Improving credit limit system in Vietcombank

ues at the working place, the Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) – Thanh Cong branch for their valuable supports cooperation throughout my study. In addition, I would like to thank all professors in NEU Business School for their knowledgeable lectures, who have kindly given me their helpful feedback to my research and inspiring me to deliver the report today. ABBREVIATIONS CAR Capital adequacy ratio CEO Chief executive officer CIC Credit information center FDI Foreign direct investment GSO General statistics office H.O Head office IT Information technology L/C Letter of credit ROI Return of investment ROA Return on assets ROE Return on equity BOD Board of director SBV State bank of Vietnam SMEs Small and medium enterprises VCB Vietcombank – Joint Stock Commercial Bank for Foreign Trade of Vietnam WTO World trade organization LIST OF TABLES Table 2.1: VCB business result in period of 2004-2008. 35 Table 2.2 : Outstanding Structure by customers 43 Table 2.3: Loan structures by industries 44 Table 2.4: Loan structure by term and currency 45 Table 2.5: VCB outstanding debts & result of credit performance 48 Table 2.6: α 51 Table 2.7: β 51 Table 2.8: Identify the credit risk for customer 54 Table 2.9: Level of risk 57 Table 2.10: Credit limit depend risk 59 Table 2.11: Scope of business 61 Table 2.12: Customer point for commercial & service company: 63 Table 2.13 : Financial capital 64 Table 2.14: Management level 64 Table 2.15: Credit prestige rating 65 Table 2.16: Summery of nonfinancial indicators: 66 Table 2.18: Customer rating 67 Table 2.19: Over due ratio 69 LIST OF CHARTS Chart 2.1: VCB structure (Parent company structure) 33 Chart 2.2: VCB structure (Operation structure) 34 Chart 2.3: Total Assets of VCB in the period of 2004-2008 36 Chart 2.4: Vietcombank ROA & ROE in 2004-2008 3637 Chart 2.5: Vietcombank ROA & ROE in 2004-2008 4243 Chart 2.6: Outstanding debts by industries (31/12/08) 4445 Chart 2.7: Outstanding debts by geographic (31/12/08) 45 Chart 2.8: Loan structure by term and currency 46 LIST OF TABLES Table 2.1: VCB business result in period of 2004-2008. 35 Table 2.2 : Outstanding Structure by customers 44 Table 2.3: Loan structures by industries 44 Table 2.4: Loan structure by term and currency 46 Table 2.5: VCB outstanding debts & result of credit performance 48 Table 2.6: α 51 Table 2.7: β 52 Table 2.8: Identify the credit risk for customer 55 Table 2.9: Level of risk 57 Table 2.10: Credit limit depend risk 59 Table 2.11: Scope of business 61 Table 2.12: Customer point for commercial & service company: 63 Table 2.13 : Financial capital 64 Table 2.14: Management level 64 Table 2.15: Credit prestige rating 65 Table 2.16: Summery of nonfinancial indicators: 66 Table 2.18: Customer rating 67 Table 2.19: Over due ratio 70 INRODUCTION 1. Rationale of the research Expanding credit activities is one of the most important requirements of thea fast growing economy and commercial banks need to maintain and improve their competitive positions. However, expanding credit means increasing risk in credit activities of banks. Credit limit system is designed to help commercial banks settle the conflict between growth target and risk management. Bank for Foreign Trade of Vietnam is one of the leading commercial banks in Vietnam with constantly increasing total assets, loans and equity. As other commercial banks, designing and maintaining a credit limit system is very importantcrucial to Vietcombank’s development, Although Vietcombank has already implemented itss credit limit system and credit activities clearly and uniformylly but a lot remains to be done for the final purpose of the perfection of this system is always important to the bank. Therefore, the author decided to choose tthe theme ‘’improving credit limit system in Vietcombank’’ in order to solve problemsfind out some feasible solutions for the bank. 2. Objectives of Research This study aims at finding out Vietcombank’s issue, the weaknesses and recommends solutions to improve its credit limit system. This objective will be achieved by performing the following tasks: - To summarize major aspects of credit limit system in a commercial banks and the basis to design this system - To analyze and evaluate current status of credit limit system of Vietcombank - To propose some solutions to improve credit limit system at Vietcombank 3. Research Methodology: Survey/short interview The research will cover fact, concepts; techniques and approaches explored from credit limit in identifying problems and therefore find out necessary solutions for Vietcombank. The research also gives a quantitative and qualitative analysis of this application process To find out disadvantages of credit limit system, I chose one company; use secondary data such as financial report, introduction of the company, information of company on website, newspaper…to evaluate all qualitative and quantitative indicators. I also have short interviews with manager or transaction staff of the company to get more and confirmed information before giving out final decision. 4. Scope and Limitation Credit limit system in Vietcombank applied for all kind of customers such as: financial institutiones, enterprises, house holds and individuals. In this thesis, the scope of credit limit system in banking only focuses on customers which are enterprises to analysanalyzeis then issue recommendations to improve credit limit system in Vietcombank. The research refers to theoretical frameworks on Credit scoring and rating at commercial banks and the actual credit limit system in Vietcombank. After analysis, the research will shows some problems in VCB then give some recommendations to improve. The research also refers to actual Vietcombank credit activities and the role of credit performance to business operation. Nowadays, changes in banking business are very fast but the policies and regulationrs of officers, State- banks and Vietcombank is not changed in timecan not be changed immediately. So sometimes, these hinder the Vietcombank’s business. Besides, the innovation of credit products is more flexible and modern so the type of enterprise is changing much andand becoming more difficult to measure. Therefore, creditors and managers need to improve their skills, finding more useful methods to measure, to scoreing and rateing them accurately. 5. Structure of the thesis The thesis consists of three main chapters as follows: Chapter I: Theoretical frameworks on Credit limit at Commercial bank Chapter II: Credit limit system at Vietcombank Chapter III: Proposed solutions to improve credit limit system at Vietcombank Chapter 1 THEORETICAL FRAMEWORKS ON CREDIT LIMIT AT COMMERCIAL BANKS Bank Credit Definition Credit relationship is established and existed as objective demands of capital circulation process to tackle excess or, deficiency of capital that often occurs in the economy. A credit is a legal contract where one party receives resource or wealth from another party and promises to repay him on a future date along with interest. In simple terms, a credit is an agreement of postponed payments of goods bought or loan. With the issuance of a credit, a debt is formed. (10)Credit is the provision of resources (such as granting a loan) by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date. The first party is called a creditor, also known as a lender, while the second party is called a debtor, also known as a borrower. (Source: website In other definition, credit is a temporary transfer of value (assets) from the owner to the user in a certain period of time, Users have to return a larger value on due date. There are three categories of credit: temporary transfer of value, limit time and reimbursement. There are many types of credit such as state credit, business credit, personal credit and bank credit. In which bank credit is transferring assets (capital) between banks with other entities in the economy. In this relationship, the bank has role as borrowers (debtors) and role as the lender (creditor). This is an indirect relationship where the depositor, through the intermediary role of banks, invests capital on who need. Bank credit is operation that the bank agree to client use assets (in cash, property or reputation) the principle of repayment by granting loans, discounts (rediscount), financial leasing, guarantee bank and other operations.