Master Thesis - Hoang Viet Thanh - CODE 112M180094

“Credit Risk Management at Standard

Chartered Vietnam”

Master Thesis

submitted to

IMC University of Applied Sciences Krems

and

Vietnam University of Commerce

Master Program

Vietnamese Austrian Business Administration

by

HOANG VIET THANH

For the award of the title

Master of Arts in Business (MA)

Thesis Supervisor: PRO. NGUYEN HOANG

Submitted on: 9th September 213

Eidesstattliche Erklärung

„Ich erkläre an Eides statt, dass ich die vorliegende Masterarbeit (Diplomarbeit) selbstständig verfasst, und in der Bearbeitung und Abfassung keine anderen als die angegebenen Quellen oder Hilfsmittel benutzt, sowie wörtliche und sinngemäße Zitate als solche gekennzeichnet habe. Die vorliegende Masterarbeit wurde noch nicht anderweitig für Prüfungszwecke vorgelegt.“

Datum: 9. August 2013 Unterschrift

HOANG VIET THANH

Statutory declaration

“I declare in lieu of an oath that I have written this master thesis myself and that I have not used any sources or resources other than stated for its preparation. I further declare that I have clearly indicated all direct and indirect quotations. This master thesis has not been submitted elsewhere for examination purposes.”

Date: 09th August 2013 Signature

HOANG VIET THANH

Acknowledgement

I take immense pleasure in thanking Rector of Vietnam

Commercial University, and Prof. NGUYEN Hoang, Chief of

International Training Department, Rector of the Applied

Sciences IMC Krems University, for having permitted me to

have a chance to complete this dissertation.

I wish to express my deep sense of gratitude to my Internal

Guide, Prof. NGUYEN Hoang, chief of International Training

Department, Vietnam Commercial University; for his able

guidance and useful suggestions, which helped me in

completing the work, in time. Needless to mention that all

SCB staff who had been a source of inspiration, for all

their valuable assistance in the project work and for their

timely guidance in the conduct of my thesis.

Finally, yet importantly, I would like to express my

heartfelt thanks to my parents for their blessings, my

friends/classmates for their help and wishes for the

successful completion of my dissertation.

Master of Art in Business Applicant

HOANG VIET THANH

FORWORD

n the situation of crisis economy, financial

market of each country has been faced with

fluctuation and risk hidden. As the results,

financial quantitative factors for credit risk management

are the top hottest factors. The world crisis consequences

appear all over the world, thus, credit risk measurements

are needed for every country to identify, evaluate,

foresee the financial situation of each enterprise. Thus,

this is the reason why, author chose the title of Credit

Risk Management of SCB.

I

In the size of thesis for Master of Art in Business,

author would like to indicate his little experience in

this sector along with combining with credit risk

management knowledge over the world. Besides he also would

love to draw quickly the overview of credit in Vietnam,

then, scoped into special application for SCB. Finally,

the dissertation will include the conclusion and short

recommendation for improving credit risk quality at SCB.

LIST OF CONTENTS

Statutory Declaration Acknowledgement ForewordTable of ContentsList of figuresChapter 1: Introduction 11. Background 12. Objectives 13. Structure 2Chapter 2: Literature Review 52.1. Credit risk definition 82.2. The components of credit risk 92.3. Credit risk management 112.4. Risk causes 162.5. Credit measurement 182.6. Basel Committee recommendation in Credit Risk Management

19

Chapter 3: Overview of Credit Risk Management in Viet Nam Banks

21

1. The organization of banks in Vietnam 212. The growth in total assets of banks in Vietnam though period

22

3. Operating Environment in Vietnam’s banking domain 234. Credit Risk Ratio 24

5. Bad Debt 256. The Vietnamese bank ratio of profit/ total revenues 31Chapter 4: Methodology 324.1. Research purpose and target 324.2. Data 334.3. Information gathering method 344.4. Procedures 364.5. Limitation 38Chapter 5: Credit Risk Management at Standard CharteredBank Vietnam (Ltd)

40

5.1. Introduction 405.2. Credit Risk at Standard Chartered Vietnam 415.3. Credit Risk Management at Standard Chartered Bank Vietnam (Ltd).

42

5.4. Financial Analysis 53

5.5. Questionnaire result analysis 615.6. Credit Risk Management Summation 745.7. Recommendation 765.8. Conclusion 82References 83Annex 1 85

TABLE OF FIGURES

Figure 1: Credit Analysis Process Flow (John

B.Caouette, Edward I. Altman, Managing Credit

Risk, 1998)11

Figure 2: Credit Organization in a large bank

Joetta Colquitt (2007) 13

Figure 3: Functional Approach to the Credit

Process (Joetta Colquitt (2007) 14

Figure 4: Credit Rating System of Fitch, S&P and

Moody’s 18

Figure 5: The increase of total assets at

Vietnamese Banks from 2009 to 2012 (Extracted from

SBV annual report)21

Figure 6: Credit Risk Ratios at Vietnamese Banks

(Extracted from Vietinbank, Vietcombank, BIDV,

ACB, Eximbank annual report).22

Figure 7: Classification of Loans in Vietnam 24Figure 8: Bad debt rate of Vietnamese banks as at

31th December 2012 (Financial Report of Commercial

Banks)25

Figure 9: The possible loss loans (Group 5)

against total liabilities of Vietnamese banks

(Financial Report of Commercial Banks)26

Figure 10: Vietnam Asset Management Company in

settling the bad debt 27

Figure 11: Extracted from banks financial annual

report. 29

Figure 12: List of SCB staff joined in

questionnaire32

Figure 13: Table of Standard Chartered Vietnam Limited Products 35

Figure 14: The lending procedures of Standard

Chartered Bank Vietnam (Ltd). (Internal Process

37

Document)Figure 15: Documents for Loan Applicants (SCB

Products Internal Document) 38

Figure 16: Credit Grading of SCB (Internal

Document). 39

Figure 17: Table of collateral evaluation at SCB

(Internal Document) 40

Figure 18: Table of maximum percentage for lending

at SCB (Internal Document) 41

Figure 19: The capital mobilization of SCB from

2009 to 2012 (SCB financial report). 48

Figure 20: Annual Financial Report of SCB (SCB

website). Unit: Billion VND 48

Figure 21: The percentage of Loan Development.

Unit: % 48

Figure 22: Bad Debt Rate of Foreign Banks in

Vietnam (Annual Financial Report of ANZ, HSBC,

Citibank, ANZ).49

Figure 23: The liquidity of SCB from 2009 -2012

(Internal Document) 51

Figure 24: The questionnaire result of credit risk

from rivals 53


from changing of governmental policies 55


from ineffective work of legality 56

Figure 27: The questionnaire result of credit risk 57

from lacking of information systemFigure 28: Credit risk from cheating financial

reports and/or capabilities 58

Figure 29: Credit risk from using loans with wrong

purpose 59

Figure 30: Credit risk from cross borrowing 60Figure 31: Credit risk from fraudsters 61Figure 32: Credit risk from staff 62Figure 33: Credit risk from procedures 63

Credit Risk Management at Standard Chartered

Chapter 1: Introduction

1. Background

Vietnam is growing with the fast speed in economy.

Vietnam’s GDP was 136 bil USD, the GDP increased 5.6 %,

the revenue per person is 1540 USD/ year, the inflation

rate is roughly 8% (2012, VBF). Besides, in financial

institutes, banks have achieved some remarkable success,

the CAR (Capital Adequacy Ratio) is 13,7% (higher than 9%

required by SBV), the lending amount against Vietnam Dong

capitalized is 95%, LDR is 91.13% (compared with 103.23%

in 2011), the liquidity was improved in crisis economy.

There outstanding number has been attracted a lot

attention from foreign investments and economy specialist.

Though keeping in safe healthy during this year, Vietnam’s

bank field was faced with a lot of problems. The bad debt

ratio was 4.9% in 2012, increased dramatically with 3.1%

in 2011; (-2.4%) is the decrease of total assets of all

bank system (2012 SBV report). Therefore, credit risk

management is really necessary for Vietnam’s economy at

that moment. If a bank collapsed, that is not problem for

1


one enterprises, this will lead to a bad situation of

economy.

2. Objectives

Credit is a sector that brings a lot of benefits to banks

in Vietnam, but this is one of the most risky sectors

(make up 70% banking risk). Once it happens, it can lead

banks to many serious scenarios, even bankruptcy. In the

world, there are numerous studies that have been made

already for the whole credit risk management in banks.

Then, all studies has been showed off the disadvantages

and advantages of credit risk system in each country like

Takeshi Jingu (2013) for off balance sheet lending risk in

China, Yogieta S.Mehra (2010) for operational risk

management in India. However, almost researches have made

for this sector focusing on some surface elements of

credit risk such as provisioning, processing, etc, not

draw a full picture with whole scenarios can be appeared

when credit risk comes especially in Vietnam where banks

are different from western system. Therefore this study

has been made with the purpose of concentration on credit

risk management (banking) in Vietnam and help reader to

2


possess the knowledge of risk management, especially in

credit of banking sector.

3. Structure

It is very important to build up a well framework to

follow up before go into the detail. The thesis work flow

can be summarized as diagram below

3


In chapter 2, the literature review will be made. The

function of this chapter is to bring out the background,

knowledge and information to understand “what is the credit risk?,

how does it works ?, how can we measure it?, etc”.

The review of banking firms in Vietnam will be reflected

in the chapter 3. The reason why this chapter given in the

thesis is that we can have the full review and see the

growth of banking area in Vietnam passed through each

period. Moreover, we can look again the dramatic change of

financial institutes in Vietnam.

In chapter 4, the methodologies of research will be

indicated in this chapter. The methodologies of research

will focus on data aim, objectives of research; data

source and analyzing methods.

For the chapter 5, The credit risk management practices of

SCB will be reflected in this chapter. Besides, the4


comparison against Basel requirement will be implemented.

On the other hand, the research is completed by a small

research.

Eventually, a conclusion and recommendations will be

listed for ending the thesis.

5


Chapter 2: Literature review

Researches of Credit Risk Management in the world

Credit Risk Management is a very important sector for each

country. Financial institutions have right to gain money

by lending, then, they can get back the original and

interest. That is profits of all banks. However, credit

always contains a lot of risk and can not be eliminated

fully. We can just minimize risk and its bad effect to

banks, even to the whole economy.

In the world, there are many researches related to this

incident. From America to Asia, this incident is always

put in the top urgent. In the size of master thesis,

author would like to choose the most three outstanding6


researches in the world about this domain and one of three

will be chose for master thesis flow.

Firstly, that is the research of Dr. Yuan Mu – China. The

research that he did is applied for Doctor title at

University of Sterling, UK is about China’s Banks Credit

Risk Assessment. At the beginning of the research, he

talked about the methodologies used in the research. The

methods are Soft Budget Constraint and the uncertain of

Keynesian approach. In the Keynesian, they introduce the

prefecture of quantity model in credit assessment and this

is the debate of Mr Yuan. He thought that we are living in

not perfect world, thus, generally we can not obtain the

full information. Moreover, two models above come from

western, so it is not suitable in China where is different

from politic, behavior, demographic, etc.

In the next step, he made an overview about roles of banks

and money for the economy, especially, he mentioned credit

as a factor that is not able to unloose in the economy.

After listing some knowledge about credit risk, he, then,

gave the history scales of Chinese banking history. In

this part, the viewer can see clearly the unbelievable

change of China for each period. He also mentioned the

roles of money and bank in China.

