INTRODUCTION.1
1.Necessity of research topic .1
2.Research objectives of the thesis .2
2.1.General research objectives .2
2.2.Specific research objectives.2
3.Object and study scope of the thesis.3
3.1.Object of the study.3
3.2.Scope of the study.3
4.Research methodology of the thesis .3
5.New contributions of the thesis .5
6.Structure of the thesis .7
CHAPTER 1: OVERVIEW OF RESEARCHES ON CREDIT RISK MANAGEMENT ON LOAN
PORTFOLIO IN COMMERCIAL BANKS .9
1.1.1.Researches on organizational model of risk management on loan portfolios .9
1.1.2.Researches on information reporting principle between divisions in organizational structure of risk
management on loan portfolios .10
1.2.Researches on risk identification on loan portfolios.11
1.2.1.Researches on credit risk early warning system .11
1.2.2.Researches on loan portfolios’ past quality evaluation models.11
1.3.Researches on risk measurement on loan portfolios.12
1.4.Researches on using loan portfolio risk management tools.12
1.4.1.Researches on modern tools . 12
1.4.2.Researches on traditional tools .13
1.5.Research gaps .14
CHAPTER 2: THEORETICAL BACKGROUND FOR RISK MANAGEMENT ON LOAN PORTFOLIO
IN COMMERCIAL BANKS .15
2.1.1.Concept of credit risk management in commercial banks.15
2.1.2.Principles of credit risk management in commercial banks .15
2.1.3.Contents of credit risk management in commercial banks .16
2.2.Theoretical background for loan portfolio risk management in commercial banks .16
2.2.1.Concept of risk management on loan portfolios in commercial banks.16
2.2.2.Contents of risk management on loan portfolios in commercial banks.17
2.2.3.Factors affecting risk management on loan portfolios in commercial banks. .18
2.3.International experiences of loan portfolio risk management in commercial banks .18
2.3.1.Experiences of Japanese commercial banks .18
2.3.2. Experiences of Korea Development Bank (KDB).18
2.3.3.Experiences of Bangkok Bank.19
2.3.4.Experiences of Citibank.20
2.3.5.Lessons learned for Vietnamese commercial banks .21
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building organizational structure for risk management on loan portfolios in
Vietnamese commercial banks.
1.1.2. Researches on information reporting principle between divisions in
organizational structure of risk management on loan portfolios
Firstly, Ghosh (2012) pointed out the principles of designing the reporting flow so
that it separates the reports on business management from those on risk management.
Moreover, according to this author, commercial banks should provide clear
regulations on the tasks of each division involved in operational operations and risk
management activities to avoid overlapping and conflicts of interests. The thesis uses
the theory of above reporting principles to analyze and evaluate the current situation
11
of the organizational structure of risk management on loan portfolios in commercial
banks.
Secondly, Viet Dung (2007) through an empirical survey at Vietnamese commercial
banks also recommends that commercial banks need to ensure a clear division of
responsibilities and reporting channels in the implementation of daily credit risk
management tasks.
1.2. Researches on risk identification on loan portfolios
1.2.1. Researches on credit risk early warning system
Firstly, regarding study related to methodology in building credit risk early warning
system in commercial banks. Some case studies are as follows:
Gramlich et al (2010); Zhou, Wang and Qiu (2008); Davis and Karim (2008)
Nguyen Van Huan and Do Nang Thang (2018)
Nguyen Thi Lan et al (2018)
Secondly, on the practical efficiency when applying the credit risk early warning
system in commercial banks. The role and effectiveness of this system for credit risk
management in commercial banks has been clarified in many studies such as research
by Azam (2016) in Iran; Qin and Luo (2014) in the group of developed countries G20;
Koyuncugil and Ozgulbas (2012) in Turkey; Tiberiu (2006) in Romania; Sahajwala
and Bergh (2000) in the G10 group of developed countries. These studies both come
to the conclusion of the early warning as a method of confidence to identify credit
risks on the bank's loan portfolios.
1.2.2. Researches on loan portfolios’ past quality evaluation models
Firstly, for groups of foreign works, the method that is focused on research is Vintage
analysis. This method proved to be quite effective as shown by Siarka (2011), Zhang
(2009), Breeden (2004), Burns and Stanley (2001).
Secondly, for domestic studies on loan portfolios’ past quality evaluation models,
there is only the work of Pham Thi Nuong (2013) studies on migration analysis
method.