(21) (Source: Commercial banks - page 343 - Nguyen Van Tien) Distinguishing the credit and lending: any transferring right of temporary using (with repayment) assets is reflected credit relations, this relation is reflected in the forms: granting loan, discount, guarantee and leasing. Thus, credit is broader than loan but granting loan is the most important activity and accounts for the largest proportion in credit activities of commercial banks. Therefore, the term credit and loan is mixed and is often used interchangeably. Characteristics of bank credit Bank credit bases on trust. Banks only grant loans if they are trust in using loan for right purposes, in efficiency of project, and ability in repaying (principal and interest) on due date of customers. Credit is a transferring asset in a limited period. Banks are financial intermediaries ''borrowers to lenders’’, so all bank credits must have duration to ensure repayment mobilize capital. To determine a reasonable period of loan, the bank must base on term of capitals and process of capital rotation of borrowers. If the bank has much stable long-term capital, it can grant long term loans. On the other hand, term of loans must be matched withto the rotation cycle of borrower for repayment on due date. If the banks determine the loan period must be less than the rotation period of capital for borrowers, the customers do not have enough resources to pay debts on due, this cause difficulties for customers. Conversely, if the term is longer than rotation cycle of customers, customer use loans improperly, this cause credit risk for banks. Credit must be repaid on the principle of principal and interest. Refund value must be greater than original value, this means in addition to refund the original value, the customer must pay the bank an interest, and this is the price of the using loans. Interest amount is always more than 0, this offsets operating costs, generates profits for banks and, reflects the nature of bank business. Credit operation is potential high risk of the bank. Attracting credit depends not only on customers, but also on the business environment, this beyond the control of clients such as fluctuations in prices, interest rates, exchange rates, inflation, rising economy, markets, natural disasters ... When customers have difficulties in repayment because of changing business environment, the bank get credit risk. Credit must be based on the commitment to refund unconditionally. Process granting loan places on the basis of strict legal grounds such as credit contracts, agreements for a loan, collateral contract, guarantee ... that the borrower must commit to a return unconditionally to the bank on due date. Roles of bank credit Who needs credit? If you want to buy a car or to travel abroad but you do not have sufficient cash in hand, what would you do? The answer is probably to approach a bank and ask them to advance the money you need which you will repay over a period of time together with interest. Similarly, a company may also approach a bank to provide finance for its business activities. Borrowers may be divided into four main groups: - Personal - Commercial Sole Proprietorships Partnerships Private Limited Companies Public Limited Companies Clubs and Associations - Government - Inter - group/bank Credit extended to governments, including embassies and consulates is subject to Group Head Office’s prior approval. The dealing of inter – group/bank loans is a specialized role of the Bank’s Foreign Exchange and Money Market departments. Why give credit? As any other business, one of main objectives of a bank is to make ‘’profits’’ for its shareholders out of the services provided to the public. And how does a bank make profits? As you all know, the principal business of a commercial bank is to receive money from customers either on current account or on deposit account. The money thus deposited will form a cash base for granting credit to other customers for various reasons. In both cases, interest is involved. However, the rate of interest charged on advances is higher than that applied to deposit accounts. The difference between interest earned and paid represents profit made by the bank. This is the main source of income for a bank. Of course a bank also makes its profits from buying and selling foreign exchange, commission/fees charged for services provided and income from investments. It may be unfair to say that a bank gives credit simply to make profit for itself. In many ways bank lending promote the economic growth of a country. For example, companies who want to expand their business or who are in need of additional working capital can approach their bankers for assistance. Also, bank can adopt a credit policy that wills encourage industrial development and investments, thereby creating employment opportunities and improving the standard of living. As purchasing power is increased, people will stimulate further economic growth. You may perhaps have another question: how much of the customers’ deposits can a bank lend out? Obviously banks cannot lend out all the money deposited with it because they have to make provision to meet customers’ request of withdrawing the whole or part of their money on demand or at a fixed future time. On the other hand, we cannot leave too much money lying idle as this will not generate any profit. It is therefore important that banks should carefully employ bank’s resources and maintain a reasonable spread of them among the various forms of assets, advances and investments so as to obtain the maximum profit. It’s necessary to take a look at the role of credit in the capitalist economy - For the economy The fFundamental role of bank credit for the economy is to rotating transfer capital from the people (individuals, households, companies and governments) that have capital surplus (due to spending less than income). Loan capital is not only for businesses but also for consumer demands. Why is transferring capital from saver to users is important to the economy? The answer is that savers often have not many investment opportunities. Thus, transferring capital between entities in the economy would have beenis congested if lacking bankwithout banks’ existence. Therefore, transferring capital channel through banks takes an important role in promoting efficiency of the economy. Bank credit is not limited only on the traditional function which is transferring capital but also expanded on allocating effectively allocation of financial resources in the economy. Through bank credit, capital is transferred from people who lack of efficient investment projects to those who have efficient investment projects but lack of funds. The result is growing the economy, creating jobs and increasing labor productivity. Capital bank invested in the credit lines, key sectors helps promoting development, modernization, efficiently of those sectors. Bank credit contributes to circulating currency, commodities, regulating market, controlling value money and expanding economic exchanges between countries. Bank credit brings huge revenues to the state budget through income taxes and interest from capital investment of the government. Bank credit is transmission fund channel to agriculture, rural areas, poverty reduction, political stability and social. - For customers First, bank credit meet promptly demand for quantity and quality capital for clients. With advantages such as safe, convenient, fast, accessible and able to meet the large capital requirements, bank credit satisfy various needs of customers. Second, bank credit helps investors capturing business opportunities, expanding production, improving of individual life. Third, bank credit constraints customer repaid principal and interest during the fixed term as agreement. Thus, this force clients attempt most of their ability to use loans effectively, speed up the process of reproduction, profitable business and ensureand ensure debt repayment obligations to the bank. - For banks First, credit is traditional activities, accounting for the largest proportion of total assets and bring major source of income for banks (from 70 to 90%). Although the proportion of credit activities tends to decrease, but bank credit is always professional using the most important capital of the bank. Second, via credit activities that banks diversify the portfolio assets minimize risk. Third, through credit activities, the bank expanded types of services such as payment, deposit, foreign currency trading, consulting... Credit limit system in commercial bank Definition of credit limit system A credit limit is the maximum amount of credit that a financial institution or other lender will extend to a debtor for a particular line of credit (sometimes called a credit line, line of credit, or a trade line) cần cắt bỏ đoạn trong ngoặc như hôm trước đã thao luận. For example, the maximum that a credit card company will allow a card holder to borrow at any given point on a specific card. Credit limit system of a bank is a set of credit limits which apply to various customers or various groups of customers. These limits are based on a variety of factors ranging from an individual's ability to make interest payments, an organization's cash flow and/or ability to repay the principal, to the credit standards employed by the lender. A credit limit is also based on the borrower's recoverable assets in the event of default. Credit limits are most often seen by consumers in the form of revolving lines of credit known as credit cards. They are also used in the extension of open account credit terms from business to business. Other examples include home equity lines of credit, residential mortgages/owner-occupier home loans with redraw facilities, a commercial line of credit or a Bank guarantee. The limit imposed in most cases is fixed for the life of the product, except in the case of credit cards that may be raised upon application by the card holder or offer by the card issuer. Roles of credit limit system Credit activities are one of the main activities of commercial banks. Each bank has a credit procedure and the most important step is the evaluation of whether or not granting loan. To make a decision whether or not a loan, credit officers use a lot of financial and non-financial information. However, each credit officers interested in a different aspect of the