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INTRODUCTION 1. Rationale Risks are an inevitable issue in any business in which the more profit a business can bring out, the more risky it is. In the banking sector in which money is the key goods, if risks, in general, or credit risks, in specific, occur, it is believed to be such diversified forms and farreaching scale that it can distort and adverse the business achievements. Therefore, there has been great concern about credit risk management nowadays. In the early 1990s, the collapse of the credit collective societies and the bankruptcy of banking based loan enterprises is a proof for the incompetent credit system that was not nimble enough with the transitional economy. In another word, policydriven lending practice throughout 1990s and limited credit assessment skills in the wake of rapid credit growth, led to the accumulation of nonperforming loans. To address this concern, the Vietnam government embarked on an important overhaul of the banking system through a multiyear restructuring and recapitalization program. Although a host of adjustments has been implemented, a credit risk is a tricky issue for the banks
INTRODUCTION Rationale Risks are an inevitable issue in any business in which the more profit a business can bring out, the more risky it is In the banking sector in which money is the key goods, if risks, in general, or credit risks, in specific, occur, it is believed to be such diversified forms and far-reaching scale that it can distort and adverse the business achievements Therefore, there has been great concern about credit risk management nowadays In the early 1990s, the collapse of the credit collective societies and the bankruptcy of banking based loan enterprises is a proof for the incompetent credit system that was not nimble enough with the transitional economy In another word, policydriven lending practice throughout 1990s and limited credit assessment skills in the wake of rapid credit growth, led to the accumulation of non-performing loans To address this concern, the Vietnam government embarked on an important overhaul of the banking system through a multi-year restructuring and recapitalization program Although a host of adjustments has been implemented, a credit risk is a tricky issue for the banks to deal with Nowadays, given the current global financial crisis that brings many financial institutions to its knee and ravages every economic sector, Vietnam cannot step outside the overwhelming trend A commercial Military bank, though newly founded, achieved great success in its short life span Yet, credit risk continues to be the leading source of problems As the result, I chose “Current situation of credit activity and solutions to the credit crisis at the Military commercial bank the period of 2005-2007” as the title for my thesis Scope of the study Due to the restriction of knowledge as well as the late release of annual report 2008, in this thesis, the author only concentrates on the situation of credit and the management of credit risk of MB during 2004-2007 Objectives of the study The objectives of the research study are: - To identify the factors which make MB vulnerable to credit risk - To determine the difficulties or problems in MB’s credit management - To provide recommendations for the MB and implication to the Vietnamese authorities with a view to improve the credit quality Methodology The author took advantage of information sources : primary sources which was collected from diligent observation during the author’s internship and secondary sources from newsapaper, the internet, the company’s catalogue and annual report, together with the record of department of credit management., the author made an analysis on the data collected to bring out the most exact assessment and solution Structure The thesis includes three parts The first part named " theoretical background’” which gives you the basic knowledge about the banking system in Vietnam, the risk types that any commercial bank must confront and specific information about credit risks-its signal and its characters The second chapter is “The current situation of credit at MB” which embodies the financing activities, credit offerings as well as my own evaluations on those activities Besides, in this chapter, I also mention the current measures being used to minimize the credit risks After analyzing the situation to grasp the overall picture of credit activities and credit risks, chapter named “Suggestions to prevent and minimize the credit risks”, I would like to make some recommendations to MB With the aim to reach a synchronized set of measures I also make implications to the government, State bank and local authority CHAPTER 1: THEORETICAL BACKGROUD 1.1 Overall the Vietnamese banking system Different from other Western countries where there are three types of banks: state bank, commercial banks and investment banks, Vietnam legislation system acknowledge two main types of banks: state bank and commercial bank Table 1.1 Vietnamese banking system State bank Urban Rural State-own Branches JointRepresent joint-stock joint-stock commerci of foreign venture ative banks (38 bank al bank (6 banks (33 banks (5 offices of Each country only has one and only Statebank The main function of licensed banks) branches) banks) foreign Statebank of Vietnam is to issue note as well as to manage, implement and supervise