LV Thạc sỹ_Credit risk management efficiency at South Asia bank

ACKNOWLEDGEMENT
Thanks for people who have given me support to me over the time of study.
Firstly, I would like to express my gratitude to my lectures for all of their support
and guidance over the past two years. Your knowledge, lecture and advice are the
foundation of this study. However, without persistent encouragement of my
supervisor, Dr…., this thesis would never have come as expected. I would really
like to thank him for all of his terrific ideas regarding the research methodology,
comments which put me on the right track during this study formulation
It is important for me to thank South Asia Commercial Joint Stock Bank and
its staffs, who provided invaluable data and information. I certainly could not have
completed this study without their knowledge and cooperation. I would also like to
thank my colleagues and my friends for what they done as well as their
understanding in effort to help me all time….
Finally, I would like to dedicate this study to my parents for all their support
and understanding, and for always believing in me


TABLE OF CONTENTS
ACKNOWLEDGEMENT........................................................................................i
TABLE OF CONTENTS.........................................................................................ii
LIST OF FIGURES...................................................................................................
LIST OF TABLES......................................................................................................
ABBREVIATION.......................................................................................................
EXECUTIVE SUMMARY........................................................................................
CHAPTER I: CREDIT RISK MANAGEMENT IN COMMERCIAL BANK
– THE THEORETICAL FRAMEWORK FOR ANALYSIS........1
1.1 OVERVIEW OF CREDIT RISK OF COMMERCIAL BANK.......................1
1.1.1. Credit activities of commercial bank....................................................1
1.1.2. Definition of the credit risk..................................................................4
1.1.3. Causes of credit risk.............................................................................6
1.1.4. Consequences caused by credit risks..................................................11

1.2 MANAGEMENT OF CREDIT RISKS IN COMMERICAL BANKS...........13
1.2.1. Definition of the credit risk management...........................................13
1.2.2
Process of the credit risk management...............................................14
1.2.3. Tools supporting for the management of the credit risks....................16
1.3
EXPERINCE IN CREDIT RISK MANAGEMENT OF SOME
COMMERCIAL BANKS IN THE WORLD........................................................24
1.3.1
Management of credit risk of some commercial banks to in the world.
24
1.3.2
Lessons for commercial banks in Vietnam.........................................27
CHAPTER II: PRESENT SITUATION OF CREDIT RISK
MANAGEMENT
OF SOUTH ASIA COMMERCIAL JOINT STOCK BANK..............................30
2.1 OVERVIEW OPERATION OF SOUTH ASIA COMMERCIAL JOINT
STOCK BANK.....................................................................................................30
2.1.1
Brief development and personnel organization..................................30
2.1.2
Peformance of South Asia Commercial Joint Stock Bank..................33
2.1.2.1 Capital mobilization..........................................................................34
2.2
REAL STATUS OF CREDIT RISK MANAGEMENT IN SOUTH
ASIA COMMERCIAL JOINT STOCK BANK...................................................38
2.2.1
Motive of the South Asia Commercial Joint Stock Bank in the
credit risk management.......................................................................38

2.2.2

The lending procedure of the South Asia Commercial Joint Stock
Bank to minimize credit risk:.............................................................39
2.2.3
Credit risk management in the South Asia Commercial Joint Stock Bank
41
2.3
ASSESSMENT OF THE CREDIT RISK MANAGEMENT IN THE
SOUTH ASIA COMMERCIAL JOINT STOCK BANK.....................................44
2.3.1
Archivements.....................................................................................44
2.3.2
Limited aspects...................................................................................47
2.3.3
Causes leading to limited credit risk management in the South Asia
Commercial Joint Stock Bank............................................................49
CHAPTER III: SOLUTIONS TO IMPROVE CREDIT RISK
MANAGEMENT EFFICIENCY AT SOUTH ASIA COMMERCIAL JOINT
STOCK BANK.......................................................................................................53
3.1 GUIDELINES FOR AND OBJECTIVES OF VIETNAM BANKING
SYSTEM DEVELOPMENT DURING THE INTEGRATION PROCESS..........53
3.1.1
Guidelines for Vietnam banking system operation during the
integration process:.............................................................................53
3.2
SOLUTIONS TO CREDIT RISK MANAGEMENT AT SOUTH ASIA
COMMERCIAL JOINT STOCK BANK.............................................................56
3.2.1

