Credit risk management at Vietnam prosperity joint stock bank

In the current economic development context, under the pressure of

fierce competition, business operations in general and commercial banks, in

particular, are facing many difficulties. Therefore, ensuring safety in business is

necessary; credit-granting activities in commercial banks are always the most

significant source of profits for the bank, thus managing risks from activities.

This movement always brings top concern. VPBank is one of the leading jointstock commercial banks in Vietnam, thus perfecting the credit risk management

system plays a vital role in the bank's development strategy.

In the scope of the thesis, the author studies the researches of scientists

to explain the problems of credit risk management in the commercial banking

system, thereby inheriting the positive scientific points and finding gaps—

research for the thesis. Based on the review of documents in Chapter 1, the

author builds a theoretical framework on credit risk management in chapter 2 as

the basis for a typical case study of credit risk management at VBank in chapter

3 and to provide solutions. Practical methods in chapter 4

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ne of VPBank, so the research results ensure scientific objectivity. Table 1: Description of VPBank employees Quantity Ratio 1. Working units VPBank’s branches 246 85,2 FE credit 43 14,8 7 2. Location Hanoi 189 65,3 Other provinces 100 34,7 3. Customers under supervision Businesses 149 51,5 Individuals 140 48,5 Total 289 For VPBank customers: The author uses a questionnaire with six independent variables and 30 observed variables, so the minimum sample size to be interviewed is: n=50+ 8 * 6 = 98 n=5 * 30 = 150 As a result, the author must investigate at least 150 customers. In the researching process, the author investigated 195 VPBank customers. Table 2: Description of VPBank customers Standard Quality Ratio 1. Location Hanoi 103 52,8 Other provinces 92 47,2 2. Customers Businesses 25 87,2 Individuals 170 12,8 3. Loaning purposes Car/household 43 22,1 Consuming 97 49,7 Investment 149 17,9 Other 140 10,3 Total 195 100 Data collected were processed using Excel software, Eviews 3.0 and SPSS for Windows 15.0. + Stage 04: Assessing the current situation of credit risk management and some factors affecting credit risk management at VPBank + Stage 05: Proposing solutions to improve credit risk management at this bank based on the current situation of credit risk management and the influence of a number of factors on credit risk management of VPBank, propose solutions to improve credit risk management activity. Correlation analyzing method In terms of model assumption, the independent and dependent variables are related. To test this relationship, we use Pearson correlation analysis (single 8 correlation). If the correlation coefficient is non-zero and statistically significant, it proves that from the research data there is evidence of the relationship between the variables in the model. Regression analyzing method To test the research hypotheses, the regression analysis method will be used. For bank staff: The author has selected 08 independent variables which are: State Policy, Socio-Economic, Prestige of the client, Bank Size, Human Resources, Financial System, Capital Policy, Document Management; 01 dependent variable: risk and 03 control variables are variables about: type of customer, working unit, location to perform regression analysis to evaluate the impact of the dependent variable on RRTD when there are more independent impacted variables. For customers: The author has selected 06 independent variables which are: bank size, 01 dependent variable (debt balance) and 04 control variables (the variables of the form of credit, place of work, the purpose of recognition, and average income) to perform a regression analysis for the price is the influence of the dependent variable on credit risk management when there is an additional independent impact. Probability levels in a regression model: Value> .05 is considered a good fit model [Arbuckle and Wothke, 1999; Rupp and Segal, 1989]. This means that the hypothesis H0 (which is a reasonable model hypothesis) cannot be rejected; that is, there is no better model than the current one). Corresponding to a relationship, we have a corresponding hypothesis (as discussed at the beginning of this chapter on research hypotheses and models). In studies in the social sciences, all causal relationships suggest a 95% confidence level (p = .05) [Cohen, 1988]. With an aim to consider tissue interpretability, the coefficient R2 is used. After checking, if the results show that the hypotheses are not violated, we can conclude that the estimation of the regression coefficients is not biased, consistent and efficient. Conclusions drawn from regression analysis are plausible. 