the monetary policy State bank is also the last resort for commercial bank in case it is on the verge on bankruptcy However, according to Vinacapital assessment, unlike other State bank of other countries, Vietnam’s Statebank also takes part in money trading as the main shareholder of six state-own commercial bank, which, therefore, more or less, resulted in the inequality in competition between state-own commercial banks and other banks Commercial banks’ main function is the bridge among individuals and corporate in which they inject idle money to the place of demand More specifically, commercial bank accept deposits( liabilities) which include current account and term account and make loans (credits) which is composed of personal, commercial and real estate loans The spread between mobilized interest and the lending interest a huge profits that commercial banks can reap at the cost of increasing risk such as credit risks, operational risks and liquidity risks Perceived from the definition, commercial banks in Viet Nam are comprised of: 38 licensed joint-stock urban banks, state-own commercial banks, 33 branches of foreign banks and five joint-venture banks The representative offices of foreign banks not perform commercial function because its main function is to make market research and to supervise the projects, which are sponsored by foreign institutions Based on Vinacapital’s report 2007, although four main state-own commercial banks account for nearly 70% capital market, their market share gradually shrinks by 0.5% per year due to the accelerating competitions from the joint-stock banks and foreign banks Yet, three state-own banks still holds the largest assets in which Agribank is VND 15,000 billion, Viettinbank is VND 9,000 billion and BIDV is VND 7,500 billion In 2008, Vietcombank with VND 4,430 billion capital went public to be the largest joint-stock commercial bank, yet, SCIC hold more than 90% of share total While the total asset of 37 joint-stock banks is about VND 30 billion which means each bank only possess about billion VND This fact restrains their lending activity due to insufficient capital Besides, Vinacapital’s judgment shows that Vietnamese banking market lacks tranquility which is manifested by the fact that a bank must count on relationship to borrow idle money from other banks on the inter –banking market rather than its competence 1.2 Banking risks 1.2.1 Def of risk and banking risk When doing business, beyond your expectation, you have to face with risks However, if the incoming risks are anticipated to some extends, company would minimize losses from the risks So what is risk? Risk is defined as the mishap that results in damage or the certain mishap that is related to unexpected event Risk is considered as the cause and the result of ineffective business activities Standing against risk, there are two options for enterprises: being eliminated or striving Banking risks are those likely-happened events which deal a heavy blow on banking expense, profit, reputation as well as asset Unlike other business, the commercial not only compete with others on the expertise field but also on relations with customers Therefore, the risks a bank has encountered also double 1.2.2 Classification of banking risks It is obvious that banking risks can be categorized by various criteria However, because this thesis is about to analyze the credit risk of Military Bank, it would be appropriate to classify risks based on the activity scope There are seven types of banking risks: a Credit risk Credit risk is defined as the potential that a bank borrower fail to meet its obligations in accordance with specified terms in the credit agreement b Price fluctuation c Interest risk Interest risk occurs when interest has to be modified beyond expectations, which leads to the decline in spread between mobilized interest and lending interest This cause of risk may lie in the fluctuation of the market interest at the certain time It also the result of the long-term imbalance in the equity and investment or using a fixed interest rate for the medium and long-term lending project d Foreign exchange risk This type of risk adheres to the foreign exchange variation which may result in the loss value or added value for foreign-currency loan that put bank or lender at jeopardy e Liquidity risk In finance, liquidity risk is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit) However, with regard to the banking term, liquidity risk is the sudden surge of withdrawals that can leave the financial institution in the condition of liquidating its assets in a short period at low price To survive in that situation, commercial banks have no option but borrow cash from inter-bank market or Statebank’s injection f Operation risks Operation risk is inevitable for any type of business The larger scale the bank is, the more types of service it offers, the riskier a bank may take These risks emerge from non-financial issues such as technology (ATM breakdown), employees (staff’s morality), customer relations (contractual dispute), and capital assets (destruction of flood or drought) g Legal risk Legal risks take their roots from the uncertainty in interpretation of contracts, laws and regulations As the results, commercial banks can get so confused that they may follow one rule, which is against the other rules h Reputation risk However, credit risk is still the major cause of