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1.3. Researches on risk measurement on loan portfolios
Table 1.1: Summary of studies on loan portfolio risk measurement methods
No. Author (Year of
research )
Content
1 Bluhm, C., Overbeck, L.
and Wegner, C. (2010)
Bernoulli model
Poisson model
Group of modern models: Credit model
Metrics, Credit Risk + model, Credit Portfolio View
model
2 Saunders, A. and Allen, L.
(2010)
The model team considers a loan as an option
contract: KMV and other models of Moody's
Compact model group: loan analysis system of
KPMG and credit risk management model of
Kamakura
Model group to approach VAR: Credit Metrics and
other models
Model group according to macro simulation: Model
Credit Portfolio View and other models
Model group to approach insurance: Bankruptcy
Model and Credit Risk + Model.
3 Capuano, C. et al. (2009) Measure the probability of a group of borrowers
defaulting on:
Loss distribution regression function by Andersen,
L., Sidenius, J. and Basu, S. (2003)
Multifactor Gaussian Equations by Li, D.X (2000)
One-factor Gaussian Equations by Vacisek, O.
(1987)
4 Engelmann, B. and
Rauhmeier, R. (2006)
Guide to determine three quantities PD, EAD, LGD
Source: The author
1.4. Researches on using loan portfolio risk management tools
1.4.1. Researches on modern tools
Regarding the group of modern tools used for loan portfolio risk management,
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according to almost researches, credit derivative products are effective tool to almost
researches, credit derivative products are effective tool to minimize and prevent the
impact of credit risk on loan portfolios. The number of domestic and foreign studies
on credit derivative products is quite massive, some of the typical studies of which
are as follows:
Huynh Thi Huong Thao (2014)
Nguyen Thi Chau Long and Tran Thuy Ai Phuong (2014)
Nguyen Minh Sang and Nguyen Thi Lan Huong (2013)
Bluhm, Overbeck and Wegner (2010)
Le Ho An Chau (2006)
Minton, Stulz and Williamson (2005)
1.4.2. Researches on traditional tools
Firstly, on loan portfolio diversification. In the group of traditional tools to manage
loan portfolio risk, portfolio diversifying is used as a popular tool in commercial
banks and there are many practical studies given about the effectiveness of this tool
in commercial banks at different markets as follows:
Nguyen Thi Que Thu (2016)
Nguyen Minh Hieu (2011)
Bui Dieu Anh (2010)
Rossi, Schwaiger and Winkler (2009)
Kamp, Pfingsten and Prath (2005)
Secondly, on loan sale. Loan sale is a tool to manage risk across the loan portfolios
that commercial banks have used for many years, as mentioned in Smithson (2003).
With studies in Vietnam, domestic research towards loan sale quite diversified such
as law on loan sale, current situation of the loan sale market in Vietnam and policy
recommendations for market development, credit institution operations of debt
trading companies, etc. However, there are not many domestic studies giving an
overview of the current situation in using this tool for loan portfolio risk management
in commercial banks. Some of the typical works can be mentioned as:
14
Huynh Thi Huong Thao (2019)
Hoang Thi Duyen (2016)
Dao Duy Huan (2013)
1.5. Research gaps
Firstly, many studies have mentioned loan portfolio risk management but do not fully
contain the above mentioned contents, or only conduct research on a selected group
of loans, or on loan portfolio of a particular commercial bank. To date, in Vietnam,
almost no official research has been published for a comprehensive study of
organizational structure and process of risk management of loan portfolios in
commercial banks.
Secondly, with the existing researches on risk management on loan portfolios in
Vietnamese commercial banks, there is currently no research conducted to measure
the risk of the loan portfolios in commercial banks. This is the theoretical gap that the
thesis will focus on exploiting, specifically, the author will simulate the risk
measurement of loan portfolios in commercial banks according to two different
methods given in the theoretical basis.
Thirdly, there is currently no research in Vietnam comparing the situation of risk
management on the scale of the loan portfolio for groups of commercial banks with
different risk management qualifications in comprehensive contents, such as: risk
management organizational structure, risk identification, risk measurement and using
tools of risk management. Existing studies have just been exploited in terms of
comparing the content of risk management of loan portfolio at commercial banks with
the standards set out in recommendations, international standards and legal
regulations. This research gap will be clarified by the thesis.
15
CHAPTER 2: THEORETICAL BACKGROUND FOR RISK
MANAGEMENT ON LOAN PORTFOLIO IN COMMERCIAL BANKS
2.1. Theoretical background for credit risk management in commercial banks
2.1.1. Concept of credit risk management in commercial banks
In the thesis, the author uses the concept of Basel (2000) on credit risk as follows:
“Credit risk is the ability of the borrower or counterparty to not fulfill their
obligations under the terms agreed in the credit contract”. Accordingly, the goal of
credit risk management is to maximize the bank's risk-adjusted rate of return income
according to the identified risk appetite. To implement this, commercial banks need
to simultaneously manage credit risks across the entire credit portfolio and for each
specific loan transaction.