business, the assessment is correct or not depends very much on qualification and experience of credit officers. If credit officers well qualified, the evaluation results are exact and reduce risks for banks and vice versa. This also causes difficulties in the approval of managers. In addition, there is no basic for evaluation what maximum amount that can be offer for a customer. Therefore, to create unity in the evaluation of credit, banks have built a system of grading and credit ratings. On that basis the bank built a total limit for each customer based on the ability of the enterprise, based on the maximum rate that credit officers may have grounds to consider loans. Besides, credit limit help branches are active in lending in the limit. Commercial banks apply credit limit system as a method to manage risk according to international standards. In operation of credit, there are two levels of risk in general: (i) overall risk for customers, and, (ii) risk of specific transactions. Overall risk is understood as business losses, inability in repaying debts. Transaction risk means that transaction is not effective. In business, company does a lot of transactions. Risks of a transaction may not lead to systemic overall risk, but if overall risk occurs, the system will offer all risks. Credit limits focus to overall risk, not to transaction risk. Therefore, the credit officers must still assess the risks of specific transactions in each granting loans. However, the credit limit helps credit officers do not repeat overall risk assessment of customers. From management point of view, roles of credit limit are as follows: Control overall risk for customer: Previously, each professional departments asses risk of their customer by themselves. For example, credit limit for lending of credit department is independent to credit limit for L/C free deposit of Trade finance department. There fore, customer’s information is distributed. In nature, all credit products from lending to opening L/C-free deposit brings risk for the bank.. So it is necessary to having a measure to manage all aspects of risks, and credit limit is one of important measure. Enhance collectivity, objectivity in credit activities: The bank empowers self-determination to people who have ability to decide granting loan or not (director or deputy director of branch). The decentralization is creating a proactive and flexible for credit department when working with clients, but also contains certain risks because decisions of individuals are not comprehensive, objective. To solve this problem, the bank first determine maximum credit for each customer (is credit limit). Credit limit is approved by board of credit, not by any individuals. In determined credit limit, manager of branch can decide on his ruling. Thus, the integration of the individual judgments on the credit limit to ensure safety and objectivity of individual’s decisions Expand initiative of branch in credit activities to meet flexible needs of customers. In determined credit limit, the branch can pre-determined actively possible level of transactions for their customers (as evaluation of the branch), does not depend on customers request officially or not. All credit limits are exceeded authority, the branch must submit to head office for approving Depend on credit limit, the branch can approach needs of customers actively, even refuse customers that are not good. Basis for credit limit system Theo determined credit limits in a credit limit system, the first step and also the most important step is credit scoring and rating. Credit scoring and rating counts to 70% workload in the process of determining the credit limit Credit limit system includes credit scoring system and credit rating system. After determining the class of business, based on equity, collateral, field of the business, credit officers can determine credit limit for customers. 1.2.3.1. Credit scoring Credit scoring A statistical technique used to determine whether to extend credit (and if so, how much) to a borrower. Credit scoring is often considered more accurate than a qualitative assessment of a person's credit worthiness, since it is based on actual data. When performing credit scoring, a creditor will analyze a relevant sample of people (either selected from current debtors, or a similar set of people) to see what factors have the most effect on credit worthiness. Once these factors and their relative importance are established, a model is developed to calculate a credit score (a number indicating how credit-worthy the applicant is) for new applicants. The officer inputs applicant-specific information for each variable in the model, and can thus find out how credit-worthy he/she is. Developing a credit scoring model is usually a time-consuming, complicated process given that creditors often have to look at a large sample and consider many different variables. Thus, these models are usually developed at the firm level as opposed to the individual credit office level. Some of the factors considered when developing a credit scoring model are outstanding debt, the number of credit accounts maintained, age, income, credit history, etc. As required by the Equal Credit Opportunity Act, a credit scoring model cannot consider race, sex, marital status, national origin, or religion. If age is considered, the analysis should be such that older people are given equal consideration in a credit application. (311) Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system. Credit scoring is not limited to banks. Other organizations, such as mobile phone companies, insurance companies, employers, and government departments employ the same techniques. Credit scoring also has a lot of overlap with data mining, which uses many similar techniques. Describes methods of credit scoring Credit scoring is a method to assess credit risk of customers through evaluating all information of customer. Criteria are applied differently to different types of customers Credit scoring for three different types of customers: financial institutions, enterprise and individuals. This thesis refers to scoring enterprises Principal of credit scoring enterprise: - If point of customer is between two level, chose higher point - Ranked point is result of the initial point and weight. Using credit scoring system Scoring division Credit officers are those who are responsible for credit scoring and ranking customers. Manager is in charge of controlling credit scoring and ranking customer. Results of credit ratings: The rating is used for credit purposes: - Define credit limit - Refuse or accept granting loan, duration, interest loan and collateral - Assess current status of customers - Manage credit list and extract credit risk reserve Credit scoring and ranking enterprise Type of ownership Type of ownership affects quite a lot of ability to payable of enterprise. Enterprises can be divided into four groups: State-owned enterprise Private enterprise Mixed owned enterprise Enterprise owned by individuals and organizations abroad. All type of enterprises has their own advantages and disadvantages, but in general, depending on the characteristics of each economy that type has different strengths. Vietnam is an example. Vietnam’s economy is affected by former regime of the planned economy which used to get all support from the State. These priorities are expressed through preferential policies; financial support by the State ... Enterprise that is guaranteed by state has a lot of advantages. But it does not mean other businesses do not have their advantages. Joint venture or 100% foreign investment enterprise that have entered Vietnam market have many advantages as machinery, modern technology and supporting by the Government through encourage policies to open investment. These businesses work often more effectively than state-owned enterprises. In addition, private enterprise develops not equally. This fact arises from ability of leaders capital invested in businesses, further more because they received little support from the state. This type of enterprise is less favorable than most others. So type of business impact performance business, it also affects to payable principal and interest. There are impacts not only due to the preferential policies of the state but also the subject of business. The subject is more important, the safety of loan is higher. Considering to type of ownership helps bank evaluate in each period, enterprises which have advantages get higher corresponding points. This is a necessary criterion in the process of grading business. Business fields In current market economy, number of active enterprises is not small. Enterprises are variety in skill, kinds of goods, business cycle, and level of risk…Therefore, to evaluate customer accurately, banks also need to arrange enterprises that have similar features to same group. This arrangement helps banks see the potential of each enterprise in each specific period. This outlook comes from the characteristics of each economy. Each country select different direction of development depends on its strength. Developing countries focus on trade on commerce, services and industry. For developed countries, agriculture is always key sector economy. The choice depends greatly on the social, geographic characteristics each country, as well as the development strategy that the State selected. In