bank failures due the fact that approximately 90% bank’s revenue generated from the credit activities Therefore, the effective management of this risk is central to a commercial bank’s performance 1.3 Credit risks of a commercial bank Banks activities often involves in all economic periods, thus, dangers that are exposed to the economy as a whole are believed to be the dangers to banks as well Although each bank has different considerations for credit risk management, it is hardly denied that credit risk is an inherent part of banking activities 1.3.1 Def of credit risk Credit risk is defined as the likelihood of loss the financial institutes suffer in their banking activities due to customer’s default on their commitment or customer’s inability to perform their commitment (article2, resolution 493/2005/QD-NHNN, released on 22/04/2005) Credit risk is often involved in the credit activity-the most important activity to determine whether bank can bear fruit from its wise lending or suffer loss from the bad debts No matter how hard bank tries to analyze the borrower’s capacity, it hardly foresees all possible scenarios Not mention to the credit staff’s competence, borrower’s capacity may be altered due to unexpected events Therefore, the risk is inevitable, yet, what is needed to is how to minimize it 1.3.2 Types of credit risks When a due loan is not performed or the clients’ business appears to deteriorate, banks stand at the verge of credit risk Realizing which loan is likely to make the bank run through the credit risk is a need; the State Bank of Vietnam promulgated a decision on loan classifications and provisioning for bad debts of credit institutions Under the resolution 493/2005/QD-NHNN, released on 22/04/2005, amended on 25/4/2007, loan portfolio falls into specific categories as follow: Table 1.2 Credit risk classification Rating Name Description Provision Standard Undue debt whose principle and interest group Group are assessed to be fully recovered when they 0% become due Group Special Debts overdue for less than 90 days and mention rescheduled debt is no longer due 5% according to scheduled term Group Substandar Debts overdue between 91 days and 180 d days and rescheduled debt is over due for less than 90 days according to scheduled 20% term Group Doubtful Debts overdue between 181 days and and bad 360days and rescheduled debt is over due debt between 91 days and 180 days according to 50% scheduled term Group Lost- Debts overdue between 361days and liquidation rescheduled debt is over more than 180 100% days according to scheduled term Debts can be upgraded or downgraded based on the assessment of the credit institutions of the ability of the borrower to pay An overdue or non-performing loan is defined as a loan classified under group 3, 4, In Vietnam, MB is one of the first movers in applying the policy on customer rating which issued under Article 7, decision no 493/2005/QD-NHNN dated 22/04/2005 This policy would help MB manage effectively risks in credit activates in particular and the whole performance of the bank in general 1.3.3 Cause of risks 1.3.3.1 Objective causes Credit activities probably have direct and massive impacts on the economy and in return, they are influenced by the objective factors from society Thus, every commercial bank should realize the cause of those risks Firstly, the political issue and legal systems likely affect the business activities as a whole and credit activities in specific Government policy is the macro economic policy compiled of the fiscal policy, monetary policy and other foreign policy The effect of those policies often deals great impact on GDP, employment, inflation and foreign exchange rate It is shown that every changes in the macro policy resulted in the verification in interest rate, exchange rate and credit condition which causes the instability in monetary business and heavily take its toll on the commercial banks Besides, legal system, which is cumbersome and nontransparent, apparently lags behind the speed of development of banking system; yet, this legal requirement for borrowing is so instable that the borrower hardly takes grasp of Those factors contribute to put bank into jeopardy Secondly, risks in the commercial bank likely come from the economic environment associated with the nature of Market mechanism, inflation, foreign exchange rate, interest rate and unemployment rate The market mechanism including the competition rules, supply-demand rule and price rule is considered as the invisible hand controlling all business transaction When customers find the interest rate and customer-care service of one bank less appealing, they will rush to banks that are more attractive This means, in a short of time, they lost their competiveness- they loss an enormous amount of mobilized money, then, they cannot afford their lending activities, they stand a risk of credit Similarly, when the economy grows at fast pace, enterprises thrive positively and generate high earnings; it is obvious debt collections of commercial banks are probably easier and bad debts are mitigated In contrast, in the time of economic downturn, high inflation, unemployment accompanied by strict monetary policy will pose significant threats to all enterprises as well as the bank In that spot, credit risk is somewhat unavoidable The third is risk that a bank rarely foresees and take control of force majeure