NATIONAL ECONOMICS UNIVERSITY NAME ADVANCED EDUCATIONAL PROGRAM BACHELOR THESIS Major Topic:…………. Student’s name MAJOR YEAR HANOI, 2017 NATIONAL ECONOMICS UNIVERSITY ADVANCED EDUCATIONAL PROGRAM BARCHELOR THESIS Topic: SOLUTIONS TO REDUCE CREDIT RISK IN AN BINH COMMERCIAL JOINT STOCK BANK – HOANG QUOC VIET BRANCH Student: Nguyễn Thùy Giang Speciality: Finance Class: Advanced Finance 55A Student’s ID: 11130980 Supervisor: Acc. Đặng Ngọc Đức HANOI, 2017 ACKNOWLEDGEMENTS I would like to express my sincere gratitude to Associate Professor Dang Ngoc Duc for his supervision, guidance, and encouragement from the initial to the final level of the thesis. Also, I would like to thank National Economics University teachers and fellow friends in helping me to broaden my view and knowledge.
My deepest appreciations to Mr. Minh Nguyen – relationship officer of An Binh Commercial Joint Stock Bank – in guiding and helping me collect information in the internship period. And my deepest gratitude to my parents in supporting me. Lastly, I offer my regards to all of those who supported me in any respect during the completion of the thesis.
TABLE OF CONTENT Introduction Chapter 1 – Theoretical framework of credit and credit risk in commercial banks 1. Overview of credit 1. Definition of bank credit 1. Features of bank credit 1.
Roles of bank credit 1. Bank credit classification 1. Bank credit processes 1. Overview of credit risk 1.
Definition and signs of credit risk 1. Classification of debts in commercial banks 1. Causes of credit risk 1. Impact of credit risk 1.
Overview of credit risk management 1. Definition of credit risk management 1. Credit risk management processes 1. Factors influencing credit risk management in commercial banks Chapter 2 – Current situation of credit and credit risk of ABBANK – Hoang Quoc Viet Branch 2.
General introduction of ABBANK – Hoang Quoc Viet Branch 2. Current situation of credit risk of ABBANK – Hoang Quoc Viet Branch 2. Provision for loan losses 2. Credit risk management in ABBANK – Hoang Quoc Viet Branch 2.
General assessment of ABBANK – Hoang Quoc Viet Branch’s credit risk management 2. Reasons for limitations Chapter 3 – Orientations, recommendations and solutions to reduce credit risk in ABBANK – Hoang Quoc Viet Branch 3. Orientations of credit risk management in ABBANK – Hoang Quoc Viet Branch 3. Orientations of credit activities 3.
Orientations of credit risk management 3. Solutions to reduce credit risk in ABBANK – Hoang Quoc Viet Branch 3. Enhancing the information collection and use in credit activity 3. Improving lending activity 3.
Improving the human resource quality 3. Monitoring and inspecting loans after lending to customers 3. Limiting losses when credit risk occurs 3. Recommendations to ABBANK 3.
Recommendations to the Government, the SBV, and other related agencies Conclusion References STATUTORY DECLARATION I herewith formally declare that I myself have written the submitted Bachelor Thesis independently. I did not use any outside support except for the quoted literature and other sources mentioned at the end of this paper. I clearly marked and separately listed all the literature and all other sources which I employed producing this academic work, either literally or in content./ 2017 Signature ABBREVIATIONS ABBANK An Binh Commercial Joint Stock Bank CIC Credit Information Center SBV State Bank of Vietnam LIST OF TABLES Table 2.1 Results in capital mobilization Table 2.2 Results in credit activities Table 2.3 Total outstanding loans classified by debt group Table 2.4 Overdue debts Table 2.5 Bad debts Table 2.6 Provision for loan losses LIST OF FIGURES Figure 1.1 Bank credit classification Figure 1.2 Bank credit processes Figure 2.1 Organizational structure of ABBANK – Hoang Quoc Viet Branch EXECUTIVE SUMMARY This thesis aims to study how credit risk affects commercial banking operations, and then propose solutions to minimize it. This thesis depicts real situations of credit risk management in a commercial bank, namely ABBANK – Hoang Quoc Viet Branch.
Credit risk is one of the oldest and most important forms of risk faced by banks as financial intermediaries. Managing this kind of risk is always one of the predominant challenges in running a bank. Chapter 1 is for the introduction of fundamental concepts of credits and credit risk, how they affect a commercial bank in particular. Rules and factors of bank credit are also briefly discussed as well as the very basic idea of other risks in banking operation.
Types of credit risk were mentioned, of course, then the chapter ends in exposing subjective and objective causes of credit risk. Chapter 2 gives a picture of ABBANK in general, and its Hoang Quoc Viet branch in particular with recent business activities such as capital mobilization, lending, etc. Credit risk management’s real situations in three years are thoroughly analyzed and explained according to different type of bank credit. Underlying reasons for the pattern of credit risk are discovered and presented.
Chapter 3 aims at proposing recommendations and solutions for the complex circumstances around ABBANK – Hoang Quoc Viet Branch’s credit risk management. It also suggests strategies for lending activities in next several years. INTRODUCTION Rationale One remarkable feature of world economy in recent decades is the fast development in financial sector and banking industry. It is clear that striving for a prosperous financial and baking attracts more and more attention, wisdom, and knowledge of humanity.
