FACTORS AFFECTING CREDIT RISK MANAGEMENT EFFICIENCY OF AGRI BANKS IN HANOI

THAI NGUYEN UNIVERSITY
Socialist Republic of Vietnam

SOUTHERN LUZON STATE UNIVERSITY
Republic of the Philippines

FACTORS AFFECTING CREDIT RISK MANAGEMENT EFFICIENCY OF AGRI
BANKS IN HANOI

A RESEARCH PROPOSAL PRESENTED TO THE FACULTY OF GRADUATE SCHOOL
SOUTHERN LUZON STATE UNIVERSITY LUCBAN, QUEZON, PHILIPPINES
THAI NGUYEN UNIVERSITY S.R. VIETNAM

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE
DOCTOR OF BUSINESS ADMINISTRATION

By
Pham Thi Tuyet (Tracy)
SLSU-DBA 2

November, 2017


CERTIFICATE OF ORIGINALITY

This is to certify that the research work entitled “Factors affecting Credit risk Management
Efficiency of Agri banks in Hanoi”orally defended/presented under the DBA program
jointly offered by Southern Luzon State University of the Republic of the Philippines and
Thai Nguyen University of the Socialist Republic of Vietnam, embodies the result of original
work carried out by the undersigned.
This thesis does not contain words or ideas taken from published sources or written works

by other persons which have been accepted as basis for the award of any degree from
other

higher

education

institutions,

acknowledgement were made.

_______________________
FULL NAME OF STUDENTS: TRACY
Date Orally Defended: ……………..

except

where

proper

referencing

and


APPROVAL SHEET
In partial fulfillment of the requirements for the degree of Master of Business Administration,
this research paper entitled “Factors affectingCredit risk Management Efficiency of Agri
banks in Hanoi ”has been prepared and submitted by Tracy (Pham Thi Tuyet) who is

hereby recommended for oral examination.
FULL NAME OF ADVISERS
Research Adviser

Nguyen Khanh Doanh
Approved in partial fulfillment of the requirements for the degree Docter of Business
Administration by the Oral Examination Committee.

Member

Member

Member

Member

Chairperson
Accepted in partial fulfillment of the requirements for the degree of Master of Business
Administration.


JOANNA PAULA A. ELLAGA, DBA
Dean, College of Business Administration
Date ____________________
ACKNOWLEDGMENTS

In grateful recognition and sincerest thanks for the encouragement, guidance and unselfish
sharing of their knowledge, time, effort and skills, and for the untiring motivation that leads to
the completion of this study, the researcher acknowledges the following:
Prof. Nordelina B.llano, Ph.D. Dr, OIAA of Southern Luzon State University, Republic of the

Philippines, for her untiring effort and belief that this collaboration is possible thus enabling us to
pursue the DBA degree;
Prof. Dang Kim Vui, Ph. D., Director of International Training Center, Thai Nguyen
University, Socialist Republic of Vietnam, for his enormous pursuit to provide the Vietnamese
people an opportunity to grow through education;
Assoc. Prof. PhD. Nguyen Khanh Doanh for his support and supervision throughout my
graduate study program. His kindness and daily instructions in the last three years are greatly
appreciated and this dissertation is as much his work as mine;
Mr. Tran Luu Hung, Deputy Head of International Faculty, Thai Nguyen Universityfor his
assistance and encouragement to pursue this study;
To all the SLSU and TNU Professors, for their support and guidance extended throughout the
graduate studies in Thai Nguyen University, Vietnam;
To the research adviser, for her selfless guidance and assistance thereby making this paper a
scholarly work;
PROFESSORS..........................., CHONA V.CAYABAT, CATHERINE R.GONZALVO, who


composed the written Defense Committee, for their suggestions, comments and corrections to
improve this study;
ITC STAFF, for providing me the necessary research materials provided to us;
Respondents, for their patience and cooperation in answering the questionnaire and for other data
given;

My family and friends, for the love and support in one way or the other; and to all who have
contributed to make this study a success.
DEDICATION
This piece of work is humbly dedicated to my colleagues and fellow instructors, my students,
my family and my relatives, my friends, my husband, and my children.

