Precluding and reducing solutions to credit risk at quang trung branch of vietnam bank of investment and development

FOREIGN TRADE UNIVERSITY
BACHELOR PROGRAM IN BUSINESS ENGLISH
--------------* * *----------------

FIELD STUDY REPORT
Precluding and reducing solutions to credit risk at
Quang Trung branch of Vietnam Bank of
Investment and Development

Student: Tran Vu
Class: 8B
Supervisor: Luu Thuy Huong

HANOI - 2012

1


INTRODUCTION
Vietnam economy starts integrating into the world economy and participating in
international and regional economic organizations such as ASEAN, WTO, and AFTA.
Integration leads to the severe competition among domestic and international companies.
Sharp rivalry also leads to the risks in production process of companies. Nowadays, risk
preventing is also the urgent issue of banking industry in Vietnam. In the past few years,
activities of commercial banks must operate in accordance with market mechanism and
innumerable credit risk, bringing about losses to the banking industry and the entire
economy. Many commercial banks and credit organizations have very huge unprofitable
debt ratio, even some banks must be bankrupt unless there is interference from the
government.
Concerning about risks, particularly credit risk in banking industry and Quang Trung
branch of Vietnam Bank of Investment and Development during my internship, I choose

the below topic:
“Precluding and reducing solutions to credit risk at Quang Trung branch of Vietnam
Bank of Investment and Development”
The special subject is presented in three main chapters:
Chapter 1: Overview of risk, significance of precluding and reducing risk in credit
relationships
Chapter 2: Methods of precluding and reducing credit risk in Quang Trung
branch of Vietnam Bank of Investment and Development
Chapter 3: Solutions to precluding and reducing credit risks at Quang Trung
branch, BIDV

2


Chapter 1: Overview of risk, significance of precluding and reducing
risk in credit relationships
1.1.

Risk and risk classification in credit relationships

1.1.1. Definition of risk
Risks are problems that accidentally damage people or assets of one or some objects
in the society.
In the economy, risks are considered the losses which enterprises have to accept
when doing business. Trading in currency- credit field, the banks must admit that too. In
reality, it has been proved that the risks of dealing in currency are the riskiest ones.
Credit risks are the losses that the banks must approve of in lending activities. The
reason is stated that credit “is a person lends or promises to lend the capital to the others,
uses the signature like a guarantee, or a deposit to prove that money is collected“.
1.1.2 Kinds of credit risks

Risks of commercial banks are very diversified and complicated. The reasons may
come from the banks, from customers, from objective issues, or from the government’s
administrative mechanism. In general, there are following risks: interest risk, capital risk,
exchange risk, payment risk, and risk of unable to pay.
- Interest risks: “are the risks that the bank must bear when the market
interest varies.” Consequently, when the interest changes the bank possibly deals
with risks. When the interest is too low, enterprises tend to borrow much but it is
difficult for the bank to mobilize capital. Hence, their action scope is narrowed, and
the revenue will reduce. In contrast, when the interest is too high, the bank has
more mobilized capital yet it is stagnant. It is explained that the bank can not lend
money at too high interest rate. That leads to unavoidably losses for the bank.
- Capital risk: is represented in two aspects:
+ Redundant capital: commercial banks are the enterprises that earn revenue by
the method “borrow to lend” when the current capital is very little. The bank’s main
capital is the mobilized from the inhabitants, from economic organizations, and from
other credit organizations. Therefore, the redundant capital is not lent or changed into
other profitable assets. As a result, the bank will suffer losses in charging borrowing fee
whereas not receiving income.

3


+ Lack of usable capital: this risk happens when the bank does not satisfy the
customers’ demand for borrowing and investing, even not meet the customers’ demand
for liquidating. This kind of risk arises from the exchange function of capital using
period and the bank’s capital. Besides, political issues, price variation, and the
decreasing reputation promote people to withdraw their money in the bank. Hence, the
bank’s liquidation is threatened. If the bank had changed all their assets into money to
pay but no result, then, the bankrupt risk is considerably high.
- Capital mobilizing risk:

+ Happens when the bank mobilizes much capital but they can not lend or slowly
lend to customers.
-

Credit investing risk:

+ The customers who have dealt with business risks can not pay the bank money.
+ The economies that get difficulties also cause risk to the bank
+ The credit officers carelessly appraise the lending project.

1.1.3. Definition of credit risk in banking activities

4


Risks in credit trading of the bank are the financial losses because the customers
borrowed capital from the bank do not pay on time, and not keep their commitment.
Credit risk can be defined as the potential losses which the bank must bear when
lending customers without being paid on schedule. It means that when the bank provides
credits to each customer, the forecasted income from the profitable assets may not be fullyreturned in both quantity and time- limit.
To sum up, credit risks are the problems that happen in credit trading process,
causing the losses of capital and reputation (or brand name) for the commercial banks. In
central planning economy, risks in banking industry are generally ignored. All the banks
were the State-owned Commercial Banks. So the losses were subsidized by the
government by methods such as releasing more money and tight money management. But
when stepping into the market economy, competition is a vigorous catalyst. Consequently,
economic posting is mainly independent. This originates the potential of losing liquidation
and bankruptcy. In changing business environment, the stability of the enterprises is only
relatively. Hence, when the customers get trouble, the same situation with the bank is easy
to understand. Realizing credit risks will help the banks to find out efficiently preventing