Next, regarding the concept of “Credit risk management”, many definitions have been
made. On this basis, it can be summarized that credit risk management is an important
activity contributing to the successful operation of a commercial bank in the long term
with the aim of maximizing the rate of adjusted income by credit risk factors for
banks. Credit risk management is implemented in accordance with the policy
frameworks and organizational model established by commercial banks and includes
the main contents as follows: risk identification; risk measurement; use of risk
monitoring, minimizing and controlling tools5; and risk reporting.
2.1.2. Principles of credit risk management in commercial banks
In the guidelines on credit risk management principles of the Basel Committee (1999),
17 principles on credit risk management are divided into five groups as follows:
5 Hereinafter referred to as “tools for risk management”
16
Diagram 2.1: Principles of credit risk management under Basel 2
Source: Adapted by the author
2.1.3. Contents of credit risk management in commercial banks
The contents of credit risk management as above are summarized in the following
diagram:
Diagram 2.2: Contents of credit risk management in commercial banks
Source: Ghosh (2012)
2.2. Theoretical background for loan portfolio risk management in commercial
banks
2.2.1. Concept of risk management on loan portfolios in commercial banks
Principle group
about
establishing
rational credit
risk environment
Principle group
about
establishing an
effective credit
procedures
Principle group
about
maintaining
appropriate
credit
management
systems, metrics
Group of
principles on
ensuring
adequate control
systems for all
credit risks
Group of
principles on role
of supervisors
Use of credit risk management tools
Report on credit risk
Credit risk management principle group
Credit Risk identification
Build a structure to
organize and manage
risk
Strategy, policy,
and procedure of risk
management
Determine your risky
appetite
Credit Risk measurement
17
There are the two aspects of credit risk management at commercial banks: loan
portfolio risk management and individual loan risk management. Thus, we can
understand the concept of loan portfolio risk management from the concept of credit
risk management on the loan portfolio level. Besides, the concept of loan portfolio
risk management is given as one of the most important goals of loan portfolio
management (LPM). In general, commercial banks' loan portfolio risk management
can be understood as a system of activities that enables banks to recognize and
measure credit risks for the entire loan portfolio, from that allows the bank to
correlate the amount of credit risk it can tolerate at a level commensurate with the
profit that can be derived from lending; at the same time, it helps the bank to control
and minimize those risks.
2.2.2. Contents of risk management on loan portfolios in commercial banks
The contents of loan portfolio risk management is similar to that of a bank's general
credit risk management, but with each content, there are specific features with the
loan portfolio.
Firstly, on building the organizational structure of risk management on loan
portfolios: The organizational model of risk management of the loan portfolio must
be consistent with the organizational model of credit risk management in commercial
banks and in accordance with the general organizational model of commercial banks
according to the powers and duties of Board of Directors/Members' Council,
Executive Board and branches and business units. However, as mentioned above, to
achieve the highest efficiency in risk management of loan portfolio, commercial
banks should organize a risk management model in the direction of centralization.
Secondly, on loan portfolio risk identification: Credit risk identification on loan
portfolio needs to be done through both groups of information: (i) identify internal
portfolio risks and (ii) analysis of the macroeconomic situation and the banking
sector. There are two methods, namely: (i) credit reporting and credit risk early
warning and (ii) loan portfolios’ past quality evaluation models.
.
18
Thirdly, on loan portfolio risk measurement: Commonly used methods to measure
credit risk on loan portfolio are as follows:
Key risk indicators
Standardized approach
Internal Rating Based approach by Basel 2 (FIRB and AIRB)
Loan portfolios’ quality forecasting models
Fourthly, regarding the use of loan portfolio risk management tools: Based on a
traditional or modern perspective on credit risk management, the following portfolio
risk management tools are divided into two groups: (i) traditional tools and (ii)
modern tools.
2.2.3. Factors affecting risk management on loan portfolios in commercial banks
These affecting factors include: factors from commercial banks, factors from
borrowers and factors from the macroeconomic environment.
2.3. International experiences of loan portfolio risk management in commercial
banks
2.3.1. Experiences of Japanese commercial banks
Regarding organizational structure of risk management on loan portfolios
All Japanese commercial banks apply a centralization model for organizational
structure of credit risk management, then the credit risk management function is
separated from the business and operational functions. Furthermore, the credit risk
management for each loan is separated from credit risk management across the loan
portfolio.
