Đề tài Precluding and reducing solutions to credit risk at Quang Trung branch of Vietnam Bank of Investment and Development

and the customer objects, through which contributing an active part in the socio-economic development of the Capital and some adjacent areas under the satellite urban chain bordering Hanoi; - Expanding the operation of BIDV, Quang Trung Branch is a measure to improve the financial capability and increase the competitiveness of Bank for Investment and Development of Vietnam in the framework of globalization and integration; - Establishing and putting into operation the BIDV, Quang Trung Branch will help boost the exploitation, clearing the capital source, increasing the capability of supplying credit, banking services, therefore, increasing profits for the Bank, concurrently, contributing a remarkable part in the unceasing development of the system of Bank for Investment and Development of Vietnam; - The operation of BIDV, Quang Trung Branch will help publicizing the trademark, heightening the position, image about an advancing, modern Bank for Investment and Development of Vietnam in the perception of the customers and in the business market; 2.1.1.3. With the strategy to develop until 2010, Bank for Investment and Development of Vietnam defines the upgradation of Quang Trung Transaction Bureau into BIDV, Quang Trung Branch (Level I branch) is a novel development step in the model of Modern-oriented retail bank, creating an improving and breakthrough step in the organization of profession and transaction process, helping to build Bank for Investment and Development of Vietnam for sustainable and integrated development. 2.1.2. Content and scope of operation 1. Legal status: * Full name in Vietnamese: “CHI NHANH NGAN HANG DAU TU VA PHAT TRIEN QUANG TRUNG” * Acronymed: “Chi nhanh Ngan Hang DT & PT Quang Trung” * The international transaction name: “Bank for Investment and Development of Vietnam, Quang Trung Branch” * Abbreviated name: BIDV, Quang Trung Branch * Headquartered at: No 53 Quang Trung, Hai Ba Trung, and Hanoi. Quang Trung Branch is an affiliated subsidies operating from 2003 but split from the Transaction headquarter and officially came into operation from 01/04/2005. At the time of establishment, the branch had a staff of 72 people, in which there were 65 trade union members. At first, the activity of the branch mainly focused on stabilizing organization, establishing the order and strengthen professional skills beside the daily profession operation. - BIDV, Quang Trung Branch is a Level I Branch, under Bank for Investment and Development of Vietnam, with its own stamp and financial balance sheet, has a task to operate the activities of Bank for Investment and Development of Vietnam according to the authorization of the General Director of Bank for Investment and Development of Vietnam, being an accounting unit under the system of Bank for Investment and Development of Vietnam; - BIDV, Quang Trung Branch was established according to the decision of the Management Board of Bank for Investment and Development of Vietnam on the basis of the approval of the State Bank Governor; 2. The content of operation BIDV, Quang Trung Branch is the organization to operate monetary business and Banking service according to the Law of Credit Organization, suitable to the “Charter on organization and operation of Bank for Investment and Development of Vietnam”, operating according to the regulation of organization and activities promulgated by the Management Board of Bank for Investment and Development of Vietnam; and according to the authorization of the General Director of Bank for Investment and Development of Vietnam, especially paying attention to developing the advanced, modern Banking service and the Banking products, services with high rate of advanced technology, combining in harmony with the traditional banking profession, creating the stable customer background, ensuring reasonable profit mechanism, manage well risks, being efficient, safe in business operation. 2.1. The advanced Banking service With the orientation to form a system of retail Banking network of Bank for Investment and Development of Vietnam, BIDV, Quang Trung Branch pledges to bring to the community the products and services of a modern retail bank, through the model and operational organization of a modern multi-function bank, on the background of advanced technology, specifically: the products and services of using the automated teller machines (ATMs), issuing and clearing credit cards, traveler cheques, paying salaries, overseas exchange … and is the place to apply the deployment of new products and services of Bank for Investment and Development of Vietnam. The operational content and specifically oriented targets: - Forming and developing wide and popular ATM network, creating the basis of crowded customers to use the products and services on ATM technology in a stable and