Pham Thi Tuyet (Tracy)

LIST OF ABBREVIATIONS
ABBREVIATIONS
ANOVA
APT
BIS
CAPM
CAR
CBK
CFA
CRM
EFA
GDP
NIM
NPLR
SPSS
SEM
ROA

MEAN
Analysis of Variance
Arbitrage Pricing Theory
Bank of International Settlement
Capital Asset Pricing Model
Capital Adequacy Ratio
Central Bank of Kenya
Confirmatory Factor Analysis
Credit Risk Management
Exploratory Factor Analysis

Growth Domestic Product
Net Interest Margin
Non- Performing Loans Ratio
Statistical Package for Social Sciences
Structural Equation Modeling
Return on Assets

TABLE OF CONTENTS
CERTIFICATE OF ORIGINALITY
APPROVAL SHEET

LIST OF ABBREVIATIONS
TABLE OF CONTENTS
LIST OF TABLES
ABSTRACT...............................................................................................................................1
CHAPTER 1: INTRODUCTION............................................................................................2
1.1. Background of the study....................................................................................................2
1.2. Objectives of the Study......................................................................................................5


1.3. Significance of the study....................................................................................................7
1.4. Scope and limitations of research.....................................................................................8
1.5. Research questions...............................................................................................................8
1.6. Research Hypotheses...........................................................................................................9
1.7. Definition of terms...........................................................................................................10
CHAPTER 2: REVIEW OF RELATED LITERATURE....................................................11
2.1. Theory of credit risk in commercial banks....................................................................11
2.1.1. Credit risk definition.......................................................................................................11
2.1.2. Credit risk classification.................................................................................................14
2.2. Credit risk management efficiency of commercial banks............................................16

2.2.1. The definition of credit risk management.......................................................................16
2.2.2. The definition of risk management efficiency.................................................................18
2.2.3. Criteria of credit risk management indicators at Agribanks..........................................21
2.2.3.1. Risk assessment...........................................................................................................25
2.2.3.2. Overdue Debts, Bad debt.............................................................................................29
2.2.3.3. Provisioning Risk Rate................................................................................................32
2.2.3.4. Ratio Profit from credit................................................................................................34
2.3. Factors affecting the efficiency of credit risk management in commercial banks.....35
2.3.1. The efficiency of employees in the Bank credit...............................................................35
2.3.2. The instructions of the Central Bank..............................................................................36
2.3.3. Agri banks' credit policies and procedures.....................................................................39
2.3.4. Credit control before procedures....................................................................................42
2.3.5. Credit control in borrowing procedures.........................................................................44
2.3.6. Credit control after procedures......................................................................................44
2.3.7. Information asymmetry between customers and banks..................................................46
2.3.8. Agribank'scredit risk management model......................................................................50
2.4. Credit risk management in terms of levels of efficiency...............................................53
2.5. Conceptual framework....................................................................................................54
CHAPTER 3: RESEARCH METHODOLOGY.................................................................55
3.1. Research design................................................................................................................55
3.2. Locale of the study...........................................................................................................58
3.3. Sources of Data.................................................................................................................58


3.4. Population, Sample and Sampling Technique...............................................................58
3.5. Determination of sample size..........................................................................................58
3.6. Research Instrument........................................................................................................60
3.7 Data Gathering Procedure...............................................................................................71
3.8. Statistical Treatment........................................................................................................71
CHAPTER IV: RESULTS AND DISCUSSION..................................................................75

4.1. Background characteristics of Agribanks......................................................................75
4.1.1. Overview of Bank for Agriculture and Rural Development of Vietnam.........................75
4.1.1.1 Organizational structure of the Bank for Agriculture and Rural Development of
Vietnam.....................................................................................................................................75
4.1.1.2. The network of Agribank system.................................................................................77
4.1.1.3. Overview of business results of Agribank Vietnam period 2014 - 2016.....................78
4.1.2. Effectiveness of credit risk management in the Bank for Agriculture and Rural
Development in Hanoi..............................................................................................................83
4.1.2.1. Overview of Bank for Agriculture and Rural Development in Hanoi.........................83
4.1.2.2. Capital and debt ratios of Agri banks in Hanoi for the period 2014-2016..................86
4.1.2.2.1. Indicators reflect the effectiveness of credit risk management of Agri banks in
Hanoi period 2014 - 2016.........................................................................................................86
4.1.2.2.2. Credit rating in credit risk management in Agri banks in Hanoi..............................88
4.1.2.2.3. Overdue debt ratio of Agri Banks in Hanoi..............................................................92
4.2.2.4. Provision for risk provisioning, risk management and debt recovery of Agri banks in
Hanoi 2014 - 2016....................................................................................................................96
4.3. Assessment of respondents on factors affecting credit risk management.................100
4.4. Assessment of respondents on credit risk management in term of levels of efficiency..........112
4.5. The evaluation of factors affecting Credit Risk Management in Agricultural Bank..................113
4.5.1. Scale reliability.............................................................................................................113
4.5.2. Results of the EFA analysis...........................................................................................126
4.5.3. Confirmatory factor analysis - CFA.............................................................................130
4.5.4. Determine the significant differences on factors that influence the efficiency of credit
risk management at Agri banks..............................................................................................133
4.6. The indentified limitations............................................................................................136
4.7. Conclusion......................................................................................................................139