Continue to complete credit operation organization structure............56
3.2.2
Develop risk management strategy and complete credit policy:.........58
3.2.3
Closely supervision of conformity with credit process, regulation
60
3.2.4
Continue to complete internal credit ranking system of the bank.......63
3.2.5
Complete information technology infrastructure................................64
3.2.6
Apply technical models and methods to measure credit risks.............65
3.2.7
Improve quality of human resource development..............................66
3.2.8
Improve financial capacity, create conditions for development as
well as guarantee safety for South Asia commercial joint stock
bank operation....................................................................................68
3.3
RECOMMENDATIONS...........................................................................68
3.3.1
Recommendations for State administration........................................68
3.3.2
Recommendations for the State Bank.................................................71
CONCLUSION OF CHAPTER III......................................................................73
APPENDIX


REFERENCE

ABBREVIATION
NAB

- Nam A Bank

SBV

- State Bank of Vietnam

CIC

- Credi information

IT

- Information Technology


LIST OF FIGURES

Diagram 1.1: Continuour risk monitoring cycle...............................................15
Diagram 1.2: Prevention and solutions to credit risks......................................16
Chart 2.1

Organization structure of South Asia Commercial Joint Stock Bank
32


LIST OF TABLES
Table 2.1

The business results of the South Asia Commercial Joint Stock
Bank in period of 2005-2008.....................................................33

Table 2.2

Structure of mobilized capital resources in period of 2005 –
2008............................................................................................34

Table 2.3

Activity of capital utilization......................................................35

Table 2.4:

The credit structure by the enterprise kind..................................36

Table 2.5

Credit outstanding structure by business branch.........................37

Table 2.6

Analysis of ther rate of capital mobilization/total outstanding....38

Table 2.7

Rate of bad debt of the South Asia Commercial Joint Stock Bank
from year 2005 to year 2008.......................................................48

EXECUTIVE SUMMARY
At present, lending is the main source of revenue for commercials banks in
Vietnam. Therefore, credit risk is the biggest risk and causes the most serious
consequences for bank. Based on the credit risk management activities in South
Asia Commercial Joint Stock Bank, the thesis focuses on the situation of credit
management at South Asia Commercial Joint Stock Bank. Then it mentions some
solutions to improve competence in credit risk management, especially in assessing
credit risk with advanced measurement methods used by banks in the world, as well
as the feasibility in Vietnam
In total, the thesis has achieved some goals, as follow:
- To provide many basic model and concept of credit risk and credit risk
management, so that, it helps readers can understand the nature of credit risk.
Beside, it also provides the reasons which cause credit risk, consequence of credit
risk, methods for managing credit risk
- To provides the method to evaluate risk credit and rank customer which are
used by many banks and international organization in the world
- To describe the overview of managing credit risk activites at South Asia
Commercial Joint Stock Bank. Hence, it shows the advantages and disadvantages of
these activites
- At last, to give and recommend some solutions which can help or support
South Asia Commercial Joint Stock Bank to improve the managing credit risk
activities
However, this thesis has many weaknesses, namely:
- It hardly approaches to the real data of bad debts at South Asia Joint Stock
Bank, so that the evaluation and reorganization are no so good as respect
- Beside, this is the first time the author writes about the credit risk
management so he lacks of experience about this topic and the way to analyze it.
And it leads to many mistak

INTRODUCTION
1

Rationale
In the context of Vietnam's increasingly deeper integration into the world

economy and especially in the current difficult economic situation, competition
among banks is becoming much more severe. Therefore, in order to maintain and
develop, each banks need to be well- equipped with operation performance,
professionalization, supplied service and product quality. In the society, material
production is a basic existence of human- beings. The need of credit creates the
higher rotation of the product and more product manufacture which make the
economy develop growth. In fact, business activities of banks also connect closely
to business activities of economic organizations and individuals. Thus, credit risk
management is an essential requirement of the economy and the customer as well as
the real need of commercial banks. Therefore, managing credit effectively will
really bring profits to banks, customers and the economy
Being a small bank, South Asia bank possesses traditional operational
characteristics. The credit profession plays an important role in the bank’s
operation. Considering bank’s profit structure, obtained income from credit
operation always keeps the highest percentage.