Flood, drought, earthquake, conflagration are natural disaster that can blow an enterprises’ achievement at the blink of eye Due to those disasters, the need for a certain goods can be changed which makes the firm doing business in that field goes bankrupt 1.3.3.2 Subjective causes a Customers With regards to the individual customers, there is a wide range of reasons that constitute their default on their debts For example, they suddenly get fired from their jobs, then, have no financial resource to pay off a debt or debtor faces unpredictable problems such as an accident, severe illness A customer’s default can be spawn from his failure in using lending fund With regard to the corporate customers, the causes seem more complicated Running a business, a firm has to face its own difficulties which originate from the nature of market, more specifically from supply and demand For example, it has to import the raw materials at a very high price; however, in the response to the harsh competition, it has to maintain the selling price at certain level, which only generates sufficient profit for its operations Sometimes, in a certain period, the imported raw materials become so scarce that the enterprises cannot implement the contract Subsequently, its prestige is shaken and its ability to pay off the debt is questionable In addition, the firm may face non-financial problems such as the lame management skills, the economic slowdown or the plunging purchasing power In short, the above-mentioned causes can cause such great loss on firm’s revenue that they hardly pay off their debt, there are, they are considered as the reason for credit risk of commercial bank b Banks Man is to err In spite of having implemented a number of measures to minimize credit risk, MB still has to suffer from a significant degree of these risks There have been several shortcomings in banks credit activity Firstly, although the non-performing loan out of total loan was comparatively low and was backed by collaterals, the credit was hardly considered as of good quality MB confronted numerous obstacles in dealing with overdue loans, especially in handling the collaterals when the borrowers often deterred MB from liquidating these collaterals Another reason lies in the staff’s failures in assessing the value of mortgages and evaluating borrower’s financial conditions Consequently, in case of default, the collaterals may not have equivalent value to compensate for the bank’ loss Secondly, the non-performing loans were on the upward trend in accordance with the volume of loans On one hand, the fact took its root from customers’ intentionthey deliberately failed to pay up principle and interest on time On the other, credit staff either failed to remind customers about the principle and interest that they were expected to duly balance or failed to update customers any variation in interest rate, as the result, the customers hardly accumulated sufficient cash on time The third weakness of MB is that the credit staffs failed to realize the significance of post-lending supervision The supervision was just for the form’s sake because it was complicated and the milestones for its success lie in customers’ side In lending process, borrowers were required to complete all dossier to prove its financial soundness, however, after disbursement, borrowers either presented inadequate or fraudulent financial statement or default on their duty Moreover, checking the business’ performance of borrower, which required time and expert knowledge in that field, was not an easy job Besides, each credit staff managed a relatively large numbers of customers, yet widened his/ her customers’ network As the result, the post-lending supervision was superficial as the matter of formality Fourthly, reports on economic sectors on specific goods were made when a commotion occurred rather than on periodically basis Subsequently, MB failed to foresee the upcoming hazards in one sector in order to implement timely measures to secure itself from credit risks Finally yet importantly, the flaw of MB is the information technology systems Given a competitive context, information technology systems in a MB hold a centre hold in connecting all internal and external activities However, there was lack of information sharing between branches which resulted the fact that one borrower who was denied at one branch was granted credit at another branch As the result, MB was likely exposed to greater credit risk In addition, inadequate information sharing was the cause of cost and resource inefficiency in case one borrower’s project was assessed twice at two different branches Not only information sharing system but also the software was far from expectation The calculation of interest rate, though made by professional software, is sometimes made manually due to technological breakdown Moreover, there was no software that specialized in loan switch In conclusion, the author’s analysis, to some extends unveiled impressive achievements in company with shortcomings in MB’s credit management Finding the best answer for the problem how to maximize its strengths and minimize its weaknesses, how to speed up the disbursement in the hope to boost the growth of the economy, yet maintain the credit quality is of utmost importance to MB CHAPTER 3: SUGGESTIONS AND IMPLILCATINS TO MINIMIZE CREDIT RISK The long-term orientation of development of MB is to increase the total