5. New contributions to the science of the thesis Firstly, the dissertation results clearly show the effects of factors affecting credit risk management at VPBank by quantitative methods. This helps the administrators have a clearer view of credit risk management at VPBank and make appropriate plans and decisions for the Bank's credit activities. Secondly, the dissertation has studied and clarified credit risk management at commercial banks and verified through credit risk management at VPBank. 9 Third, the thesis correctly assesses the current situation of credit risk management at Vpbank, giving out several factors that directly affect credit risk management at the Bank, including the group of external factors: State policy, Socio-economic, Customer and the group of elements inside are: Bank size, Human resources, Organizational system, Loan policy, Document management, Overdue debt. For VPBank's credit risk management, the factors that have the most significant influence are the Bank's human resources and the Social Economy, the group that has the most impact on the adverse risk is the State's Policy and the management records. Fourthly, the study has proposed a system of solutions with scientific and feasible basis to improve credit risk management at VPBank. 6. The theoretical and practical significance of the thesis 6.1 The theoretical significance The thesis has applied a combination of two scientific qualitative and quantitative research methods, logic to explain the problems posed by the topic, contributing to supplementing the theoretical basis of the content of credit risk management with specific of Vietnamese commercial banks. During the research process, the thesis has pointed out the primary, essential contents and factors affecting credit risk management in the commercial banks in the world in general and in Vietnam in particular. 6.2 The practical significance + The thesis provides the necessary foundation to help bank administrators supplement and complete the awareness of credit risk management at commercial banks. + With a case study of VPBank (one of the private banks always standing in the list of top banks in Vietnam) the thesis contributes to increasing the awareness of administrators about the reality of credit risk management. At the same time, through a combination of quantitative and qualitative research methods, to assess the factors affecting this activity at VPBank. + Based on the orientation implementing credit risk management in the commercial banks' system in general and VPBank in particular, and at the same time combined with the current situation that affects credit risk management at banks, and in association with challenges occurring in banking operations in Vietnam, the author has proposed several solutions to further improve credit risk management at VPBank. 7. The thesis structure The thesis is structured into 04 chapters, which are: Chapter 1: Overview Chapter 2: Theoretical basis and experience in credit risk management at commercial banks 10 Chapter 3: Reality of credit risk management and factors affecting credit risk management at Vietnam Prosperity Joint Stock Commercial Bank Chapter 4: Solutions and recommendations to improve credit risk management at Vietnam Prosperity Joint Stock Commercial Bank Chapter 1 OVERVIEW 1.1. Studies on commercial bank credit risks According to Jason (2007), Ngwa Eveline (2010) credit is the main income-generating business for commercial banks, but this is also an area with many potential risks, so it can be said that credit risk is one of the leading and most important risks in the banking business [81], [96]. According to the Law on Credit Institutions No. 47/2010 / QH12.2010, credit extension means an agreement for organizations and individuals to use an amount of money or committing to allow the use of an amount of money following the principle of refund via lending, discount, financial leasing, factoring, bank guarantee and other credit operations [27]. In Vietnam, there have been studies on CI arising. Most domestic tasks have agreed on the content of credit risk that is: Credit risk is the ability that borrowers or partners of financial institutions do not fulfil financial obligations under agreed terms. 1.2. Studies on credit risk management of commercial banks  Foreign studies: Researcher Patrick (2005) studies on risk management, focuses on the role of risk managers in risk management. The author designed questionnaires and analyzes to show the effects of risk. Managers to the rate of profit earned by the organization [97]. Credit risk management also has access to research under the Basel Treaty - International standards of capital to limit risks in business activities of commercial banks. According to this research direction, some authors can be mentioned such as Laurent (2006); Kalyan (2006); Smita (2018) [87], [81], [112], gave concrete examples and provided the techniques most likely to make that application of Basel 2.  