sustainable way. Building the system to accept POS/EDC linked with the bank to deploy many added facilities integrated in ATM-BIDV such as: paying invoices of goods, services, recording debts … operating the link of card payment with VISA International, MasterCard International, and AMEX, etc, and then issuing international credit cards of Bank for Investment and Development of Vietnam - Applying the Home-banking service for the customers, helping customers to manage and control their accounts closely, effectively, with such functions as account enquiries, banking information enquiries, next is to perform transactions via the Internet and by electronic documents. - Performing the purchase of traveler’s cheques and international cheques, building the network of collecting and exchanging traveler’s cheques to the Branch to ask for clearance; - Supplying the service of authorized paying salaries (automatically) for individuals, payment of overseas exchange, connecting with the profession of capital mobilization; - Supplying the service of managing the customers’ personal accounts according to the norms of modern banking with high quality. Performing counseling and managing investment portfolios as authorized by the account owners; - Willing to organize Mobile banking when necessary, researching to deploy new products and services as requested by the customers and the market. 2.2 Clearance and budget services - Supplying domestic and international clearance products and services; - Performing the professions of purchasing-selling, converting foreign currencies to serve credit activities, international payment and aiming to serve the business operation of the Branch. Executing other foreign relations banking services as ruled, authorizing of the General Director of BIDV; - Performing the service of authorized receivable and payable. Supplying the service of collecting and paying cash for customers; Performing other payment services delegated by the General Director of BIDV; 2.3 Capital mobilization Mobilizing short-medium-long term in Vietnam dongs and other foreign currencies from various domestic and foreign capital sources in all forms; - Receiving deposits, non-time deposits, time deposits, the deposits for payments of all organizations and civilians; - Issuing deposit certificates, domestic and international bonds when assigned by General Director of BIDV; - Performing other capital mobilization forms allowed by law; 2.4 Loaning and securing - Performing short-medium-long term loans in Vietnam dongs foreign currencies to entitled customers, BIDV; - Discounting valuable documents; - Performing securing services; - Performing credit professions after being approved by General Director of BIDV; + Being the key or member capital contributors to be engaged in co-sponsor of any investment projects exceeding the limit assigned and authorized by General Director of BIDV to the Branch Director; + Performing the profession of loaning, guaranteeing or re-guaranteeing for foreign organizations and individuals, except the case of responsive guaranteeing for foreign customers taking part in bidding, performing the contract in Vietnam and other cases instructed by the General Director of BIDV and/or distributing the levels; specifically delegated to the Branch Director; 2.5 Other activities - Performing the service of agent bank, managing the investment capital for the projects as requested by customers; - Supplying the steel safe service (storing, preserving and managing valuable papers, the precious documents and assets of customers); - Performing the activities after being approved by the General Director of BIDV; + Investing, repairing, improving and upgrading collaterals, mortgages which have been converted into the assets managed by BIDV for use or business. + Investing in the form of capital contribution, joint ventures, purchasing stakes and other forms of investing outside the BIDV system; + Dealing with gold, silver, precious stones (including imports and exports); - Performing other activities and tasks delegated, assigned by the General Director of BIDV; 3. The scope of operation - Geographically: BIDV Quang Trung Branch operating on the location of Hanoi City; - About the fields of operations: within the legal scope allowing BIDV to perform and regulations of BIDV; 4. Financial management - BIDV Quang Trung Branch can receive capital from BIDV, being responsible for the efficiency of using, securing and developing the assigned capital: + Performing rightly the regime to manage and use the capital according to the regulation of the State; + Purchasing insurance for the asset; + Accounting into the expense of risk reserves; - Performing rightly the Decree on Accounting and Statistics, accounting - and auditing regime; - Establishing the Quarterly, Annual financial reports according to the form, sending BIDV according to the present regulations; - Being responsible for the preciseness, honesty of the reported statistics; - Being active in business, ensuring growth to secure and develop the capital; - Enjoying privileges according to the State regulations; 2.3. Organizational machine I. Organizational model The organizational model of BIDV, Quang Trung Branch was built according to the model of modernized banking, in the orientation of renovation and advancement, suitable to the scale and operational characteristics of the Branch (details are as Appendix 1). 