2,020,000 8
3.Type of currency
VND 4,935,57 66 9,013,212 76 19,979,057 79
Foreign Currency 2,492,355 34 2,809,205 24 5,177,387 21
4.Term of account
Current account 3,426,041 46 4,753,879 40 8,153,572 33
Time account 4,001,671 54 7.068.538 60 17,002,872 67
Source: annual report 2005, 2006, 2007
The total capital mobilization significantly increased in great pace. In 2006, its
liquidity was 11,822,417 million VND which was slightly doubled 2005. In
addition, the year 2007 witnessed the largest capital mobilization, which was 2.5

times as much as those of 2006. First, the success in capital mobilization was partly
due to the expanse of the branches and offices nationwide. In 2007, there were 65
branches and offices across the country, which roughly doubled the number of total
of branches in 2006 and approximately tripled the amount of branches in 2005. The
extension of banking branches not only allowed the borrower access to the bank’
capital more easily but also attracted a great amount of idle money. Second, in the
year of 2007, together with the blooming of the security market, the instruction no
27 released by the Ministry of Finance requiring all deposits of security speculators
which were opened at security companies were now under the banks’ management.
The large amount of cash, estimated roughly 3,300,345 million, therefore, in flew in
MB in 2007. Besides, MB organized a great deal of promotion campaigns namely
“Open deposit to get present” which channel the idle money from people and
institution into the banks.
Chart 2.1: economic unit-based capital mobilization
The chart depicted that most of capital mobilization of MB comes from the private
depositors, which accounted for approximately 86% of total capitalized cash.
Nevertheless, the amount gradually reduced as a part of MB’ policy which focused
in the institutions depositors. As the result, the amount of money raised from
institution depositor was steadily on the upward trend from 14% (2005) to 20%
(2007). The year 2006 was an exception in defiance with MB’s policy towards
institutional customers. The result of 2006 stemmed from two facts. First is the
expanse of its branches, from 25 branches (2005) to 38 branches (2006). Secondly,
being the main sponsor of APEC summit conference 2006, MB’s image as a sound
financial institution was acknowledged, which led in an immense of cash inflow
from private customers.
Another good sign is that out of institutionally capitalized cash, the deposits
outnumbered the loans. In 2005 and 2006, the loan was 100,000 million VND out
of 1,171,230 million VND and 1,049,186 respectively. Whereas, the loan in 2007,
although soared, about 385,673 million VND is equivalent to 1/11 of the total
institutional capitalized cash.