7


Next, he drew a general view of economy of China now with

the statistic. The financial ratios related to credit area

were also dealt with. The final chapters in his research,

he used for his case studies. He did two case studies, one

focused on the credit risk management system of ICBC, the

remaining was utilized for whole banking system in a

province of China.

Nevertheless, he concluded his research by his

recommendation based on the result of interview and his

literature review.

Secondly, that is the research of Dr Edward I.Altman – USA.

In his research, he dealt with the literature review of

credit sector first. Edward has wide knowledge and

experience in banking sector because he is not only a

lecturer of New York University, but also he is the

director of credit risk centre of BNY Mellon (top 50

largest bank in USA).

The literature review of him concentrated on the effect of

change in regulatory to credit risk. Then, he mentioned

the important of credit measurement in credit risk

management. He said that “If we do not have a clearly way of Credit

Measurement, it will be a blind alley for credit risk management”. The

credit risk measurement used is the scales of risk

evaluation made by Moody’s and S&P. On the other hand, the

8


rules of Basel were mentioned as highly importance by

Edward.

The size of Edward Research is much bigger than Dr. Yuan

because if Mr Yuan focused strongly in China, Edward used

his research to compare the credit risk management in the

United States of America and the Europe by financial

ratios like capital position, Capital/ Assets Ratio, etc.

In his research, he did not use any interview or

questionnaire. He analyzed based on actual data of banks

in the US and previous research paper.

The third research that I mentioned before is the research

of JPMorgan Chase. His research applied for banks in the

UK. JP Morgan Chase’s research has appeared in the Journal

of Credit Risk in 2013.

As other research, he also started with the literature

review. However, there are some different between 02

researches below. As normal, he went down from the basic

definition, the principle of credit risk management,

measurement, problem in credit management, but the special

thing is that he mentions 04 credit models: Merton, Rating

Actuary and Macroeconomic. Four of credit models above

will support the credit risk management in banks to be

9


much more clearly from security in credit to protect bank

from the change.

Continuously, he said about the methodologies of his

research (aim, method and limitation). He did compare each

other between banks in the UK to find out which bank is

the best in credit risk management. The actual data and

the statistic are obviously mentioned strongly.

In summary, in the size of Master thesis for the title of

“Master of Art in Business Administration”, the author

will based on the flow of 03 researches above to find out

the problem in credit risk management of Vietnam in

general, at Standard Chartered Vietnam in special way.

Each research has advantage that we can not refuse and the

disadvantage needed to realize. The research will prefer

the way of Mr Yuan model to remaining 02 researches. The

reason is that the model of Mr Yuan applied for China

where has not totally but almost similar demographic,

politic, behavior, etc. However, the remaining researches

will support to find out the best recommendation for a

good credit risk management. Because researches applied

for UK, US, where have powerful competence in credit risk

management.

2.1. Credit risk definition

10


In the economy, credit provider is a basic function of

banks. For almost bank in Vietnam, credit activities make

up ½ total assets and profit from lending is 2/3 against

the total profits of whole banks. However, banking risks

focus on mostly in credit activities. According to Joel

Bessis (2010), “Credit risk is the first of all risk in term of importance”.

Regarding GARP. 2012.”Credit risk is the potential loss due to the

nonperformance of a financial contract, or financial aspects of

nonperformance in any contract”.

State Bank of Vietnam (SBV) - Decision 493/2005/QĐ-NHNN,

22/04/2005. “Credit risk is the loss of payback or late payment”

Generally speaking, “Credit risk is the potential loss that is created

when banks offer credit contracts to customers. Customers do not (or can not)

take the responsibility for their loans and guarantee financial aspects”.

However, we need to understand that credit risk potential

will be kept in every loan. Although a bank has low bad

debt ration, they still face with high credit risk when

they concentrate on only type of individual customers.

Quantitative Concept: Credit Risk is reflected by the bad debt

ratio of bank

Qualitative Concept: Credit Risk is along with the quality of

credit. Means, the quality good will maintain the credit

risk low, and vice versa.11


2.2. The components of credit risk

There is necessary to know the categories of credit risk

for having the deep understanding the environment of

credit risk. Concerning about this element, each research

have different expressions. Due to UniCredit Group, they

classified credit risk into three types: Credit Default

Risk, Concentration Risk and Country Risk. Karen A.

Horcher (2005) expressed her ideas a little bit with

author above in her book “Essentials of Financial Risk

Management”. She though that there is essential to divide

credit risk into six separate types including default

risk, counterparty pre settlement risk, counterparty

settlement risk, legal risk, country or sovereign risk and

concentration risk. However, due to GARP (2007), this

organization listed legal risk as an operational risk and

the concentration risk, is a mistake in managing credit

rather than relating as a type of credit risk. Thus, the

thesis will concentrate on the four remaining types of

credit risk classified by Karen A. Horcher (2005).

2.2.1. The default risk

12


The definition is given by UniCredit Group is the

probability of borrower’s default. The risk appears when

customers have late payback on loan (or) can not

responsible for their obligations.“Default risk may impact all

credit-sensitive transactions, including loans, securities and derivatives” (see

UniCredit Group).

To avoid such risk, Pavla Vodová (2006) considers that

banks should separate bad customer by defining the

procedures of evaluating credit applicants and set a

maximum credit amount provided to one borrower.

2.2.2. Counterparty Risk

Firstly, according to Julius Tandler (2007), Counterpartyrisk is defined as “Risk of non-performance of counterparts onrepaying any amount of money owed to our bank”.

For evaluating the counterparty risk, the credit scoring

should be used. For example, the party who hold the credit

scoring A will have the lower counterparty risk compared

with credit scoring B.

Counterparty Risk encloses Pre-Settlement Risk and Settlement

Risk. 13


Regarding the Pre-Settlement Risk, the Pre-Settlement Risk

arises when the party defaults before the settlement date

and can not meet the provisions of contract, e.g. A

company has a credit contract with the settlement date is

the beginning of Y+3 with the currency USD, but in the end

of Y+2, with the situation of profitable exchange rate

between VND and USD, they exchange their USD to VND in

black market to make profit. Unfortunately, after one week

the buying rate of USD rockets the market. They can not

have fulfilling USD amount as contract required at the

settlement date.

Pre-Settlement Risk includes two components, there are

current exposure and potential exposure (Julius Tandler

2007).

Settlement risk is a baking term used when the

counterparty fail to delivery their assets, money or the

term of contract at the settlement date. Investopedia

explains that “Settlement risk was a problem in the forex market up until

the creation of continuously linked settlement (CLS), which is facilitated by CLS

Bank International, which eliminates time differences in settlement, providing

a safer forex market”.

The cases of German bank Herstatt on 26 June 1974 is a

clearly example about this incident. This bank received

the foreign exchange from their counterparty in Europe,

14


but had not made any payment to the financial institution

counterparty at the settlement date. Then, this bank was

bankrupted, leaving the international banking sector a

loss of $620 million (see Remolona 1990).

2.2.3. Country Risk (Sovereign Risk)

As collected from Wikipedia, “Country risk refers to the risk ofinvesting in a country, dependent on changes in the business environmentthat may adversely affect operating profits or the value of assets in a specificcountry”.

Ms Cristina Alina Naftanalia (2012) guessed that “Countryrisk is a materialization risk of the losses caused by the situation and evolutionof the political and macroeconomic developments from the partner country”;while the Sovereign Risk was considered by her that thegovernment uses their authority to guarantee thetransactions.

2.3. Credit Risk Management

2.3.1. What is the credit risk management?

15

Does the borrowerhave a repayment strategy? What other services are needed by the borrower?

Motivation:Why does the

companyneed to borrow?

Does the lender have an appetite for the industry geography? Is the risk reward ratio acceptable? (Credit Culture)

Business and Strategy Review: Does the company have a clear sense of direction and how to get there? Is it doable?Financial Statement Analysis: Balance Sheet Analysis & Cash Flow Analysis-Efficiency & costs-Profitability-LeverageAssess the financial and competitive strengthAssumptions for projections

Management Analysis: Competence, integrity, depth

Industry Analysis: Position in the industry, market share, price leadership, innovation trends


First of all, credit risk is the possibility that customer

can not payback loan to banks at the maturity date, or can

not payback fully including first amount and interest for

banks. Credit Risk is not only lending activities, but

also other activities like guarantee, commodity and trade

finance. When an approval for an activity is decided,

banks will analyze the credit applicant strictly for

minimizing credit risk. However, credit risk is a default

elements in credit activities, thus, we only can minimize

the risk instead of removing totally.

The question now is “What is the credit risk management?” Due to

a research of New York University in 2010, Credit Risk

Management includes realization and risk level evaluation,

risk limitation, loss minimization when credit risk comes.

John B.Caouette, Edward I. Altman, Paul Narayanan cited a

process of credit analyze process flow that is necessary

for a financial institutes making a credit decision with

minimum credit risk.

16

Financial Statement Analysis: Balance Sheet Analysis & Cash Flow Analysis-Efficiency & costs-Profitability-LeverageAssess the financial and competitive strengthAssumptions for projections

Management Analysis: Competence, integrity, depth

Industry Analysis: Position in the industry, market share, price leadership, innovation trends

Qualitative arguments to be used in credit memorandum

Financial SimulationBreakeven PricingStress Testin

Risk Rating, CovenantsLoan documentationLegal Opinions

Loan AdministrationSet up, Data SystemsFunding Schedule

Loan DocumentationOther Legal WorkClosing

NegotiationsCredit PresentationCredit Approval


Figure 1: Credit Analysis Process Flow (John B.Caouette,

Edward I. Altman, Managing Credit Risk, 1998)

2.3.2. The embody of credit risk management

Credit Risk Management embody in:

- Culture

- Organization

- Policy

17


(See Heinz-Peter Berg, 2010)

2.3.2.1. Culture

According to Federal Reserve Bank of Philadelphia, “Credit

culture more narrowly as the sum of all the characteristics of an

organization's unique behavior in its extension of credit.It not only

encompasses the tangible written policies and procedures, but also intangible,

such as ideas, traditions, skills, attitudes, philosophies, and standards.”

In the book “Credit Risk Management” of Joetta Colquitt

(24 May 2007), he thought that a great credit culture

should have

- Highest annual growth rates of loan

- Weighted credit quality goals for bonds

- Targeted returns to be measured against inclusive of

any asset price changes and interest spread income

- Acceptable exposure levels should be quantified for

the loan mix of the portfolio according to the

liquidity and term structures of the different debt

types.

18

CEOCredit OfficerCredit AdminCredit ManagerCredit Risk Management at Standard Chartered2.3.2.2. Organization

The thesis also cite the diagram of Joetta Colquitt (2007)

about the credit organization

Figure 2: Credit Organization in a large bank Joetta

Colquitt (2007)

In a large bank, the organization will be controlled

follow the regional of operating areas (North, South,

19


West, East), and the sales field will be separated with

the credit risk management (as figure above). The

separation will help the credit go under the transparent

and minimizing the loss of credit.

2.3.2.3. Credit Process

Figure 3: Functional Approach to the Credit Process

(Joetta Colquitt (2007)

20


When a customer comes to bank for a loan request, the

first staff they met is Relationship Manager who can

advise which loan package that is suitable for customer,

and collect the credit application of customer. Then,

he/she will propose the documentation of customer to get

the approval for disbursement after assessing

documentation. RM must follow the loan from the opening

case to ending case. If there is any problem with loans

(customers can not payback loan), RM must send the request

to investigate and further action to the work out and

recovery department.

2.4. Risk Causes

The risk causes of credit can be divided in to Objective

Causes and Subjective Causes. (Kenneth J. Singleton, 2003).