Domestic studies: In Vietnam, the research on credit risk management in commercial banks is similar to the research direction on credit risk management in the world. The study focuses on understanding credit risk management according to the risk management process, from which to draw an assessment of the current situation, achievements and shortcomings that need to be overcome of risk management activities in some Specific commercial banks in Vietnam, some studies go in this direction such as [1], [24], [19]. In addition, credit risk management is also placed in the relationship with the Basel 2 treaty by some 11 authors such as Nguyen Thi Van Anh (2014), Le Thi Hanh (2017), Tran Thi Viet Thach (2016). 1.3 Studies on credit risk management activities at commercial banks Credit risk management and credit risk always have a close relationship and impact with each other. Factors influencing the risk will also affect risk management, and the risk management itself is also the factor that influences the risk. Specifically: According to Das (2007), Jiajia et al. (2012), the authors have studied the factors affecting credit risk management in commercial banks in India, China and Malaysia [69]; [84]. 1.4. General assessment of domestic and foreign research projects 1.4.1. Achievements The research scope: The research scope of the topics are particular, precise and intended to cover the whole process of credit risk management at a bank. Research methods: The studies have used traditional and scientific research methods such as synthesis method, secondary document statistics and expert interview method to get more information about credit risk management model, using quantitative models to determine the impact of factors on credit risk management and risk forecasting at commercial banks. The research content: The research results are the sources assisting readers to have an overall, basic and objective view of credit risk management of commercial banks in competitive market conditions. 1.4.2. Problems The credit risk management: In general, although the researches have approached credit risk management towards the currently applicable international standard, which is the Basel 2 treaty, these studies stop at the stated level. On the content of Basel 2, with the object of specific commercial banks, many studies have not mentioned the actual level of what these commercial banks are achieving compared to the international standards prescribed by Basel 2 treaty, real progress. How is Basel 2 applied now? Besides, it has not yet pointed out what is lacking in commercial banks compared to the Basel 2 regulations and also does not mention the difference between credit risk management at banks. Regarding factors affecting credit risk management: Some studies have used quantitative methods, but it is clear that for different commercial banks, they have their characteristics and credit policies. Separate credit risk management and credit risk, so the factors that affect credit risk in each bank will be different. Therefore, it is impossible to have a general result about the effects of factors on credit risk as well as credit risk management at commercial banks. 12 1.4.3. Inheritances and blanks Inheritances: - Contributing to systematize and update the theoretical and practical basis of credit risk and credit risk management at commercial banks. - Examing factors affecting credit risk management at commercial banks Blanks - Regarding the research methodology: the research on credit risk management in particular in the commercial banking system in general and VPBank in particular by using a combination of descriptive statistical analysis, the qualitative analysis combined with quantitative analysis; - Regarding the content of the thesis: Researching and implementing with VPBank as a specific object, proposing the theoretical framework of the theory on credit risk management at VPBank; Also, with my thesis, the author uses qualitative and quantitative methods to study the effects of factors on credit risk management at VPBank, thereby making conclusions about the degree of influence. Of these factors to credit risk management at the Bank. Thereby, managers have a more precise and more specific view to proposing credit policies following VPBank's characteristics. Besides, based on the actual limitations of credit risk management, the author offers a system of solutions to improve the credit risk management system at VPBank. CHAPTER 1 CONCLUSION Chapter 1 investigated the essential contents of credit risk management at commercial banks, including: -Clarifying studies on credit risk, management of credit risk in the country and abroad from many different angles and aspects of the authors -Specifing the points that the thesis can inherit, from which to make comments and find research gaps to serve as an essential basis for completing the theoretical system of credit risk management in chapters 2 & 3 such as: conducting the system academic system of credit risk management at commercial banks; Analyzing the factors affecting credit risk management in commercial banks by both qualitative and quantitative methods. Chapter 2 THEORETICAL BASIS AND EXPERIENCE IN CREDIT RISK MANAGEMENT