capital by 25-28%/year to reach VND 7,800 billion by 2010, Total outstanding loans rises by 20-25%, of which the maximum medium and long-term credit ratio accounts for 45% of the total outstanding loans on the basis of accepted capital balance; to keep overdue debt less than 1% of the total loan portfolio; to raise minimum profit by 10% MB continues implementing the international-standardized risk management system in order to ensure the safe, effective, and sustain operations 3.1 Suggestions to minimize and prevent credit risk at MB Like other commercial banks, MB’s main source of profit generation is related to credit activity which generates more than 70% of the total turnover However, the more profit credit activity produces, the bigger risk its poses to the bank In other words, credit risks are the unavoidable hazard in banking business With the emergence of credit risk’ impact on its operation, the need for credit risk management has increased It is the time for MB to be more careful when identifying, measuring and controlling credit activity as well as be sure of holding adequate capital against these risks However, the fact is that overdue debts always exists in credit activity, thus, MB should constantly implement appropriate measures for minimizing credit risks 3.1.1 Improve the quality of research and analysis of customers’ creditworthiness The banking credit relationship is contingent on mutual trust and confidence, which requires counterparties to have adequate information on their partner MB applied criteria CAMPRI, which are the shorthand of character, ability, margin, purpose, amount, repayment, insurance; to analyze all customers-related information In fact, this information collected on CAMPRI basis was distorted due to several reasons, for instance, either bank does not carry out detailed research on customers’ status or borrowers with bad morals supply false information on purpose It is necessary for MB staff to implement several suggestion as following First, it is advisory for MB to conduct in-depth investigations, bankers can have a clear understanding on customers’ present financial capacity, their potential and their ability to pay off debts In other words, research and analysis of customers are extremely important because they will pave the way for right lending decision The finance-related information on borrower can be also provided by borrowers themselves or can be achieved from different sources as governing body: the Credit Information Centre (CIC) of the state Bank of Vietnam or information center of commercial banks Besides, calculating several other financial ratios, for example, profitability ratios, liquidity ratios, debts ratios and asset activity ratios also define the payment ability of the borrower Moreover, it is also crucial to analyzing a customers’ business project because it directly relates to his/her payment ability The main purpose is to examine whether the plan is sufficiently feasible to be provided with loan Besides, the bank should aware of the non-financial information of customers comprising of the customers’ morals and social relationships In terms of businesses, there is massive concern about the competitiveness and reputation of company on the market, as well as management skill of its board of directors This type of information is often collected by personal meetings or interviews or by paying a visit to borrowers’ place However, non-financial information is contingent on the credit staff’s subjective judgments As the result, a wise lending decision only made in case the credit staff observe and assess customers’ factory, together with processing the information collected from in-depth interview with great care and unbiased attitude 3.1.2 Tighten post-lending supervision Bank must remain in contact with the customers during the time of credit agreement to ensure that its customers receive the funds as directed on the credit agreement and that the funds are being used for the stated purpose The bank should closely keep its eye on customers’ financial condition Delayed payments, information from trade sources of other late payment or request for additional loan may indicate that the borrower having problems The sooner the problems are recognized and addressed, the less likely MB is exposed to risks In fact, the customers’ payment ability varies according to the global and national economic environment in company with the legal and political environment Therefore, post-lending supervision should not be solely contingent on customers’ report but others approach such as: - Field checking at customers’ workshop - make a periodical report on the market and sectors that customers invest in - Regularly re-evaluate the collaterals In case there is any decline in the collateral’s price, bank will call supplementary assets In fact, MB established a risk management bloc, apart from credit committee and trading bloc, to mainly function the supervision over credit With all efforts, postlending supervision is exercised professionally and efficiently, therefore, credit risk is partly eliminated 3.1.3 Enhance the quality of human resource People are always the heart and soul of any activities, particularly in risky business as banking sector One of the reason causing credit risks is the recklessness of the staffs in conducting a business, such as immorality and violation of the regulations Training and retraining