parallel with the identification of key sectors of each country, it also needs to understand the development trend of countries, particularly in transition countries. In a transition economy, enterprises are in sector that State set development goals have many advantages. Singapore is an example. Before 2002, the strength of the Singapore is tourism and information technology, but from 2002 to date, Singapore gradually shifted to biotechnology, a new and potential sector. This is a right direction. With this conversion, the biological research center in Singapore is invested with high capital, improved infrastructure, and procurement of machinery. In the near future, biotechnology surely becomes strength of this country. So loans granted for customers in biology field are safer. Of course banks score these companies higher tha._.n others The question arises: is dividing enterprises into groups in credit scoring necessary? The answer is yes. Key or basic sector are supported by the State. Moreover, enterprise in key sector is in favorable conditions. If the State doses not invest in key sector, fail of this sector impact to overall economy. So in credit scoring, dividing enterprise into groups is necessary. Bank builds a frame score for businesses. But this frame needs to change in each period. Scale of equity Scale of enterprises is a synthetic criterion includes many indicators such as obligations to the state, the total value of assets, equity, and revenue. Scale of equity is top priority indicator. It is understood that all business’s capital is spend to conduct business; this capital can be added or reduced during operation. Not only business owners but also creditors care to this capital monitored. On balance sheet, total capital includes short-term loans, long-term from credit institutes, payable and receivable, capital gain from the activity bond issuance, equity and other types of capital. Cost of capital from loan is lower than from equity. Business realizes advantages of using loan, not only of low cost but also low risk. Therefore, business use loans to expand production. Of course the loan is only made when debtor meet requirements of lender. These requirements are in order to ensure repayment of enterprise. In the request, equity is a very important part. Investors find peace of mind when the equity counts safe proportion in total capital. So scale of equity is included in scoring table when bank evaluate customers. However, the same scale of equity enterprises may have not same score. Score depends on business sectors. For each sector, required capital in operation varies. Trade and services sector has faster cycle of working capital , they can make effective business capital, so should usually not need more capital but still gain considerably stable profit margin. Meanwhile, construction field need large amount of capital because of time depreciation, proportion of equity in this field is usually smaller than loans so scoring model is different with other sectors. Agricultural, forestry and fisheries sectors bear more objective risks such as season, materials price… In generally, each sector has specific characteristics so same scale of equity not means same risk Proportion of equity ensures safety for investors. So this indicator is necessary. Financial indicator This indicator reflects overall financial capital and also reflects ability of repaying of business. The most important target of bank is collecting principal and interest from borrowers so analyzing financial indicator is necessary. This indicator includes 5 criteria as follows: - Speed gGrowth criteria: help analyzer compare operation of enterprise through revenue and profit in 2 years: o Speed increasing rRevenue growth rate = (revenue-revenue previous year)/revenue previous year. o Speed increasing pProfit growth rate s = (profit-profit previous year)/profit previous year. - Performance criteria include: o IReturn of inventory turnover = Cost of goods/Average Inventory. o Repayment of capital ratio = receivable / average revenue a day. o Performance using property = Revenue / Assets. - Liquidity criteria: o Current paymentratio = current assets / current liabilities. o Quick paymentratio = (current assets - ReserveInventories) / Current liabilities. - Income criteria: o The profit assetsReturn on Assets (ROA) = (Profit before tax / total assets) * 100%. o Business interests equityReturn on Equity (ROE) = (Profit before tax / Capital) * 100%. o Business benefits product salesProfit margin = (Profit before tax / TurnoverRevenues) * 100%. - Balance capital criteria: o Coefficient of debtDebt ratio = (Total outstanding debt / total assets) * 100% o Repayable principal and interestDebt and interest repayment ratio. o Ratio of overdue debt on total outstanding loans. Obviously businesses workgoes well, use capital efficiently will get a score higher than companies are struggling financially. However, these indicators base on the financial statements of the enterprise, so they may have unwanted fluctuations. Bank assess the importance of each criteria focusing on two indicators reflect the debt balance and profitable. When indicators are completed bank bases on these criteria to give out decision of granting loan. Non-financial indicators Financial indicators are necessary but not enough because they base on past figures by companies banks rely on to predict financial capacity of enterprises. Bank can use other factors determines success or failure of business. Considering non-financial factors help the bank assess business accurately. Some indicators that bank interest when building scoring system as follows: Prestige in credit relations include: the number of loans extended, the number of deferred interest, overdue debts ... Businesses do not make the debt repayment obligations in case: difficult finance or not aware of repayment. Need to find out the customers in which case. Customers do not have good credit past will not be high scoring, hard to be granted credit or not much. - Product, market and position of the enterprise: o Market: before going into operation, a business has to determine demand of market, and find out target market. This market plays crucial role for the existence of the business, and bank also care about when evaluating customer. Credit institutes need to find out the trend development, size and ability to consume of market in future. o Product: banks studying product of enterprise need to consider some the following: quality, price, compete of product with others on market? Is input product stable? Products are at which stage of life cycle. etc. Answers of above question help bank evaluate appropriately point of business. o Position of the enterprise: position target is difficult to assess accurately, only be measured by qualitative. It bases on: the popularity of the business through people known. Fluctuation of the market in changing of the enterprise; attitude of competitors; Studying targets, analysts can evaluation is more accurate; avoid setting up high point for business in bad situation. - Experience, qualifications and abilities of leadership and management. Enterprise still succeeds and expands production with small capital if they have proper oriented direction. That is true. So analyzers can not ignore this factor. Which is the number of years of operation, number of years as much as convenient for enterprises because they make these ideas more wisely? But that does not mean having many years experience as leaders can do. Collateral Collateral is used to increase repayable of customer. These assets are often underestimated than market price and value of loan always is lower than value of collateral. Provisions not only helps prevent credit risk, but also give enterprise more chance of receive loan. The bank is not a pawn name, their mission is not a liquidation of assets but is lending, and credit amount for their customers is huge. For that reason, banks should be very interested in collateral. The non-financial indicators show responsibility for repayment of business. Business does not always work well, they can not afford to repay on time, bank can base on non-financial indicators to evaluate the future of that debt and have policies consistent with the enterprise 1.2.3.12. Credit Scoring and rating Credit rating A credit rating assesses the credit worthiness of an individual, corporation, or even a country. Credit ratings are calculated from financial history and current assets and liabilities. Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan. However, in recent years, credit ratings have also been used to adjust insurance premiums, determine employment eligibility, and establish the amount of a utility or leasing deposit. (Source: website A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates, or the refusal of a loan by the creditor. The rating that follows – an opinion on creditworthiness—is generated by an analytical team, a report is prepared with the rating and rationale, this is put to the rating committee made up of senior officials, and a final determination is made in private. The decision is subject to appeal by the issuer. Issuer credit ratings can be either long or short term. S&P use the following nomenclature for long term issue credit ratings AAA - (highest/ extremely strong capacity to meet financial commitments AA - very strong capacity to meet financial commitments A – strong capacity to meet financial commitments, but susceptible to adverse affects of changes in circumstances and economic conditions BBB - adequate capacity to meet financial commitments BB – less vulnerable in the near term than other lower rated obligators, but faces major ongoing uncertainties B – more vulnerable than BB – but adverse business, financial or economic conditions will likely impair obligator’s capacity to meet its financial commitments Credit scoring A credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person, which is the perceived likelihood that the person will pay debts in a timely manner. A credit score is primarily based on credit report information typically sourced from credit bureaus / credit reference agencies. (Source: website Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system. Credit scoring is not limited to banks. Other organizations, such as mobile phone companies, insurance companies, employers, and government departments employ the same techniques. Credit scoring also has a lot of overlap with data mining, which uses many similar techniques. Purpose of credit scoring and ranking customers The purpose of credit scoring is based on test data, analyze data from records, financial statements and audit reports of the enterprises to evaluate the working situation, profitability, liquidity in the present and future business in order to determine the ability to withdraw capital of bank. The credit scoring and ranking is implemented to support bank in: - Decision granting loan is determining credit limit amount of loan/guarantee, term, interest rates/fees, and security measures for credit. - Monitoring and evaluating customer when remain outstanding loans to help bank anticipate the signs of bad loans and give out countermeasures in time. In term of managing the entire portfolio of credit, credit scoring and ranking customers to: - Develop marketing strategies towards customers to less risk. - Estimated bad debts to extract up reserve credit risk. In short, the purpose of credit scoring and ranking is to anticipate the risks may occur in the business. Principles of credit scoring and ranking In the process of credit scoring, staff gets the initial point and total point to rank customers. - Initial point is point of each grading criteria that credit officers identified after analyzing of the criteria. - General points to rank customers isare the initial point multiplied with weight number. - Weight number of the level of importance of each credit scoring criteria (financial or non-financial indicators) considers to perspective of the impact of credit risk. In the process of credit scoring, staff uses standard tables to evaluate the credit scoring criteria as follows: - For each criterion, indicator is closed to which actual value will apply that value to ranking, if the point is between two priorities, toward the higher. - Where customers are guaranteed fully (greater than or equal to 100% of credits amount) of a strong organization, staff can use results of the credit rating of guarantor to determine the customer's credit rating (if the guarantor are also graded). Grading process for guarantors like process applied to customers. If customer is guaranteed partially, staff grades only that customer. Grouping customers in credit scoring Because of the difference among customers, in order to score and rank customer accurately, science, bank divides borrowers into three groups: - The enterprise customer - The individual customers (including individuals and households) - The credit institutions customer Customers that are not eligible to be scored (such as administrative unit...) be considered under specific instructions in each period. 1.2.3.2. Scoring system for customer Describes methods of credit scoring Credit scoring is a method to assess credit risk of customers through evaluating all information of customer. Criteria are applied differently to different types of customers Credit scoring for three different types of customers which are: financial institutions, enterprise and individuals. This thesis refers to scoring enterprises Principal of credit scoring enterprise: - If point of customer is between two level, chose higher point - Ranked point is result of the initial point and weight. Using credit scoring system Scoring division Person Credit officers are those whothat are responsible for credit scoring and ranking customers. is credit officer Manager is in charged of controlling credit scoring and ranking customer. Results of credit ratings: The rating is used for credit purposes: - Define credit limit - Define refuseRefuse or accept granting loan, duration, interest loan and collateral - Assess current status of customers - Manage credit list and extract credit risk reserve Credit scoring and ranking enterprise Type of ownership Type of ownership affects quite a lot of ability to payable of enterprise. Enterprises can be divided into four groups: State-owned enterprise Private enterprise Mixed owned enterprise Enterprise owned by individuals and organizations abroad. All type of enterprises have their own advantages and disadvantages, but in general, depending on the characteristics of each economy that type has different strengths. Vietnam is an example. Vietnam’s economy is affected by former regime of former the planned economy which, used to get all support from the State. These priorities are expressed through preferential policies; financial support finance by the State ... Enterprise that is guaranteed by state have a lot of advantages. But it does not means other businesses do not have their advantages. Joint venture or 100% foreign investment enterprise entry tothat have enterred Vietnam market have many advantages as machinery, modern technology and supporting by the Government through encourage policies to open investment. These businesses work often more effectively than state-owned enterprises. In addition, private enterprise develops not equally. This fact arises from ability of leaders capital invested in businesses, further more because they received little support from the state. This type of enterprise is less favorable than most others. So type of business impact performance business, it also affects to payable principal and interest. There are impacts not only due to the preferential policies of the state but also the subject of business. The subject is more important, the safety of loan is higher. Considering to type of ownership helps bank evaluate in each period, enterprises which have advantages get higher corresponding points. This is a necessary criterion in the process of grading business. Business fields In current market economy, number of active enterprises is not small. Enterprises are variety in skill, kinds of goods, business cycle, and level of risk…Therefore, to evaluate customer accurately, banks also need to arrange enterprises that have similar features to same group. This arrangement helps banks see the potential of each enterprise in each specific period. This outlook comes from the characteristics of each economy. Each country select different direction of development depends on its strength. Developing countries focus on trade on commerce, services and industry. For developed countries, agriculture is always key sector economy. The choice depends greatly on the characteristics, social, geographic characteristics each country, as well as the development strategy that the State selected. In pParallel with the identification of key sectors of each country, it also needs to understand the development trend of countries, particularly in transitoning countries. In transiting economya transition economy, enterprises are in sector that State set development goals have many advantages. Singapore is an example. Before 2002, the strength of the Singapore is tourism and information technology, but from 2002 to date, Singapore gradually shifted to biotechnology, a new and potential sector. This is a right direction. With this conversion, the biological research center in Singapore is invested with high capital, improved infrastructure, and procurement of machinery. In the near future, biotechnology surely becomes strength of this country. So loans granted for customers in biology field are safer. Of course banks score these companies higher than others The question arises: is dividing enterprises into groups in credit scoring necessary? The aAnswer is yes. Key or basic sector are supported by the State. Moreover, enterprise in key sector is in favorable conditions. If the State dose not invests in key sector, fail of this sector impact to overall economy. So in credit scoring, dividing enterprise into groups is necessary. Bank builds a frame score for businesses. But this frame needs to change in each period. Scale of equity Scale of enterprises is a synthetic criterion includes many indicators such as obligations to the state, the total value of assets, equity, and revenue. Scale of equity is top priority indicator. It is understood that all business’s capital is spend to conduct business; this capital can be added or reduced during operation. Not only business owners but also creditors care to this capital monitored. On balance sheet, total capital includes short-term loans, long-term from credit institutes, payable and receivable, capital gain from the activity bond