AT COMMERCIAL BANKS 2.1. General theory of credit risks at commercial banks 2.1.1. Basic concepts Commercial banks According to Law on credit institutions No. 47/2010 / Qh12.2010: Commercial bank is a type of credit institution that can carry out all activities: 13 receiving deposits, granting credit, providing payment services via accounts and other business activities following profit-oriented purposes. [27] Credit activities of commercial banks According to the Law on Credit Institutions No. 47/2010 / QH12.2010: Credit is an agreement for organizations and individuals to use an amount of money or commit to allow the use of an amount of money according to the principle of refund. pay by transactions of lending, discount, financial leasing, factoring, bank guarantee and other operations of granting activities [27] Credit risk When it comes to credit risk in banks, the primary and most straightforward concept can be understood according to the Law on Credit Institutions No. 47/2010 / QH12.2010: Credit risk is the possibility of losses in the banking operations of credit institutions due to customers' failure to perform or inability to fulfil their obligations as committed [27]. 2.1.2. Several reasons causing credit risks in commercial banks Objective causes includes political and legal factors; factors about economic activities and factors about customers having credit relations with the bank. This is a group of reasons outside the bank and is the cause of credit risk. Subjective causes include the bank's credit policy; qualifications and professional ethics of bank credit officers; cooperation between commercial banks, units and organizations related to the credit sector. 2.1.3. Credit risk effects on banks and economy 2.2. Theoretical basis of credit risk management at commercial banks 2.2.1. Concepts and roles of credit risk management at commercial banks  Concepts: According to Basel (2001), credit risk management is the implementation of measures to maximize the rate of return adjusted to credit risk by maintaining credit balances within proper parameters [58].  Roles 2.2.2. Credit risk managing model The credit risk management model at commercial banks often uses two models introduced by two researchers, namely Nguyen Van Tien (2012) [46] and Bessi (2015) [85] 2.2.3. Implementation of commercial bank credit risk management Credit risk management process includes 04 contents: Risk identification, risk measurement; risk response; risk control. These are all stages in a credit risk management process; all of these stages are closely linked 14 together, forming a continuous cycle, so that a risk management process can be formed completely and efficiently. 2.3. Factors affecting commercial bank credit risk management Factors affecting credit risk management at commercial banks are divided into two main groups: external factors and internal factors.  External factors According to research by Das (2007), Bessis (2015), Michel (2001), external factors affecting credit risk management of commercial banks include: economic factors: growth, GDP, inflation ... [69], [85], [93];  Internal factors According to international and domestic research results by researcher Nguyen Quoc Anh and co-workers (2015), Truong Dong Loc and co-workers (2014), Idowu and co-workers (2014), Hussain (2014), ... credit risk is influenced by macro factors but also influenced by factors that belong to the bank itself. There are a number of factors that have a strong impact on the effectiveness of credit risk management at commercial banks such as size of the bank, credit growth rate, credit structure, rate of profit / total assets, return / equity, the bank's credit policy in each period, the bank's human resources.[2], [26], [79], [78]. 2.4 Risk management practices at commercial banks and lessons for VPBank 2.4.1. Credit risk management at foreign commercial banks DBS (The Development Bank of Singarore Limited) ANZ (Australia and New Zealand Banking Group Limited) 2.4.2. Risk management at commercial banks in Vietnam 2.4.3.Summary of practical issues in risk management at domestic and foreign commercial banks 2.4.4. Lessons learned from theoretical and practical basis for credit risk management at VPBank First, VPBank needs to build a complete, complete and detailed system of regulations and guidance on the implementation of credit risk management. Second, solutions need to be built based on the actual specific conditions, characteristics and capabilities of each bank. Third, the bank should build a system of processes to monitor, review and control the risk in all steps of risk management, including identifying the risk, providing suitable methods and tools to determine the chance will arise or have arisen entirely; build an internal credit rating system applicable to all credits; use stress testing to identify risks and factors early impact on RRD. Fourth, the disclosure and transparency of information needs to be ensured Fifth, VPBank should follow the credit risk management apparatus under Basel 2 requires the bank to have a good quality human resource in all positions of the device. 