CHAPTERV: SUMMARYOFFINDINGS, CONCLUSIONANDRECOMMENDATIONS................141
5.1. Summary of the Findings..............................................................................................141

5.2. Conclusions.....................................................................................................................145
5.3. Recommendations..........................................................................................................145
5.4. For further research.......................................................................................................153
REFERENCES
APPENDIX


LIST OF TABLES

Table 2.1:

Moody’s corporate rating...............................................................................27

Table: 3.4.

Scale factors affecting credit risk management effective of Agri Bánks.......62

Table 4.1.3

Business results of Agribank VietnamPeriod 2014 - 2016............................79

Table 4.1.4.

Statistics of transaction centers and branches of type I of the Vietnam Bank
for Agriculture and Rural Development in Hanoi..........................................83

Table 4.1.5

Capital and debt balance of Agri banks in Hanoi for the period 2014-2016. 87

Table 4.1.6:

Aggregate debt classification of Agri banks in Hanoi Period 2014 - 2016. . .93

Table 4.1.6:

Agri banks in Hanoi compared with Agribank in the period 2014 - 2016.....97

Table 4.1.7

Agribank's debt recovery performance in Hanoi compared to Agribank's
period 2014 - 2016........................................................................................ 98

Table 4.2.1:

Characteristics of Research Subjects.............................................................99

Table 4.3.1

Mean distribution of one-sample T-test in term of the efficiency of employess
in the Bank credit.........................................................................................102

Table 4.3.2

Mean distribution of one-sample T-test in term of the instructions of the
Central bank.................................................................................................104

Table 4.3.3

Mean distribution of one-sample T-test in term of the credit policy and

procedures of the Bank................................................................................106

Table 4.3.4

Mean distribution of one-sample T-test in term of Credit Control before
borrowing.....................................................................................................107

Table 4.3.5

Mean distribution of one-sample T-test in term of Credit Control in
borrowing proceduces..................................................................................108

Table 4.3.6

Mean distribution of one-sample T-test in term of Credit Control after
borrowing.....................................................................................................109

Table 4.3.7

Mean distribution of one-sample T-test in term of Information asymmetry.......110

Table 4.3.8

Mean distribution of one-sample T-test in term of the Risk management
model............................................................................................................111

Table 4.4.1

Mean distribution of one-sample T-test in term of Credit Risk Management.....112

Table 4.5.1.1.

Result of the Cronbach's Alpha coefficient of The efficiency of employee in
the Bank credit (1st).....................................................................................114


Table 4.5.1.2.

Result of the Cronbach's Alpha coefficient of The efficiency of employee in
the Bank credit (2nd)....................................................................................115

Table 4.5.1.3.

Result of the Cronbach's Alpha coefficient of The instructions of the Central
bank (1st)......................................................................................................116

Table 4.5.1.4. Result of the Cronbach's Alpha coefficient of The instructions of the Central
bank (2nd)....................................................................................................117
Table 4.5.1.5.

Result of the Cronbach's Alpha coefficient of The credit policy and
procedures of the Bank (1st)........................................................................117

Table 4.5.1.6.

Result of the Cronbach's Alpha coefficient of The credit policy and
procedures of the Bank (2nd)......................................................................118

Table 4.5.1.7.

Result of the Cronbach's Alpha coefficient of The credit policy and
procedures of the Bank (3thd).....................................................................119

Table 4.5.1.8.

