ACKNOWLEDGEMENT Foremost, I would like to express my sincere gratitude to my supervisor Ph.D … for the continuous support for my MBA graduation thesis, for his patience, motivation, enthusiasm, and immense knowledge His guidance helped me in all the time of research and writing of this thesis I would also like to thank to … who help me for better understanding and implementation of Six sigma tools in the project Next, my sincere thanks also goes to National Economics University (NEU) – Business School with its doctors, professors, teachers, coordinators together with my classmates who have assisted me in my studying, conveying useful knowledge and exchanging experiences via their lectures, case study and discussions I also would like to say thanks to my managers, colleagues at Vietnam International Bank, Hanoi Head office and some branches in Hanoi for their support and sharing materials, ideas and orientation, which help me much in collecting data and doing thesis analysis Last but not the least, my deep gratitude goes to my family and friends who were always supportive to me and encouraged me to fulfill the graduation thesis The author … TABLE OF CONTENTS ACKNOWLEDGEMENT ABBREVIATIONS LIST OF TABLES EXECUTIVE SUMMARY INTRODUCTION CHAPTER 1: THEORETICAL BACKGROUND ON TOOLS ANALYZING FAILURE IN BANKING OPERATING 14 1.1 Major definitions of Six-sigma and Six-sigma tools 14 1.1.1 Definition of Six-sigma 14 1.1.2 DMAIC methodology 15 1.1.3 Seven basic tools of quality control 16 1.2 Operations at a commercial bank 20 1.2.1 Commercial banks 20 1.2.2 Operations of commercial banks 21 1.3 Implementation of Six-sigma in analyzing failures of banking operation 23 1.3.1 Using Six-sigma to improve quality in banking operation 23 1.3.2 Using Six sigma tools for analyzing failures in operating management 26 1.3.3 Implementing “Cause and Effect diagram” in Banking 28 CHAPTER 2: ANALYSIS THE CURRENT STATUS OF CREDIT FAILURE IN PROCESSING AT VIB 32 2.1 Overview of credit activities at VIB 32 2.1.1 Introduction to VIB .32 2.1.2 Credit activities at VIB 34 2.1.3 VIB credit performance 43 2.2 Analysis of failures of implementation credit process at VIB .46 2.2.1 Define 46 2.2.2 Measure 48 2.2.3 Analysis 54 CHAPTER 3: RECOMMENDATIONS TO PREVENT FAILURE IN IMPLEMENTING CREDIT PROCESS AT VIB .70 3.1 Orientation of VIB 70 3.2 Recommendations to prevent failures in implementing credit process at VIB 71 3.2.1 The solution groups to improve the professional skill, and the work handling skills 76 3.2.2 Solutions to reduce the pressure of work load .78 3.2.3 The solution formulation of the policy reviewing work performance and discipline to reward employees at VIB 79 3.2.4 Solution to manage the data and reports by software 80 3.2.5 Summarize the data of reports per six months 80 CONCLUSION 82 REFERENCES 83 APPENDIX 1: In-depth Interview Summary 85 APPENDIX 2: Flowchart of credit process .87 ABBREVIATIONS BOD Board of Directors BOM Board of Management CBA Commonwealth Bank of Australia CEO Chief Execute Officer DMAIC Define-Measure-Analysis-Improve-Control NPLs Non-performing loans SBV State Bank of Vietnam SMEs Small and Medium Enterprises USD United States Dollar VIB Vietnam International Bank VND Vietnam dong LIST OF TABLES Table 1.1: Six-sigma processes in Credit and Financial management 24 Table 2.1: Loan structure by duration and currency .43 Table 2.2: Loan classification 44 Table 2.3: Failures in implementing credit process at VIB 49 Table 2.4: Summary of the critical failures in credit operations in VIB, 53 at June 30 2011 53 Table 2.5: Summary the critical failures in collateral security process at June 30 2011 in VIB 55 Table 3.1: Summary of causes of failures and solution to the failures in credit process 72 LIST OF CHARTS Chart 1.1: DMAIC methodology .16 Chart 1.2: Cause and Effect diagram 31 Chart 2.1: Flowchart of credit process at VIB (see at the page of 83) .40 Chart 2.2: The evolution of the group debt, bad debts and overdue debts over the years 45 Chart 2.3: Fishbone diagram of cause groups for Failures in credit process at VIB.47 Chart 2.4: Fishbone diagram of possible causes for failures in credit process at VIB.52 Chart 2.5: Frequent of critical failures in credit operations in VIB, at June 30 2011 54 Chart 2.6: Pareto diagram of failures in collateral security process at June 2011 in VIB 56 Chart 2.7: Fishbone diagram of root causes lead to failures in credit process of individual customer .58 Chart 2.8: Fishbone of root causes related to collateral failure in the individual loan case 60 Chart 2.9: Fishbone diagram of root cause of failures in credit process of firm customer 67 EXECUTIVE SUMMARY There is no doubt that the banking sector plays a significant role in the economy of Vietnam One of the most critical issues in banking management is credit risk supervising, which refers to the mixture of credit growth and violations monitoring in operation Banks should choose and adjust their credit process and regulations in order to maximize the value of the firm and ensure that their operations develop stably and sustainably Established in 1996, Vietnam International Joint Stock Bank (VIB) has continually grown and expanded its business In order to increase