In South Asia Bank, credit

outstanding make up more than 2/3 total incomes of the bank. If the credit risk
management is not good, Bank’s Non-performing loan (NPL) rate will increase and
affect to bank payable, even lose bank payable. For that reason, researching
solutions to enhance the quality of the credit risk management is really essential for
the effectiveness of the bank operation. Also the research on credit risk management

in South Asia aims to analyze recent credit management’s reality and thus proposes
some potential solutions, proposals which will contribute to the expansion and
enhancement on credit risk management as well as security and activity
effectiveness of commercial banks.
2

Research objectives:


-

To provide an overview of credit risk management at South Asia Bank in

recent time
-

To study the strength and weakness in managing credit risk of South Asia

Bank
-

To study reality of credit risk management in South Asia Bank

-

To find out effective solutions for enhancing the quality of the credit risk

management at South Asia Bank.
3

Research question: To achieve these objectives above, the thesis will

answer some following questions
-

What is the credit risk management ?

-

How does the credit management play role in banks ?

-

How is the current situation on the credit risk management of South Asia

bank ?
-

What is the new solution to improve the credit risk management of South

Asia bank?
4

Scope and limitation of research

-

In this research, I will only focus on credit risk management in banking

operation

-

This research is implemented in South Asia bank whose credit activities are a

core business of bank
-

Collected data: implemented only in South Asia bank

-

Time limitation: In the period from 2005 up to now

-

Knowledge and experience of author.

5

Research methodology: Analysis and estimation is made by


-

Method of data collection: from the banks’ data, reference books and

newspapers & magazines relating banking
-

Interview method: interview credit staffs directly at South Asia Bank and

other banks to understand the real operation
-

Method of analyzing and comparing data according to the criteria relatively

and absolutely. From that, comment and conclusion on credit risk management at
Bank will be offered


1

CHAPTER I
CREDIT RISK MANAGEMENT IN COMMERCIAL BANK – THE
THEORETICAL FRAMEWORK FOR ANALYSIS
1.1 OVERVIEW OF CREDIT RISK OF COMMERCIAL BANK
1.1.1. Credit activities of commercial bank
Bank credit is generally understood as a property transaction (cash or goods)
between the lender (the bank) and borrowers, in which the bank transfers assets to
the borrower for use at a fixed period as per agreement, the borrower shall repay
the principal and interest unconditionally to the bank when due.
Within the scope of the

research, bank credit is defined as a property

transaction between the bank and customer (borrower) in which the bank transfers a
certain amount for the customer to use within a fixed period under the agreement,
the customer is responsible for repaying principal and interest unconditionally to the
bank when due.
Credit activities are basic activities of commercial bank. Credit balance

accounts for 50% of the total assets of commercial bank and credit income usually
accounts for 50% - 70% of the total income of commercial bank. A part from the
main earnings for the banks, the risks in the banking business also tend to focus on
credit portfolio. Therefore, the credit activity is always the biggest concern of the
commercial banks and banking ombudsman. Credit activities of commercial banks
have the following characteristics:
Money is the asset in relation to the bank credit, rising from the principle of
redemption, so when the bank transfers the assets to the borrower, it must use a basis to
believe that the borrower will pay on time. This is considered as a very basic
element of credit management, and the reason for the bank to make careful analysis
before deciding to lend. As usual, redemption value is greater than the loan value, or
in other words, the borrower pays more interest, except the principal part.
Moreover, as for the relationship of bank credit, loans are granted on the basis of
commitment to an unconditional refund. Regarding legal aspects, the documents


2

identified credit relations as credit contracts, contracts ... is naturally the order in
which the borrower is committed to return unconditionally to the bank at the
mature term.
The commercial bank carries out some types of credit as follows:
a) Referring to the lending purpose: Based on the lending purpose, credit
activities can be divided industrial and commercial credit, agricultural credit and
consumer credit. Industrial and commercial credit: a type of lending to the
businesses in the fields of industry, commerce and service. Agricultural credit is the
type of loans to cover production costs in the agricultural sector. Consumer credit is
a type of loan to meet the needs of individual consumers. Banks nowadays tends to
increase consumer credit because it is a source of high profits for them and has quite
low risks.