Result of the Cronbach's Alpha coefficient of The credit Control before
borrowing.....................................................................................................119

Table 4.5.1.9.

Result of the Cronbach's Alpha coefficient of the credit Control in borrowing
proceduces....................................................................................................120

Table 4.5.1.10.

Result of the Cronbach's Alpha coefficient of credit Control after borrowing....121

Table 4.5.1.11.

Result of the Cronbach's Alpha coefficient of the Information asymmetry
(1st)..............................................................................................................122

Table 4.5.1.13.

Result of the Cronbach's Alpha coefficient of Risk management systems
(1st)..............................................................................................................123

Table 4.5.1.14.

Result of the Cronbach's Alpha coefficient of The risk management systems

(2nd).............................................................................................................124

Table 4.5.1.15.

Result of the Cronbach's Alpha coefficient of Credit Risk Management (1st)...125

Table 4.5.1.16.

Result of the Cronbach's Alpha coefficient of The credit Risk Management
(2nd).............................................................................................................126

Table 4.5.2.1.

KMO and Bartlett's Test...............................................................................127

Table 4.5.2.2.

Total Variance Explained.............................................................................127

Table 4.5.2.3.

Pattern Matrixa.............................................................................................129

Table 4.5.3.1.

Factors’ covariances.....................................................................................131

Table 4.5.3.2.

Composite Reliability and Average Variance Extracted of factors.............133

Table 4.5.4.1.

Results of hypothesis test (Hi)....................................................................135


Table 4.6.1.

Problems encounted in Credit risk management.........................................138

Table 5.3.

Introduce solutions to improve the weakest point from the research results of
the author.....................................................................................................150

LIST OF FIG
Figure 2.1:

Continuous credit control process..................................................................43

Figure 2.2:

Conceptual framework...................................................................................54

Figure 4.1.1

Structure of the Bank for Agriculture and Rural Development of Vietnam. .76

Figure 4.1.2

Agribank's network of organizations............................................................77

Figure 4.1.3.

Organizational structure of Agribank Dong Anh, Hanoi..............................84

Figure 4.1.4

The process of marking for corporate customers...........................................89

Figure 4.5.3.1.

Result of CFA testing for the second time (standardized)..........................130

Figure 4.5.4.1.

The results of analyzing by SEM model (standardized).............................134

Figure 5.1.

Credit risk management model at Agribank................................................147

Figure 5.2.

Proposed model of credit risk mangement in type I branch........................148

LIST OF GRAP
Graph 3.1.

Research Process............................................................................................57

LIST OF CHART
Chart 4.1.5:

Bad debt ratio/total outstanding loans at Agri banks in Hanoi period 2014 2016 compared to Agribank Vietnam............................................................94



ABSTRACT
Title:
Author:

Factors affecting Credit risk Management Efficiency of Agri banks in Hanoi
Tracy
Factors affecting; credit risk; Credit risk Management; Credit risk Management

Keywords:
Efficiency; Banking.
Adviser:
Nguyen Khanh Doanh
This study was conducted to determine Factors affecting Credit risk Management Efficiency
of Agri banks in Hanoi. Research done on the basis of theoretical practice of Factors Affecting
Credit Risk Management Efficiency. In the research process is divided in two part study of
qualitative research in order to adjust the variables and additional observations for the scale.
Regarding quantitative study using coefficient method reliability Cronbach 's alpha, factor
analysis exploring EFA, CFA correlation analysis and regression with the number of samples
surveyed 307 full-time employees working in Vietnam Bank for Agriculture and Rural
Development to evaluate the research model. The author uses the SEM network model to
measure reliability, validity as well as the relationship between independent variables and
dependent variables. The result found that the Before borrowwing factor was the strongest

factor to affecting Credit risk Management in Agribanks Ha Noi. According to the result, this
study give some recommendations for Credit risk Management such as: training human
resoucrces; applying technology into the work, connecting two way between Central and
outside banks; controlling in all procedures including before, in, and after the borrowing
process; supervising and reviewing the operations and results regularly; applying the credit
risk management efficiency model.