outstanding of loan and prevent failures in lending activities, the questions that BOM and BOD of the bank greatly concern are: Which tools can used to analyze the failures in the credit operation at the bank? What are failures and what are the root causes of failures? And the solutions VIB should apply and how can the bank improve the situation in its credit management? These questions encourage the author to study and write the thesis on the topic “Analysis of failures in implementing credit process at Vietnam International Bank” To get materials for the thesis, both secondary and primary data are collected in the period from 2008 up to June 2011 Sources of secondary data are from published information from textbooks, articles, studies on magazines, websites; information from VIB’s annual reports; reports from credit monitoring department, loan restructuring department For primary data, it is based on qualitative method, particularly using in-depth interviews with one executive manager of the bank, seven officers in different departments related risk credit monitoring, two customers have loan of VIB The thesis starts with theoretical background on tool analyzing errors in credit activities at banks, in which some related concept such as Six-sigma, DMAIC methodology, tools of quality control (Cause and Effect diagram, Pareto diagram ) are clarified On reviewing the literature, operations in a bank is also pointed out such as: taking deposit, lending, securities and other services In the next section, the author briefly introduces about Vietnam International Bank Chapter of the thesis also analyzes real situation of VIB’s credit performance Nevertheless, what should be paid more attention by VIB’s Board management are the failures in its lending activities which includes: Failures relate to collateral profiles, Failures relate to legal profiles, Failures relate to financial profiles, Failures relate to loan profiles, Failures relate to Profile after disbursement, Errors in drafting and document store stage, Do not implement correctly credit procedures, and policies And the author uses Six-sigma tools as Cause and Effect diagram, Pareto diagram to analyze two loan cases and find causes to those shortcomings as follow: The weak professional skill of officers in some departments related credit risk monitoring, there is no sanction to punish these failures, the business target and responsibility are too high while lack of staffs is happening, the weakness of the loan data management The final part of the thesis, based on the VIB’s orientation to develop in the next years, suggests some solutions to improve credit quality and decrease the above failures in credit operation The recommendations includes: reducing the pressure of work load, formulating the policy reviewing work performance and discipline to reward employees, managing data and reporting by software, summarizing reports per six month and using some tools to analyze the report INTRODUCTION Rationale Recent economic turmoil has put significant pressure on bank to cut cost and decrease credit risk while maintaining a high level of customer satisfaction Vietnam International Commercial Joint Stock Bank, abbreviated as Vietnam International Bank - VIB, same as other banks, from time to time VIB is now facing with gradual and fierce competition from both domestic and foreign banks And credit activity is one of the most important programs that VIB’s Board of management and Board of directors always put great attention However, affected by both objective and subjective causes, VIB has some problem in their credit process recently as follows: Number of overdue debts including group and a significant increase in bad debt over the year (bad debts doubled in 2010 compared to 2009, bad debts in June - 2011 increased 1.5 times compared to 2010) demonstrated a certain stages in the lending process errors Add to that the number of violations at VIB (especially concerning credit violations of collateral) increases remarkably that capital losses are very high) The violations occurred in almost all business units across the country, have a serious nature, lasts a long time, pose a risk to the bank However, statistics on the offense of credit in reports stop at the individual statements and generalizations is not adequate or not only cause deep, the roots of errors and so the violations continue to occur many years So, for the purpose of the study is to analyze the root causes of the violations in the process of lending at VIB from which useful solutions and practical to reduce these errors, reduce credit risk for VIB, the author chose to research a thesis: Analysis of failures in implementing credit process at VIB Research problem How managers at VIB can decrease essential failures in credit activities in order to increase credit quality in the context of competition and government’s tightened management regulations Research objective The objectives of the research are: - To review credit process at VIB - To indentify errors in credit activities of VIB in some recent years and causes of - those errors To suggest some recommendations to improve credit quality in credit at VIB Research questions This research