methods, and then they have more efficient business result.
Credit risks are diversified and sophisticated. It could be when the bank has stagnant
capital, lacks of usable capital, unequal ratio of lent capital and mobilized capital,
guaranteed asset risks or risk of not taking back debts.
In this paper, credit risks are examined in the situation that the bank can not recover
debts, being called bad debts.
For principal and interest debts, credit risks may occur in four cases. It is when the
bank can not recover the interest on schedule. Depending on each case, the bank enters in
the accounts with different items such as hanging interests and overdue debts. When not
being paid on time, risks are at the low level and posted as arising hanging interests. If the
bank can not collect the interests, risks are posted as hanging interests, except the case that
the bank remitted that item. If the bank cannot reclaim the capital on time, it will cause bad
debts. Yet this item is not regarded as absolute loss of the bank. Because for some reasons,
enterprises slowly refund the principal but they still pay all after the contracted period. If
this debt can not be paid, the bank will highly deal with credit risks.

5


Credit risks

Not recover
interest on
time

Not recover
principal on
time

Not collect

enough
interest

Not collect
enough lent
interest

Hanging
interest
arises

Unrecoverable
debts
Or
Forgiving

Overdue
debts arise

Frozen hanging
interest
Or
Interest remission

Credit risks remain in many forms. Those forms always vary. The result is that the
bank is unable to recover. In the beginning, enterprises may slowly pay the interest and
then slowly pay the principal. It really makes the bank at risk. But the credit risks are not
always shown through all the above forms. There is the situation that enterprises pay
interests but do not pay the principal. So the bank only posted it as arising bad debt and
then changed it into unrecoverable bad debts.

The above cases are only general ones. When researching credit risks, people usually
pay attention in the danger of risks such as hanging interest and arising bad debts. Frozen
hanging interests and actual debts are usually examined to solve the problem and to infer
lessons.

1.2. Criteria to determine credit risks.
Criteria of measuring include:
• Overdue debts:
Gross overdue debts
Overdue debts rate =

* 100
Gross debts

Low overdue debts rate proves that the credit quality is high. When absolute
numeric value of the overdue debts goes down, if the gross debts increase then overdue
debts rate has not reflected the nature of credit.
- Classification according to time period, there are arising risks:
+ Less than 180 days
+ Greater than 180 days

6


+ Greater than 360 days
- Classification of unpaid debts and unrecovered debts
- Classification of guaranteed and unguaranteed risks
Number of customers having
Overdue debts
Ratio of customers =

having bad debts

* 100
Gross numbers of customers
Having credit relationship

• Losing capital situation:
Losing capital
Debts
Ratio of losing capital =

* 100
Gross debts

• Bad debts situation:
Bad debts
Ratio of bad debts =

* 100
Gross debts

• Unrecoverable debts:
Unrecoverable debts
Ratio of unrecoverable debts =

* 100
Gross overdue debts

1.3.

Significance of precluding and reducing risks in credit relationships

Precluding and reducing risks in credit relationships will help the bank avoid bad
consequences. Those kinds of credit risks not only affect on the bank itself but also on the
economy. Therefore, precluding and reducing credit risks has a very important
significance.
• For the bank:
Risks directly impact the revenue of the bank. If the risk is at low level, the bank
can use its profit or its capital to make up. But if it is a big risk, the bank can not use its
profit to compensate, it will be bankrupt. For this reason, precluding and reducing
credit risks helps the bank prevent and minimize damage, stabilize profit, maintain

7


economic security, and maintain prestige and brand. In doing credit business, prestige
and brand is extremely important, directly affect customers’ behavior.
• For the customers:
A bank that is good at preventing and reducing credit risks will positively
influence on customers. The bank has created its prestige and brand name. The
customers will consider the bank as a reliable address to deposit money as well as to
borrow money. For all business activities, the customers are always important ones.
The same situation is in the credit- banking activities. When the bank is free from risk,
customers will trust more and choose the bank as their partner more. In the situation of
integrating into world economy, there will be many international banks enter and
compete. A free- risk bank will leave the customers belief- it is very important.
• For the economy:
Credit and banking are sensitive financial business activities. So it directly
influence on the social economy. If the bank preclude and reduce risks then the cash
flow will circulate normally. It will not cause redundancy as well as deficiency. The

economic security will be ensured. When the risk occurs, customers will be puzzled.
They will simultaneously withdraw money. Thus, the bank will be lack of capital. The
reason is the bank chiefly mobilizes capital from customers. Then organizations who
want to borrow capital also get trouble. In fact, economic organizations form an
economy. When those organizations that will have huge impacts on the social economy
as a whole face crises.