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CHAPTER 1: INTRODUCTION
In the context of the world there are many changes with complicated developments and
unpredictability of financial markets, political problem in the world plus production domestic business more difficult; bad debt ratio of some commercial banks is not really at the
controlled level; Banks have to compete hard against each other, as a result the marginal
interest spread is decreasing,…Compared with international rules and regulations on the
management of information, risk management, internal control system of credit organizations
in Vietnam are still gaps need to continue to improve.One of the problems posed for existence
and sustainable development of commercial banks is the capacity to manage operational risk,
especially credit risk. Credit risk in banking business is often difficult to control and if it
happens, its consequences are unpredictable, by the extent of its influence spread to all
organizations in society, especially affecting operating macroeconomic policies of the
government. Therefore, the identification of factors affecting the effectiveness of credit risk
management in commercial banks it requires intensive research in the context of the changing
business environment today.
1.1. Background of the study
Bank is a typical type of financial institution and its main function is trading in money. During
the 1980s and 1990s in Vietnam, there were only several state-owned banks participating in
the banking industry so the competition was quite insignificant. The centrally planned
subsidized economy (1975-1986) had created monopoly power for the state-owned banks. As
a result, the banks served their customers in a bureaucratic and red-tape manner with a deep

rooted attitude existing in a considerable part of the banking staff that the customers need
them rather than they need customers. Thus, people used to have great hesitation in working
with banks. Since Vietnam opened the economy, then became a member of WTO, a lot of

2


joint stock commercial banks have been established, along with some 100% foreign invested
banks and a number of foreign bank’s representative offices. This makes the competition
within the banking industry become more and more intensive. To stay firmly and keep
thriving in the new business environment, it is necessary that the state-owned banks undertake
comprehensive reforms in terms of four aspects: increase capital capability, offer competitive
services (regarding quality, variety and distinction), build effective branding strategy in
response to the requirements of a more open economy.
The process of globalization forces the Vietnamese banking industry to overcome itself and to
embrace the tendency of corporatization, groupization, demonization and multi-ownership.
These trends require more rigorous reform of the legal environment and restructuring of the
business operations, leading to a restructuring of the entire banking system. In this context,
Vietnam's commercial banks with limited resources are facing a variety of risks in which
credit risk is one of the most risky types of all to the operation of each commercial bank if it
occurs. It is time for credit risk management to be identified by commercial banks as a key
strategic task, to force banks to actively manage the loan portfolio to mitigate losses and gain
profit. Credit risk management is an integral part of the loan process. It maximizes bank
exposure by adjusting the rate of return risk by maintaining exposure to credit risk to protect
banks from the negative impact of credit risk. Credit risk management is simply a practical
activity of systematic selection of efficient methods to minimize the impact of the
implementation of the threat to the insitution. All risks are unavoidable or partially mitigated
simply because of financial and practical constraints (Moteff, 2005).
Date 26/03/1998, the Council of Ministers of the Socialist Republic of Vietnam issued
Decision

No.53/HDBT,

establishment

of

the

Vietnam

Agricultural

Development

Bank.Vietnam Bank for Agriculture and Rural Development is a State-owned enterprise of

3


special grade, operating under the Law on Credit Institutions and under the direct management of
the State Bank of Vietnam. Apart from the functions of a commercial bank, the Vietnam Bank for
Agriculture and Rural Development has further defined development investment tasks for rural
areas by expanding medium- and long-term capital for construction. The material and technical
facilities for agricultural, forestry and fishery production contribute to successfully implementing
the cause of industrialization and modernization of rural agriculture.
According to the Decision No. 214 / QD-NHNN dated 30 January 2011 of the Governor of
the State Bank of Vietnam, Agribank was transformed into a one-member limited liability
company owned by the state. In November 2011, Agribank was approved by the Government
to supplement VND 8,445.47 billion, raising the total chartered capital of Agribank to

VND29,605 billion. As of 31/12/2016, the total assets of Agribank are VND 1,001,204,753
billion. In addition to its capital size, Agribank is also the largest bank in terms of number of
employees and the largest network of commercial banks in Vietnam. Staff of nearly 40,000
people; Nearly 2,300 branches and transaction offices, Cambodia branch; Agency
relationships with more than 1,000 banks in nearly 100 countries and territories; trusted by
millions of clients ... Agribank is also the leading bank in Vietnam to receive and deploy
foreign projects, especially projects of the World Bank, Asian Development Bank…
In recent years, Agribank has been also wellknown for its reputation of a leading bank
providing state-of-the-art and convenient service packs. Since 2010, due to the impact of the
global financial crisis and the government's macroeconomic management policies, Agribank
has faced many difficulties. According to audited data, Agribank's outstanding debt is VND
23,652 billion, accounting for 59.23% of total outstanding loans, equal to 89% of charter
capital. Thus, Agribank's total bad debt reached approximately 40,000 billion, higher than the
chartered capital of about 10,000 billion (Hoai, 2014).