issuance, equity and other types of capital. Cost of capital from loan is lower than from equity. Business realizes advantages of using loan, not only of low cost but also low risk. Therefore, business use loans to expand production. Of course the loan is only made when debtor meet requirements of lender. These requirements are in order to ensure repayment of enterprise. In the request, equity is a very important part. Investors find peace of mind when the equity counts safe proportion in total capital. So scale of equity is included in scoring table when bank evaluate customers. However, the same scale of equity enterprises may have not same score. Score depends on business sectors. For each sector, required capital in operation is very differentvaries. Trade and services sector has faster cycle of working capital cycle revolving, they can make effective business capital, so should usually not need more capital but still gain ed considerably stable e stable profit rate.margin. Meanwhile, construction field need large amount of capital because of time depreciation, proportion of equity in this field is usually smaller than loans so scoring model is different with other sectors. Agricultural, forestry and fisheries sectors bear more objective risks such as season, materials price… In generally, each sector has specific characteristics so same scale of equity not means same risk Proportion of equity ensures safety for investors. So this indicator is necessary. Financial indicator This indicator reflects overall financial capital and also reflects ability of repaying of business. The most important target of bank is collecting principal and interest from borrowers so analyzing financial indicator is necessary. This indicator includes 5 criteria as follows: - Speed growth criteria: help analyzer compare operation of enterprise through revenue and profit in 2 years: o Speed increasing revenue = (revenue-revenue previous year)/revenue previous year. o Speed increasing profits = (profit-profit previous year)/profit previous year. - Performance criteria include: o Return of inventory = Cost of goods/Average Inventory. o Repayment of capital ratio = receivable / average revenue a day. o Performance using property = Revenue / Assets. - Liquidity criteria: o Current payment = current assets / liabilities. o Quick payment = (current assets - Reserve) / Current liabilities. - Income criteria: o The profit assets (ROA) = (Profit before tax / total assets) * 100%. o Business interests equity (ROE) = (Profit before tax / Capital) * 100%. o Business benefits product sales = (Profit before tax / Turnover) * 100%. - Balance capital criteria: o Coefficient of debt = (Total outstanding debt / total assets) * 100% o Repayable principal and interest. o Ratio of overdue debt on total outstanding loans. Obviously businesses work well, use capital efficiently will get a score higher than companies are struggling financially. However, these indicators base on the financial statements of the enterprise, so they may have unwanted fluctuations. Bank assess the importance of each criteria focusing on two indicators reflect the debt balance and profitable. When indicators are completed bank bases on these criteria to give out decision of granting loan. Non-financial indicators Financial indicators are necessary but not enough because they base on past figures by companies banks rely on to predict financial capacity of enterprises. Bank can use other factors determines success or failure of business. Considering non-financial factors help the bank assess business accurately. Some indicators that bank interest when building scoring system as follows: Prestige in credit relations include: the number of loans extended, the number of deferred interest, overdue debts ... Businesses do not make the debt repayment obligations in case: difficult finance or not aware of repayment. Need to find out the customers in which case. Customers do not have good credit past will not be high scoring, hard to be granted credit or not much. - Product, market and position of the enterprise: o Market: before going into operation, a business has to determine demand of market, and find out target market. This market plays crucial role for the existence of the business, and bank also care about when evaluating customer. Credit institutes need to find out the trend development, size and ability to consume of market in future. o Product: banks studying product of enterprise need to consider some the following: quality, price, compete of product with others on market? Is input product stable? Products are at which stage of life cycle. etc. Answers of above question help bank evaluate appropriately point of business. o Position of the enterprise: position target is difficult to assess accurately, only be measured by qualitative. It bases on: the popularity of the business through people known. Fluctuation of the market in changing of the enterprise; attitude of competitors; Studying targets, analysts can evaluation is more accurate; avoid setting up high point for business in bad situation. - Experience, qualifications and abilities of leadership and management. Enterprise still succeeds and expands production with small capital if they have proper oriented direction. That is true. So analyzers can not ignore this factor. Which is the number of years of operation, number of years as much as convenient for enterprises because they make these ideas more wisely? But that does not mean having many years experience as leaders can do. Collateral Collateral is used to increase repayable of customer. These assets are often underestimated than market price and value of loan always is lower than value of collateral. Provisions not only helps prevent credit risk, but also give enterprise more chance of receive loan. The bank is not a pawn name, their mission is not a liquidation of assets but is lending, and credit amount for their customers is huge. For that reason, banks should be very interested in collateral. The non-financial indicators show responsibility for repayment of business. Business does not always work well, they can not afford to repay on time, bank can base on non-financial indicators to evaluate the future of that debt and have policies consistent with the enterprise. Factors effecting credit limit system in banks External factors 1.3.1.1. Legal system on accounting, statistics, public information regulations Legal system relating to credit activities includes laws and sub-law documents. Complete and uniform legal system facilitate all activities in economic life - society...However, the legal system really only works when compliance seriously under the supervision of agencies. Complete legal environment is important factor for ensuring the formulation of the credit limit of commercial banks Legal system, policies of the state is incomplete, lack harmony, many loopholes, lax management or harassment cause difficulty in managing credit risk of commercial banks. Result is overdue debts, bad debts and high credit risk. Conversely, full and uniform policies of the state contribute to effective management of credit risk positively. System credit limit subject to the Bank Law, Law on Credit Institutions was also influenced by the laws on accounting, statistics and regulations published information. The texts are very big influence to collect information from customers. 1.3.1.2. Sources of information Maintaining credit information in bank system is extremely important because credit information create centralized databases of customers to serve process for credit analysis and credit management, credit risk management. Credit information helps searching and early detecting of problem and appreciating the level of risk, and foreseeing the possibility of a loan can be transferred to bad debt. A full information system of customers such as: History and development, financial capacity, the level of confidence, quality manager is very important help for credit scoring. The adequate system will affect greatly the ability of evaluating, classifying customers. To apply the method of scoring and credit rating, banks must have a credit information system to automatically collect information accurately and fully to customers. This is a very important factor, to determine the accuracy of the results credit scoring. Quality of information sources is expressed by four factors: - Fully and timely Periodically or upon arising, credit information must be collected, recorded and processed in time to reflect accurately the level of risk and ability in implementing their obligations with bank, and help bank adjusting properly for credit activities. Information about deposit and loan of customers or never have a relationship with the bank but is big business, must be recorded, stored. - Honest, objective: Credit information must be collected from other sources to provide a legal basis or practical basis to ensure the integrity and objectivity. All information obtained from other sources is not valid only use for reference purposes. - Consistency: Credit information must be set, update, and monitor continuously, at least until the end of relationship with the bank. - Security: Credit information must be stored, managed by security regime as a property of bank, use safely, privately, without disrupting the supply of information and do not provide to 3rd party. 