is carried out in order to answer the following questions: a Tools used to analyze the errors in the operation at the bank? b Existing violations of the credit in the lending activities of VIB? The cause of such violations? c Which solutions and recommendations for VIB to decrease credit failures? Research methodology The research process is illustrated in the figure below: 10 - The knowledge of business - The loan monitoring department activities is not high - The quality of risk management is - Training (included internal low including: monitoring about the and external) - A high requirement in the number of loan profiles and the recruitment implementation process compared to the bank regulations The goods security officers - The weakness of goods - counting skill - The awareness and distinction are weak - No skills handling the situation Direct training - The punishment sanction There is no sanction to punish these failures It is The related units only stayed in warning - Do not work fully responsibility - Do not follow full enough the loan process and the regulations of VIB should be strict and fair: increasing the financial punishment level (salary, reward), or dismissing 73 - Decrease the work The loan target number and the The credit department profit turnover are too high pressure - Increase the number of credit officers - Increase income - Decrease the work pressure - Increase the number of The business target and The loan monitoring profiles, so the time is not enough responsibility are too department for officers to read more carefully and more quality monitoring officers - Increase income The time is not enough for the - Decrease the work The credit admin officers to draft and check the department disbursement of the loan profile, so pressure - Increase the number of high As the large number of loan The weakness of the loan data management The credit department it is easy to cause the failures credit admin officers - Increase income There is no a solution to manage Take the data into the the expiration date of a contract management software such as: insurance, mortgage, labor 74 The loan monitoring department To manage the data reports by paper profiles is difficult to look up, or easy to lose Results of tests are only collected by listing the specific violation So, the final report just only Take the data into the management software -Summarize the data of gives an overview of compliance with lending regulations of the business unit It has not reports per six months -Using tools Cause and shown out the existence of serious, systematic issue that needs urgently resolving Effect, Pareto diagram in analysis the report 75 3.2.1 The solution groups to improve the professional skill, and the work handling skills The officers’ professional skill is a key role to make a decision on the quality of the work in any organization In particular bank, the credit quality is totally depends on the officer’s professional skill and the management ability of the business directors in each unit That is because the loan quality as well as the financial ability and the customer’s eligibility are all evaluated by the credit officers and the loan leaders So, to solve this situation will become a big mission for the credit officers and the loan manager to improve their professional skills as well as the management skills Besides, improving the understanding of the after – disbursement monitoring officers also plays an important role in controlling the potential risks to the bank There are some solutions to be taken into this situation such as: organizing a training class, and that this class may be taken over by the leaders or managers in the different departments such as: the credit monitoring department, re-evaluation department, or even the business director However, the training should be got the right direction and the suitable pace to suit the different officers In VIB, the credit officers are currently managing and monitoring the customers’ activity as well as the secure assets easily Thus, organizing the class is an urgent mission, where the officers may exchange the experiences and the actual situations amongst business units, and between the head office departments and the branches will help the officers improve the acknowledge about the risk and the unusual situation handling skills The combination between the actual experiences and the theories about the customer evaluation, the customer credit scoring, the mortgage evaluation, goods security … will be the necessary solutions to prevent the failures caused in the loan process Besides, as the actual situations are existed in the chapter 2, the researcher has been drawing a true picture about the qualification and the shortage of knowledge about the legal procedures occurred in the credit administration department Due to the serious and necessary situation to guarantee the loans, so to 76 complete the loan security procedures must be implemented fully and most complete It is the positive reason for the bank to need two directions to resolve: Firstly, it should be separated into a small division, where all of the legal procedures, the loan security assets contract (as signed in the loan contract, the