human resources, therefore, are advisable A good credit staff is required to have qualifications, such as specialist knowledge of economics, accounting and banking, ability to process and analyze financial information, together with good moral and communications skill Besides, he/she needs to understand the practice of supply and demand on the market, in term of domestic and international business activity The following suggestions have been made in the light of enhancing the quality of personnel in credit activity First, with regard to recruitment, it is highly recommended to hire the qualified officials who have comprehensive knowledge and professional ethnics Besides, a strict and open recruitment is a must to avoid nepotism which can result in quality decline and brain draining Second, in term of playing catch-up game with competitors and current tendency, bank should provide regularly credit staffs with training courses on banking operations and lending principles which especially focus on improving skills to evaluate collateral assets and business project Moreover, it is advisable to encourage staff to improve their English in order to deal with international transactions and foreign corporate Third, bank need to improve the working environment by ensuring legitimate rights, physical as well as the spiritual life for its staff in order to keep them inspired for their work In addition, preferable regulations on wages and rewards to encourage and promote staff accompanied by punishment for anyone disobeyed the banks’ lending principles will fuel the staff’ thriving motives 3.1.4 Intensify MB’s competiveness 3.1.4.1 Diversifying credit portfolio In lending activity, one of the principles for the sake of safety of credit is diversify credit portfolio- meaning that “put eggs into different baskets rather than putting all eggs in one basket” The worldwide financial crunch that has stroke most of financial institutions to its knees took its root from the fact that a great deal of American commercial banks offered a loan in mortgage sector When the land price drop, the interest and the principle paid monthly exceed the land price, the borrowers turned their bank to the bank and declined to pay the rest amount The bank was left no option but liquidate the mortgage at market price which is at great loss The violation of lending regulation came into light- such an excessive amount of money used for mortgage that other banking activities cannot compensate for As the result, a host of banks, including Citigroup, Lehman Brothers, Merrill Lynch, Northern Rock (UK), stand at two options: either going bankrupt or being nationalized Therefore, MB should invest its mobilized capital in various economic sectors because, in case of woe, the loss of one investment will doomed the others that are generating profits 3.1.4.2 Providing the consultancy The relation between bank and borrower is reciprocal and mutually benefit, in which bank provides borrower capital to expanse his business, in turn, in case his business flourishes, bank can reap profit and eliminate the credit risks MB has developed a good relation with a wide range of customers of different economic sectors, from which MB acquire a certain knowledge and experience about some field that customer hardly get accessed As the result, MB can give its borrower some advice on his trade partner as well as the most efficient method of profit generation At the same time, in order to delivering appropriate consultancy, credit staff always keeps a closely eye on borrower’s performance It is doing responsibly this service that MB not only get abundant information on its customers’ performance but also timely assist them when they needed, as the result borrower and bank can be excluded from market risks 3.1.5 Ensure the credit quality through mortgage, guarantee 3.1.5.1 Ensure the credit quality through mortgage Mortgages are often so diversified that credit official hardly fully grasp of its origin, its characteristics and value For example, on granting a real estate- backed credit, a credit staff is expected to understand not only the law on real estate, price list released by the government but also its market price and construction specifications Realizing that however erudite a credit staff is, he cannot comprehend all aspects of an economy, MB should construct a certain indicators for each type of mortgage For example, if the mortgage is real estate, its location, present condition and market price fluctuation are taken into considerations In case machine or assembly line is used as mortgage, MB can hire a specialist bodies to examine its quality and offer a short-term loan in order to avoid invisible depreciation Moreover, because borrower cannot manufacture without machine, whereas, these machine and assembly line cost MB a small fortune to preserve, MB stands no choice but allow the borrower uses them However, it is compulsory that the borrower’s obligation is to maintain its condition and not selling the collateral at any price MB has fully right to supervise this commitment Furthermore, MB should improve the relationship with local people’s committee who will give MB a hand in anticipation of ruckus being occurred during the process of collateral confiscation 3.1.5.2 Ensure the credit quality through guarantee Guarantee appeared to outperform mortgage in the sense that it does not cost the bank time, money and