Regarding risk identification of loan portfolios
Japanese banks’ operations and Japanese economy have a close relationship with each
other. As a result, an early warning signs of credit risk on loan portfolios comes from
indicators evaluating the “health” of the macro economy.
2.3.2. Experiences of Korea Development Bank (KDB)
Regarding organizational structure of risk management on loan portfolios
The maintenance of the risk control system in the organizational structure of risk
management is taken very seriously at KDB. Credit risk control system of KDB is
19
established independently, applying to individual credits, including off-balance sheet
credits, and the bank's entire credit portfolio on a daily management principle and
warning early once the system detects a risk. The results of the credit risk control will
be reported directly to the Risk Management Committee (Nguyen Quang Hien, 2016).
Regarding credit risk measurement of loan portfolios
Diagram 2.3: Steps to quantify credit risk at KDB
Source: Synthesized by the author according to Nguyen Quang Hien (2016)
Regarding the use of loan portfolio risk management tools
To manage credit risk on the whole loan portfolio, KDB implements credit limit
including two main types: credit limit by industry and credit limit by customer.
2.3.3. Experiences of Bangkok Bank
Regarding organizational structure of risk management on loan portfolios
In Bangkok Bank, the credit risk management model applied is a transformational
model, which is a combination of centralization and decentralization model (Le Thi
Huyen Dieu, 2010). This transformation model is considered suitable for developing
economies such as Thailand, when commercial banks are making efforts to renovate
credit risk management activities according to modern international standards.
Besides, in these economies, they are also facing some limitations in terms of scale,
technology, personnel level, cultural factors, etc., so it is impossible to fully apply the
centralization credit risk management model.
Calculate PD,
LGD, EAD
Calculate
EL,UL
Calculate ELp,
ULp
Calculate
Economic
capital and loan
price
Manage credit
portfolio
subjectively
Manage risk on
value based
20
Regrading risk identification of loan portfolios
Bangkok Bank conducts credit information reports to the Credit Information
Department6, who then collects and releases outputs reports on borrowers and their
monthly repayment history to the bank when requested. This is an important basis of
information to help banks identify risks from customers early. Besides, regular credit
checks and supervision both before, during and after lending are an effective tools of
Bangkok Bank in early detection of arising credit risks, with the customer monitoring
model used mostly as CAMELS (Truong Quoc Doanh, 2007).
2.3.4. Experiences of Citibank
Regarding organizational structure of risk management on loan portfolios
Diagram 2.4: Organizational structure of credit risk management in Citibank (USA)
Source: www.citigroup.com
Regarding the use of loan portfolio risk management tools
The facts of the US Citibank's credit activities show that in order to effectively control
credit risk on the loan portfolio, it is necessary to implement the following tools:
Firstly, the loan appraisal is considered more important than post-loan control in
preventing credit risk. The credit officer at this commercial bank is more focused on
assessing the borrower's health rather than being overly dependent on automated
methods and formulas.
6 Credit Information Bureau is privatized
Risk management committee
Operation
Dept.
Risk
Management
Dept.
Debt
Management
Dept.
21
Secondly, avoid using brokers in lending.
Thirdly, banks use a centralization model in making lending decision to ensure
consistency and control.
Fourthly, require lenders to be responsible for the loan they take to their banks.
Fifthly, apply a credit rating for new loans and reevaluate them periodically over the
life of the loan.
Sixthly, participate in new financial instruments as role of insurance for bad debts
Seventhly, focus on setting safety limits to reduce the risk of concentration on the loan
portfolio.
2.3.5. Lessons learned for Vietnamese commercial banks
Regarding organizational structure of risk management on loan portfolios
Firstly, in terms of the organizational model, the experience of US Citibank or
commercial banks in Japan shows that the centralization credit risk management
model is chosen for risk management of loan portfolio.
Secondly, regarding the role of internal control in credit risk management, the
experience as shown at KDB is consistent with the theory that maintaining an
independent internal control department increases enhance the transparency and
efficiency of credit risk management. This division should be structured as a separate
branch of the risk management organizational structure and is responsible for
reporting directly to the Risk Management Committee or the Board of Directors.
Regarding risk identification of loan portfolios
Regarding the information used in loan portfolio risk identification, the experiences
of commercial banks in Japan show that the bank's credit risk early warning system
needs to take into account the influence of factors in macroeconomic environment.