mortgage contract and handling the related regulations) For a typical example about specialization, it has been performed in Asia Commercial Bank and reduces much risk related to the legal procedures for the bank Secondly, the signed contracts need consulting and monitoring by the law department of the bank This department has responsibility to draft the sample forms in the bank However, there are a few members and located in the head office, while the loan process is implemented in the branches with the complicated changes So, the law department is limited to help and support the business units now in VIB system Next, there are some solutions to protect the mortgage of goods, which are located in the customer’s stores or the other third party It was the fact in banks, particularly in 2008, the prices of steel and iron fell dramatically, which made many enterprises activating in this area drop into the difficulty In this stage, the financial difficulty was enough for these enterprises to find any solutions to recover their stabilization and it was very hard for them to follow the bank regulations correctly As presented in the chapter 2, the first necessary solutions are the need to implement is that it is an urgent mission to train and strongly instruct the store guards for VIB Especially, the risk managers of the bank need to have the new forced conditions to hire the goods store such as: the guards’ responsibility for losing of the goods, or to punish if the guards collude with the customers for negative activity, and training the guards to know how to count goods everyday, compare the real numbers of good to the numbers in the book and the solution handling process in the bank regulations Also, the bank could sign directly the contract with the security company to protect the secure assets stores The second solution should be used is that the bank could hire its own stores to contain the goods of secure assets There is a difficulty, however, that it can lead to the stores are not convenient for the customers’ transportation, so it may raise their cost The 77 third solution is that the bank may establish its own security company which has responsibility to protect the assets for VIB This solution is carrying out the implementation to set up the security company named Asset Management Company since December 2009 But the number of the security officers are limited and mainly used in the serious situation such as: resolving the bad debts or an unusual situation The VIB Managers should focus on recruitment and training of security force to be responsible for protecting goods stores to minimize potential risks of goods by mortgage losses 3.2.2 Solutions to reduce the pressure of work load General situation is now taking place in the departments directly related to the management and supervision of loans at VIB is an overload of work Caused by VIB is currently in the process of transferring management capacity with a capital contribution to CBA so process has changed a lot The credit growth and expansion of business units throughout the system takes place leading to an increase in both customer numbers and total outstanding loans This will directly affect the quality of loan management If the bank does not have policies to manage, monitor and control, it will easily lead to certain risks in credit operation A problem arises in recent years is that the number of experienced staffs had work for VIB especially senior leaders were transferred to the work of many other units It is caused that the employee's income at VIB is average compared to other banks, while it always happens that the lack of human resources leading to work pressure is greater Requirements of the board as credit growth but also to administrators of good credit quality, this is very difficult to implement in the current context of VIB The solution to increase income for employees and recruiting new staffs is practical and necessary to perform the various departments in the machinery of lending and supervision of compliance can work with the best performance In addition, the board should plan carefully review the annual work targets set for staffs with the resources actually available in the departments of the bank 3.2.3 The solution formulation of the policy reviewing work performance and discipline to reward employees at VIB 78 This solution bases on a very interesting situation at VIB There have no policies to handle violations in credit activities Many cases occurred to cause loss of capital and bank risk but the officers who are responsible for violations only reminded and have to explain errors in writing However, there has not been any administrative sanctions such as a fine, reduction of wages, bonuses or dismiss Specifically, as the two loans have analyzed in chapter two above, up to now the staffs that make mistakes in these cases has not affected to any benefit Thus, it suggested that managers of VIB must develop reward and fine regulations for preventing cases of errors in lending activity at VIB This action is extremely important and significant decision to issue the working quality of employees Specifically: Based on target of work each year for the employees that the