1. Directing the operations of the BIDV, Quang Trung Branch is the Branch Director. 2. Assisting the Branch Executive Director is one or several Deputy Directors, working as being assigned and delegated by the Branch Director; 3. The organizational model of the BIDV, Quang Trung Branch up to the end of 2006 is supposed as follows: 3.1. At the Branch headquarter includes: + Credit Department + Customer service department (including enterprise and individual customers) + International Payment Department; + Monetary – Budgeting Department; + Planning – Capital Source Department; + Assessment and Credit Management Department; + Finance-Accounting Department; + Personnel-administration Department; + Interior Supervising Department; + Computing Department; 3.2 The underlying unit: Nguyen Dinh Chieu Transaction Bureau. During the operational process, the organizational machine will be adjusted to correspond to the business operation situation of the Branch; 4. The BIDV, Quang Trung Branch is allowed to launch second level branches, Transaction bureau, Saving funds; Foreign exchange desk at necessary locations within Hanoi City area; being allowed to establish assistant counseling council if necessary such as: Credit council; Risk control council; scientific council, the Competition – Rewarding – Punishment Council … 5. The specific functions, tasks of the Departments, units under BIDV, Quang Trung Branch are instructed by the Director of BIDV, Quang Trung Branch; being suitable to the regulations of BIDV and operational requirement of the Branch. 2.2. Real situation of credit risks at Quang Trung branch 2.2.1. Real situation of overdue debts Situation of overdue debts at the branch has been cared by both the leading board and staff in recent years. From 2003- 2006, some main activities in precluding and managing risks has been done and achieved certain results such as classifying, evaluating risk of credit and overdue debts. The quality of credit is considered as the top objective of the bank. Therefore, the branch has broadened their market share, enhanced quality of bank loan. The branch also perfects the credit process, upgrades professional skills, dignifies the process of appraising projects, and ensures the effectiveness of projects. From that point, the credit capital of the branch has high coefficient of safety. Table 1: general situation of overdue debts Unit: VND billion Year Target 2003 2004 2005 2006 Loan turnover 1763 2200 2243 2280 Debt collecting turnover 1583 1829 2134 2230 Total debts 1670 2041 2150 2200 Gross overdue debts 10 8 12 16 Overdue debts/ total debts 0.60 % 0.39 % 0.56 % 0.73 % (Source: Credit department of BIDV) From the above table, we can see that the branch has positively activities in collecting bad debts as well as dealing with overdue debts. Overdue debts ratio is always lower than 1 % compared to the total debts. In detail, overdue debts over total debts are 0.60 % in 2003, 0.39 % in 2004 reduces in comparison with 2003.It means that the bank had certain methods and achievements in precluding and reducing risks. In 2005, the rate of overdue debts increased to 0.56 %. While the total debts grew to VND 109 billion, the overdue debts increased to VND 4 billion. Until 2006, the overdue debts ratio sharply increased to 0.73 %, an outstanding growth against three previous years. It demonstrated that there may be some unavoidable mistakes and risks. 2.2.2. Overdue debts classified according to economic composition Table 2.2: Overdue debts classified according to economic composition Unit: VND billion Year Target 2003 2004 2005 2006 Loan turnover to state- owned enterprises 1568 1800 1863 1100 Total debts 1495 1523 1800 1210 Overdue debts 2 4 7 10 Overdue debts/ total debts 0.13 % 0.26 % 0.39 % 0.83 % Loan turnover to private enterprises 195 400 380 1180 Total debts 175 518 350 990 Overdue debts 8 4 5 6 Overdue debts/ total debts 4.57 % 0.77 % 1.43 % 0.61 % (Source: Credit department of BIDV) Overdue debts of private enterprises accounts of large priority in comparison with state- owned enterprises. About total debts, total debts in state- owned field is 5 to 8 times of private ones. Thus, in terms of the bank’s benefit, the quality of credit provided to state- run enterprises is still low. At present, state- run enterprises operate not very effectively due to many factors, such as small financial potential, and not very high management ability. Some enterprises