2.4.1. Subjective Causes

Human Resources and Work forces

21

http://www.amazon.com/s/ref=ntt_athr_dp_sr_2?_encoding=UTF8&field-author=Kenneth%20J.%20Singleton&search-alias=books&sort=relevancerank


- The limitation of creditor competence is the big reason

for Credit Risk happen. They evaluate and finalize wrongly

credit decision to non-profit investment, non-effect

business plan, etc. On the other hand, the unstable

financial analyze skill of creditor takes them into fail

in large project consider and decide step with long

investment tenor, project feasibility and capability.

- The morality of creditor is very important in right

credit decision with high influence. Indeed, if creditor

receives corrupt money from project owners or individual

customers for make an artificial report or financial

statements, it can take them to wrong credit decision,

then, make loss to banks.

Operations and Technology

- The credit operates base on the internal rules, DOI

(Digital Object Identifier), Process. However, in credit

risk management, all elements above sometimes are not

complied, not follow the loan distinction, reserves, then,

it weakens the credit risk management of bank. On the

other hand, the technology is one of the reasons that

raise the banking credit risk.

22


- Credit risk may come from verifier board, checker teams.

If they do not follow strictly the process, bank rules,

the risk can be happened.

- The next reason is the policy. Every bank has particular

policy combine with their business strategy. Yet, they

will make a big mistake when create regulation with the

purpose of rocketing business. At that moment, the policy

will be changed into focusing on one kind of economic

element, expanding long term loans while lack of long term

capital, concentrating on profits and bypass the credit

risk compliance.

2.4.2. Objective Causes

Market and Client

- Price fluctuation on the market can make the input

prices (iron, steel, etc.) be high. From this, the

activities of enterprises are not smooth as normal. Thus,

the credit actives will be also influenced. On the other

hand, the compound market of exporting and importing

market can effect direct to banking credit operations.

23


- The cause also comes from customers. They use lending

with other purpose, not focus on business, this have led

the liabilities to increase higher and higher including

banking loans. Secondly, lack of enterprise management can

engender bad result for company even collapsed. Bank can

not collect totally asset from bankruptcy company and get

lost. Thirdly, this is lack of attitude. They did not have

the manner to pay back money while they have the capacity.

Politics and Economy

- The change of mobilization interest ceiling rate from

SBV can lead the lending interest went up. As the result,

many enterprises can not pay back the loan with high

interest and put the burden on the bank.

- The depression of global economy brings the negative

effects to companies. Surplus supply while lack of demand.

They can not sell their goods, products, then, the profits

go down.

- The fluctuation of foreign exchange, gold rate, etc

influences also the enterprise activities.

24


2.5. Credit Measurement

Based on the definition of Standard Poor’s, credit

measurement can be understood that credit measurement is

the evaluation on the good will of loan repayment and the

capability of debtor by ranking letter.

The most popular credit rating method is Moody’s, S&P and

Fitch. The risk will be ordered from lowest risk to

highest risk. The investment decisions are described as

column beside.

25


Figure 4: Credit Rating System of Fitch, S&P and Moody’s

2.6. Basel Committee recommendation in Credit Risk

Management

Basel Committee was established by President of Central

Bank G10 in 1975 (See Wikipedia). This committee has

executive representative of national banking observation

unit of Belgium, Canada, France, Germany, Italy, Japan,

Holland, The United Kingdom, The United States of America.

Basel Committee has annual meeting at International

Payment Bank in Washington, US or Basel City of

Switzerland. The rules of Basel Committee in credit risk

management focus on (See Studies on Credit Concentration,

Basel Committee on Banking Supervision 2005)

26


Rules 1: BOM is responsible for approval and re-evaluate

frequently the credit risk management policy and strategy.

Credit Risk Strategy reflects the level of risk acceptance

with demand profit of bank. Besides, Credit Risk Strategy

also identify the target market and general features in

Credit Portfolio.

Rules 2: BOED must accept to operate credit activities

under bad debt rate required by BOM. They also must

develop policies to foresee credit risks in whole

portfolio.

Rules 3: All banks must identify clearly and manage

strictly in all products and services. For new product

ranges, it need to be verified, tested, risk controlled

before lunching or sent to market with the approval from

BOM.

Rules 4: All banks must set up credit limit for whole

credit portfolio

Rules 5: All banks must work within the required credit

limit

Rules 6: All banks must have a clear process and policies

Rules 7: Lending Operations will be made based on fairly

treating between two partners

27


Rules 8: All banks must update frequently the status of

loans for loans that have signal of bad debt or credit

risk.

Rules 9: All banks must build the system to monitor every

loans to ensure that the reserve is whether enough or not.

Chapter 3: Overview of Credit Risk Management in

Viet Nam Banks

Vietnam is a developing country with fast growth speed

compared with some countries in Asia and over the world.

The banking industry of Vietnam has developed since 1951

after the events of State Bank of Vietnam establishment.

Although banking field in Vietnam has experienced over 60

years – a very modest number with other developed country

like Japan, China, the US or the UK. However, Banks in

Vietnam has achieved a lot of success and has contributed

greatly to the Vietnam’s economy.

28


1. The organization of banks in Vietnam

As the decision of Vietnamese government – 163 CP, Vietnam

has only one State Bank that has the unique function of

printing notes and managing the cash flow. SBV will be at

the centre and manage all banks in Vietnam.

Vietnam has approximately 70 working financial

institutions including Policy Banks, Governmental Credit

Foundation, Commercial Banks, Wholly-owned Foreign Banks,

Branches and representative of foreign banks, Join Venture

Banks.

2. The growth in total assets of banks in Vietnam though

period

Unit: thousand billions vietnam dong

29


Banks 2009 2010 2011 2012Commercial

Banks82.6 82.9 82 80

Foreign

Banks11.43 11.89 12 11.9

Financial

Institution

s

1.36 1.38 1.35 1.32

Figure 5: The increase of total assets at Vietnamese Banks

from 2009 to 2012 (Extracted from SBV annual report)

As you can see from this table the total assets of

domestic commercial banks in Vietnam is highest. The

volume increased gradually from 2009 to 2010 before

reaching a slow fall during 2011 – 2012. Foreign Banks in

Vietnam is the main competition between HSBC, ANZ and

Standard Chartered. The total assets went up from 11.43 in

2009 to 12 in 2011. In 2012, it went down to 11.9. The

total assets of other financial institution dived during

this period along with crisis economy.

30


3. Operating Environment in Vietnam’s banking domain

Vietnam’s banks operations have been effected negatively

from macro economy in recent years. The world economic

crisis impacts greatly to operations of banks. Besides

that Vietnam suffers the highest inflation rate in history

with the largest number around 18% in the period from 2009

to 2012. Thus, SBV issued the tightened policies for

curbing inflation. The capitalization interest went down,

and lending interest rocketed market, the liquidity has

been in dilemma.

At the end of 2010 and beginning of 2011, the tightened

policies of SBV showed clearly in increase the interest of

reimbursement and decrease credit growth limit. Therefore,

commercial banks Vietnam coped with the difficulties in

reaching projected revenues.

The element of gain/loss FX in recent years also is the

important factor that impacted directly to operations of

banks. In 2011, the exchange rate between VND and USD for

31


interbank increased by roughly 9%. After adjustment of

exchange rate with the high inflation rate, the forex

market is in stressed.

Other factor is the gold trade. Gold trade in recent times

has been managed strictly from SBV. From 01st Jan 2013,

all commercial banks do not have the authority for trading

gold. This decision from SBV leads many banks to loss

heavily in profits and capital.

After reviewing the operating environment of Vietnamese

banks, we can realized that SBV has been careful in

managing banks in Vietnam during difficulties economy over

the world with the purpose of avoiding to be in case like

the corruption of giant financial bodies in USA.

4. Credit Risk Ratio

Credit Risk Ratio is calculated as

Credit Ratio = CurrentLiabilitiesCurrentAssets

(See Basel II)

32


The table below showed out the trust that the state-owned

banks (pink highlighted) have the highest credit ratios,

approximately 70%, counted as at 31th December 2012. By

the contrast, the credit management at commercial banks

like ACB or Eximbank seems to be better.

2011 2012Vietinbank 74% 70%Vietcombank 51% 60%BIDV 66% 68%ACB 41% 43.5%Eximbank 46% 53.82%

Figure 6: Credit Risk Ratios at Vietnamese Banks

(Extracted from Vietinbank, Vietcombank, BIDV, ACB,

Eximbank annual report).

5. Bad Debt

5.1. Bad debt and the consequences

Risks always go along with credit risk activities. The

risk will be much more complicated when banks compete

33


together to have many more customers on their hands.

Stages of credit evaluation can be ignored. They prefer

the amount of disbursement to the credit risk management.

From this, it will bring big risk with huge losses to

banks in Vietnam. “Bad debt in the banking sector is a

major concern”, Mr. Le Xuan Nghia, the deputy head of the

National Financial Supervisory Committee.

Bad debt will be a true disaster if it comes true for

banks. The first consequence can be listed out is that bad

debt may lead to decrease the cash flow. When the cash

flow is affected, there is a problem in credit activity of

this bank. They can not have enough money for credit

sector as usual while this is the main sector of banks

with highest revenue. On the other hand, individual

customers, SMEs, corporations are hard to approach the

capital of banks.

Secondly, bad debt is the burden of economy. Bad debt will

not only effect to banks, but also the whole economy. Bad

debt and low interest rate will calm the development of

economy.

Thirdly, if banks have bad debt, they will have plans to

settle the property of customers. However, with the

downturn of economy, this work is not simple, especially

in Vietnam. There are some conflicts between legal

34

Loans in tenorLoans overdue under 10 days Qualified - Group 1Loans overdue from 10 to under 30 daysNotice - Group 2Loans overdue from 30 days to under 90 daysUnder - Qualified - Group 3Loans overude from 90 days to under 180 daysDoubful - Group 4Loans overdue over 180 days Possible loss - Group 5Credit Risk Management at Standard Chartereddocuments. Due to 03/2001/TTLT-NHNN of SBV, banks can not

sell the asset of loans to collect debt. However, the

announcement number 195 of SBV said that banks can sell

the asset of loans directly to collect debt without

permission of debtors. Furthermore, the process of selling

the assets and suing has been taken a lot of time. The

capital will be kept under the mortgage for a long time

and can not be used.

5.2. Bad debt number in Vietnam

Bad debt in Vietnam will be divided into five groups as

the official decision of SBV (15/2010/TT-NHNN, 2010)

35


Figure 7: Classification of Loans in Vietnam

The debt from 03 to 05 is the main reason for credit risk.

With the crisis economy, loans of this group experienced a

dramatic increase passed years. According to the monthly

speech of SBV, as at the end of December 2012, the bad

debt of whole banking system in Vietnam is around 8.8% -

10% against total liabilities, compared with 3.05% in

2011.

Figure 8: Bad debt rate of Vietnamese banks as at 31th

December 2012 (Financial Report of Commercial Banks)

36


The graph above showed that the bad debt is extremely

serious. Vietcombank increased from 2% to 3.21% in 2012,

ACB from 0.9% to 2.1% , Sacombank from 0.57% to 1.4%,

BaoViet Bank from 4.56% to 6.13%, Navibank from 2.92% to

3.97%.

Some banks maintain the speed of average bad debt increase

are Techcombank (increase 0.12% during period),

Kienlongbank from 2.77% to 2.78%. We have one exceptional

case, the bad debt decrease instead of going up. That is

PG bank with 2.96%, compared with 3.06% in 2011.

Figure 9: The possible loss loans (Group 5) against total

liabilities of Vietnamese banks (Financial Report of

Commercial Banks)

37


Overall, almost bank have twice increase of this group as

at 31th December 2012. As the requirement of 15/2010/TT-

NHNN, 2010, for loans in group 5, all banks must keep the

reserve at 100%.