managers at all levels build Key performance indicators (KPI) appropriate for different departments In VIB Human resources has developed this indicator in 2010 but this is in the continuing adjustment to suit the actual work KPI indicator to be effective in case the board except KPI scores of staffs if they suffer violations during KPI scored KPI Grading of the branch managers, credit officers, credit admin officers must be consulted and have input from direct credit monitoring department (for staffs who manage group loans), the loan restructuring department (for staffs manage high risk group loans and group loans), the loan collecting department (for staffs manage bad debt) The construction of appropriate KPI with the provisions of the reward will be a serious tied rope between the interests of staff and their responsibility There can be certain that with this solution the offense in the lending process at VIB will decrease significantly in the near future 3.2.4 Solution to manage the data and reports by software Loan information management at VIB has been applied on Symbols software at this time This software has many useful functions that have not yet been fully exploited benefits because entering data input has not been focused The author proposes using data management software, credit officers need to monitor to remind customers promptly, minimizing the undue offense occurs if the contracts expire 79 during the loan Particularly data are insurance contracts of mortgages, mortgage contracts, labor contracts of customers and other information related loan In addition, the current audit reports of many departments are being held under the old reporting regime that does not support the information technology Meanwhile, a loan usually is monitored, checked by many different staffs over time and by different departments Thus the update compliance m results of monitoring through each stage to test management software will help executives, officials of other departments easily look up when needed to use or refer to reports of other departments 3.2.5 Summarize the data of reports per six months In VIB, monitoring credit activities in the whole system is a standard cycle as prescribed by the board Each year, more than ten thousand reports of the monitoring department on checking lending activities in compliance with regulations What the reports contribute in credit management at VIB? To support the quality management and understand the real situation of banking activities, the researcher suggests two recommendations as follows: First, staffs of the loan monitoring department summarize the data of reports per six months The results of summarized report should be statistically as offense groups as follows: Failures relate to collateral profiles, Failures relate to legal profiles, Failures relate to financial profile, Failures relate to loan profile, Failures relate to Profile after disbursement, Errors in drafting and document store stage, Do not implement correctly credit procedures, and policies The goal is for managers to grasp the actual state of the lending activity at VIB in the most particular and obvious way Catching the issues need to be improved in what process, whom can solve the problem, this will help the executives early find the correct and fastest way to prevent failures and limit credit risk at VIB Second, recommend using of tools in statistical analysis for example Cause and Effect diagram, Pareto diagram in managing credit risk at VIB as follows: Using Cause and Effect diagram is to find the root cause of the errors in reports 80 Using Pareto diagram tool in finding issues most often occur to help managers select the examples to test Then using Cause and Effect diagram is to find the root cause of the errors From that, continuously using Pareto diagram to classify which problem happen most to need to urgently resolve To sum up the 3rd chapter, to have a stronger financial status with lower overdue debt ratio, to decrease a number of failures in the credit process in both short-term and long-term, it is suggested that managers of VIB need to perform a number of solutions including: improve the professional skill of staffs, to reduce the pressure of work load, to formulate the policy reviewing work performance and discipline to reward employees, to manage data and reporting by software, to synthesis reports per six month This leads to the end of the thesis content 81 CONCLUSION For a bank, the healthy development of credit keeps the speed of the overall development of the banking is always in bank managers’ concern, not only in the case of VIB Beside some difficulties, the bank has gained some success during recent time such as: charter capital raising, management capacity and technology transforming with CBA, building new brand name and expand operating system in Vietnam With the aim of reaching out is to become the top three leading banks in Vietnam, VIB faces many challenges Hot credit growth but to control credit risks closely, not lead to the rate of overdue debts, bad debt ratio is too high These problems are difficult to be solved because these issues are easy to become controversial problems in real lending operation at banks The