1.3.1.3. Customers Elements from the enterprise itself is a great influence on the construction of credit limit Ability and experience managing business: This is the qualified factor can not be quantified. This factor is not showed in profile of customers so credit officers are difficult to grasp. Then evaluating customer is not comprehensive and accurate Ethics of customers: customers intentionally deceptive, cheat the bank ... this case cause difficulty for credit officers in evaluating customer. Internal factors 1.3.2.1. Strategy of the bank Credit policies take an important role in orientation of the bank. A reasonable credit policy brings high profits for banks and reduces risk. But today, credit policies of commercial banks still face many difficulties such as credit policies subject to increase higher debt than focusing improving credit quality, interest in collateral than the effectiveness of the plan ... Strategy of the bank affects to staff psychology in building credit limit, credit limit for enterprise will tend to be higher if the bank extend credit - extent risk and vice versa. 1.3.2.2. Structure, procedures and policies Before applying credit limit for customer, the bank has to build credit scoring process, including: steps, indicators, standards for process grading, ranking business ... credit scoring system is more detail, evaluation of the business is more accurate. In addition, the credit scoring models have been implemented, the Bank will issue the policies, procedures and regulations to legalizing the role of work in the credit scoring process for the loan, and established an independent board to check, mon._.re than five years of application, credit limit systems have contributed much to the success of the credit activities in Vietcombank, but this system also contain many limitations. 2.4.2. DisadvantagesLimitations - The permission officials score and build credit limit for customers create flexibility conditions for granting loans and save time. However, this does not security of bank, branches do not have risk management departments, the grading and constructing credit limit is not evaluated by risk management department. Credit departments score by themselves so result may be not accurateive, cause risk to the bank - VCB has applied credit limit system for customers since 2004 but since then, VCB has not updated indicators and scoring criteria yet, nor review formula credit limit is reasonable or not. Economic situation changed a lot over time since 2004; so many indicators are no longer suitable. VCB also has never held a course explained to staff credits – who direct scoring customers about indicators and criteria to help credit officers understanding nature of those. - The grading and building credit limit are made manually in Word or Excel, there is not any automatic software supporting so it takes a lot of time and sometime results are not correct. VCB has not software to store results of the credit limit through the years for easy management and retrieval. Storing customer’s records only on papers causes inconvenience to credit officers - the people who receipt customers from previous staffs in evaluating customer’s history and forecasting customer’s future. - Authority of approving credit limit is not reasonable. In VCB, the credit limit exceeded authority approval will be submitted to the risk management department of Head office. It takes a lot of time to gather records for explanation and affect to time of loans. Many cases, Head office’s approvals does not help reduce risk because head office’s staff understand customer less than the branch so they can not give their own comments but almost based on the evaluation of the branch. 2.4.3. Causes of limitations 2.4.3.1. Subjective. Subjective causes The structure of Vietcombank is not strongly supportive to the credit sysmtemsystem Phần này rất quan trọng cần viết lại theo hướng: Mỗi một đề mục phản ánh một nghuyên nhân của nhược điểm – ví dụ như trên Giải thích rõ tại sao đẩy lại là nghuyên jnhaan của hạn chế nêu trên (Lưu ý đây là cơ sở cho các giải pháp được trình bày ở chương sau) The structure of the VCB, credit officers build credit limit and submit to Chief/Vice Chief for approval. For exceeded credit limit of branch, branch must submit to Head office for approval. The credit limit then is assessed again by the risk management department of Head office. However, the performance of this department is not high because the numbers staff of this department is not enough; quality of these staffs is also weak. Credit policies of Vietcombank are weak? Process credit revealed some limitations. At VCB, credit officers are looking for customers, analyze and assess customers, evaluate, grant loans then monitor loans. In the process of credit in the modern bank, a systematic structure in which multiple participants in one or several stages of work to specialized industry and minimize risk. With existing procedures, official credits of VCB do more work, so the level of depth in each profession is difficult. Document system is too large. The market situation and legal provisions are constantly changing, but there is no division tracking system updates, tracking documents. Each branch and staff self update, monitor, sometimes overlapping condition occurs in writing, regardless of any policy is valid. Some credit scoring and rating criteria is inconvenience The economy is changing very rapidly, appearing more new economics so business portfolio of VCB is not enough; staffs do not know group customers in which category Some non-financial indicators are not consistent with reality. Small businesses not reflect the nature of good repayment history, financial reports less (do not reflect enterprise business results to deal with tax policy) ... a non-target financial nature macro against small businesses not reflect the actual situation of customers. Therefore affect the results of the customer ratings are small business Evaluation criteria are applied to all business customers of the bank. In fact the large enterprises and small businesses have huge differences on the history of the business activities and scale of assets; turnover, labor ... so general criteria applicable to all type of business will not accurately reflect the real situation of enterprises. Information system is not enough to support credit activity Information system is not multi-dimension, processing information is slow. Information for assessing and analyzing is not enough, incomplete and incorrect. Standing on theoretical and practical aspects, analyzing credit first need complete information. However, VCB also has problems in collecting information fully and accurately to serve the process of analysis, evaluating customers. Information stored in VCB is too limited. Previously, each credit staff lending, managing loans and repayment of our customers does not save information about customers. Records are stored in bags, so searching information is very difficult. Credit Information center (CIC) is just exploiting the profile of customers for 2-3 years but not often, information is still slow, not updated so effectively of exploitation information is not high Information from state agencies: it is so difficult to get information from state agencies. Because there is none clear mechanism to coordinate, none technology into operation. In addition, these agencies also have specific regulations on security Staff quality Knowledge and expertise of staff are not strong? Credit officers have to deal so much work, they always are overloaded. So credit officers have not enough time to learn information about customers Professional qualifications of the staff credits are also very restrictive. Banks are rejuvenating staff so they have professional qualifications but lack experience, while analyzing credit information not only requires professional capacity but also relative experience Equipments (cần lý giải như đã nói ở trên: nó yếu như thế nào, và hậu quả của thực trạng này là gì, gắn với các nhận xét đánh giá về hạn chế ở trên; không viết ngắn gọn, không rõ ý như thế này) Equipments for building credit limit are not attended, not consistent with reality. Outdated and low efficiency equipments are not replaced in time affecting to effectiveness of formulation credit limit 2.4.3.2. Objective causes From customers To day, many businesses today is not strictly comply with financial reporting regime; they also do not realize importance of clear financial reports. Most of the financial reporting bank is poor quality, does not reflect the real financial condition and business operations of the business, so it is difficult for banks to analyze and assess the status of customers and take time to identify again contents of financial statements. On the other hand, very few companies perform audited financial statements. Normally, only state-owned enterprises are required audit financial statements, the remaining majority of enterprises, especially small and medium enterprises do not perform audited financial statements. Therefore, it is difficult to detect false in the observance of accounting system of these enterprises, so the information are used to analyze customer inaccurately. From the state (cần lý giải như đã nói ở trên: nó yếu như thế nào, và hậu quả của thực trạng này là gì, gắn với các nhận xét đánh giá về hạn chế ở trên; không viết ngắn gọn, không rõ ý như thế