As can be seen from this chart, the highest number is

belonged to BaoViet Bank, i.e. 2.93%. The second place is

Navibank with the number of 2.5%. The remaining positions

are LienVietPostBank, Vietcombank, Kienlongbank with the

number of 1.46%, 1.42%, 1.36% respectively.

Other banks have the loans in this group at roughly 1% are

Vietinbank (0.86%), Techcombank (0.99%), ACB (0.81%), PG

Bank (0.83%).

In general, the highest loans of group 5 are focus on

small banks with low credit management system. “State-

owned economic groups are performing very inefficiently.

They have used a large part of the national capital and

are accumulating bad debts for banks" Mr Nghia, a former

central bank official said. The speech of him is the most

suitable answer for the case of Vietcombank.

5.3. Bad Debt Controlling in Vietnam

38

VAMC InvestorsBanks

Government


World Economy has been experienced a deep fall. The

consequence is that enterprises can not sell their good,

high inventory. Then, they are not able to pay back loans

to banks and lead to create bad debs. In Vietnam, after a

slow decrease of bad debt, it went up over the two passed

quarter in 2013 (from 4.14% in 2012 to 4.65% in 2013 –

VnEconomy). As forecasted and experienced the deep

consequences, Vietnam Government has decided to create

Vietnam Asset Management Company – VAMC on June 2013.

VAMC was established based on the decision number 53 of

SBV. Follow this decision, if financial institutions have

bad debt rate over 3%, they will be required to sell for

VAMC.

39


Figure 10: Vietnam Asset Management Company in settling

the bad debt

VAMC uses the capital of government for purchasing the bad

debt of banks. The bad debts include the assets of debtors

when applying a loan, bonds, etc. Then, company will re-

sell those assets to investors. In 2013, Vietnamese

Government estimates to settle around 80 -100 thousand

billions VietnamDong of bad deb (VnEconomy).

For dealing with bad debt, banks have been required

compulsory reserves by SBV (TT02-2013-NHNN,2013). The

required rate is:

- Group 1: 0%

- Group 2: 5%

- Group 3: 20%

- Group 4: 50%

- Group 5: 100%

The required reserves can help banks to avoid bankruptcy

in case of too much bad debts. The required reserves must

be calculated as formula below

R = Max (0, A-C) x r

While: R Compulsory Reserve Amount40


A Loan Amount

C Collateral Valuation

r Reserves Rate Required

(See SBV regulation, 493/2005/Q.-NHNN, 2005)

Finally, the SBV’s decision number 780 has cited about the

debt restructuring. If loans are in group 1, but customers

are in dilemma and facing with difficulties in paying

back, financial institution can consider the debt

restructuring (including adjust tenor and debt

rescheduling) after strictly evaluation. This action can

support enterprise to have more time to payback loans.

During this time, they will have plan and strategy to push

up the operations of company and pay back money to banks.

6. The Vietnamese bank ratio of profit/ total revenues

NO BanksLending Profit/ Total Revenues

2009 2010 2011 20121 Agribank 73 68 67 62.1

2Vietinban

k90 84 82 81

3 Vietcomba 68 67 62 60

41


nk4 BIDV 70 72 71 715 ACB 63 63 61 59

6Standard

Chartered58 58 57.5 58

Figure 11: Extracted from banks financial annual report.

This table showed that, with the lending profit/ total

revenues over 50%, this is also means that the lending

operation is the main area of all banks in Vietnam.

Therefore, if banks do not have the credit risk management

strong enough, banks will face with a lot of troubles come

from the market, this is also effected to whole Vietnamese

economy.

Chapter 4: Research methodology

4.1. Research purpose and target42


In the basic way, the purpose and target of the research

is to show the practices of SCB in credit risk management

by analyzing current financial ratios of SCB, describing

the credit management of SCB. On the other hand, author

would like to provide the overview of credit market in

Vietnam with scope of Vietnam Economy, bad debt statistic,

etc. Finally, the research includes a small survey used

for SCB staff with the purpose of investigating the root

causes of credit risk of SCB. Then, author would indicate

some recommendations for credit risk improvement at SCB.

Generally, the research will answer respectively those

answers below:

- Which credit risk is SCB coping?

- How can describe the credit management system of SCB?

(lending procedures, credit management organization,

credit policies, credit measurement)

- How is safety of SCB financial ratios?

- Does SCB credit risk management satisfy with the

requirement of Basel?

- After doing the survey, what do the causes of SCB

credit risk come from?

- What are the suggestions for enhancing the credit

risk management at SCB?

43


4.2. Data

For all researches in the world, we need support

information. The support information is divided into 2

types: primary and secondary. In this thesis, the primary

and secondary information are used.

4.2.1. Secondary information

As business dictionary, “Secondary data is collected by someone

other than the user”. E.g. a student does a research in asset

and liability management in bank can use paragraph that

describes the general asset management of country from

ministry of finance.

Secondary information is the basis for everyone who has

started a research. The second chapter – literature review

is an example of secondary information collection.

Secondary information may be found from a lot of

references. It can be from books, magazines, newspapers;

or from Internet; even from others experiences.44


All secondary data that was collected during master work

is really necessary for the author and help author to

solve with problems in credit risk management of banks in

Vietnam. The information, data of banks in Vietnam is

always kept in secret. The approach with this kind of

information is really hard, but, with the support of

Standard Chartered Vietnam and other banks colleagues,

author has obtained a lot of precious secondary data which

is really useful for the dissertation.

4.2.2. Primary information

If secondary data is collected from others and it will be

summarized and categorized by author, primary data will be

processed by the author. “Data observed or collected directly from

first-hand experience”, quoted from Business Dictionary.

In a dissertation, primary information is one of the best

ways that help students to apply the theoretical knowledge

that is received from academic environment into reality.

It will bring an effective view of thesis about problem,

with the comparison between the practices and literature.

Then, the productivity of article will be higher.45


During the size of master dissertation, primary data will

be also utilized by author. The purpose of using this

method is that primary data will support author to find

out the true causes of credit risk to Standard Chartered

Vietnam, then, author can propose right and suitable

solutions for credit risk improvement at SCB. The method

of primary information is to use questionnaire. The

participant for questionnaire is SCB staff.

4.3. Information gathering method

With the purpose of research, there are really necessary

to combine the methodology of qualitative and quantitative

methods for the highest and the most effective

productivity. The usage of both is called mixed method.

Based on the definition of Dr. Johnson, “Mix research - research

that involves the mixing of quantitative and qualitative methods or paradigm

characteristics”.

4.3.1. Quantitative method

46


As defined by Paranomality website, “Quantitative method is a

research method that relies less on interviews, observations, small numbers of

questionnaires, focus groups, subjective reports and case studies but is much

more focused on the collection and analysis of numerical data and statistics.”

Additionally, the definition of Creswell (1994) stated

that the quantitative research is explaining phenomena by

collecting numerical data that are analyzed using

mathematically based methods.

Author made a questionnaire was filled by SCB staff to

prepare the quantitative data. The number of SCB staff

joined in this survey is 200 people with detailed as table

below. The questionnaire will include rank order questions

with the purpose of ordering from lowest to highest level

of credit risk causes. The research questionnaire is

designed with the verification from SCB.

Title QuantityBusiness Lines (Sales) 100Product Officers and

Managers

20

Risk Officer 20Operations Officer 20Credit Officer 20

Branch Back Office 20

47


Figure 12: List of SCB staff joined in questionnaire

The target of questionnaire is to statistic the causes of

risk in the opinion of SCB staff. The research response

result input to SPSS and Excel for analyzing data.

4.3.2. Qualitative method

The definition of qualitative method is given by Wikipedia

is “Qualitative researchers aim to gather an in-depth understanding of

human behavior and the reasons that govern such behavior”.

On the Business Dictionary, they define the qualitative

method that the qualitative method includes the interview

conducted to gather the needs, reaction and point of view

to a problem.

The qualitative method was processed under face to face

interviews and voice conferences. The steps of qualitative

will be discussed in the next part.

4.4. Procedures

48

http://en.wikipedia.org/wiki/Human_behavior


After showing out the literature review, the financial

analysis for credit risk management in Vietnam, especially

at Standard Chartered Vietnam will be processed. The

analysis will be focus on two categories below.

Short-term liquidity risk, this ratios help to know the

current operations of enterprise and the ability of pay

back liabilities in short term.

Long-term risk shows the possibility of paying back

liabilities in the long term.

Along with analysis financial ratios, author used crystal

ball for calculating the expected loss of SCB based on the

data of bad debt at SCB through the period from 2009 –

2012. The analysis will operated under Variance and

covariance method.

The survey was conducted under the permission of SCB

Vietnam. At the beginning, author sent introduction email

by internal system to whole SCB Vietnam and get the

response for accepting to join the survey or not. The

response from email was tracked. After having enough

people as listed in previous page, author sent electric

questionnaires to all interviewees via email. Kindly be

noted at this point, the questionnaire was made by Google,

and the data return was recorded under XLSX file. Then,

the data was imported directly to SPSS for analyzing.49


The interviewer was joined by 250 SCB Staff. The reason

for needing much more 50 participants than official

portfolio is that some staff could give up during the

interview session; the connection between Google server

and SCB net could be broken, then, the records of

interviewees were not validated on the system, etc. Many

reasons could be appeared during session, then, we need to

have supplementary questionnaire to avoid risk of

insufficient data. The result of the survey is that author

collected 210 result samples from colleagues. However, as

mentioned before, author chose only random 200 samples for

statistic in the master dissertation.

Besides, the direct interview with SCB managers will be

held. Why does the author need to question them directly

instead of emailing for them as other staff? We can answer

this question in simple way. They are all managers of SCB.

They are really busy for dealing with bank operations. On

the other hands, they have a lot of emails per day and if

author sent email to them, they can miss this email

because it is marked not importance, secondly, they think

that they do not need to response this kind of email.

Thus, author did call to them and arrange the small voice

conference with 10 managers in the south. Each

conversation has the duration of 5 minutes. For the rest

managers, the author tried to appoint with them for having50


lunch together, in this appointment, the questionnaire was

implemented. Fortunately, the voice conferences and

appointments with managers were successfully, author got

all their information, comments about this problem at SCB.

Their points of view are really precious for not only

statistic of the survey, but also for the current status

of credit risk at SCB.

4.5. Limitation

4.5.1. Difficulty in the ratios list

There is a lot of limitation in selecting the financial

ratios. It is really hard for analyzing all ratios. Author

must select the most important and outstanding factors to

list in the dissertation.

4.5.2. Difficulty in private data approach

Almost documents in banks are confidential. Although

author is currently an officer of SCB, the data copy must

51


be authorized by compliance department. However, author

can see a part of needed information because the remaining

documents are ranked as highly confidential. Thus, author

does not have the authorization to access.

4.5.3. Limitation of getting co-operation from SCB staff

SCB staff have high workload. Thus, author found hard to

getting the co-operation from filling in the survey. The

only method in this situation is to persuade as many as

staff for reaching the number of estimation, design an e-

survey and send link through internal email.

52


Chapter 5: Credit Risk Management at Standard

Chartered Bank Vietnam (Ltd)

5.1. Introduction

Standard Chartered is a successful M&A between Standard

Bank and Chartered Bank in London (UK) in 1969. As the

information from Wikipedia, “It operates a network of over 1,700

branches and outlets (including subsidiaries, associates and joint ventures)

across more than 70 countries and employs around 87,000 people. It is a

universal bank with operations in consumer, corporate and institutional

banking, and treasury services. Despite its UK base, around 90% of its profits

53


come from Africa, Asia and the Middle East.”. With the revenue of $

18258 billion and Operating Income of 19071 billion in

2012 (See FTSE 2012), Standard Chartered is one of the

biggest international banks over the world.

In Vietnam, Standard Chartered opened a representative in

1904 in Saigon, Vietnam (now Ho Chi Minh city). Then, It

came out of Vietnam due to the war and returned in 1993.

In 2009, Standard Chartered commenced operations in its

locally incorporated entity – Standard Chartered Vietnam

(Limited).

After long time operation in Vietnam, Standard Chartered

Vietnam has been a bank in top 3 of strongest foreign

banks in Vietnam along with ANZ and HSBC. It provides

products and services for variety segments: Personal

Banking, Priority Banking, SME Banking and Wholesale

Banking.

Personal

Banking

Priority

BankingSME Banking

Wholesale

Banking

Deposits Priority

Benefits

Current

AccountTransaction

54


CardsPriority

Solutions

Treasury

Services

Principal

FinancePersonal

Loans

Priority

Services

Trade finance

and Working

Capital

Corporate

FinanceMortgage International

Banking

Services

Financial

MarketsInsurance

Term LoansServices

5.2. Credit Risk at Standard Chartered Vietnam

As one of the top 3 strongest foreign banks in Vietnam,

SCB should not be out of the race for launching credit

products to attract customers. Nowadays in Vietnam, people

have adapted with purchasing goods by credit card (non

using cash) or approaching personal loans easier. A loan

will bring a huge benefit to bank, but it also creates a

big loss when customers are not able to payback in crisis

period.

“Risks can be found in any products”, Mrs. Trinh Dinh

Phuong Anh – Head of Consumer Banking Product, SCB Vietnam

said.

55

Figure 13: Table of Standard Chartered Vietnam LimitedProducts


In Vietnam, Vietnamese have approached the credit cards

since 2008, so credit cards are just familiar with a part

of people in Vietnam. Many people do not have the

awareness the importance of paying back money after buying

goods. Like personal loans, when customers apply to a

credit card or loan, they do not need to have a clearly

financial plan for repayment. The application just

includes the job certification and salary statement. This

will create a big split for bad debt if banks do not have

a strong credit risk management.

More secured than credit card and personal loans, mortgage

loans require customers to deposit their asset for

guarantee. In case of bad debt, banks can settle the asset

for money collection. However, as talked in the previous

chapter, there is still some mismatch of the legal

documents in Vietnam. It will take long times for asset

settlement. On the other hand, the property fluctuates

daily. At the moment of credit decision, the asset (or

property) is in good price and can be guarantee for loans.

However, after few months, the price of asset can be

declined. In this case banks will be lost, the

consequences are really incredible.

SCB is a foreign bank, thus, the process of credit risk

management in each country will be synced with SCB group.

56


Indeed, with the credit risk management system, SCB

Vietnam have stable in credit development. Although the

profit can be low compared with other banks, but SCB has

the lowest bad debt rate in Vietnam. “Slowly but surely”,

Louis Taylor – CEO SCB Vietnam said. The credit risk

management of SCB will be explained deeply in the next

part.

5.3. Credit Risk Management at Standard Chartered Bank

Vietnam (Ltd).

Credit Risk Management system is an important tool for all

banks. In Vietnam, as a foreign bank, SCB must have strict

regulation on credit management. If they do not protect

their credit risk management, they must to face with a lot

of troubles when credit risks happen. The worst result is

that they must re-sell bank to other financial institution

like SCB Canada (Wikipedia) and go out of Vietnam. Thus,

Credit Risk Management is one of the actions that is put

in priority.

5.3.1. Lending Procedures

57


Figure 14: The lending procedures of Standard Chartered

Bank Vietnam (Ltd). (Internal Process Document)

In Vietnam, each bank will have separate lending

procedures. The process will be different a bit betweens

banks based on their policy. However, as a world wide

bank, SCB have a united process and the same for all SCB

58


in over the world. Therefore the procedures of SCB will

have some changes, compared with other local banks.

As can be seen from the figure above, first step is

“document collection”. This step will be processed by

sales officers (PFC-*, DS*, R*). After agreeing to apply

for loan, customers will be requested for document

preparation. The needed documents for two kind of loans

are listed on two table below.

59


Figure 15: Documents for Loan Applicants (SCB Products

Internal Document)

Sales Officers will make a seal “Original Seen and

Verified” on all received documents from customers to

announce the responsibility of documents. Then, they will

transfer all documents to Sales Coordinators.

The next stage is basic assessment. After receiving

documents from Sales, Sales Coordinator will have a check

as if fulfilling documents, verify signature of customer.

Sales Coordinator will book loan on “Lending Tracking

System” to announce for credit. Then, they will scan all

documents to a system that is called eOPS and book CIC. In

Vietnam, the credit history of all customers will be

stored in CIC (a property of SBV). Sales Coordinator must

attach the result of CIC with the document before transfer

to other department before processing.

Credit Officers and Operations Officer will do the

remaining steps. Credit Officer will check again the

submitted documents by Sales Coordinator. If there is any

enquires, they will reject to Sales Coordinator and note

the rejection reason on comment of EOPS. From this, Sales

Coordinator will request Sales Officer to explain. After

having acceptable reason, Credit Officer will do the next60


action.Credit Officer will call to customers for KYC,

verify against the document of customer. Credit officer

will also check the CIC result from Sales Coordinator. If

customer has not bad debt or bad lending history, credit

officer make a loan proposal, then submit to authorization

officer. Customer will be scored, and passed cases must

above 4.

Grade Rank Description Risk Status92-100 1 Excellent Low83-91 2 Extreme good Low74-82 3 Very Good Low65-73 4 Good Low56-64 5 Average Normal47-55 6 Normal Normal38-46 7 Under Average Normal29-37 8 Under Standard High20-28 9 Loss High10-19 10 Highest Loss High

61


Figure 16: Credit Grading of SCB (Internal Document).

If loans are approved, credit officer will send a request

to Asset Valuation Company for asset appraisal. The

finding will be exposed after 2 working days. This step is

only for mortgage loan. The collaterals of loans are

evaluated as follow table of condition.

Collateral Evaluation Types of Collateral

Strongest – 1

- Block deposit amount at

SCB

- Personal Mortgage in

urban areas in Hanoi or

Ho Chi Minh City.

- Corporate Mortgage in

urban areas Hanoi or Ho

Chi Minh City

- Governmental Bonds

- Bonds issued by State-

owned BanksAverage - Guarantee by government

62


- Mortgage in sub-urban

areas in Hanoi or Ho

Chi Minh city.

- Stocks posted in

VietnamStock Exchange

Center

Low

- Transportation

- Inventory

- Stocks are not posted

Other

- Guarantee by other

companies

- Infrastructure

Figure 17: Table of collateral evaluation at SCB (Internal

Document)

The accepted collateral will be considered for loans must

be higher than low. After having the result of evaluation,

credit officer will proposed all documents along with

Asset Valuation Result to CAC (Credit Approval Centre –

including all related Head and Managers) to get the final

approve. After having the approval, credit officer will

complete case on EOPS, then, push to Operations Unit.

63


Operations Officers will include ATM& Card Operations

Officer, Lending Operations Officer, Account Services

Officer. Lending Operations will take the responsibility

for disbursing money to customer account when Account

Services team open successfully. The request will also

send to ATM& Cards team for issuing cards for customer if

demand.

No borrowers can make the loan with total credit. The

limit will be set by SCB for avoiding risk. The percentage

of credit limit will base on the borrowing purpose, the

financial prove, etc.

Purpose of borrowing Maximum creditPersonal Loans Based on income, from 3 -5

times monthly incomeMortgage Loan Based on the collateral,

maximum 70% of collateralSME Loan Based on kind of loan, from

70% -100% WB Loan Based on kind of loan, from

70% -100%

Figure 18: Table of maximum percentage for lending at SCB

(Internal Document)64


As the requirement from Basel (2000), Credit organization

must have clearly credit granting. That’s means the

lending procedure must be divided carefully, separate the

business unit and credit department where credit

processing and deciding. On the other hand, the limit for

borrower must be set based on bank’s policy. Compared with

those rules of Basel, SCB has worked well in this field.

5.3.2. Credit Organizational Structure

SCB has indentified the roles and responsibility of BOM

and all staff in credit operation and management to ensure

that:

- All important credit strategy and grading should be

considered carefully by individual and team with wide

knowledge and experience in credit risk management.

- All departments related to credit activities will be

separated to guarantee credit quality. For example,

credit analyzing department, business line, credit65


management are three departments which work

individually for minimizing the unclear in lending

process.

Here are all units at SCB involving the credit risk

management

- Board of Management (BOM)

- Board of Executive Directory (BOED)

- Credit Risk Management Union (CRMU)

- Credit Centre (CC)

- Board of Branch Managers (BOBM)

- Collection Department (CD)

- Group Audit (GA)

Board of Management (BOM)

BOM is responsible for final accurate of credit activities

in banks including strategy propose, target and action

plan of BOM. The credit responsibilities are:

- Approve and re-evaluate frequently credit strategy as

a party of strategy and business target of bank.

- Approve credit policy with safety in lending

guideline.66


- Approve organization structure of credit sector in

bank including delegation

- Approve types and products of lending.

- Ensure recruiting a qualified management team enough

for credit management.

- Forecast the scenario of credit risk now or in the

future

- Read carefully the annual financial report of bank,

BOED, internal audit, etc to monitor the quality of

credit process compliance.

-

Board of Executive Directors (BOED)

BOED is responsible for complying with the credit strategy

published by BOM

- Guarantee the credit activities followed indentified

strategy.

- Observe the capabilities of loan repayment and

suggest the level of reserve.

- Ensure the Human Resources and Training Development

if any.

67


- Report the credit risk management to BOM at least

twice a year.

Credit Risk Management Union (CRMU)

- CRMU is including senior managers in credit sector.

CRMU is under the responsibility of following credit

risk codes of bank

- Build and propose credit policies and procedures,

then, submit to BOED.

- Set the credit limit for lending portfoliobased on

credit risk management strategy.

- Evaluate the quality of lending portfolio and

portfolio materials.

- Maintain and evaluate the credit scorecard

Credit Centre (CC)

CC is the unit where approve all loan applications.

68


- Approve all loans under 120 billions VietnamDong, if

excess the above amount needed to have approval from

BOED.

- Report credit activity directly to CRMU and support

for Audit Company, Group Audit.

- Comply strictly to lending policies and procedures.

Board of Branch Managers (BOBM)

BOBM must warrantee the operations of branch. BOBM do not

have the right to approve loan application, but the

related credit responsibilities are

- Manage all process and policy compliance at branches.

- Promote and training the lending products, policies,

and system to staff.

- Report the credit operations to CRMU

- Guarantee the competence of staff at branches in

credit area.

Collection Department (CD)

69


An effective department of collection in bank is highly

important. When experience staff in credit collection work

in a unit, they can suggest the methods that are suitable

for situation, use deeply knowledge of law, negotiate and

other skills that gained previous cases. Moreover, the

alerts of collection officers are necessary for minimizing

bad debt. They can base on some criteria like overdue,

loans in difficulty trading areas, etc. to notify to

credit officer.

When they foresee the signals of bad debt, collection must

follow the collection solutions that are built by CRMU.

- Negotiate with customer for restructuring loans by

changing terms, interests or collateral.

- Request to repay back loans.

- Settle the collateral or sue for non – performing

loan at the court.