writer’s efforts are to provide t the tools and method to find out the root causes of the problems that VIB comes up with in its credit risk supervising process and to suggest some solutions and recommendations to decrease the number of failures in credit process Nevertheless, due to the restraint on researching time, data and the author’s capacity, the thesis cannot avoid mistakes and shortcomings The writer expects to receive any comments and recommendations from all of you – the professors, readers and colleagues to improve the study theme 82 REFERENCES Books: Carl Wolf (2010), Role of Commercial Banks in Foreign Trade Jonas Karlsson (2010), Six sigma in Swedish banking: A case study in the appicability of Six sigma for improvements in the loan process Keller,P.,& Pyzdez, T (2009), The six sigma handbook (3 ed), Mc Graw Hill International Edition Muhmmad (2010), How to minimize the defects rate of final product in textile plant by the implementation of DMAIC tool of Six sigma Peter S.Rose (2002), Commercial Bank Management, Mc Graw Hill International Edition Russell & Taylor (2009), Operation management, Jonh Wiley & Sons, Inc Articles: Antony J.,Antony, F.J.Kumar,M.,&Cho,B.R.(2007), Six sigma in service organisations Internatinal Journal of Quality and reliability management,24(3), pp 294-311 Heckl D., Moormann,J.,&Rosemann,M.(2010), Uptake and success factors of six sigma in the financial services industry, Business process management journal, 16(3) Stephen A DeLurgio, Fred Hays (2004), The credit and financial management review, 4th Quarter 2004, pages - 10 Company’s Document: Credit handbook of VIB, 2010 Reports of Credit monitoring Department at VIB 2008-June2011 Reports of Loan restructuring Department at VIB 2011 83 Websites http://mu.motorola.com/faqs.shtml http://www.vib.com.vn http://sbv.com.vn http://www.igneousesolution.net Rucker, Rochelle, “Six sigma at Citibank” (http://www.qualitydigest.com/dec99/html/citibank.html) 84 APPENDIX In-depth Interview Summary Interviewees Information collected The individual loan case Ms Pham Van Anh is a individual - To make clear about the credit officer’s customer have loan in VIB Dong Da real supervising on loan branch - To be required supporting some lack documents The credit officer Mr Nguyen Hoai - Collect shortcomings Nam and the manager of VIB Dong activities Da branch Mr Ho Hong Ha (high target, in lending no suitable software to store data) - Find root causes of failures -The credit admin supervisor Ms - Find the cause of the failure: In a short Nguyen Thi Mai Hanh is responsible time, to control the errors of drafting and for mortgage contract drafting in this processing is also of poor quality case -The credit monitoring officer Ms Le - Clearly find failure which are related Thi Hang Nga who check this loan to this loan profile The cooperate loan case The customer named Asia trade and production company which has loan at VIB Hoan Kiem branch -Legal representative (also the -Describe the difficulty in financial representative for loan): Mr Vu Huu status of the company Cuong is the director of the company -Admitted wrongly implementing commitment - Mr Hong Minh Hoang is the Deputy -Discover critical failures in collateral of credit monitoring department also security profile of this loan directly examine the loan profiles 85 - Ms Nguyen Minh Hong who is a -Redefine the real shortcomings in the team leader of loan restructuring loan case and payment history of department also have responsibility for customer checking this customer’s loan case - The credit officer Ms Nguyen Thi - Admitted that she did not manage Thu Huong has responsibility of follow the policy of bank, but comment managing this loan about high pressure on work Mr Do Van Khu, VIB Hoan Kiem - Admitted that she did not manage Director follow the policy of bank - Define the causes of the failures: not strictly management, the weak specialist skill from the credit admin officers - Mr Nguyen Van Dung who is the - Admitted that he did not monitor the loan monitoring discover this officer failure did related document drafting before not loan profile carefully to but he also confirmed that the time is limited for the credit – monitoring officers to read carefully six loan profiles per day Mr Nguyen Dinh Truong Anh – the - Define the real situation that the bank Deputy Director Management division of Credit have to find the root cause lower credit quality and the main factors leading to instability in the credit business - Recommendations to divided credit failures into seven basic groups at VIB 86 APPENDIX Flowchart of credit process 87 ... Failures in credit process at VIB. 47 Chart 2.4: Fishbone diagram of possible causes for failures in credit process at VIB. 52 Chart 2.5: Frequent of critical failures in credit operations in VIB, ... analyzing failure in banking operating Chapter 2: Analysis the current status of credit failure in processing at VIB Chapter 3: Recommendations to prevent failure in implementing credit process at. .. reports of loan monitoring department Table 2.3: Failures in implementing credit process at VIB Failures in implementing credit process Why should we measure it? Failures relate to collateral profiles: