MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECNOMICS HOCHIMINH CITY ---- K --- BÙI NGUYÊN NGỌC CREDIT RISK MANAGEMENT: CASE STUDY OF BIDV MASTES’S THESIS In Banking Ology code: 60. Nguyễn Văn Phúc Ho Chi Minh City – 2010 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ACKNOWLEDGMENT I owe a debt of gratitude to many people who helped me complete this thesis. I would like to acknowledge the help of all. First of all I would like to express my deepest acknowledgement to my supervisor, Doctor Phóc Nguyễn Văn, for his valuable advice and recommendations.
Then, I would like to thank my superiors and colleagues who agreed to be interviewed and/or completed the survey questionnaires. The information they provided, especially from managers/vice managers, allowed me to get deeper understanding about credit risk management in BIDV and deriving the findings of this study. Finally, I want to express my sincere thanks to every member of my family for their encouragement and support during the time I devoted to this dissertation. Page i LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABSTRACT Credit risk is one of the most popular risks in banks due to their intermediary functions: lending and borrowing.
An excessive level of credit risk may destroy not only banks’ profitability but also the stability of global banking system. Therefore, it is necessary for banks to develop an effective credit risk management strategy not only to protect themselves but also to prevent banking crises. In case of BIDV, BIDV is one of four State Banks established when Viet Nam banking system is at a very early stage of development. For a long time, BIDV was controlled in allocating loans by government.
Therefore, credit risk management has been the main challenge facing the board of BIDV managers. With the best try of this board, since 2008, BIDV has controlled credit risk that comply with international standard (non-performing-loan ratio was less than 3%). This is the main reason that drove this study to describe credit risk management in BIDV, to know why non-performing loan ratio in BIDV has been sharply reduced from 38. Both secondary data and primary data are needed for this study.
Collected data is analyzed by Statistical Package for Social Studies version 16. Cronbach alpha is used to measure coefficient of reliability and t-test technique is used to test the hypotheses about the four factors influence reduction of non-performing-loan ratio in BIDV. These techniques and tools help collected data transform into information that will answer the researcher’s questions. Page ii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF FIGURES Figure 1.1: Structure of chapter 1.2: Field of research problem .3: Method of secondary data.4: Population and sampling.5: Quota sampling method.6: Structure of the study.1: BIDV Organization Chart .2: BIDV’s non-performing loans .3: BIDV’s loan structure by collateral .4: BIDV’s loan structure by economic sector.2: Respondents’ working years in BIDV.
58 Page iii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF TABLES Table 2.1: Level of specific provision .2: Example of a loan rating system and bond rating mapping .3: Strategies for reducing and scoping with portfolio credit risk .1: BIDV’s key performance indicators.2: BIDV’s credit indicators .3: Loan classification in BIDV.4: Summarize four factors influencing NPL ratio in BIDV.1: Four variables with different aspects .2: Level of agreement in survey questionnaire .3: The overall score of Cronbach’s alpha.4: The t-test result.5: Summary of hypotheses testing results. 64 LIST OF APPENDICES Appendix A. 79 Page iv LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com TABLE OF CONTENTS Acknowledgment. ii List of figures .iii List of tables.
iv List of appendices. iv Table of contents .2 Rationale of the study.3 Statement of the problem and the scope of the study .4 Research questions and objectives .6 Significance of the study .7 Structure of the study. 12 Chapter 2: Literature review .2 Basic functions of banks.1 The board of directors’ written loan policy .4 Credit risk in banks .3 Loan loss provision. 20 Page v LUAN VAN CHAT LUONG download : add luanvanchat@agmail.4 Non-performing loan .5 Credit risk measurement.6 External factors that affect the level of credit risk .2 Supervision and re-regulation .4 The recent financial crisis.7 Internal factors that affect the level of credit risk.
35 Chapter 3: Case study of BIDV .2 Overview of BIDV.3 BIDV business performance .2 Non-performing loans and loan loss provision .4 Internal factors that influence non-performing-loan ratio in BIDV. 51 Page vi LUAN VAN CHAT LUONG download : add luanvanchat@agmail. 55 Chapter 4: Data analysis and findings .2 Data collection results .2 Measures of reliability .3 Statistical hypotheses testing (t-test).4 Comparison and discussion of findings.5 Result of hypotheses testing. 64 Chapter 5: Recommendation and Conclusion.2 Reviewing research questions .3 Recommendation for BIDV .4 Recommendation for other banks .5 Limitation of the research .6 Summarizing and concluding the dissertation.