Following the world’s trend as well as positive changes of country, especially after Vietnam officially joined the International Trade Organization (WTO), in recent years, Vietnam’s banking system has made significant changes in structure, scale, and diversification in the term of organization types. Commercial banking system is expected to continue to promote its roles to support in capital, investment, and financial services to make economic growth prosperously and stably. Banks perform different services: deposits, loans, remittance services, payment transactions, etc. The modern world banking trends to operate more kinds of services to make more profit.
However, in the current period, in most countries including Vietnam, the main source of income is from credit activities. ABBANK – Hoang Quoc Viet Brach belongs to ABBANK and operates in Hanoi. In the past few years, in spite of significant achievements on many aspects, this bank also has to confront with difficulties in managing credit risks. To assert its position in the market, ABBANK – Hoang Quoc Viet Brach needs to find solutions to manage credit risks smoothly and efficiently.
That is the main reason I chose the theme “Solutions to reduce credit risks in An Binh Commercial Joint Stock Bank – Hoang Quoc Viet Branch” as the topic for my graduation thesis. Objectives To study the general theory of bank credit in business activities of commercial banks. To analyze and assess the real situations of credit risk at ABBANK – Hoang Quoc Viet Branch. 1 To propose solutions and recommendations to reduce credit risks at ABBANK – Hoang Quoc Viet Branch.
Methodology Document research method: Researching documents relating to the topic from many sources such as books, research papers, newspapers, internet and also documents provided by ABBANK: annual report, financial report, internal documents, etc. Data collection method: Collecting information and figures that could be useful for the topic. In this thesis, the data of ABBANK was over three years (2014- 2016). Data processing method: - Comparative method: Comparing figures over the years to evaluate the fluctuation of each indicator.
- Data analysis method: Based on all the information collected and compared above, considering and analyzing every elements relating to credit risk. - Data synthesis method: Based on the analysis results, summarizing all the information in order to make final assessment and recommendations. Scope Research subjects: Credit and credit risk Research scope: - Time: The data was conducted in three years from 2014 to 2016 - Space: ABBANK – Hoang Quoc Viet Branch Research structure Apart from the introduction, conclusion and appendix, the thesis includes three chapters: Chapter 1: Theoretical framework of credit and credit risk in commercial banks. Chapter 2: Current situation of credit and credit risk of ABBANK – Hoang Quoc Viet Branch.
Chapter 3: Orientations, recommendations and solutions to reduce credit risk in ABBANK – Hoang Quoc Viet Branch. 2 CHAPTER 1: THEORETICAL FRAMEWORK OF CREDIT AND CREDIT RISK IN COMMERCIAL BANKS 1. OVERVIEW OF CREDIT 1. Definition of bank credit Credit refers to the granting of a loan and the creation of debt.
Credit is considered as mutual relationship between lenders and borrowers with promise to repay both principal and interest after a certain period. Credit reflects an economic relationship in which individual or organization gives another individual or organization the right to use an amount of asset with specific conditions about interest rate, time of repayment, and payment method. Bank credit activities include lending, discount, guarantee and financial lease. Therefore, credit is a broader concept than lending because it includes lending.
However, among those credit activities, lending is the most important and accounts for the largest proportion of almost commercial banks. For this reason, the terms ‘credit’ and ‘lending’ are often used interchangeably. Features of bank credit First, the decisive element of a credit is the bank’s trust in the proper use of the loan and the borrower’s ability to repay it on time, while the borrower believes in themselves’ possibility of earning money in the future to ensure the repayment of principal and interest. Second, credit is the transfer of the right to use an amount of money or property from one party to another, rather than altering the ownership of it.
Credit granted to customers is from the mobilized capital of the bank, which are mainly deposits of individuals and organizations from inside and outside the country. Consequently, customers only receive a ‘temporary’ amount of money and use it for the purpose they have committed to the bank. Third, credit always has time-limit and must be unconditionally refunded. The bank performs the function of "borrowing for lending" so maturity date is necessary for all credits to ensure that the bank is always ready to use funds for other borrowers or to 3 reimburse when the depositors need withdrawing.
Since the customers are not the real owner of the loan, it is apparent that they have to commit to unconditional repayment to the bank. Fourth, credit value is not only preserved but also increased because of interest rate. The repayment value must be greater than the loan value as customers must pay for the right to use that loan. The amount of interest is always positive to compensate for operating costs as well as to make profit for the bank.
Fifth, the most basic feature of credit is the potential risk. Even if customers are willing to pay debts, many other elements could easily cause difficulties such as unfavorable business environment, fluctuations of economic indicators, force majeure, etc., and consequently, the bank faces with credit risk. Roles of bank credit Bank credit has a great deal to do with the economic health of its region; it supports communities and nations by providing credit to finance the development of new businesses, sustain existing activities, and create jobs so that living standard can grow over time. Bank credit helps to increase economic efficiency.
Enterprises usually do business based on equity and debt. One of the important sources of debt is bank’s loans, because this kind of source usually meets firm’s demands in term of quantity and duration. Inversely, in order to borrow money from bank, enterprise has to do business effectively to meet bank’s requirement. As a result, enterprise must change time by time, search new market, develop technology… and these things increase market efficiency.
It also contributes to market’s continuous movement, increases money transferring, and supports business strategies, monetary policy. Bank credit classification In order to catch up the market’s development, meet the customers’ needs and increase the competitiveness, commercial banks have been developing various forms of credit.