- Transfer loans to shares.

Group Audit (GA)

Target

70


GA will directly report to BOM. They have an important

role in identify whether all units comply strictly with

the policies whether or not. GA will an individual unit,

they just need to report to BOM about the activities of

credit. BOM can not control the operations of GA. GA is

under the control of Regional Audit including Singapore,

Thailand, Malaysia, Vietnam, Indonesia, Philippines.

Responsibility

GA must follow

- Evaluate the suitability, full and effective of

internal process and policy.

- Checking the transparent of financial ratios.

- Consider any official decisions from CEO to bank’s

operations.

- Discover fraud in credit sector.

- Checking the authority on the system for each unit.

- Unusual audit for minimizing frauds.

GA will have unlimited right to assess to the system,

bank’s operations and must receive the support in

reporting of related units.

The organization of SCB was showed above. The organization

of SCB credit management was designed in united concept

71


over the world. Therefore, the verification of SCB

(internal audit) always operates individually. CEO only

can receive the report from them, but can not effect to

change the result. It is not surprise that the requirement

of Basel is followed up strictly at SCB.

5.4. Financial analysis

5.4.1. Risk Analysis at SCB

Before starting to analyze the Bad Debt at SCB using the

Add In Crystal Ball, we need the first look about the data

of bad credit of SCB through the period from 2009 to 2012

by the chart below.

72


1st Quarter 09

3rd Quarter 09

1st Quarter 10

3rd Quarter 10

1st Quarter 11

3rd Quarter 11

1st Quarter 12

3rd Quarter 12

0 50000 100000150000200000250000300000

Bad Debt of SCB

Series 1

Using the Crystal Ball, with the Binomial Distribution,

with the possibility of 0.25 (as standard), trial 1000

times to calculate the Va, we have the results in graph

below

73


The result of the software reflected that after 1000

trials, the Alpha = 5%, applied the Variance and

74


covariance method to calculate the expected loss and the

formula

VaR = Vox(-m+ ⱷ(z)∂) (1)

Using statistic method, we found that μ = 98000, and ∂ =

73000

Applied for (1) with alpha = 5%

VaR = 252 753 (millions VND)

In consecutive year, the loss estimation of SCB will

around 252 753 millions VND.

5.4.1. Capital Mobilization

Currency 2009 2010 2011 2012VND 1891 1945 1956 1554USD 1238 1519 1938 1435

75


Figure 19: The capital mobilization of SCB from 2009 to

2012 (SCB financial report).

As can be seen from this table, the capital

mobilization of SCB went up steadily in this period.

The activities of mobilizing in USD or in VND achieved

a great success with the big amount of 1554 billion VND

in 2012 and 1435 billion VND (as exchange from USD

mobilization). If the economy has not gone down in

2012, the capital mobilization of SCB can be better.

5.4.2. Loan Balance and Bad Debt from 2009 – 2012

Criteria 2009 2010 2011 2012Total Loan

Balance1860.43 2236.64 2238.85 1927.12

Bad Debt

Rate

(Group 3

to 5)

3 3.1 2.9 3

Reserve

Rate2.89 2.89 1.5 1.2

76


Figure 20: Annual Financial Report of SCB (SCB website).

Unit: Billion VND

From the table above, the percentage of credit growth is

calculated as below

Criteria 2009 2010 2011 2012Percentage

of Loan

Developmen

t

NA 120.22 100 86.07

Figure 21: The percentage of Loan Development. Unit: %

As can be seen from both tables, we can see the loan

development of SCB increased gradually from 2009 -2011

before experiencing a slight decrease in 2012. The Loan

Balance went up from 1860.43 billion VND to 2236.64

billion VND in the period of 2009-2010, increase 120.22%.

It also increased to 2238.85 billion VND and reached the

percentage of loan development 100% in 2011. However, as

the result of economy crisis, the percentage of loan

development decline slightly to 1927.12 billion VND in

77


2012 (increase only 86.07%). In 2013, SCB estimates to

grow higher than 2000 billion VND in loan disbursement.

The bad debt rate is around 3%, compared with 5% as

requirement from SBV (SBV regulation, 2011). This number

shows that SCB has achieved a good result in bad debt

management. In group of foreign banks, SCB is leading in

curbing bad debt.

Criteria ANZ Citibank HSBC ANZBad Debt

Rate (From

3 to 5)

3.9 3.1 3.5 3

Figure 22: Bad Debt Rate of Foreign Banks in Vietnam

(Annual Financial Report of ANZ, HSBC, Citibank, ANZ).

5.4.3. The structure of loans of SCB in 2012

78


This Pie Chart reflected that loans came from

international enterprise are highest with the percentage

of 59% in 2012. The next position is the domestic

companies, 26%. The last is from personal banking. Yet,

kindly be noted that CB of SCB has been found since 2009.

It has only 5 years for development till now. This proves

that the personal banking will be moved ahead and be

forecasted to beat out domestic enterprises for 2nd place.

79

26%

59%

15%

Structure of Loans based on types of customers

Domestic EnterprisesInternational EnterprisePersonal Banking


9%

54%5%

27%6%

Structure of Loans based on loans purposes in 2012

Business Expand Working Capital ImprovementGuarantee Early BusinessOther Purpose

(See annual report of SCB – 2012)

We have one more pie chart described the structure of

loans based on loans purpose of wholes sales banking at

SCB. Making the largest part of “cake” is belonged to lend

for improving working capital with 54%. The working

capital loans are short term, usually under 1 year.

The working capital of enterprise is calculated

Working Capital = Current Assets – Current Liabilities

(Investopedia)

80


When the working capital lost, companies must add to

maintain the business. Thus, make a loan from bank will be

a good choice for them.

Second place is “Loans for early business”. As the

encouragement from SBV, SCB has launched several promotion

loan packages for new business. These packages will

support new companies to have fulfilling capital for

producing and business lines. The percentage of criteria

is 26%.

The remaining places are “Business Expand”, “Guarantee”

and “Other Purpose”, respectively.

5.4.4. Credit Growth

With the good history of credit extent, Standard Chartered

is assigned in the bank group can develop the maximum of

lending 14% while other foreign banks in Vietnam like

HSBC, ANZ, Citibank stopped at 11%. This proves that SCB

has an advantage in developing credit sector in Vietnam

because of suitable interest rate, good credit risk

management system.

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5.4.5. Liquidity ratio

2009 2010 2011 201225% 27% 27.5% 31%

Figure 23: The liquidity of SCB from 2009 -2012 (Internal

Document)

The liquidity ratio of SCB has increased gradually in this

period. From 25% in 2009, SCB ended the year of 2012 with

impressive number 31%. Because the credit sector in

Vietnam is facing with poor situation. If any decision

like “No pain no gain” at that moment, it can lead bank to

serious consequences. Thus, SCB has tried to increased

credit risk for avoiding risk of liquidation. They balance

between credit and capitalization.

5.5. Questionnaire result analysis

5.5.1. Credit risk from business environment

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5.5.1.1. Credit risk from rivals

One of the most outstanding point that can be used for

describe about Vietnam Banking market is that almost banks

now are focusing on expanding network, concentrating on

largest cities and industrial zones, especially personal

loan concentration. All banks are joining in this race,

then, it leads the competition to become much more

drastic. As can be predicted before, SCB developed based

on the stability. When seeing the expanding strongly

networks of other banks, SCB still maintain the number of

branches at three (two for Hanoi and one for Ho Chi Minh).

The target customers will have stable and high income. SCB

does not intend to general market.

However, Sales always scare about losing customers for

other banks. Thus, in some cases, customers with low

capabilities of finance, bad performance of business, lost

in profit, competitive ratio in the market low, etc.

Moreover, other competitive banks with weaker credit risk

management can offer customers loans with quicker process

and disbursement. Thus, they still ignore all risks above

and make cheating applications and apply loans for

customers. This is one of the important things that make

the quality of credit decreased. Although the credit

83


procedures of SCB are really strong, but “we can not eliminate

all risks”.(See Basel).

From the result of questionnaire, we can see almost SCB

staff agree that credit risk from rivals is high, only 10%

took their choice as normal. The rate of selection of this

question is 90%.

0 10 20 30 40 50 60 70 80 90 100

FewNormalHighExtremely high

Figure 24: The questionnaire result of credit risk from

rivals

5.5.1.2. Credit risk from change in governmental policies

84


As mentioned from credit process, companies or individuals

will be required to submit the business plan and loan

repayment strategy. These proposals based on the current

situation of economy and it can be changed anytime in the

future due to change of governmental policies. “A good credit

contract will be good at that moment, but not certainly in the future”Dr. Le

Xuan Nghia – Head Deputy of Bad Debt Management – VAMC

said.

Indeed, the change in governmental policies will impact

all aspect of economy. If this is a good change, it will

motivate the increase of economy. By contrast, it will

lead to down turn of economy and effect badly to the

country.

For example, the agrarian reform in Zimbabwe is the

consequences of diving consecutively in productivity. Ex-

president of Zimbabwe is Robert Mugabe. In the period of

2000-200, he made an order to return all paddy field of

white farmers and redistribution for black farmers after.

As the results, the productivity of agriculture products

went down haft in 09 years consecutively. (CNN).

In Vietnam, there is no dramatic changes that lead to bad

consequence as the example, but, with the fluctuation of

economy, the price ceiling of some essential products in

85


producing of companies like petrol, oil, gas, iron and

steel has gone up and down as the result.

- Based on decision 9274/BTC-QLG of Vietnam Petrolimex

Corporation, the price ceiling of petrol in Vietnam

will be adjust, increased to $ 124.7/ cask on 15th

July 2013.

- Based on the 19th decision of Ministry of Industry,

the electricity will increase by 5% compared with

previous period.

The result of the questionnaire also pointed out that the

credit risk from change in governmental policies is a high

risk element to credit. The chart below showed that 80% of

SCB staff chose that this is a high risk. 18% of

interviewers thought that is a normal risk and 20% people

chose “extremely high”. The rate of selection in this

question is 85%.

860% 20% 40% 60% 80% 100%

FewNormalHighExtremely High



changing of governmental policies

5.5.1.3. Credit risk from ineffective work of legality

In recent years, Vietnamese government has issued a lot of

documents for guiding credit operations in Vietnam. The

announcement 163/2006/NĐ-CP from Vietnam Government said

“In case of customers can not repay back loans, banks can have full authority

on settling assets of customers”. However, it will be conflict with

the actual that banks are financial institutions, not

legal organizations, thus, banks can not use the assets

for bidding or re-selling. They must send it to the court.

The process at court usually takes long time. Therefore,

banks are coping with a lot of troubles when settling non

performance loans.

At SCB, the bad debt rate is low. There are not many cases

of NPLs must be processed compared with other banks.

87


However, there are several cases that are still pending

due to this reason.

As the result of survey, no one thought that this is not a

risk. By contrast, over 70% of interviewees expressed that

this is really a credit risk. The rate of selection in

this question is 71.2%.


ineffective work of legality

5.5.1.4. Credit risk from lacking of information system

88

0102030405060708090100

Extreme HighHighNormalFew


In Vietnam, there is only CIC provided the credit

information for banks. However, CIC has stopped as an

information provider, not a truly professional credit

evaluation centre.

CIC was found in 1995 as the announcement 120-QĐ/NH14 of

SBV. It has achieved some achievements in providing credit

information of individuals, corporations to banks. From

this, it helps banks to reduce risk for weak customers and

decide right credit decision.