70 Page vii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER ONE INTRODUCTION 1.1 Introduction: This chapter provides a general introduction to the research study. The purpose is to establish foundations for following chapters and the study as a whole, by providing a general picture of the study. This chapter is structured into seven sections as presented by figure 1.1 provides a general introduction to the chapter and section 1.2 examines the research background where the research problem is identified.3 defines the statement of the problem and scope of the study.4 which includes two subsections 1.2 defines the research questions and research objectives.1 addresses the research questions that will be respectively answered in chapters of the study.2 presents research objectives that the study covers in the process of solving the research problem defined.5 discusses the aspects of research methodology such as selecting from alternative types of research, research design and research techniques.6 points out the significance and scope of the study, and finally section 1.7 describes overall structure of the thesis. Chapter 1: Introduction Page 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Section 1: Introduction Section 2: Rationale of the study Section 3: Statement of the problem and scope of the study Section 4: Research questions and objectives Section 5: Methodology Section 6: Significance of the study Section 7: Structure of the study Figure 1.1: Structure of chapter 1 1.2 Rationale of the study: In today’s world, in order to meet customers’ requirements, there is a need for banks to diversify their business including other activities such as payments, leasing, and investments besides the two traditional functions of lending and borrowing.
However, lending still plays an important role in banks because banks’ revenue primarily comes from lending revenue which contributes over a half of bank total operating (about 70% in case of BIDV). The traditional way that banks make their profit is to take risk in exchange for an acceptable return to not only cover the cost of funding but also maintain their profitability. Thus, the main business of banks is not, as everyone might assume, taking deposits and making loans but minimizing the risk in collecting interest and principle from the loans which is known as managing credit risk (Burton & Lombra 2006). Chapter 1: Introduction Page 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Credit risk is usually associated with banks because of their intermediary function which is channeling funds from people who have fund surplus to those who have fund deficit for their investment opportunities (Mishkin & Eakins 2006).
Historically, financial crises are usually derived from the failure of banks to manage credit risk from poor quality loans or high probability of customers’ default (Yarbrough & Yarbrough 2006). In case of BIDV, BIDV is one of four State Banks established when Viet Nam banking system is at a very early stage of development. For a long time, BIDV was controlled in allocating loans by government. Therefore, credit risk management has been the main challenge facing the board of BIDV managers.
With the best try of this board, since 2008, BIDV has controlled credit risk that comply with international standard (non-performing-loan ratio was less than 3%). This is the main reason that drove this study to describe BIDV credit risk management, to know why non-performing loan ratio in BIDV has been rapidly reduced from 38.3 Statement of the problem and scope of the study This study conducts with particular emphasis on why non-performing-loan ratio in BIDV has been rapidly reduced from 38. Stemming from the reason mentioned in the rationale part, this research will focus two main parts: First is credit risk management background; second is case study of BIDV credit risk management. The first part provides some background knowledge about credit risk, credit risk measurements, management and the factors that influence credit risk.
The second part analyses BIDV’s case in reducing non- performing-loan ratio. This part presents three main subparts including overview of BIDV; analysis credit activities, application of credit risk management theory to its credit activity practice; consideration of four factors including credit information, technology, credit staff and loan policy during the period 2004-2009, and suggesting hypotheses. These analysis and consideration help the researcher realize that credit risk management is one of significant achievements of BIDV because at the end of 2009, BIDV has controlled credit risk under international standard (non-performing- Chapter 1: Introduction Page 3 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com loan ratio was less than 3%). Maybe there are many reasons leading the success of BIDV.
In scope of this study, four factors including credit information, technology, credit staff, and loan policy will be examined as the main positive factors that influence credit risk management of BIDV. The four factors will be presented throughout this study. Firstly, this study reviews literature related to the four factors and credit risk management theory. Secondly, by analyzing BIDV’s credit business practice, this paper shows how the four main factors influence BIDV on reducing non-performing-loan ratio.
Finally, findings from the survey by questionnaires confirm the above relationships. Credit staffs Credit NPL ratio in Technology information BIDV Loan policy Figure 1.2: Fields of the research problem 1. Research Questions and Research Objectives: 1.1 Research Questions Research questions involve the research translation of “problem” into the need for inquiry (Zikmund, 1997, p. The research problem defined above leads to the following research questions: •What are factors that influence non-performing-loan ratio in BIDV? •How has BIDV applied credit risk management theory to practice? Chapter 1: Introduction Page 4 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.2 Research Objectives This study is conducted with the purpose of: •To know the main factors leading to BIDV success in reducing non-performing loan ratio, •To consider whether BIDV applies theory to manage its credit risk or not.3 Research hypotheses Aiming to confirm the influence of four factors including credit information, technology, credit staffs and loan policy on reducing non-performing-loan ratio in BIDV, the researcher assumes hypotheses as follows: H1: Credit information variable influences non-performing-loan ratio in BIDV.
H2: Technology variable influences non-performing-loan ratio in BIDV. H3: Credit staffs variable influences non-performing-loan ratio in BIDV. H4: Loan policy variable influences non-performing-loan ratio in BIDV.5 Methodology The research methodology includes research design, data collection and data analysis.1 Research design: provide a road map of the whole research, The researcher undertakes both qualitative and quantitative approach to this study since both numerical data (BIDV’s performance indicators, BIDV’s business lending indicators, level of agreement about factors that influence non-performing- loan ratio, ) and non-numerical data (respondents’ background, position and their suggestion to help BIDV continuously reduce non-performing-loan ratio, ) are needed to answer the research questions.Zikmund (1997), there are four basic design techniques: survey, experiment, secondary data and observation. This research utilizes both survey and secondary data methods.