effort to keep a close eyes on the collaterals This does not mean that guarantee is completely risk-free method Actually, bank will be exposed to risk in case the guarantor goes bankrupt or loses their solvency MB, therefore, will only approve guarantor who is well-established companies, having a collateral and regular income Therefore, MB always prefers the option that is beneficial to not only itself but also the borrower and the guarantor For example, a 6- years- loan will be periodically paid on 6-month installments basis The borrower, due to some particulars reasons, failed to pay the principle and interest of months, the guarantee will take on that months’ liability rather than years’ liability Consequently, the guarantee does not have to liquidate its collaterals while the borrower will continue settling his obligation In short, the MB’s moves in credit risk management are believed to be in the line with international best practice 3.1.5.3 Using credit derivatives 3.1.6 Develop the information system Technology is regarded as the growth engine and a condition for MB’s integration into global banking system Updated information system will not only boost the quality of customer service, reduce cost but also increase bank’s competitiveness in conformity with international standard MB has diversified its service by introducing various service packages such as mobile bank and internet bank, which is considered as a milestone in MB’s strategic roadmap However, MB needs to perfect its information system, for instant, establishing intranet among branches In addition, updating information is a must The IT department should take a role as news collector More specifically, this department updates the latest resolutions and circulars on different industries as well as contemporary production and consumption of that industry The collected information will be used as source to consider whether MB should grant the credit in that economic sector It is also the source for internal credit rating It is advisory that MB should develop software that assesses the competence of each branch This software will quickly and accurately calculates regional risk exposures – probability of default, exposure at default, credit migration, regulatory capital, risk weighted assets, credit value at risk Accordingly, MB will improved credit loss forecasting, implementation of appropriate strategies, improved capital allocation and maximized return from risk management investments 3.1.7 Dealing with overdue loan In the context of the global common trend, MB established AMC- Asset Management Company, which is mainly in charge of tackling overdue loan and financing a large project thereby achieving a narrow set of goals without putting the entire bank at risk With the advent of AMC, subprime loan of MB in 2007 plummeted significantly In the long-term, AMC should be separated from MB on the ground that, in the absence of adequate distance between the sponsor and the AMC, performance of the AMC will be affected by the ups and downs of the originating MB The AMC will be subject to greater risks and thus provide less comfort to the lenders In short, there are various measures to prevent and mitigate credit risks, however the application of these measure is contingent on a host of factors such as the scope and sophistication of the bank's activities, the MB’s practice and capacity 3.2 Implications to government and Statebank 3.2.1 Implications to the government and related sectors With the purpose of making commercial banks’ credit activity safer, firstly, the government needs to create a fairly sound business environment by boosting the reform process, restructuring enterprises, especially the State own ones At present, the performance of many SOEs, which are believed to take the leading role in manufacturing, updating new technology and embrace the government’s policy, appear to be inefficient and unprofitable This will be a disadvantage for the economic development The government, therefore, should issue documents that are comprised of specific regulations about how to establish, to dissolve, to emerge and to privatize In addition, the relevant authority needs to supervise the privatization process with discreet In terms of training and education on banking sector, the government, especially the Ministry of Education and Training needs to pay more attention to the education methods and research activities at colleges and universities nationwide Instead of just theoretically taught in classes, students should be provided with more chances to know about the practical banking operations These methods will probably bring great benefits to either student or the society as a whole Firstly, students will be more interested in the career in the future Furthermore, seminars and discussions should be regularly held so that students will have opportunities to raise their own opinions and enlarge their knowledge on banking field Secondly, the time for retraining after graduation can be reduced, and commercial banks will have an enormous resource of qualified personnel Besides, association between banks and university in analyzing the economic and political situation periodically is undeniably loose Banks often make report at their will or at the advent of unexpected chaos while it is advisory for them to make periodic assessment to take grasp of the whole picture of the entire opportunities and threats