However, the information given by CIC is simple without

detail financial ratios evaluation and based on report

from financial institutions. Monthly financial bodies must

send a report of credit activities including detail

information of customers to SBV. Then, CIC will take the

information of SBV into their database. Thus, if there is

any mismatching from banks (not include customers in the

report), CIC will not reflect any information in the

system. This will be a big gap and then, leads to big

loss.

SCB has a trouble with this mistake. When sales

coordinators of SCB looked up the information of customer

on the CIC, CIC replied that “There is no credit

information”. That’s means customer do not have any bad

debt at banks in last 05 years and customer qualified to

89


apply loans at SCB. However, after 03 days of

disbursement, risk team rechecked all documents of

customers and realized that this customer had a bad debt

(group 4) at other commercial bank. This is one of the

actual consequences appeared at SCB.

0%10%20%30%40%50%60%70%80%90%100%

Extreme HighNormalHighFew


lacking of information system

As experienced gained from history, about 75% SCB staff

realized the problem of incident. 4% of staff evaluated

that this is a low risk. The percentage of this question

is 70%.

90


5.5.1.5. Credit risk from cheating financial reports

and/or capabilities

In Vietnam, the asset and capital of companies are usually

much smaller than debt. Therefore, almost companies used

the method of hiding their loans for receiving a good

report. This will lead bank to take risks. If the current

financial status of companies goes far compared with the

financial report, it will be a big trouble. Companies lost

in actual, but gain profit in the financial report. Then,

what will the sources of loan repayment?

SCB staff also agreed that this is the highest risk from

customer, with the percentage of 100%. The percentage of

selection in this question is 95%.

91


0102030405060

Few

Normal

High

Extremely High

Few NormalHighExtremely High

Figure 28: Credit risk from cheating financial reports

and/or capabilities

5.5.1.6. Credit risk from using loans with wrong purpose

Almost companies are disbursed at SCB successfully must

have a possible business and repayment plan. Hence, if

corporations use wrong purpose as applied loans, all

statistics before disbursement will be nonsense. As a

method of preventing risk, risk officers of SCB must come

92


to corporations frequently with the purpose of rechecking

the usage of loans after disbursement.

In some cases in actual, customers use a part of loans for

personal purpose, then, when companies do not have enough

capital, they are not able to pay back loans for bank and

create the bad debt.

The result of questionnaire reflected as diagram below.

The percentage of selection is 97%.


Figure 29: Credit risk from using loans with wrong purpose

93


5.5.1.7. Credit risk from cross borrowing

Vietnam regulation does not require customers used their

asset for borrowing at only one bank. Moreover, this

information does not reflect in the CIC result. Hence,

bank does not know the asset usage of customer at other

banks

Customers applied loans at SCB sometimes have current

credit relationship with 02, 03 or more other banks. These

customers usually are corporate, big enterprises.

Consequently, SCB is hard to know the status of rollover

at other bank. That means they will use loans of 2nd bank

for settling loans at the 1st bank, vice versa.

This reason has total selection percentage 73%.

94


38%

47%

15%

Few Normal High Extremely High

Figure 30: Credit risk from cross borrowing

5.5.1.8. Credit risk from fraudsters

In the history of operations in Vietnam, SCB has

experienced some cases that made by fraudsters with the

purpose of appropriating money of bank. The bullets below

showed off the cheating method of customers.

- Customers use the fake contract, invoice to prove the

capability of loan repayment.

- Customers create the fake current business

operations. When risk officers come to the company

95


for rechecking. They have act like in a drama to

prove that they are working in normal. However, they

are loosing in revenue.

- When customers deposit their assets as inventory. In

one case that was discovered on August 2012, the

inventory has just only the cover and outside box,

not have the content insides.

- Create fake land authority paper to deposit at bank

- Customers use rental house for mortgaging at bank

- Customers use sharing assets for mortgaging at bank

without permission of asset co-owners

As the result of questionnaire, the percentage of

selection for this question is 63%

0% 20%

40%

60%

80%

100%


96


Figure 31: Credit risk from fraudsters

5.5.1.9. Credit risk from staff

Firstly, credit staff is incompetence. They process a loan

only based on documents from customer, and not verify

again carefully. Then, they analyze on wrong statistic and

lead to wrong credit decision. For the side of approver,

they have many loans for approving. Sometimes, they can

not read totally and carefully one by one document, thus,

they can be easy to take the mistake of following the

instruction of credit officer. Moreover, they are too

confident with the mortgage assets valuation.

Secondly, the activities of rechecking loans after

disbursement are still not tightened. Furthermore, the

knowledge of staff in customer business sector is low,

then, they can not know totally what exactly customers do

after disbursement.

Thirdly, the morality of credit staff is also a problem.

Some credit staff takes advantage of credit approval

authority, they compromise with customer to achieve the

97


commission. Then, they will approve the credit of customer

even though this will bring big loss to bank.

As realized that this is very serious and sensitive

factor, all SCB staff evaluate and mark this credit cause

at high level. The percentage of this question is 98%.

0%

20%

40%

60%

80%

100%

Extremely HighHighNormalFew

Figure 32: Credit risk from staff

5.5.1.10. Credit risk from procedures

98


As talked in previous part, SCB has developed based on

stability. Thus, the lending procedures of SCB have built

with strict security. Thus, the procedures of lending at

SCB will be not a big issue.

The result from questionnaire is also proved that point of

view, with 100% of interviewee.

0

20

40

60

80

100

Few

Normal

High

Extremely High


Figure 33: Credit risk from procedures

5.6. Credit risk management summation

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At the beginning of this part, the author would love to

indicate the human recourses of SCB first. As the result

of the questionnaire, a numerous number of staff chose

that the risk comes from staff is high. However, with the

hierarchy followed strictly as SCB group, the risk from

business line effect to credit decision is not a problem

with SCB. Yet, the other incident is the back office

mistake. Although back officer have great training on risk

management, but SCB still have recorded some credit frauds

related to credit back office. Although the number of

fraud cases is not too much, but this can effect to the

reputation and credit safety of SCB.

The training is also a problem for SCB. Though having

short courses in risk management, the result is not high

enough and sufficient. These courses focus on mainly

introduction, duration is about 1 or 2 hours. This can not

help staff to have fully view of risk management and

realize the consequences of credit risk.

Nevertheless, the credit approval hierarchy is a great

outstanding point, compared with other banks, even foreign

banks in Vietnam like HSBC, Citibank, ANZ. With the

totally separate between front line, back office and

approval board, SCB guarantee the risk of credit will be

lowest. On the other hand, staff with high qualification

100


is another good point for SCB. They have deep knowledge in

Vietnam credit law and regulation. The law and regulation

can not be acknowledged only by BOM or other managers,

this incident must be realized by all staff of SCB to

minimize risks to banks.

Secondly, the procedures of lending process are quite

great. With the standard quality of SCB group, lending

procedure is not a weakness of SCB. Besides the commitment

of approving the credit in 24 hours, SCB has minimized the

paper process to bring the best service to customers. The

security and risk control are ensured. In addition, the

interest rate of SCB can be committed as lowest rate in

the market due to low interest rate of capital

mobilization. Thus, there are many customers applied for

loans at SCB to have the promotion interest rate.

Nonetheless, with strictly lending procedures for credit

risk minimize, a lot of customers can not qualify with the

lending conditions of SCB. Consequently, they will come to

other banks with easier process.

Credit organization is also a strong point of SCB. If

other banks in Vietnam, they are still confused with which

are their standards of credit organization. A lot of bank

give the authorities to the hand of one person or do not

have separate risk controlling division. In contrast, the

101


credit organization of SCB is really a highlight point.

The authority is divided into many people, all steps have

dual control. On the other hand, the risk controlling

division of SCB works effectively in managing credit risk

during this time. As the result, the credit loss and fraud

of SCB are lower than other banks and the pressure of

manager on SCB staff to change credit decision is

minimized.

For the financial ratios, with the loan development in

2012 is 86.07% while the bad debt rate is only 3%. This

proves that the credit risk policy of SCB is safe.

Furthermore, the liquidity increase year by year and reach

approximately 30% in 2012. This can help bank to protect

the capital in short term and have strong capital to

invest in other domain. Moreover, complied with the

requirement of SBV in reverse rate (at least 70%

outstanding balance), authorized capital (3000 billions

Vietnam Dong) are qualified by SCB. There are not many

foreign banks in Vietnam can not do like this.

5.7. Recommendation

1. Recommendation for credit staff and managers

102


As a world trademark of an international bank, SCB has

introduced a professional image of working, services to

customers. For a long time, services quality has been

treated well. However, in recent years, some officers of

SCB have worked for the commission only. They compromise

with customer, ignore rules of credit risk, decide wrong

credit decision. Consequently, banks will take a big loss.

Therefore, staff should put the benefits of bank first to

reduce risk for bank.

Training for staff should be held frequently. The training

for new staff is doing under training on the job. That

means the senior officer will educated for newbie. That is

really unprofessional. The solution is that SCB should

establish the educational centre where has united

pedagogic method, official documents and material. On the

other hands, SCB employee should improve the competence of

risk management.

For the approver, Approver will take the higher

responsibility than officers. Thus, they should work at

the highest morality. Every decision of them will effect

badly / well to operation of bank.

Bank need to have specific plan to improve the quality of

BOM. BOM that is a unit decide the existence of bank.103


Thus, the qualification of BOM should be qualified with

strict condition (talent, qualification, leading skill,

etc.). On the other hand, every documents issued by banks

should be united with detail guidance.

Eventually, bank should push the effectiveness of group

audit. The internal audit will help bank to control the

risk.

2. Recommendation for credit information

In Vietnam, CIC has act as the credit information centre

belonged to SBV. Therefore, SCB need to cooperate with CIC

to develop and improve the credit information system. SCB

should observe and make frequent report to CIC about the

number of loans and quality of credit to CIC.

At that moment, the software named LITS (Lending

Information Tracking System) responsible for tracking all

loans of banks. However, the disadvantages of LITS can not

track a loan over 5 years. After 5 year, loan will be

cleared automatically. Indeed, the report about loan can

be not accurate. SCB should fix this problem to implement

the credit information quality.

104


Almost information of customer is collected from the

application form that is written by customer. Although SCB

always have trustworthy in customers and treat customers

fairly, evidently, not total information written on form

by customers is right. Hence, besides collecting

information from customer, SCB should expand the

information sources to know more about customers business,

the possibility of repayment, etc. Additionally, the

relationship with other banks in Vietnam will also help

SCB to reduce credit risk. If SCB has a suspicious loan,

they can enquiry to partner banks about loan history,

characteristics analysis, etc. That information is not

disclosed to CIC. It is really precious for bank.

Finally, the market division of bank should work more

effectively. They should forecast the fluctuation of

market earlier; give information for other team about

import, export, inflation rate, interest rate of

competitors, etc in time.

3. Recommendation for collaterals

SCB Staff must complete collateral contract, eligibility

contract (land holding certification, verified

105


certification, agreements, etc.) before disbursement

because all paper above will decide the right of settling

assets in case customer can not repay back loans.

SCB should re-evaluate assets and collaterals frequently.

At that moment, SCB use outsourcing company for asset

evaluation. Yet, with large valuable assets, they should

have a board of advisor for asset evaluation. This board

member can comes from reputation and trade mark companies

in this area.

SCB should update the newest circulation, information of

SBV related to collaterals.

4. Recommendation for credit policy and credit procedures

For the business line, they responsible for setting

relationship with customer, maintain the relationship and

expand continuously relationship with customers, then,

reaching the business target safely, effectively.

They should identify the business market, target customer

based on collecting and evaluating the market information,

proposed loans to higher level. In addition, the business

106


line should corporate with other departments, divisions to

build the customer policy, including product improvements.