15 Sixth, the process of deploying credit risk management under Basel 2 commercial banks raises the need of investing a large amount of capital, including investment in staff training, technology system investment, data resources equipment, etc. CHAPTER 2 CONCLUSION Chapter 2 clarified the necessary of theoretical and practical content in credit risk management at commercial banks, including: -Clarifying the fundamental issues about credit risk, credit risk management in commercial banks, including the basic concepts surrounding credit risk management, the credit risk management model, the credit risk management process, the factors affecting governance Credit risk at commercial banks. The experience of credit risk management of commercial banks in the world and lessons learned for VPBank including issues to consider such as: encouraging commercial banks to use IRB risk measurement method, the application roadmap for Basel 2 implementation; building a system of monitoring procedures in the steps of credit risk management; It is necessary to have specific and detailed guidance from regulatory agencies in credit risk management. Chapter 2 contributes to systematize as well as enriches the basic theory of credit risk management in the system of commercial banks. These fundamental theoretical issues will be the theoretical framework that the author can use to analyze the case of credit risk management at VPBank in chapter 3. Chapter 3 REALITY OF CREDIT RISK MANAGEMENT AND FACTORS AFFECTING CREDIT RISK MANAGEMENT AT VIETNAM PROSPERITY JOINT STOCK COMMERCIAL BANK 3.1. Overview of Vietnam Prosperity Joint Stock Commercial Bank 3.1.1. Formation and development Name: Vietnam Prosperity Joint Stock Commercial Bank (VPBank) Headquarter: No. 89 Lang Ha Street, Dong Da District, Hanoi Date of incorporation: 12/08/1993 Main business fields: Monetary intermediary activities including receiving demand deposits, time deposits; issuing certificates of deposit; credit granting in the forms of: lending, discount, guarantee, opening payment accounts for customers, etc. 16 Logo: 3.1.2. Operational results of VPBank Table 3.1 VPBank's business results in the period of 2010 - June 2019 Standard 2010 2011 2012 2013 2014 2015 2016 2017 2018 T6/201 9 Total assets (billions) 59.80 7 82.81 8 102.67 3 121.26 4 163.24 1 193.87 6 228.77 1 277.75 2 323.29 1 348.73 2 Owner equity (billions) 5.204 5.996 6.709 7.727 8.980 13.389 17.178 29.696 34.750 38.208 Mobilizing capital (billions) 48.71 9 71.05 9 59.680 88.345 119.16 3 152.13 1 172.43 8 199.65 5 219.50 9 251.18 8 Pre-tax profit (billions) 663 1.064 949 1.355 1.609 3.096 4.929 8.130 9.199 4.342 Employees (people) 2.861 3.548 4.326 6.795 9.501 12.927 17.387 23.826 25.200 27.037 Transaction points 150 199 204 207 209 208 215 216 222 226 Customers (thousands) 353 635 1.305 2.088 3.290 4.901 5.767 6.120 ROA (%) 1,15 1,09 0,77 0,91 0,88 1,34 1,86 2,54 2,4 2,1 ROE (%) 13,9 22,65 11 14 15 21 26 27,5 22,8 19 CAR (following SBV’s requirement s) (%) 12,5 12,5 11,3 12,2 13,2 14,6 12,3 12,3 CAR (following Basel 2) (%) - - - - - - 9,5 12,6 11,2 11,2 (Sources: database of author). 3.2. Reality of risk management at VPBank 3.2.1. Reality of credit activities at VPBank 3.2.1.1. Results of credit activities at VPBank 17 Table 3.2. Assets structure Unit: Billion Standard 2010 2011 2012 2013 2014 2015 2016 2017 2018 Customer loan 59.807 82.818 102.673 121.264 163.241 193.876 228.771 277.752 323.291 Securities 25.324 29.184 36.903 52.474 78.379 116.804 114.673 182.666 221.962 Other assets 20.933 32.708 42.170 31.113 32.657 27.298 55.805 40.103 45.201 Sources: VPBank annual report 2010-2018 [5] 3.2.1.2. Reality of credit risk at VPBank 3.2.2. Credit risk management model at VPBank 3.2.3. Implementation of credit risk management at VPBank 3.3. Factors affecting credit risk management at VPBank 3.3.1. Statistics of credit risk management factors 3.3.2. Reliability of scale In the study, the author has built scales to reflect the factors affecting the effectiveness of credit risk management. Checking the reliability of the scale to remove the criteria that are not really consistent with reality. Results are shown in the following 02 tables: (Appendix 9, 10) - Group of external factors: Socio-economic: Socio-economic; CSNN: State policy; Client: Customers - The group of internal factors: QM: Size of the bank NL: Human resources; HTTC: Organizational system; Management of students: Manage records in 3 control lines; CSCV: Loan policy. After analyzing the reliability of the scale, the observed variables do not meet the requirements (total variable correlation coefficient> 0.3) including CSNN3; KH6; KH7; NL7; HTTC6 has been removed (Appendix 9 and 10 for details.). Factor analysis results show indicators that reflect the concept are relatively good, factor load coefficients> 0.5 and KMO coefficient> 0.6, Bartlett's test ha

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