b) Referring to the lending period: Referring to the loan term, credit activity
may be divided into short-term credit, midium-term credit and long-term credit.
Short-term credit is a type of loan with the term to 12 months to offset working
capital deficiency of the business and short-term spending needs of the individual.
For banks ratio of short-term credit is higher than medium-term and long-term and
normally from 65 percent to 70 percent of total loans. Medium-term credit is a type
of loan has a term from 12 months to 5 years (depending on each country).
Medium-term credit is used mainly for investment of purchasing fixed assets,
improvement or renewal of equipment, technology, business expansion, setting up
new projects with small scale and time of rapid payback, etc ... Long-term credit is
a type of loan has a term of over 5 years, can last up to 20-30 years or even longer.
Long-term credit is provided to meet the long-term needs such as housing,
equipment, large-scale means of transport, building new factories, etc.
c) Based on loans by the customer: Based on the customer’s loans, credit
activities

can

be

divided

into

credit

to

individuals

and

credit

for

organization/companies. Credit to individuals is a type of loan to compensate for
personal spending demand. Loan term may be short, medium or long term depending


3

on loan purpose and source of personal debt. Credit for organizations/companies is the
types of loans to cater to the demands of production and business activities of the
enterprises. Loan term may be short, medium or long term depending on the needs of
the business capital. Nowadays credit ratio of commercial banks for enterprises is
normally higher than that for individuals.
d) Based on the level of confidence for the customers: Based on the level of
confidence for the customers, credit activity may be divided into unsecured credit
and secured credit. Unsecured credit is a type of loans without collateral, pledge or
guarantee by a third person, that the lending is only based on the reputation of the
individual customer. Types of loans are usually applied only for some customers for
the best and has long credit ties with the bank. Secured credit is a type of loans that
banks require the customers to have security such as mortgage or pledge of property
or guarantee by a third. Types of loans are usually applied to the customer who does
not have high reputation for the bank. This guarantee shall be the legal basis for the
banks to have the second additional source for the first debt collection with
uncertainty.
e) Based on the method of repayment: Based on the method for repayment by
the customers, credit activity may be divided into dated credit and undated credit.

Dated credit is a loan with agreement on repayment term as specified under the
contract, including the loan with the only repayment period, loans with multiple
repayment periods. Undated credit is a for this type of lending, the banks may
require the borrower to repay voluntarily at any time but making the prior
notice at a reasonable time, this time may reach upon in the contract. Credit
activities of commercial banks are primarily time credit and credit activities
without specific repayment scheme are limited to maximum because this maybe
cause high risks for banks.
f) Based on the origin of credit: Based on the origin of credit, credit activity may
be divided into direct credit and indirect credit. Direct credit is the Bank
directly finances to the borrower and the direct borrower has to repay the bank loans


4

while indirect credit is a type of lending is done through repurchase of agreements
or documents of debt induced or under the maturity period. Commercial banks
usually lend indirectly under the following categories: Discount of commercial
bills, purchase of sales bills, factoring (buying receivables).
1.1.2. Definition of the credit risk
Risk is the problem unexpected in all areas of social life. Risk can be
understood in a generalization that is likely unforeseen events; in case of these
happened, realistic results are very different from expected one as planned. Risk is
always a surprising appearance and threatens the survival of the business, but for
the sake of profitability, they must accept itwithout avoidance. As a result, in order
to survive and grow under competitiveness, the firms face up with risks that may
occur by the judge whether the possible risk taking measures to prevent and limit
for purpose of reducing damage caused by risk.
Credit risk is one of the most common types of risk in commercial banking
activities in financial markets. Credit risk is also the biggest risk, which frequently

occurs and causes severe consequences for the operation of bank because the loans
typically accounts for over half of total assets and value creation from 1/2 to 2/3 of
bank revenue. Credit activities generate revenue for most banks, but also bring
serious damages, sometimes leading to bankruptcy of the bank. Credit risk is the
most complex risk, the most difficult management and prevention. It requires the
banks to have the same and effective set of solutions to restrict, prevent risk, and
minimize the damages that may occur.
Credit risks have also been studied by many scientists and also made many
different notions:
- Credit risk is the loss because the customers cannot repay the debt or
decrease the credibility quality of debts
- Credit risk arises in cases where the Bank does not capture the full principal
and interest of the loan or the payment of unpunctual principal and interest.