Moreover, in order to improve the quality of information used in loan portfolio risk
identification, information from a single credit information center used for the whole
system of commercial banks are proven to be as effective as the experience at
Bangkok Bank.
22
Regarding credit risk measurement of loan portfolios
The modern six-stage roadmap of credit risk measurement that KDB is implementing
is a useful suggestion for Vietnamese commercial banks.
Regarding the use of loan portfolio risk management tools
The experiences of many commercial banks, such as US Citibank or KDB have
emphasized the role of credit limit tools in credit risk management across the loan
portfolio. Furthermore, the experiences of US Citibank show that portfolio risk
management should be done through a combination of several groups of measures:
(i) credit risk management on each loan in the portfolio; (ii) strict compliance with
regulations on prudential limits on the loan portfolio; (iii) using modern financial
instruments, such as securitization to restructure and reduce risk in the loan portfolio.
23
CHAPTER 3: CURRENT SITUATIONS OF CREDIT RISK MANAGEMENT
ON LOAN PORTFOLIO IN VIETNAM COMMERCIAL BANKS
3.1. Overview of Vietnamese commercial banks in research sample
The thesis summarizes the operations of 16 commercial banks under the research
sample on three aspects: (i) scale - expressed in Total Assets, (ii) profitability - as
defined by Net Income on Average Total Assets (ROAA) and (iii) capital adequacy -
It is reflected in the target of Capital Adequacy Ratio (CAR).
3.2. Current situations of loan portfolio risk in Vietnamese commercial banks
3.2.1. Regarding the ratio of NPLs on loan portfolios
In general, the bad debt ratio in commercial banks in the sample for 2017 to 2019
period, most of them reached the threshold as prescribed in Circular 02/2013/TT-
NHNN, but the NPLs ratio still exceeded 3% at some commercial banks in some
points of time.
3.2.2. Regarding loss rate on loan portfolios
Firstly, about the rate of provisioning for credit losses on the customer loan portfolio:
The quality of loan portfolio of group 1 commercial banks in the research period is
not good. For group 2 commercial banks, the rate of provisioning for this risk is much
lower than that of commercial banks of group 1. However, it is not enough to draw a
conclusion that the quality of the loan portfolio of group 2 commercial banks is better
than group 1 because the size of the loan portfolio of commercial banks in group 2 is
much smaller than that of commercial banks in group 1.
Secondly, about the ratio of the cost of provision for credit losses on the loan portfolio:
Group 1 commercial banks maintained both trends in the 2017-2019 period, while
group 2 commercial banks also tended to improve during this period.
3.2.3. Regarding credit concentration on loan portfolio
3.2.3.1. Credit concentration by industry
There are 04 commercial banks with a high level of credit concentration in lending
by industry (at the level of more than 40% of outstanding loans), such as: VP Bank,
VIB, AB Bank and PVcomBank. These are commercial banks that are potentially
24
risky due to focusing their loan portfolio in terms of industry.
3.2.3.2. Credit concentration by customer
Commercial banks have high concentration of outstanding loans (at the level of more
than 40% of the bank's loan balance) such as: (i) Group 1 includes Vietcombank, VP
bank, MB, ACB, Techcombank, Maritimebank; (ii) Group 2 includes HDBank, PG
Bank, Sacombank, and PvcomBank. Therefore, it can be said that the concentration
level of loan portfolio by customers in both groups of commercial banks is quite high.
3.3. Current situations of risk management on loan portfolio in Vietnamese
commercial banks
3.3.1. Regarding organizational structure of credit risk management on loan
portfolios
(i) Regarding the method of building the organizational structure of risk
management on loan portfolios. The survey results show that 100% of commercial
banks of both groups perform loan portfolio risk management under the centralization
method of all contents, including risk identification, risk measurement, risk control
and reporting.
(ii) Regarding role of internal control department in the organizational structure of
credit risk management on loan portfolio
In fact, at all commercial banks in the research sample, there are clear internal
regulations on the functions, tasks and powers of the internal control department in
the credit risk management process. However, the actual effectiveness of internal
control is assessed to be higher in commercial banks in group 1 compared to
commercial banks in group 2.
(iii) Regarding the reporting process among departments in the organizational
structure of risk management on loan portfolios
Firstly, with the report on credit risks to the SBV, commercial banks are all
implementing the reporting regime prescribed by the SBV on each content and
operation segment.
Secondly, with internal reports on credit risk on the loan portfolios, these reports are
25
made at commercial banks on a quarterly basis or on an irregular basis.
3.3.2. Regarding risk identification of loan portfolios
Regarding information used to identify the ri
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