8


Chapter 2: Real situation of credit risks at Quang Trung
branch, BIDV.
2.1. Bank for investment and development of VietNam, Quang Trung branch
2.1.1. Objectives
Being one of the major State commercial bank of Viet Nam, with nearly half a
century of operation and development, Bank for Investment and Development of Vietnam
has had much higher effort, with very encouraging success, contributing actively to the
cause of construction and development of the country’s economy. With the purpose to
improve, expand the operation network, increase prestige, the image of Bank for
Investment and Development of Vietnam to customers and domestic and foreign credit
organizations, the separation, improvement of Quang Trung transaction bureau into BIDV,
Quang Trung Branch (Level 1 branch) with the main function is to perform retail banking
professions will contribute to overcome shortcomings in operation scale; improving the
capabilities of finance, management, technology, and the staff qualifications. Together with
several Branches and Transaction bureaus which share the same function. BIDV, Quang
Trung Branch will become one of the nucleus to build a chain of “supermarkets” of
banking, with full modern customer-oriented facilities and banking services, meeting the
demand and needs of the market economy with the unceasing diversification and
development in the demand to use finance-banking products, services of the customers,
aiming to prepare sufficient conditions to improve the competitiveness of Bank for

Investment and Development of Vietnam in the region and in the world, actively
integrating and proceeding step by step following international customs and norms
acknowledged in banking business operations. Specifically:
- BIDV, Quang Trung Branch will take the development of modern banking service
as the operational background, pledging to bring about more and more facilities and added
value for customers being civilians or enterprises of every economic element;
- The operation of BIDV, Quang Trung Branch will help enhance the business
operation of Bank for Investment and Development of Vietnam. The upgradation of Quang
Trung Transaction Bureau into BIDV, Quang Trung Branch (Level I branch) will expand
the operational network of Bank for Investment and Development of Vietnam in Hanoi
City, assisting Bank for Investment and Development of Vietnam to seize and take the

9


opportunity to expand the customer objects, through which contributing an active part in
the socio-economic development of the Capital and some adjacent areas under the satellite
urban chain bordering Hanoi;
- Expanding the operation of BIDV, Quang Trung Branch is a measure to improve
the financial capability and increase the competitiveness of Bank for Investment and
Development of Vietnam in the framework of globalization and integration;
- Establishing and putting into operation the BIDV, Quang Trung Branch will help
boost the exploitation, clearing the capital source, increasing the capability of supplying
credit, banking services, therefore, increasing profits for the Bank, concurrently,
contributing a remarkable part in the unceasing development of the system of Bank for
Investment and Development of Vietnam;
- The operation of BIDV, Quang Trung Branch will help publicizing the trademark,
heightening the position, image about an advancing, modern Bank for Investment and
Development of Vietnam in the perception of the customers and in the business market;
2.1.2. Scope of operation

2.1.2.1. Legal status:
* Full name in Vietnamese:
“CHI NHANH NGAN HANG DAU TU VA PHAT TRIEN QUANG TRUNG”
* Acronymed: “Chi nhanh Ngan Hang DT & PT Quang Trung”
* The international transaction name:
“Bank for Investment and Development of Vietnam, Quang Trung Branch”
* Abbreviated name: BIDV, Quang Trung Branch
* Headquartered at: No 53 Quang Trung, Hai Ba Trung, and Hanoi.
Quang Trung Branch is an affiliated subsidies operating from 2003 but split from the
Transaction headquarter and officially came into operation from 01/04/2005. At the time of
establishment, the branch had a staff of 72 people, in which there were 65 trade union
members. At first, the activity of the branch mainly focused on stabilizing organization,
establishing the order and strengthen professional skills beside the daily profession
operation.
- BIDV, Quang Trung Branch is a Level I Branch, under Bank for Investment and
Development of Vietnam, with its own stamp and financial balance sheet, has a task to
operate the activities of Bank for Investment and Development of Vietnam according to the
authorization of the General Director of Bank for Investment and Development of

10


Vietnam, being an accounting unit under the system of Bank for Investment and
Development of Vietnam;
- BIDV, Quang Trung Branch was established according to the decision of the
Management Board of Bank for Investment and Development of Vietnam on the basis of
the approval of the State Bank Governor;
2.1.2.2. The content of operation
BIDV, Quang Trung Branch is the organization to operate monetary business and
Banking service according to the Law of Credit Organization, suitable to the “Charter on

organization and operation of Bank for Investment and Development of Vietnam”,
operating according to the regulation of organization and activities promulgated by the
Management Board of Bank for Investment and Development of Vietnam; and according
to the authorization of the General Director of Bank for Investment and Development of
Vietnam, especially paying attention to developing the advanced, modern Banking service
and the Banking products, services with high rate of advanced technology, combining in
harmony with the traditional banking profession, creating the stable customer background,
ensuring reasonable profit mechanism, manage well risks, being efficient, safe in business
operation.
•

The advanced Banking service
The operational content and specifically oriented targets:
- Forming and developing wide and popular ATM network, creating the basis of

crowded customers to use the products and services on ATM technology in a stable and
sustainable way. Building the system to accept POS/EDC linked with the bank to deploy
many added facilities integrated in ATM-BIDV such as: paying invoices of goods, services,
recording debts … operating the link of card payment with VISA International, MasterCard
International, and AMEX, etc, and then issuing international credit cards of Bank for
Investment and Development of Vietnam
- Applying the Home-banking service for the customers, helping customers to
manage and control their accounts closely, effectively, with such functions as account
enquiries, banking information enquiries, next is to perform transactions via the Internet
and by electronic documents.
- Performing the purchase of traveler’s cheques and international cheques, building
the network of collecting and exchanging traveler’s cheques to the Branch to ask for
clearance;