do not have clear business project, hence, they can not allocate the capital properly, work ineffectively, and are lack of responsibilities. This is one of the main reasons that leads to the case that the bank is afraid of lending private enterprises. Therefore, it creates drawback for them in expanding their production and business. In 2003, overdue debts ratio of state- owned block was 0.13 %. But in 2004, the ratio was two times higher than the year 2003, at 0.26 %. Whereas, total debts only increased by VND 277 billion. It demonstrated that the preclusion task get trouble. In 2006, overdue debts were 0.83 %, 3 times higher than the previous year, yet the total debts decreased much. It originated from the group of customers who built infrastructures, including of Head of company of Traffic Project Construction Number 8 and members, and some industrial customers, get matter because of inconvenient business environment. For example, Company 889 incurs overdue debts because they did not have new projects. Some of old projects such as QL2C- Tuyen Quang, Sai Gon- Trung Luong road, cross-asia road are still under construction. They gains low revenue and has not paid the bank. In case of Viet- Laos Company, they have completed projects such as QL54- Vinh Long, Vientiane road, QL57- Ben Tre. The problem is that they have not been audited and liquidated. This kind of lending is basically changeable. In the time being, the bank should pay attention to this subject. Some customers in industrial group such as Electrical Material and Mechanical Tools Company have equity capital/ total capital is very low (at 7 %), so profit coefficient is too low. The products which the company provides Electric Department are slowly paid. Or Artificial Board Processing Company also gets loss. For such customers, the bank had better have methods to overcome. 2.2.3. Overdue debts classified according to period Table 2.3: Overdue debts classified according to period Unit: VND billion Year Target 2003 2004 2005 2006 Bank loan turnover 1560 1790 1993 2080 Total debts 919 1231 1250 1500 Overdue debts 10 8 12 16 Overdue debts/ total debts 1.09 % 0.65 % 0.96 % 1.07 % 203 230 250 200 Total debts 751 810 900 700 Overdue debts 0 0 0 0 Overdue debts/ total debts 0 % 0 % 0 % 0 % (Source: Credit department of BIDV) In terms of period, short term loans account for higher rate compared to medium and long term loan. Medium and long term overdue debts are virtually zero. The reason is that every credit officers was fully aware of the leading spirit of the BIDV to raise the quality of credit. The Office only focus on investing into customers who have sufficient conditions such as healthy financial situation, for example: Tran Phu Mechanics and Electrics Company, Central Pharmacy Factory Number 1, etc… Overdue debts are mainly short term debts. Medium and long term overdue debts are uncommon. The main reason is short term debts are less risky than other kind of debts. In 2003, the rate of short term overdue debts was 1.09%, reduced to 0.65% in 2004. It was a positive sign. In 2005, this rate increased to 0.96%, 1.5 times higher than the previous year and overdue debts increased by VND 4 billion. It is not a good symbol for the bank. But there are many events and difficulties for companies who borrow short term loans. Facing difficulties in doing business and high inflation make them collect debts slowly leading to pay the bank slowly. The rate continued to increase to 1.07%, in 2006. It demonstrated that the bank should consider and reorganize lending mission and risk preclusion. 2.2.4. Debts collecting capability and overdue debts Table 2.4: Debts collecting situation Unit: VND billion Year Target 2003 2004 2005 2005 Lending revenue 1763 2200 2243 2280 State- owned 1568 1800 1863 110 Private 195 400 380 1180 Debt collecting revenue 1583 1829 2134 2230 State- owned 1418 1772 1586 1476 Private 165 57 548 754 (Source: Credit department of BIDV) From the table, we can see that the debt collecting capability of the Office is pretty high, is always approximate to the lending revenue. In detail, in 2003, the lending revenue was VND 1763 billion while debt collecting revenue was VND 1583 billion. In 2004, the Office lent VND 2200 billion and collected VND 1829 billion, a sharply increase compared to the previous year. Especially, in 2006, the Office lent VND 2280 billion and collection achieved VND 2230 billion. Debt collecting revenue gets higher level than the lending revenue. There is a fact that BIDV has outstanding debt collecting situation than other commercial banks in the area. It is caused by considering quality of credit as the top- ranking objective, not the growth of total debts. According to the information of Credit department of BIDV, overdue debts collecting capability of the Office is above 80% of total overdue debts. In general, overdue debts ratio is too small (< 1 %), thus, it is acceptable. In coming