4


Some officials and employees of Agribank violated professional ethics standards and were
prosecuted for "irresponsibility in economic management causing serious consequences",
which greatly affected the prestige and reputation of Agribank. Credit risk is defined as the
probability in which a client will not be able to pay back the stated amount to the bank in
accordance with the terms agreed in the credit agreement. Credit risk occurs in relation to the
potential return on an investment that makes the bank face the risk of bankruptcy. Both
domestic and foreign studies confirm that the most tremendous risk for banks is credit risk.
The purpose of this study is to identify the factors that influence the efficiency of Agribank's
credit risk management in Hanoi.
Moreover, the intensified global competition and the liberalization of banking rules and
regulations have also changed the modern banking system by providing greater opportunities
for banks’ risk diversification. Consequently, the purpose of this study to find out the factors

that will affect the banks’ risks taking in the industry. The recognition of these factors would be
of assistance in constructing valuable risk management strategies in the banks and to minimize
a loss in income. Besides, an understanding on the relationship of risk involved in the banking
industry will also aid banks to formulate suitable strategy that will rise optimistic and reduce
pessimistic shock of linked risks. Identifying and accepting these influential factors will be a
key step in the development of valuable strategies and methods for credit risks management at
Agri banks. For the abovementioned reasons, I have chosen to study the subject: "Factors
affecting Credit Risk Management of Agri banks in Hanoi" with a view to contributing to the
improvement of credit risk management, helping Agribank to develop sustainably.
1.2. Objectives of the Study
The general objective of the study is to find thefactors affecting credit risk management
efficiency of Agri banks in Hanoi. In order to reach that goal, the specific objectives of the
study are as follows:

5


1. Background characteristics of Agribanks
1.1 Overview of Bank for Agriculture and Rural Development of Vietnam
1.2 Effectiveness of credit risk management in the Bank for Agriculture and Rural
Development in Hanoi
1.3 Assessment of respondents on factors affecting credit risk management
2. Demographic characteristics profile of respondents in terms of:
2.1.
Sex
2.2.
Age
2.3.
Working time in credit position
2.4.

Education attainments
3. Assess the factors of efficiency affecting the credit risk management efficiency of
Agri Banks in Hanoi in terms of:
3.1.
The efficiency of employees in the Bank credit
3.2.
The instructions of the Central bank
3.3.
The credit policy and procedures of the bank
3.4.
Credit Control before borrowing
3.5.
Credit Control in borrowing proceduces
3.6.
Credit Control after borrowing
3.7.
Information asymmetry
3.8.
Risk management systems
4. Assess the credit risk management in terms of level of efficiency
5. The relationship between factors affecting credit risk management and the levels of
efficiency of CRM
6. Develop a model for credit risk management
1.3. Significance of the study
This is the very first study on the factors affecting the efficiency of credit risk management in
the Vietnam Bank for Agriculture and Rural Development (Agribank) and as a result, this
research is of both theoretical and empirical significance.
This study will provide valuable information to help Agri banks identify the factors that
influence the efficiency of credit risk management. Accordingly, the leaders’ outlook on credit
risk management will be more comprehensive and they will attach more special importance to

it. The empirical result of the survey is a proof of the need to focus on credit risk
management, to gradually regain the reputation of Agribank in the domestic and regional
currency trading market.