5

- Credit risk is defined as the risk that borrowers cannot pay interest or repay
principal over a fixed time in the credit agreement. This is the inherent attributes of
banking activities. Credit risk means the payment delayed, or worse, cannot be
returned in full. This causes the problems for monetary flows, and affects the
liquidity of the banks.
If credit is considered as the "trust" that gives the customers using the current
value with the desire to receive future value in a certain time, the credit risk is that
wish that is not responded or in other words, it is the possibility of unwanted
differences between actual results and expected ones as planned-on time to receive
full principal and interest.
With the target to receive punctual and full principal and interest as noted
above as per the credit contract , the credit risk can be understood as the potential
losses that may occur due to the partners in the credit agreement cannot afford or

are not qualified to perform their obligations in full or on time as committed.
As a consequence, credit risk is the possibility that the customer does not pay,
or fails to make due payment of principal and interest to the bank. In other words,
credit risk is the risk that the borrower in a transaction does not achieve within the
time limits and conditions of the contract to the lender incurred financial losses.
As the above analysis, credit risk is associated with the most important
activities of commercial banks-credit activities. Loans are often the largest
proportion of the total assets of commercial banks, providing the most income for
the banks, but also exists large potential risk, sometimes leading to bankruptcy of
the bank. Before lending, banks try to analyze the elements of the borrowers so that
safety is the highest. Generally, the bank only makes lending decision in case of
credit risk un-occurred. However, the bank is incapable of anticipating the correct
problem at any time. Their ability to repay the loans of the customers may be
altered by many factors. Furthermore, many banking loan tellers do not have the
ability to perform proper credit analysis. Thus, in view of the entire bank
management, credit risk is unavoidable and objective. Many agreed that: credit risk
is the concomitant of doing business that may prevent and limit, but not excluded


6

1.1.3. Causes of credit risk
1.1.3.1. Objective reasons
The banking loan tellers must be put into a analysis situation of future
borrower under the present and past conditions: analysis of management skills,
business situation and financial situation, repayment of past debt, reputation, level
of competition in the market and market share ... these factors affect credit risk.
However, the situation in the future is something unknown; the future may bring
unexpected difficulties that will lead to the possibility of credit risk in the future.
The impact of the external environment is often difficult to predict, beyond the

control, and causes major damage to the borrower and the bank, including the
following things:
a) A change of the government policies affecting the financial situation and
repayment capability of the customer.
Activities of the banks and customers are affected by socio-economic
environment. Stable macroeconomic policies will help the operation of customers
less volatile, thus, the forecasting of financial and business situation of the
customers is more convenient. In contrast, macroeconomic policy volatility can
make the bank difficult to analyze and predict accurately business and financial
operations of the customer in the future as well as difficult to anticipate risks of the
customer, so the banks cannot correctly assess the repayment capacity of the clients
in the future, then the credit quality of the banks do not meet the requirements.
Government policies affecting the operations of enterprises, thereby affecting the
bank's activities on the following aspects:
- Tax policy: Tax policy directly affects the cost of the business. When the
government changes in tax policies, business activities of enterprises will be
affected and could affect the revenues of the enterprise, thereby shall affect the
repayment of bank credit resources.
Export-import policy of materials and equipment: When there is any change
taken in the policy of importing materials and equipment, it will affect immediately