they might face In fact, this report is often made by a department, which is responsible for the issues, and it is often costs bank a great deal of money Thus, outsourcing is a good option Bank still can receive a periodic assessment from a reliable and professional center of a university at a competitively lower cost 3.2.2 Implication for State bank of Vietnam Firstly, the State Bank needs to perfect the system of legal documents and regulations on banking operations, particularly credit activity It is also essential to impose an appropriate policy on interest rate and exchange rate which is in conformity with actual situation of the economy Moreover, the State bank should strengthen its role in the inter-banking market For example, it may become either a buyer or seller to help commercial banks maintain security of the balance of foreign exchange In the common trend of economic integration, the State bank should avoid interfering too much in each commercial bank’s activity, yet it has to keep close supervision on them in order to ensure the safety and soundness of the sector Secondly, the State bank needs to improve the performance quality of its Credit Information Centre (CIC) The main function of CIC is to collect and analyze information about financial institutions, credit relations, currency market and legal status of enterprises Over the past years, CIC has assisted banks by providing timely financial reports on enterprises, and dissert of changes on the market, but those still might not satisfy the increasing demand for information It is, therefore, it is necessary to enhance the performance of this center For example, CIC should be equipped with advanced technology as well as updated software in order to collect accurate and comprehensive credit information If CIC can strongly support commercial banks in researching market and borrowing partners, risks in credit activity will be probably minimized CONCLUSION It cannot be denied the critical role in economic growth of banking system as a financial intermediate; however, exposure to credit risk continues to be the leading source of problems in banks nationwide MB, though its short life span, have a keen awareness of the need to identify, measure credit risk as well as to determine that they hold adequate capital against these risks and that they are adequately compensated for risks incurred MB, therefore, made significant stride in building its image as a sound financial institution which generates profit of 451.1 billion VND (2007) while reducing the overdue loans to 1% This not to say MB’ credit risk management is completely perfect, in fact, MB lack attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank's counterparties Furthermore, their post-lending supervision is regarded as a flaw need to improve It is therefore, advisable for MB to maintaining an appropriate monitoring credit process; ensuring adequate controls over credit risk by improving the quality of research and analysis of customers’ credit-worthiness; developing its information technology Due to lack of time and experience, the author cannot cover all aspect of credit risks For example, credit mobilization was comprised of deposits and loan of private and institutional customers rather than shares which was issued to public Credit utilization refer to only loans without regarding to banks’ other activities such as investing in security market and financing big project Suggestions and corrections from teachers and readers are highly appreciated TABLE OF CONTENTS CHAPTER 1: THEORETICAL BACKGROUD 1.4 Signal to realize credit risks caused by the corporate customers 11 1.5 Criteria for evaluating credit risks .12 1.5.1 Bank criteria 12 1.5.2 Borrower criteria 14 1.6 Impact of credit risks on commercial banks’ activities 16 1.6.2 Credit risk damage banks’ prestige 16 1.6.3 Credit risks may be the main cause of banks’ insolvency .17 1.7 Measures to minimize and prevent credit risks 17 1.7.1 Make a credit policy .17 1.7.2 Diversify services and maintain the relation with close customers 17 1.7.3 Assess credit risk 18 CHAPTER 2: THE CURRENT SITUATION OF CREDIT ACTIVITIES AT MB 20 CHAPTER 3: SUGGESTIONS AND IMPLILCATINS TO MINIMIZE CREDIT RISK 41 3.1 Suggestions to minimize and prevent credit risk at MB 41 3.1.1 Improve the quality of research and analysis of customers’ credit-worthiness 42 3.1.2 Tighten post-lending supervision 43 3.1.3 Enhance the quality of human resource 44 3.1.4 Intensify MB’s competiveness 44 3.1.4.1 Diversifying credit portfolio 45 3.1.4.2 Providing the consultancy .45 3.1.5 Ensure the credit quality through mortgage, guarantee 46 3.1.5.1 Ensure the credit quality through mortgage 46 3.1.5.2 Ensure the credit quality through guarantee 46 3.1.5.3 Using credit derivatives 47 3.1.6 Develop the information system 47 ... factors such as the scope and sophistication of the bank'' s activities, the MB’s practice and capacity 3.2 Implications to government and Statebank 3.2.1 Implications to the government and related... appears to deteriorate, banks stand at the verge of credit risk Realizing which loan is likely to make the bank run through the credit risk is a need; the State Bank of Vietnam promulgated a decision... have the ability to measure risks Banks often take into account helpful ratios including bank ratios and obligator’s ratios to estimate credit risks 1.5.1 Bank criteria Minium capital aquedacy ratio