11

- Supplying the service of authorized paying salaries (automatically) for individuals,
payment of overseas exchange, connecting with the profession of capital mobilization;
- Supplying the service of managing the customers’ personal accounts according to
the norms of modern banking with high quality. Performing counseling and managing
investment portfolios as authorized by the account owners;
- Willing to organize Mobile banking when necessary, researching to deploy new
products and services as requested by the customers and the market.
•

Clearance and budget services

- Supplying domestic and international clearance products and services;
- Performing the professions of purchasing-selling, converting foreign currencies to
serve credit activities, international payment and aiming to serve the business operation of
the Branch. Executing other foreign relations banking services as ruled, authorizing of the
General Director of BIDV;
- Performing the service of authorized receivable and payable. Supplying the service
of collecting and paying cash for customers;
Performing other payment services delegated by the General Director of BIDV;
•

Capital mobilization

Mobilizing short-medium-long term in Vietnam dongs and other foreign currencies
from various domestic and foreign capital sources in all forms;
- Receiving deposits, non-time deposits, time deposits, the deposits for payments of
all organizations and civilians;
- Issuing deposit certificates, domestic and international bonds when assigned by

General Director of BIDV;
- Performing other capital mobilization forms allowed by law;
•

Loaning and securing

- Performing short-medium-long term loans in Vietnam dongs foreign currencies to
entitled customers, BIDV;
- Discounting valuable documents;
- Performing securing services;
- Performing credit professions after being approved by General Director of BIDV;
+ Being the key or member capital contributors to be engaged in co-sponsor of any
investment projects exceeding the limit assigned and authorized by General Director of
BIDV to the Branch Director;

12


+ Performing the profession of loaning, guaranteeing or re-guaranteeing for foreign
organizations and individuals, except the case of responsive guaranteeing for foreign
customers taking part in bidding, performing the contract in Vietnam and other cases
instructed by the General Director of BIDV and/or distributing the levels; specifically
delegated to the Branch Director;
•

Other activities

- Performing the service of agent bank, managing the investment capital for the
projects as requested by customers;
- Supplying the steel safe service (storing, preserving and managing valuable papers,

the precious documents and assets of customers);
- Performing the activities after being approved by the General Director of BIDV;
+ Investing, repairing, improving and upgrading collaterals, mortgages which have
been converted into the assets managed by BIDV for use or business.
+ Investing in the form of capital contribution, joint ventures, purchasing stakes and
other forms of investing outside the BIDV system;
+ Dealing with gold, silver, precious stones (including imports and exports);
- Performing other activities and tasks delegated, assigned by the General Director of
BIDV;
2.1.2.3. The scope of operation
- Geographically: BIDV Quang Trung Branch operating on the location of Hanoi
City;
- About the fields of operations: within the legal scope allowing BIDV to perform
and regulations of BIDV;
2.1.2.4. Financial management
- BIDV Quang Trung Branch can receive capital from BIDV, being responsible for
the efficiency of using, securing and developing the assigned capital:
+ Performing rightly the regime to manage and use the capital according to the
regulation of the State;
+ Purchasing insurance for the asset;
+ Accounting into the expense of risk reserves;
- Performing rightly the Decree on Accounting and Statistics, accounting - and
auditing regime;
- Establishing the Quarterly, Annual financial reports according to the form, sending
BIDV according to the present regulations;

13


- Being responsible for the preciseness, honesty of the reported statistics;

- Being active in business, ensuring growth to secure and develop the capital;
- Enjoying privileges according to the State regulations;
2.1.3. Organizational machine
Organizational model
The organizational model of BIDV, Quang Trung Branch was built according to the
model of modernized banking, in the orientation of renovation and advancement, suitable
to the scale and operational characteristics of the Branch (details are as Appendix 1).
1. Directing the operations of the BIDV, Quang Trung Branch is the Branch Director.
2. Assisting the Branch Executive Director is one or several Deputy Directors,
working as being assigned and delegated by the Branch Director;
3. The organizational model of the BIDV, Quang Trung Branch up to the end of 2011
is supposed as follows:
3.1. At the Branch headquarter includes:
+ Credit Department
+ Customer service department (including enterprise and individual customers)
+ International Payment Department;
+ Monetary – Budgeting Department;
+ Planning – Capital Source Department;
+ Assessment and Credit Management Department;
+ Finance-Accounting Department;
+ Personnel-administration Department;
+ Interior Supervising Department;
+ Computing Department;
3.2 The underlying unit: Nguyen Dinh Chieu Transaction Bureau.
During the operational process, the organizational machine will be adjusted to
correspond to the business operation situation of the Branch;
4. The BIDV, Quang Trung Branch is allowed to launch second level branches,
Transaction bureau, Saving funds; Foreign exchange desk at necessary locations within
Hanoi City area; being allowed to establish assistant counseling council if necessary such
as: Credit council; Risk control council; scientific council, the Competition – Rewarding –