7

and directly to the cost and revenue of the business, making it difficult for
enterprises in production and business activities and reduce revenues, thereby
making it difficult for the repayment of the bank debt, therefore leading to
increase of credit risk of banks.
General policy of the inputs: This policy also causes the direct effect on
business costs, which could take businesses into the difficulty and lead to loss of

ability to repay the bank.
b) Natural Environment
Variety of weather, climate can bring about effects for business activities,
especially in the agricultural field. Nature conditions are factors difficult to forecast,
that usually happen without prediction with dramatic losses out of the control of the
human. So, when there is disasters happening, the banks will have the risk of
serious losses, the business project will not have revenues. This means that the bank
has to share risk with the customers. Effects of the natural environment , especially
the natural disaster is very difficult to predict, prevent and when the risk happen, the
banks and the customers have to bear the consequences.
c) Socio-economic Environment
Socio-economic environment in the country affected by fluctuations of the
world economy, which causes the risk incurred in trading activities of the economy,
thereby affecting the sectors of the economy in which the banks must bear the
greatest risk. Economic environment has great influence to the financial strength,
loss or success of the borrower. During the development phase, the borrower runs
well, but in the crisis phase, the ability of loan repayment will be decreased.
Typically, these loans are difficult to recover in case of economic crisis occurred.
Besides, the credit business depends very much on habits, traditions and
practices of the people. These factors often make it difficult and limit the expansion
of business activities of the banks. The impact of the external environment to the
borrower can cause their financial loss incapable to implement adequate or timely
payment commitment of principal and interest to the bank or even an inability to
pay and go bankrupt or dissolved.


8

1.1.3.2. Caused by the borrowers
Weak level of borrower in the prediction of business issues, weaknesses in

management, fraudulent intention to bank officials, delaying, ... are the causes of
credit risk.
a) Customers unaffordable to repay loans to the bank: Customer’s weaknesses
in management, especially financial management. In case the borrower has poor
level of management, not carefully calculate or not able to carefully calculate the
possible mishaps, not able to adapt and overcome difficulties in business will lead
the ineffective use of the loans. In addition, weaknesses in financial management
could lead to case whether the project or business process is effective, but the
banking debt payment will not be guaranteed. Therefore, the enterprises have no
capacity to repay principal and interest in full and on time for the banks. Customers
who encounter problems in production and business activities. When a borrower
meets the risks from the market (eg: demand for products of the business suddenly
decreases due to some adverse information), from your goods (for example, your
business is appropriated

capital and not return within the time limit specified) or

from the unexpected risks to affect the revenues of the business and the ability to
repay debt to the bank.
b) The customer’s fraud with the purposeI: In this case, borrowers remain
profitability but they do not repay on time or do not want to pay bank debt. They
delay the payment in the hope they can repudiate the debt or use delinquent loans as
long as possible.
Moral hazard is a problem caused by information asymmetries created after
the transaction taking place. Moral hazard arising from the actions that affect
efficiency but not to be easily observable and thus, the implementer of these actions
may choose to pursue their personal interests on the basis of harming the others.
Moral hazard in the financial sector occurs after the granting of credit, the credit
givers tend to make risky investments than lenders expected, because the investor
will get very large profits if the project is successful, while the credit givers only

9

receive a fixed benefit. Conversely, if the project fails, the lender will lose a part or
all of the funds due to un-repayment in full.
1.1.3.3. Caused by the banks
a) The views of executive leadership
Leadership of the banks often sets a maximum level of risk acceptable in each
period (risk appetite). The higher risk is, the higher profit expectation is, so some
banks should accept the lending to risky projects to gain high profit. If commercial
banks have set a target on the most profitable, the management mechanism will
encourage and create conditions for the relevant parts of the search, decision on the
loan, investment with highly expected income, but potentially large risks, also, the
provisions on inspection and control, particularly the criteria for consideration and
evaluation in making lending decision will also be lower while the criteria of
profitability are highly valued. Otherwise, if a business standpoint considers the
safety at the first, the provisions of asset management mechanism in the evaluation
and consideration before making a decision on lending and investment will be
closer, more specific, the standard for making decision, monitoring and supervision
are also set at a higher level. The commercial banks must know their best choices to
determine a reasonable profit.
b) The weakness of the bank's technology
Nowadays, technology level is an important factor in the banking business
organization, especially for credit risk management. Because the higher level of
technology shall support for the bank in screening clients, industries with the high
level of risk as well as databases of information on each customer. In developed
countries, the banking technology also develops, especially in conditions of very
effective support of information technology as today. Banking technology is
reflected in the level of information concentration, the ability to analyze and process

information, in giving conclusions from them, identified to serve as the bank
management like factors affecting quality status and asset allocation, risk level of
concentration ... the bank's technology also shows the ability to govern and control