6


The study has proposed a system of feasible solutions to help Agribank leaders complete and
develop a credit risk management framework consistent with bank resources and the trend of
risk governance of financial institutions worldwide with a desire for sustainable development.
This is also a valuable resource for the Agribanks Training Center to refer to Staff internal
training on credit risk management in the economy of high competitiveness.
The results help the author to apply the empirical figures and result into the lectures so that
the learners have a more comprehensive and profound view on credit risk management as
well as factors affecting the efficiency of credit risk mangement in banking industry. This
research process helps the author to improve her knowledge, skills and gain a more
comprehensive understanding of credit risk management as well as its influential factors on
the sustainable development of commercial banks;Research helps the author have the
opportunity to gain experience and enhance ability in studying scientific works from lecturers,
scientists at home and abroad.
This research is provided as a valuable reference for researchers involved in the management
of credit risk in banking industry. Finally, the methodology, theoretical basis and conclusions
in the research are useful references for individuals who want to study economics, finance and
banking.
1.4. Scope and limitations of research


Research content

- Risks in the money trading business are manifold and often manifest in 6 basic risks such as

credit risk, liquidity risk, market risk, exchange rate risk, interest rate risk and finally
operational risk. In this research, the author focuses on the efficiency of credit risk
management in some Agribank branches of type I in Hanoi.
- Credit activities of Agribank have many different types of service packs and the clients are

7


various as well. Therefore, in this study, the author focuses on the factors affecting the
efficiency of credit risk management in medium and long term lending services to individual
clients and business households. Individuals and corporate loans (excluding loans to other
credit institutions)


Research Area: The author focuses on 34 type I Branches of Agribank in Hanoi,

Vietnam.Of which, 34 branches are divided into two groups: (i) group 1: includes branches
located in the counties of downtown Hanoi.(ii) group 2: includes branches located in
districts,suburban districts of Hanoi.


Survey respondents: 307 managers and credit officers are working at branches of Agri

banks in Hanoi.


Implementation period: April 2013 to December 2017

1.5. Research questions
(1).How are Hanoi Agri Banks' branches applying in credit risk management?

(2). How are agricultural bank branches in Hanoi controlling credit risk?
(3). Which factors affect the effectiveness of credit risk management at Agribank branches in
Hanoi?
(4). Instructions from the central bank affect effective credit risk management at branches of
Agribank does not?
(5). What are the differences in the effectiveness of credit risk management between branches
based in downtown Hanoi and branches located outside the city of Hanoi of the Bank for
Agriculture and Rural Development of Vietnam?
(6). It is possible to use a credit risk management model suitable for credit activities of
branches of the Bank for Agriculture and Rural Development in Hanoi.
1.6. Research Hypotheses

8


H1: The efficiency of employee in the bank credit officers has a positive impact on the
effectiveness of credit risk management.
H2: There is a significantly positive relationship between the instructions of the Central Bank
and the efficiency of credit risk management.
H3: The credit policy and procedures of the Bank has a positive impact on the efficiency of
credit risk management at Agri banks.
H4: Credit control before borrowing of the Bank has a positive impact on the efficiency of
credit risk management at Agri banks.
H5: Credit control in borrowing proceduces of the Bank has a positive impact on the
efficiency of credit risk management at Agri banks.
H6: Credit control after proceduces of the Bank has a positive impact on the efficiency of
credit risk management at Agri banks.
H7: Information asymmetry has a significantly positive impact on the efficiency of credit risk
management in medium and long-term loans at Agri banks.
H8: Agribank's credit risk management has a significantly positive impact on the efficiency of

credit risk management in medium and long-term loans at Agri banks.
1.7. Definition of terms
- LOAN: it simply means that the bank lends, usually with interest and at a stipulated time
and terms of payment.
- CREDIT: an avenue in which loan able fund is made available to a prospective borrower,
which is to be repaid in a determinable future date. The bank control the loanble fund.
- RISK: a measurable uncertainty involved in any decision making, be it granting of loans or
an advances
- CREDIT RISK: is the type of risk that arises in the credit granting process of the bank,

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whether the client defaults on principal or interest or fails to repay it. The due date for the
bank as committed in the credit agreement.
- BANK: A bank is a financial institution which collects and from dividends or organization,
safeguard them and undertakes to surrender them to their owners which required but also at a
certain time, lends some of these funds to those who needs to borrow it and pay back with
interest.
- CREDIT RISK MANAGEMENT: is the process of planning, organizing, implementing and
monitoring all credit operations to maximize bank profitability and minimize losses about
which credit risk brings.
- EFFICIENT CREDIT RISK MANAGEMENT: Efficient credit risk management in banking
activities reflects the level of utilization of bank resources, expressed in the results achieved
against expenditure bank charges for a specified period of time.