years, the Office will try to maximize the rate. 2.3. Causes of risks 2.3.1. Causes from the bank The process of assessing projects The beneficiaries are still insufficient. In order to lend a loan, credit officer is the one who do almost every phase. They have to gather information of the customers, analyze and evaluate customers, consider the possibility and liquidating capability of the projects, check the value and legality of guaranteed assets as well as tackle with those assets in necessary conditions. After assessing customers and project- related issues, the credit officer forms a statement of assessing, and proposes whether to lend or not. With such kind of process, the officer has much responsibility and mistakes are unavoidable. Hence, the officer’s morality and intuition will decide the safety of the credit. In addition, credit officers have not obeyed all credit principles although the bank has tight credit principles. It is also one of the reasons that cause risks. Lack of concrete information of customers Although they have used many information collecting methods, they still do not get enough and exact information. One reason is that the infrastructure used for collecting information is limited. It prevents employees from gathering information sufficiently and timely. Besides, the Office faces difficulties in checking exactitude of the information provided by customers. But the companies usually send information to cope with the bank, not the exact one. Inaccurate information easily causes risks. The bank’s system of precluding and reducing risks has not met the requirements in approving, lending and managing capital for customers. So it is not the main source of information. The bank cannot shirk risks. Recently, with more investment into infrastructure and technology, these centers progressively affirm its position. In the previous year, CIC has gotten many improvements such as periodical warning information about customer list that have credit relationship in many credit organizations, and financial situation. These are extremely useful information in approving and deploying customers- a channel which provides information effectively. Irregular internal control The staff of checking department is still insufficient with large volume of work. In addition, infrastructure and technology are still low- conscious. The current Incas system will supervise more effectively if it is invested more supporting soft wares. Unequal professional skills and experiences Beside the senior employees, there are also newly- graduated employees. Thus, they have little experiences in dealing with situations when they meet the leaders of enterprises. Customers coming from many industries require very big effort of credit officers in self searching for related knowledge. Therefore, management is difficult. 2.3.2. Objective reasons These are reasons rising from customers as well as business environment that cause credit risks. Customers lack of conditions to borrow It makes the customers make up reports of credit documents. So they can satisfy all conditions about customers’ capital, collaterals, possibility of projects. In medium and long term credit, customers’ capital must account for 30- 50 % of total capital. The customers provide inexact, in sufficient and untimely information, to make difficulties in checking and controlling process of the bank. Limited management ability Big customers usually have complex management model including many intermediaries. So they face many difficulties in managing business. Legal environment Law of State Bank and Law of Credit Organizations have created a legal corridor for the activities of commercial bank. It steers legally and efficiently the business operations of the banks. But it is not sufficient and scientifically enough. There are still overlapped and not synchronous. It makes contradiction among laws. In fact, appropriate authorities who provide legal documents of assets have to deal with many difficulties. Accounting and Statistic Ordinance and accounting standards of Ministry of Finance is low validity in forcing customers follow the law. This leads to the case of not timely payment, spare documents, not obey compulsory audition system and inexact figures. On the other hand, banking system today is not actually united in many fields such as interest rate, borrowing conditions. Although competition is the motivator of development, in business, currency has it specialty. Especially, interest competition made the banks heavily failed in the end of 2006. Whereas, other state- owned commercial banks has committed to adopt interest rate of Association of Vietnamese Banks. Consequently, they could not carry out. It made interest competition wave be continued. If the State Bank does not interfere, the banking situation will have many changes. All the above basic reasons alternately and inseparably influence on the banks’ activities. T