10

over the activities of the division operation. At each level, different technologies
require different management mechanisms.
c) Qualification of the banking staff
Quality of credit staff plays a key role in filtering the good customers, good
project. Loan officers must get in touch many customers in many different business
areas, regions, territories, or even different countries; in order to better assess
clients, they must understand their customers and domains of that customer ‘s
business and environment where the customers live. Loan officers must be able to
predict problems related to the borrower. Thus, loan officers must be trained and
self-trained comprehensively. When loan officers loans to customers that they are
incapable of understanding thoroughly, they shall always face up with the credit
risk. Causes of risk from the weakness of bank staff may result from:
No complete analysis of business management capabilities of the enterprises.
In business, the role of business leaders is important, the success or failure of the
operation depends very much on the orientation and decision by the leader of that
enterprise. In case of loans without properly evaluating the ability of managers, it
will easily lead to losses.
Analysis of financial statements is inaccurate or not appreciating the real
effective loans will be more risky. With any business in recession, but weak banking
staff in assessing the analysis of lending will be difficult to recover.
Credit risk is originated form limited knowledge of economic and social fields
of the bank employee, not understanding the regulation of credit. When borrowers
do not fully measure the risk that the bank staff are unable to advise customers in

case of the loss, the business would not be able to repay the bank.
The repayment period is inaccurate, after lending, the bank is lack of
monitoring which makes the borrowers use funds for improper purposes without
timely resolutions, it also lead to credit risk.
d) Credit staff ethics
With more and more risky loans and non-guarantee of the credit conditions as
set, the borrowers often takes "great commission" to be able to be borrowed


11

money. This led to a number of loan officers intentionally falsifying the process of
credit or missing a few steps in the process to get “commission” from customers.
Therefore, the loan tellers’ bad quality relating to qualification and professional
ethics also can result in credit risks.
e) Weakness in operation coordination
Credit risks may derive from all stages of credit granting including the before
-a –loan stage, the disbursement, and the management of customers’ loan. At the
before-a-loan stage, the failures to comply with credit system, terms and conditions
of loan; careless consideration and evaluation of customers and loans can lead to
credit risks in the futures.
At the stages of the disbursement, and the management of customers’ loan:
Disbursement not under terms and conditions; a lot of shortcoming in monitoring
and controlling (not control the customers’ aims of capital utilization, relax the
examination of customers’ production, business and financial situations, ineffective
controlling and monitoring of the loan lists) will cause credit risks in the future.
1.1.4. Consequences caused by credit risks
1.1.4.1. Over banks
a) Risk will damage the reputation of the bank
Once a bank has high risk of assets, it usually is in danger of losing its prestige in

the market. No one want to consign their money on a bank which have overdue debt
and bad debt rates which exceed the permitted standards and have bad quality of credit,
or cause a great deal of losses. Information about a bank with high credit risks is often
introduced and spread in public, which bring banks with a lot of difficulties in the
capital mobilization. On the other hand, the loss of prestige also affects the
competitiveness of banks, so its operations will face with more difficulties.
b) Risks affecting banks’ liquidity
The main operation of a bank is to buy deposit and grant a loan, if the loans
are at risks, the debt retirement may be more difficult while the deposits still have to
be paid punctually. While capital is not mobilized, the rate of deposit breakers
increase, as the result, banks meets with serious difficulties in its payment


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c) Risk will affect the payment capacity of the bank
In case of credit risks, banks fails to receive both the seed money and the
interests as the set contract, even its capital can be lost. Accordingly, the credit risks
reduce the turnover rate, which lessens the effectiveness of capital utilization as
well as banks liquidity. Credit activities relate closely to many other ones such as
banks services, so the credit risks decrease not only banks turnover benefited from
the credit activities but also incomes from other activities. Besides, a high risk also
makes banks speed up its plan for contingency account, which brings about lower
profits.
d) Risk can lead bank to bankruptcy
Credit risks often bring banks with losses in finance, much more in prestige,
and social trust. Therefore, it is necessary to remain prestige because if the
customers lose their trust in banks, they will immediately flock to banks to draw
money. To extend those banks fail to deal with, it will cause domino effect in public
and accordingly the masses will flock to banks for drawing their money. For the