CHAPTER 2
REVIEW OF RELATED LITERATURE
In this chapter, the author focuses on analyzing and synthesizing theory and models of factors
affecting the effectiveness of credit risk management in commercial banks. On this basis, the

author proposes the variables used in the study; Conceptual framework and Research
paradigm.
2.1. Theory of credit risk in commercial banks
2.1.1. Credit risk definition
According to Broll, Pausch and Welzel (2012), (Broll et al., 2012) one of the most important
types of risk faced by commercial banks is credit risk. This is the type of risk that a borrower

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can not afford to repay principal and interest. If commercial banks fail to control this type of
risk, very easily lead to loss of capital. Catherine (2009) defines credit risk as the prospective
that a borrower from a bank will fail to meet its obligation in agreement with agreed term and
conditions (Catherine and Yusoff, 2009). The risk of monetary losses due to debt issuers who
do not honor contractual debt payments is commonly referred to as credit risk (Lindset et al.,
2014). Funso, Kolade and Ojo found that when bank expose more to credit risk will make the
bank have high tendency to experience the financial crisis and vice-versa (Funso et al., 2012).
Vogiazas and Nikolaidou defined credit risk as the ratio of loss and doubtful loans to total
loans (LLP ratio) in their research (Vogiazas and Nikolaidou, 2011). The authors, Funso,
Kolade and Ojo (2012) used the ratio of Non-performing loan to loan & Advances (NPL/LA),
ratio of Total loan and Advances to Total deposit (LA/TD) and the ratio of loan loss provision
to classified loans (LLP/CL) as the measurement of credit risk. However, the most common
indicator of credit risk is non-performing loans (NPLs) which is the ratio of non-performing
loan to total loans, because nonperforming loans (NPL) is directly affect the bank’s financial
performance which is the contributing factor to the credit risk in the banking system. A large
number of credit defaults will be suspect in a high probability when NPL increase in the bank
(Thiagarajan, 2013).
According to Somoye (2010), non-performing loans (NPLs) reduces the liquidity of banks
because increase credit will decelerate the growth on the bank performance when bank is in
default and will affect the whole economy (Somoye, 2010). Espinoza and Prasad (2010) also

found that the NPL ratio worsens when economic growth becomes lower, therefore large banks
and banks that spend less would have lower NPLs, but high NPLs in the future might cause by
the high credit growth in the past (Espinoza and Prasad, 2010). Besides, Karim, Chan and
Hassan (2010) indicate that higher non-performing loan reduces cost efficiency which means

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will make the bank efficiency drop, in other words, lower cost efficiency of the bank increases
non-performing loans (Karim et al., 2010). As a result, credit risk that represent by nonperforming loans not only affect by the economic condition and economic factors, it also affect
by the internal factors which will affect the bank efficiency at the same time.
Credit risk in the operation of banks is always among tops concern of policymakers and bank
managers. Credit risk is addressed in various aspects such as:
Thomas P. Fitch (1997) states that "Credit risk is the type of risk that occurs when borrowers
fail to pay their debt under a contractual agreement that results in a default in the repayment
obligation." (Fitch, 1997). In view of this, it seems that Thomas P. Fitch is narrowing the
scope of credit risk which is misleading, as the author argues that credit risk can occur in the
case of a late payer (both principal and interest) or to pay part of the principal and interest to
the bank.
In the view of the Basel Committee, "Credit risk is the possibility of a borrower or its
counterpart to fail to comply with an agreed commitment" (Basle Committee on Banking
Supervision, 2000). In this view, credit risk is broadly understood not only in the credit
relationship between the banks and the clients, but also in other activities such as investment
and other derivative transactions.
According to Broll, Pausch and Welzel, one of the most important forms of risk faced by
banks is credit risk. This is the type of risk that the customer is unable to repay the loan and
interest as committed to the bank (Broll et al., 2012). Catherine (2009) defines credit risk as
the prospective that a borrower from a bank will fail to meet its obligation in agreement with
agreed term and conditions (Catherine and Yusoff, 2009). The risk of monetary losses due to
debt issuers who do not honor contractual debt payments is commonly referred to as credit

risk (Lindset et al., 2014). Funso, Kolade and Ojo (2012) found that when bank expose more

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