They also introduce directly newest products and services

to customers and keep in touch with customers in case of

having demand and answer queries of customers.

If the product is lending products, they are in charge of

collecting loans application of customers. They should

evaluate carefully before submitting to credit risk

management department. They must guarantee the documents

and signature of customer that collected from customers

faithfully. Moreover, they also should corporate with

other department for collecting bad debt if any.

For risk management department, with the function of

researching, analyzing, risk management, they must take

the responsible of building credit risk management policy.

From this, they can identify bad debt percentage and have

further action. They also must observe the credit policy

compliance.

Next, they need to manage the credit portfolio.

Observation frequently credit portfolio to ensure that

lending outstanding balance for individuals or groups must

not be over total approved credit limitation. Then, they

should detect risk in time for further action.

107


On the other hand, they must grade customer as standard

grading of SCB, customer classification and risk analysis

including legality analysis, fulfill of application form,

credit decision, etc. Plus, they need to propose the

credit limit for customers to minimize the risk.

Observing and checking the business line in document

collecting, process compliance to ensure a transparent

process.

For lending operations department, they have responsibility for

disbursing loans, loans collection, ensuring the date of

system matched with the hard copies, custody loan

contracts safely and sufficiently.

They must comply with the SCB standard related to check

and verify lending papers. All of papers must be verified,

sufficient and fully legality.

Accordingly, they also ensure that they input information

to system right. All information about the collaterals,

lending tracking, customer requests, etc must be updated

to this system.

They are in charge of collecting the credit papers from

branches, sales channels for custody. They also have an

important function of disbursing loans for customer. They

have the right of using fund held account – a type of

108


account can be debit to negative for disbursement. Hence,

they have to reconcile this account daily in case of

internal fraud.

Lending Operations will make monthly reports which

including lending data (credit limit, outstanding balance,

paid to date, etc), then, send it to SBV. Besides that,

all query information from Business lines, BOM will be

answered by Lending Operations.

The installment payment will be collected by Lending

Operations. For the repayment date, they should monitor

the account of customers, and block installment on

customer account. Then, they should send the list of not

repayment and overdue loans to business lines and

collection department.

When they think about the unnecessary or unsuitable in

credit policy, they need to raise the problems to higher

level for adjustment in time.

5.8. Conclusion

With the downturn of economy, Vietnam and other countries

must have specific strategies to cope with risk

109


management. There are several types of risk. In the size

of master thesis for “Master of Art in Business

Administration”, author would like to concentrate on the

risk in banks, more detail credit risk management. In

banking firms, there are 03 types of risk for banks:

operational risk, market risk and financial risk. Credit

risk belongs to the third group that is financial risk.

Credit sector is core for any banking services. Thus,

credit risk management will be put in top priority. If

credit risk comes to bank, it will bring a lot of loss,

even bankruptcy for banks and bad effect to the whole

economy.

As the importance of credit risk management, author

mentions some researches that were made by famous and

realizable researchers in over the world. They come from

China, UK and US where have strong credit risk management.

The flow of their research goes down from the literature

review, the credit models to the practices / application

for specific cases. The thesis of author will be expanded

based on the flow of three researchers above. From this,

author figure out the assessment for credit risk

management in Vietnam generally, at SCB in special way.

In Vietnam or some countries over the world, central bank

will work like a government division where monitor the

110


cash flow of commercial banks, cash flow in the market and

will issue financial policies for controlling the market.

However, SBV’s operations are still big question. The

policies for credit risk management from SBV sometimes

conflict with the decision, law and regulation from the

government. Thus, commercial banks confuse to follow the

guidance documents.

The credit risk management in this thesis will base on the

culture of credit, organization, procedures and

performance. The statistics are included for each part, if

any.

In this conclusion, author will provide some

recommendations for banks including the documents and

staff to improve credit risk management quality at SCB.

111


REFERENCES

1. Elizabeth Mays, 1999. Credit Risk Modeling. AMACOM.

221pp.

2. Wikipedia, 2012. Credit Risk.

http://en.wikipedia.org/wiki/Credit_risk, Accessed on

06th April 2013.

3. Dr. Nguyen Minh Kieu, 2006. Credit and Appraisal.

Financial Publisher. 444 pp.

4. Le Van Te, 2009. Banking Credit. Transportation

Publisher. 276 pp.

5. Dr. Nguyen Minh Kieu, 2009. Financial Risk

Management. 492 pp.

6. Standard Chartered Vietnam, 2012. Internal Process of

Lending. SCB VN. 72 pp.

7. Standard Chartered Vietnam, 2013. Vietnam Banking

Field Overview. SCB VN. 16 pp.

8. Nguyen Dinh Tho, 2011. Research Methodology in

Business. Labor and Social Affairs Publisher. 592 pp.

9. Cafef, 2013. 2012 Non-Performance Loan of Vietnam

Overview. http://cafef.vn/tai-chinh-ngan-hang/tinh-

hinh-no-xau-cac-ngan-hang-20121106065835302ca34.chn,112

http://cafef.vn/tai-chinh-ngan-hang/tinh-hinh-no-xau-cac-ngan-hang-20121106065835302ca34.chn

http://cafef.vn/tai-chinh-ngan-hang/tinh-hinh-no-xau-cac-ngan-hang-20121106065835302ca34.chn

http://en.wikipedia.org/wiki/Credit_risk


Accessed on 7th April 2013.

10. Code of Conduct, 2013, SCB Policy.

11. Compliance Policy, 2013, SCB Internal Policy.

12. Dr. Yuan Mu, 2009, Doctor Dissertation.

13. GARP, 2012, Credit Rules

14. Decision 493/2005/QĐ-NHNN, 2005, State Bank of

Vietnam

15. Karen A. Horcher, 2005, Essentials of Financial

Risk Management

16. GARP, 2007, Credit Rules

17. UniCredit Group, 2012, Credit Instruction

18. Pavla Vodová, 2006, Thesis for Doctor award

19. Julius Tandler, 2007, Credit Management

20. Remolona, 1990, Bankruptcy for financial bodies

summary

21. Cristina Alina Naftanalia, 2012, Definition for

country risk

22. Wikipedia, 2012. Country Risk.

http://en.wikipedia.org/wiki/Country_risk, Accessed

on 07th July 2013.

23. John B.Caouette, Edward I. Altman, Paul

Narayanan, 2008, Credit Process

24. Federal Reserve Bank of Philadelphia, 2009, Bank

Policy

25. Joetta Colquitt, 2007, Credit Risk Management

113


26. Kenneth J. Singleton, 2003, Credit Risk

Clarification

27. Moody’s, S&P and Fitch, Sources on the Internet

28. Basel Committee on Banking Supervision, 2005,

Studies on Credit Concentration

29. Decision of Vietnamese government – 163 CP,

2008, State Bank of Vietnam

30. Financial Report of HSBC, ANZ, Citibank,

Vietinbank, Vietcombank, etc, 2009-2012, Bank’s

website.

31. Annual Report, 2009-2012, State Bank of Vietnam

32. Decision 03/2001/TTLT-NHNN, 2001, State bank of

Vietnam

33. Decision 15/2010/TT-NHNN, 2010, State Bank of

Vietnam

34. VnEconomy, 2013. VAMC establishment

http://vneconomy.vn/20130522114955509P0C6/no-xau-can-

dieu-kien-gi-de-vamc-mua-lai.htm, Accessed on 029th

July 2013.

35. Regulation 493/2005/Q.-NHNN, 2005, State Bank of

Vietnam

36. Dr. Johnson, 2006, Mix Research Methodology

37. SPSS and Ball Crystal Software Instruction book

38. Standard Chartered Bank Product, 2013, SCB

website

114

http://www.amazon.com/s/ref=ntt_athr_dp_sr_2?_encoding=UTF8&field-author=Kenneth%20J.%20Singleton&search-alias=books&sort=relevancerank

http://vneconomy.vn/20130522114955509P0C6/no-xau-can-dieu-kien-gi-de-vamc-mua-lai.htm

http://vneconomy.vn/20130522114955509P0C6/no-xau-can-dieu-kien-gi-de-vamc-mua-lai.htm


39. Wikipedia, 2013.

http://en.wikipedia.org/wiki/Standard_Chartered,

Accessed on 04th April 2013.

40. Internal Financial Report, 2009 -2013, Standard

Chartered Bank Vietnam (Ltd).

INTERNAL QUESTIONNAIRE OF CREDIT RISK

The purpose of survey is to improve the quality of products and services, withthe target of minimum credit risk. SCB really appreciates your helps andsupports. We commit that the statistics from customers will be used only forthe survey and not to expose to the third party. Thanks for your co-operation !

1. Which department at SCB are you working for? Product Operations Risk

Credit Sales Branch Back

Kindly help to evaluate the cause level of credit risk from the lowest level (Few)to the highest (extremely high) by checking on the square

2. Credit risk from change in governmental policies

115

Standard Chartered Vietnam (Ltd)Operations Department

7th Floor, Vinaconex Tower, 34 Lang Ha Street,Dong Da, Hanoi

Annex 1

http://en.wikipedia.org/wiki/Standard_Chartered


Few Normal High Extremely high

3. Credit risk from ineffective work of legality Few Normal High Extremely high

4. Credit risk from lacking of information system Few Normal High Extremely high

5. Credit risk from cheating financial report and/or capabilities Few Normal High Extremely high

6. Credit risk from using loan with wrong purpose Few Normal High Extremely high

7. Credit risk from cross borrowing Few Normal High Extremely high

8. Credit risk from fraudster Few Normal High Extremely high

9. Credit risk from staff Few Normal High Extremely high

10. Credit risk from procedures Few Normal High Extremely high

116


11. If you have any suggestion for credit risk managing improvement, kindly help us to fill in rows below.

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117


ID Project NameDays Start End 1-Apr

8-

Apr

26-

Apr

27-

May

14-

Jun

28-

Jun5-Jul 2-Aug 6-Sep

1.0 MBA Thesis 158 1-Apr 6-Sep

1.1Thesis Proposal

Submission25 1-Apr 26-Apr

1.1

.1

Define research

objectives4 1-Apr 5-Apr

1.1

.2

Define research

requirements1 6-Apr 7-Apr

Ask for support from

Standard Chartered

Vietnam

2 8-Apr 10-Apr

1.1

.3 Write Proposal3 11-Apr 14-Apr

1.1

.4

Confirmation of Topic

and Draft by IMC

Program Director

0 26-Apr 26-Apr

1

Milestone Table


1.2 Resources 43 2-May 14-Jun

1.2

.1

Find relevant

information through

academic books and

Internet

22 2-May 24-May

1.2

.2

Request for

Information and Data

to Standard Chartered

Vietnam

11 27-May 7-Jun

1.2

.3

Conduct Survey

Questions34 10-Jun 14-Jul

1.3Composition of Master

Thesis83 15-Jun 6-Sep

1.3

.1

Deliver survey

questions to Standard

Chartered Vietnam

33 15-Jun 18-Jul

2


Branches via Internal

Email and Hard Copies1.3

.2 Collect the survey4 20-Jun 24-Jun

1.3

.3

Classify the survey

results3 25-Jun 28-Jun

1.3

.4 Analyze survey results6 29-Jun 5-Jul

1.3

.5

Analyze Standard

Chartered Vietnam Data6 6-Jul 12-Jul

1.3

.6 Complete Master Thesis20 13-Jul 2-Aug

1.3

.7

Submission of Unbound

Version0 2-Aug 2-Aug

1.3

.8 Corrections14 2-Aug 16-Aug

1.3 Final Submission 0 6-Sep 6-Sep

3


.9

4


1