Punishment Council …

14


5. The specific functions, tasks of the Departments, units under BIDV, Quang Trung
Branch are instructed by the Director of BIDV, Quang Trung Branch; being suitable to the
regulations of BIDV and operational requirement of the Branch.
2.2. Real situation of credit risks at Quang Trung branch
2.2.1. Real situation of overdue debts
Situation of overdue debts at the branch has been cared by both the leading board and
staff in recent years. From 2008- 2011, some main activities in precluding and managing
risks has been done and achieved certain results such as classifying, evaluating risk of
credit and overdue debts.
The quality of credit is considered as the top objective of the bank. Therefore, the
branch has broadened their market share, enhanced quality of bank loan. The branch also
perfects the credit process, upgrades professional skills, dignifies the process of appraising
projects, and ensures the effectiveness of projects. From that point, the credit capital of the
branch has high coefficient of safety.
Table 1: General situation of overdue debts
Unit: VND billion
Year

2008

2009

2010

2011

1763

2200

2243

2280

Debt collecting turnover

1583

1829

2134

2230

Total debts

1670

2041

2150

2200

10

8

12

16

Target
Loan turnover

Gross overdue debts
Overdue debts/ total debts

0.6 %

0.39 %

0.56 %

0.73 %

(Source: Credit department of BIDV)
From the above table, we can see that the branch has positively activities in
collecting bad debts as well as dealing with overdue debts. Overdue debts ratio is always
lower than 1 % compared to the total debts. In detail, overdue debts over total debts are
0.60 % in 2008, 0.39 % in 2009 reduces in comparison with 2008.It means that the bank
had certain methods and achievements in precluding and reducing risks. In 2010, the rate
of overdue debts increased to 0.56 %. While the total debts grew to VND 109 billion, the
overdue debts increased to VND 4 billion. Until 2011, the overdue debts ratio sharply

15


increased to 0.73 %, an outstanding growth against three previous years. It demonstrated
that there may be some unavoidable mistakes and risks.
2.2.2. Overdue debts classified according to economic composition
Table 2: Overdue debts classified according to economic composition
Unit: VND billion
Year

2008

2009

2010

2011

1568

1800

1863

1100

Total debts

1495

1523

1800

1210

Overdue debts

2

4

7

10

Target
Loan turnover to stateowned enterprises

Overdue debts/ total debts

0.13 %

0.26 %

0.39 %

0.83 %

195

400

380

1180

Total debts

175

518

350

990

Overdue debts

8

4

5

6

Loan turnover to private
enterprises

Overdue debts/ total debts

4.57 %

0.77 %

1.43 %

0.61 %

(Source: Credit department of BIDV)
Overdue debts of private enterprises accounts of large priority in comparison with
state- owned enterprises. About total debts, total debts in state- owned field is 5 to 8 times
of private ones. Thus, in terms of the bank’s benefit, the quality of credit provided to staterun enterprises is still low. At present, state- run enterprises operate not very effectively
due to many factors, such as small financial potential, and not very high management
ability. Some enterprises do not have clear business project, hence, they can not allocate
the capital properly, work ineffectively, and are lack of responsibilities. This is one of the
main reasons that leads to the case that the bank is afraid of lending private enterprises.
Therefore, it creates drawback for them in expanding their production and business.
In 2008, overdue debts ratio of state- owned block was 0.13 %. But in 2009, the ratio
was two times higher than the year 2008, at 0.26 %. Whereas, total debts only increased by
VND 277 billion. It demonstrated that the preclusion task get trouble. In 2011, overdue
debts were 0.83 %, 3 times higher than the previous year, yet the total debts decreased
much. It originated from the group of customers who built infrastructures, including of

16


Head of company of Traffic Project Construction Number 8 and members, and some
industrial customers, get matter because of inconvenient business environment. For

example, Company 889 incurs overdue debts because they did not have new projects.
Some of old projects such as QL2C- Tuyen Quang, Sai Gon- Trung Luong road, cross-asia
road are still under construction. They gains low revenue and has not paid the bank. In case
of Viet- Laos Company, they have completed projects such as QL54- Vinh Long, Vientiane
road, QL57- Ben Tre. The problem is that they have not been audited and liquidated. This
kind of lending is basically changeable. In the time being, the bank should pay attention to
this subject.
Some customers in industrial group such as Electrical Material and Mechanical Tools
Company have equity capital/ total capital is very low (at 7 %), so profit coefficient is too
low. The products which the company provides Electric Department are slowly paid. Or
Artificial Board Processing Company also gets loss. For such customers, the bank had
better have methods to overcome.
2.2.3. Overdue debts classified according to period
Table 3: Overdue debts classified according to period
Unit: VND billion
Year
Target
Bank loan turnover
Total debts
Overdue debts
Overdue debts/ total debts
Total debts
Overdue debts
Overdue debts/ total debts

2008

2009

2010

2011

1560

1790

1993

2080

919

1231

1250

1500

10

8

12

16

1.09 %

0.65 %

0.96 %

1.07 %

751

810

900

700

0

0

0

0

0%

0%

0%

0%

(Source: Credit department of BIDV)

In terms of period, short term loans account for higher rate compared to medium and
long term loan. Medium and long term overdue debts are virtually zero. The reason is that
every credit officers was fully aware of the leading spirit of the BIDV to raise the quality
of credit. The Office only focus on investing into customers who have sufficient conditions

17


such as healthy financial situation, for example: Tran Phu Mechanics and Electrics
Company, Central Pharmacy Factory Number 1, etc…
Overdue debts are mainly short term debts. Medium and long term overdue debts are
uncommon. The main reason is short term debts are less risky than other kind of debts. In
2008, the rate of short term overdue debts was 1.09%, reduced to 0.65% in 2009. It was a
positive sign. In 2010, this rate increased to 0.96%, 1.5 times higher than the previous year
and overdue debts increased by VND 4 billion. It is not a good symbol for the bank. But
there are many events and difficulties for companies who borrow short term loans. Facing
difficulties in doing business and high inflation make them collect debts slowly leading to
pay the bank slowly. The rate continued to increase to 1.07%, in 2011. It demonstrated that
the bank should consider and reorganize lending mission and risk preclusion.
2.2.4. Debts collecting capability and overdue debts
Table 4: Debts collecting situation
Unit: VND billion
Year

2008

2009

2010

2011

1763

2200

2243

2280

State- owned

1568

1800

1863

110

Private

195

400

380

1180

Debt collecting revenue

1583

1829

2134

2230

State- owned

1418

1772

1586

1476

Private

165

57

548

754

Target
Lending revenue

(Source: Credit department of BIDV)
From the table, we can see that the debt collecting capability of the Office is pretty
high, is always approximate to the lending revenue. In detail, in 2008, the lending revenue
was VND 1763 billion while debt collecting revenue was VND 1583 billion. In 2009, the
Office lent VND 2200 billion and collected VND 1829 billion, a sharply increase
compared to the previous year. Especially, in 2011, the Office lent VND 2280 billion and
collection achieved VND 2230 billion. Debt collecting revenue gets higher level than the
lending revenue. There is a fact that BIDV has outstanding debt collecting situation than
other commercial banks in the area. It is caused by considering quality of credit as the topranking objective, not the growth of total debts.

18


According to the information of Credit department of BIDV, overdue debts collecting
capability of the Office is above 80% of total overdue debts.
In general, overdue debts ratio is too small (< 1 %), thus, it is acceptable. In coming
years, the Office will try to maximize the rate.
2.3. Causes of risks
2.3.1. Causes from the bank
The process of assessing projects
The beneficiaries are still insufficient. In order to lend a loan, credit officer is the one
who do almost every phase. They have to gather information of the customers, analyze and
evaluate customers, consider the possibility and liquidating capability of the projects,
check the value and legality of guaranteed assets as well as tackle with those assets in
necessary conditions. After assessing customers and project- related issues, the credit
officer forms a statement of assessing, and proposes whether to lend or not. With such kind
of process, the officer has much responsibility and mistakes are unavoidable. Hence, the

officer’s morality and intuition will decide the safety of the credit.
Lack of concrete information of customers
Although they have used many information collecting methods, they still do not get
enough and exact information. One reason is that the infrastructure used for collecting
information is limited. It prevents employees from gathering information sufficiently and
timely. Besides, the Office faces difficulties in checking exactitude of the information
provided by customers. But the companies usually send information to cope with the bank,
not the exact one. Inaccurate information easily causes risks. The bank’s system of
precluding and reducing risks has not met the requirements in approving, lending and
managing capital for customers. So it is not the main source of information. The bank
cannot shirk risks. Recently, with more investment into infrastructure and technology, these
centers progressively affirm its position. In the previous year, CIC has gotten many
improvements such as periodical warning information about customer list that have credit
relationship in many credit organizations, and financial situation. These are extremely
useful information in approving and deploying customers- a channel which provides
information effectively.
Irregular internal control
The staff of checking department is still insufficient with large volume of work. In
addition, infrastructure and technology are still low- conscious. The current Incas system
will supervise more effectively if it is invested more supporting soft wares.

19


Unequal professional skills and experiences
Beside the senior employees, there are also newly- graduated employees. Thus, they
have little experiences in dealing with situations when they meet the leaders of enterprises.
Customers coming from many industries require very big effort of credit officers in self
searching for related knowledge. Therefore, management is difficult.
2.3.2. Objective reasons

These are reasons rising from customers as well as business environment that cause
credit risks.
Customers lack of conditions to borrow
It makes the customers make up reports of credit documents. So they can satisfy all
conditions about customers’ capital, collaterals, possibility of projects. In medium and long
term credit, customers’ capital must account for 30- 50 % of total capital. The customers
provide inexact, in sufficient and untimely information, to make difficulties in checking
and controlling process of the bank.
Legal environment
Law of State Bank and Law of Credit Organizations have created a legal corridor for
the activities of commercial bank. It steers legally and efficiently the business operations of
the banks. But it is not sufficient and scientifically enough. There are still overlapped and
not synchronous. It makes contradiction among laws. In fact, appropriate authorities who
provide legal documents of assets have to deal with many difficulties. Accounting and
Statistic Ordinance and accounting standards of Ministry of Finance is low validity in
forcing customers follow the law. This leads to the case of not timely payment, spare
documents, not obey compulsory audition system and inexact figures.
On the other hand, banking system today is not actually united in many fields such as
interest rate, borrowing conditions. Although competition is the motivator of development,
in business, currency has it specialty. Especially, interest competition made the banks
heavily failed in the end of 2011. Whereas, other state- owned commercial banks has
committed to adopt interest rate of Association of Vietnamese Banks. Consequently, they
could not carry out. It made interest competition wave be continued. If the State Bank does
not interfere, the banking situation will have many changes.
All the above basic reasons alternately and inseparably influence on the banks’
activities. The consequence may be caused by many reasons, which directly affects risk
preclusion and reduction and increasing overdue debts and bad debts.

20

Chapter 3: Solutions to precluding and reducing credit risks at
Quang Trung branch, BIDV
3.1. Activity orientations of Quang Trung branch, BIDV in coming time
Based on the objectives of BIDV, the branch has operated in the area for such a long
time that they attract many customers including companies and big head of companies. So
the mobilized capital and debts is increasing. However, the main source of mobilized
capital is non- period type, hence, the branch is always defensive in lending and investing
activities. Starting from the general direction of BIDV “development- safenessefficiency”, in the future the branch will operate according to the following directions:
• Continues to summarize lending situation and bring out credit policy,
enhance customer analyzing methods and bring out proper credit managing
method.
Maintain capital mobilization growth and lend at a logical level.
Simultaneously, the office establishes, reinforces, maintains regular relationships
with big and loyal customers and look for potential customers.
• Diversify lending methods, because the current methods are mainly time by
time and limited lending. These methods are to meet maximum customer’s need
who have healthy business situation. The bank will contribute to the process of
production and business of these enterprises. Then it motivates the national
economic growth.
Promote sponsoring method of lending to the customers who want to borrow
a big amount of money for their big projects, have a part in transferring local
economic structure. The office has used this method but it is still not popular. The
reason is that the projects are not big enough. The bank has co-ordinate with VCB
Quang Ninh branch. They sponsorally lent Dong Bac Coal Company in bridge and
road constructing project.
• Grow credit and keep the business safe and effective.
Continue to solve overdue debts, restructure lending money and maintain
overdue debts below 2 %.
Attract more bank deposits and international liquidation service at the branch.

Increase rate of lending with guaranteed assets.
• Enhance banking technology modernization and provide officers
professional skills as well as moral issues.
Improve internal control.
Detailed objectives to 31/12/2011:
Gross mobilized capital: VND 3500 billion

21


Gross debts: VND 2200 billion
Gross medium and long term debts : 38 %
Ratio of overdue debts: < 2 %
Posting revenue: VND 80 billion
From those objectives, the office safely lends and minimizes risks and upholds the
role of the Office in the economy.
3.2. Some solutions to risk preclusion and reduction at Quang Trung branch,
BIDV
3.2.1. Solutions to risk preclusion
The bank mainly does business in lending field. Its capital is mobilized from citizens
and other social organizations. So precluding risks is extremely important. It will help the
bank minimize potential risks. Therefore, the bank can make its credit activities really
effective. The bank should implement following steps:
a.
Rank customers’ loyalty
It is the general policy of BIDV, i.e. the bank will provide limited rate of credit for
each group of customers. That rate must ensure not to exceed and may cause risk.
The bank has changed its lending structure to attract customers as well as maintain
safe coefficient or minimize risks.
b.

Appraise lending projects
Before lending, the branch needs to check borrowing conditions such as legal
document, borrowing project, financial statements and balance sheet. Then the bank
considers lending and appraising. This task is tightly conducted from the early phase.
When lending, the bank also has methods to control customers’ financial status. The
purpose is to prevent customers from using the capital ineffectively, even cheating the
bank.
After lending, the bank must continue to check. The bank can control by different
information collecting methods without offending them. They can send their officers to the
companies or collect information from other sources.
c.
Guarantee borrowing money
According to bank restructuring and credit activity cleaning up project period
2000- 2005 of BIDV, the branch must gradually improve the quality of credit. One of
the most important issues is to enhance density of loan with guaranteed assets.
Guaranteed assets create a second income (for mobilized capital), basic depreciation
and profit (for fixed loan). It aids the bank preclude inconvenient changes in business.
With guaranteed assets, borrowers are committed in managing and using money and it
creates tie between the bank and the customers.
d. Effectively carry out credit process

22


- Improve the lending procedures: the bank need to simplify the lending procedures.
So the procedure is orderly but keep the bank safe
- Try best in shortening the time confirming borrowing documents and ensure credit
safeness. The bank should consider this as a competitive advantage.
- Enhance the quality of appraising business methods and business projects. This
decides the safeness of the loan later. Credit appraisal includes collecting information and

handling information.
* About the quality of collected information
The branch can collect customer information from different sources such as directly
interview their customers, have a look at financial statements, information from service,
information providers and from fellow traders. However, this information is mostly not
very exact and not very reliable. The branch mainly collects information through directly
interviewing customers, looking at financial statements and business outcome. This source
is easy to find and is not money consuming. But the level of exactness and reliability is not
high. For this reason, the branch should expand scale of business, collect more information
from other sources. The bank should pay attention to the followings:
+ Information is directly got at the branch
+ Information is directly got at customers’ home
+ The branch also often catches economic situation, common producing situation,
relationships with partnerships and surrounding activities.
+ There are also information from other credit organizations and the customers’
rivals. But it is difficult because of the bank’s secret.
+ Information from Tax Branch and Auditing Companies.
The branch should have a professional team specializing in exploiting information
and upgrading equipments. Exploiting information is done at once with storing and
securing customers’ information.
e. Analyzing information
After having necessary information, the bank analyzes information to decide whether
to lend or not. The branch should analyze basing on different customer’s financial and nonfinancial issues. About customer’s financial capability, the bank must evaluate scale of
operation, real financial capability, competition, future prospect and the ability to pay. It
helps the bank confirm the mobilization of the cash flow, minimize credit risks.
Nowadays, information handling process is still time consuming and inexact because
of credit officers’ feelings. It is easy to have potential risk of people. If it is possible, in the

23

near future, the bank should apply automatic technology in classifying credits. Many other
countries have chosen it. The most outstanding strengths of this method are quickness, low
cost, and high honesty. According to experts of ANZ Bank Hanoi, “the most different thing
between manual and automatic system is risk managing technology. For foreign banks,
they have used it for a long time and they have many tools to carry out”. Risks arising from
mistakes and individual bias are rejected in maximum in the automatic system. Therefore,
evaluation criteria are selected from customer’s information in the past and then
automatically classify the customers and group them properly. Then the results will be
directly sent back to the customers. It is enclosed by a bank’s announcement of accepting
or refusing customers’ requests, conditions and interest rate. Using the automatic one
makes the bank be professional, shorten time, increase loyalty. It also makes the customers
satisfied when being refused.
Besides, the credit officer’s responsibilities are very big. And they cannot avoid
mistakes. The bank should establish risk department, or at least risk team to share the work
with them in dealing with big loan in specific industries. It will have a part in enhancing
appraising quality, shortening time, enhancing lending effectiveness and minimizing credit
risks.
3.2.2. Solutions to risk reduction
Precluding risk means that those risks have not occurred. The thing that the bank
must do is not let the risk occur or rarely occur. However, credit activity is sensitive so
risks are unavoidable. Sometimes, the enterprises ineffectively use the fund. Then it is
difficult for the bank to collect money back, even they cannot collect them. Therefore,
reducing risks is also important.
Steps to reduce risks:
a. Lending in the form of collective name
It can be understood as a credit risk sharing method. This form is usually applied for
the enterprises that need much fund and have high risk. Big lending projects means high
level of risk. The bank can invite other banks to share, in order to participate in those
projects. It will bring profit to the bank. Because the final result of lending activities is the

profitability of the capital.
b. Classifying debts
Properly classifying customers confirms correlative demands. It will help customers
find out the suitable investment direction for each enterprise in different periods. It is also
easy to manage and minimize mistakes. The bank can classify based on criteria such as

24


financial situation, operating result, prestige and level of relationship between enterprises
and the bank. From that point, the bank will have different marketing policy. If the
customers have good relationship, good financial situation, the bank should have
preferential policy to attract them, because of low risk level. If the customers facing
difficulties, the bank can counsel and support them in order to enhance its prestige and
minimize risks. When being helped, companies are aware of paying on schedule, and make
profit for both sides.
c. Business counseling: for the organizations and individuals who difficultly pay
loan. Due to be losing or use the fund mispurposingly, the enterprise can hardly pay
interest or capital to the bank. The branch should consult them business methods, help
them doing business effectively and being credit- worthy.
3.2.3. Improve quality of the bank’s officers and credit officers
a. Improve quality of human resources
In any kind of doing business, human resources are always the top- ranking factors.
They decide the success as well as the failure of every activity. Particularly the banking
industry trades special goods and bear many risks. So the role of people is more and more
important. Credit officers must express sufficient
status of a person who deeply understand professional skills, are ready- witted, moral
and have abundant social knowledge. This is the top important thing that the bank should
do. Business officers should self- upgrade their level of ability, to adapt to the age
requirements. The branch had better orient to train, select and recruit appropriately.

Detailed as:
•

For credit managing officers

Beside the basic working knowledge, they need to have a deep understand legal
documents about banking industry, regulations and institutions. They must be able to
analyze mistakes then to steer subordinates.
•

For credit officers

The bank gives their employees chances to learn and cultivate knowledge,
accumulate experience as well as moral concern to finish their works excellently. They are
sent to classes about necessary characteristics that a credit officer should have. They are
also required level of ability, professional skills, style of works, and serving manners.
Especially, in 2010, the branch had obvious changes in training and upgrading task,
contribute to avoid mistakes.

25