long-term loan, banks can not retire it immediately and at the same time the risks
also cause losses in banks capital, banks, therefore no long have solvency and face
with bank smash.
1.1.4.2 Over customers
The credit risks affect seriously not only banks but also its customers.
a) Over the depositors: In case banks meet with a credit risk, which means it
fails to regain its seed money and interests. Money which banks finances enterprises
comes from the depositors. Besides, when the risks occur, banks prestige will be
affected, the customers, therefore, flock to banks, and banks will lose its liquidity. The
customers may also face with the risks that they can not regain their deposited amounts
b) Over the money borrowers: In case banks credit is at high risk which
damages banks prestige, the number of depositors will decrease and banks has to
introduce a higher interest rate as well as apply a safer policy in its crediting.
Hence, banks have to limit its crediting and apply tighter terms with higher interest


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rate to make deficit for the high interest rate in the deposit. Therefore, the borrowers
may meet with more difficulties in mobilizing capitals or if do, it will be under
higher interest rate, which influence their expenses and effectiveness.
c) Over customers who cause bad and overdue debts: they will be
punished with higher arrears of interest and their chance to find a new financer
will be limited.
1.1.4.3 Over the economy
Banks operations are highly socialized and relating to many other industries. A
commercial bank is considered as an important financial intermediate which has
direct and regular relation with all other economic organizations and economic
sectors in the economy. Therefore, in case of a credit risk, the effects can be found
in every economic organization and other individuals. The depositors will lose their

money and the borrowers may meet with difficulties in mobilizing capitals, which
leads to addition in capital mobilization and shortage of capital in production and
business. That enterprises which operate ineffectively, find it difficult to pay affect
the whole economy as well as banks. Therefore, the collapse of a bank may lead to
the break of a whole banking system, cause loss of people’s trust, and economic
crisis. It can be seen that it is credit risks that are the reasons of financial and socioeconomic crisis. Such impacts not only are on the related nation but also the world
economy.
1.2 MANAGEMENT OF CREDIT RISKS IN COMMERICAL BANKS
Credit risks are indispensable and always associate with banks crediting
activities. Therefore, the management of risks is considered an important task of a
commercial bank.
1.2.1. Definition of the credit risk management
The management of the credit risks plays an important part and connects
closely to every operation of the commercial bank. Managing the credit risks does
not mean avoiding risks but specifying an acceptable level and basing on which
setting solutions to insure that the risks are not beyond what has been set.


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Management of credit risks mean a process of measurement and evaluation
during the crediting; supervision, monitoring, detection, and in-time handling to
guarantee banks interests in case of any changes until the loan is paid. The policies
on the management is for the prevention and minimizing loss in crediting ensuring
all the loans are paid in time and in full.
The objective of credit risk management
The management of credit risks has to be considered and meet the following
requirements:
- Create a reasonable list of credit with high profitability, less risk, and if
necessary can be securitized to support the liquidity.

- Motivate the sense of initiative and enhance the responsibility of professional
parts in order to seek for loans with high profitability and less risks.
- Set unanimous, exact, and clear regulations on the crediting procedures; as
well as regulations on structure and rates.
- Ensure report clearly and exactly the quality of the credit lists, set sufficient
contingency account to make deficit for the arisen risks during the crediting.
- Equip with suitable examining and controlling system to detect, prevent, and
deal with arisen risks over loan risks.
1.2.2 Process of the credit risk management
The management of the credit risk naturally is a continuous process
commencing from the evaluation phase before approving a loan; disbursement; loan
inspection (including the report of early warning customers’ state), management of
bad debt (including the finding solutions and approach to minimize the damages
born by banks) until the capital is retired.


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Diagram 1.1: Continuour risk monitoring cycle

Monitoring
before lending
Monitoring after
lending

Monitoring
while lending

In which:
Monitoring

before lending

Monitoring
while lending

Monitoring
after lending

Establishing policy and credit procedures
verifying before lending
Approving the loan

Drawing up credit agreement
Supervising disbursement
Credit supervising

Watching, speeding up collection of repayment
Reconsidering and rating credit
Independent internal controlling
Reevaluating credit policy