này) Information of state agencies is published rrestricted in publishing. Information about planning development sectors, infrastructure ... impact directly to property and business of customers. However, this information is often not published in detail, so it is difficult for the bank to predict accurately the impact of those events on activities of customers. Chapter 3 PROPOSED SOLUTIONS TO IMPROVE CREDIT LIMIT SYSTEM AT VIETCOMBANK Orientation of VCB’s credit activities Orientation VCB strives for growth of credit in accordance with economic growth, creates powerful changes in growth quality, credit quality, enhances competitiveness and performance VCB keeps target appropriate structure, creates a stable, integrate graduate into international practices, improve the credit system in principles scale and structure of credit is suitable to each locality, region, sector, industry and economic characteristics of clients. Promote the restructuring of the network clients, loan portfolio structure in the direction of credit activities associated with promoting the mobilization of capital to develop the products and services of modern banking. VCB control strictly proportion of middle - long term loans, extends to effective, profitable and low risk industries and areas. VCB raises the proportion of loans with collateral, handles positively bad debt, and recovers suspense interest. VCB promotes the strengths and overcomes weaknesses by using opportunities of the economy, continue to implement the direction of credit expansion and constructs traditional customers to improve operational efficiencies business and brand name Objectivities of VCB’s credit activities to 2012 In 2010, global economy has many signs of recovery, the largest economy out of recession. However, economies in developed countries continue to experience many changes and challenges in the process of rehabilitation and also strongly influence the market to import, export and capital investment. For the economic environment in the country, in 2010 is forecast to more than 2009 articles (6.5% of GDP, export market and FDI capital likely to flow back ...). However, to achieve medium to promote economic growth, moderate inflation may curb Vietnam to accept changes in monetary policy, fiscal year 2010. (i) first, to curb inflation, including monetary policy and fiscal policy will tighten to a certain extent, (ii) second, to the business, financial costs to family do not enjoy increasing support short-term interest rates, (iii) third, the competition between banks is becoming more fierce, especially between the groups bank shares, the foreign banks operating 100% of capital in Vietnam and other investment channels. Anticipate the fluctuations, economic challenges, the Government has defined the goal of socioeconomic development in 2010: executive needs careful and flexible fiscal policy, monetary policy contributed to restore economic growth, increase macroeconomic stability, ensuring value for money, striving to achieve economic growth at 6.5% and control inflation below 7%. To accomplish the objectives of government, state bank identified 11 tasks and implement solutions in banking. Pursuant to resolutions of the government and the orientation of the state bank in 2010 for banking operations, considered on the basis of business results achieved in recent years, VCB Board of Directors determined Categories objectives and key tasks for the system VCB Total assets reached 15% Mobilize capital from the economy 28% Outstanding debt 23% NPL 2,4-2,9% Profit before taxes reached 4.000 billion dong Orientation of credit activities helps VCB concretized goal-oriented business. Objectivities are increasing collateral of loans, increasing loans to 20% and reducing bad debt under 5%. Credit structure bases on the actual situation in the credit activities, economic environment and society, financial markets coming years on the principle of improving the performance of credit associated with the development and stability of national economy.Credit structure and reasonable direction to the manufacturing sector, exports, and continued attention to credit quality Credit growth coupled with the ability to mobilize capital, with rational structure and efficiency are improved Active participation, successful implementation of government programs, state-related banks, such as implementing programs to support medium and long term interest rate, loan program can guarantee VDB Note to seasonal issues in each industry, each region and the characteristics of each business to actively plan to pool funds in response to business loans Expand the list of SME customers, business and industrial parks and export processing in order to disperse risk and increase efficiency in the operation of credit and trade finance Improve and continue to build risk management tools such as credit rating systems, model analysis of industry ... Continue efforts to implement recovery of bad debt, debt was risk reserve process Orientation of credit activities helps VCB concretized goal-oriented business. Objectivities are increasing collateral of loans, increasing loans and reducing bad debt. Credit structure bases on the actual situation in the credit activities, economic environment and society, financial markets coming years on the principle of improving the performance of credit associated with the development and stability of national economy . Cần bổ sung phàn này với các nội dung (cần ít nhất 1,5 trang với các nội dung phù hợp: Tình hình thị trường nền kinh tế và thị trường thời gian tới (theo các nhận định chuyên gia của ngân hàng), ví dụ như tính cạnh tranh tăng lên, kinh tế hồi phục hay tăng trưởng nhanh lên, chậm lại, ngân hàng ngày càng cạnh tranh… Chiến lược của VCB (càn tham khảo các báo cáo thường niên hoặc Chiến lược của ngân hàng về các mặt: Mục tiêu chung, mục tiêu cụ thể, tăng trưởng vốn điều lệ, cổ động chiến lược, tăng trưởng tài sản, định hướng cho vay… Solutions to improve credit limit system at VCB Improve structure of VCB Phân tích rõ thêm mỗi giải pháp (neus chưa gắn với các nhận xét đahs giá ở phàn trên thì phải bổ sung hoặc chihr sửa lại), mỗi giải pháp cần làm rõ: Cơ sở của giải pháp (tại vù thực trạng yếu kém hoặc không phù hợp – như nhận xét ở phần trên) Mô tả giải pháp: cải tiến như thể nào: thành lập phòng nào mới, chuyển bộ phận nào sang bộ phạn nào… Tác động của giải pháp: làm như thế sẽ khắc phụ được hạn chế như thế nào Các bước thực hiện giải pháp, điều kiện thực hiện, bộ phận được giao hay có trách nhiệm thực hiện… As requiring of practice, not only in Head office, branches need risk management department to review loans and construction credit limit for customers. Activities of credit department and risk management department should be separate. Risk management function should be assigned to an independent division independents to business of the bank and will not engage in creating risks activities. For the credit structure of most banks, marketing, handing loans, disbursement, monitoring and evaluation, collecting debts... are in charge of credit officers without independent monitoring department, this easily leads to negative, causes more risks to the bank Model of the credit institutions must be built in direction of separating decision function and management function bases on delineation of responsibilities and functions among assessment, approval, and management. By then, credit department (front office) contact to customers, asses loans then move customer’s records to risk management department (back office) for analysis, independent verification and implementation role security to accurately build accurately credit limit for customers. All records of approved loans must be in debt management in order to create consistency, objectivity in store credit report and avoid arbitrarily editing documents after approval It is needed to separate corporate banking and personal banking department to specialize in each professiontask performance. Improve credit policies To ensure credit activities of banks is in accordance with the development, efficient and sustainable growth orientation, as well as gradually progress gradually to international practices, policies of credit banks must be built and implemented on the basic contents as follows: Improve decentralization, authorization mechanism The decentralization, the authority in approving credit complies in following principles: - Compliance with the provisions of the law and the regime of bank on credit activities to ensure safety, quality and efficiency - Determine the initiative, self-responsibility of all levels operating in credit activities, compliance credit approval process - In accordance with characteristics of organizations, activities, size, condition, capacity and features of decentralized, authorized persons/units. - Change decentralization and authorization annually for each branch, depending on business results of previous year, avoiding application of unreasonable decentralization, authorization for branches Improve decentralization, authorization mechanism The decentralization, the authority in approving credit complies in following principles: - Compliance with the provisions of the law and the regime of bank on credit activities to ensure safety, quality and efficiency - Determine the initiative, self-responsibility of all levels operating in credit activities, compliance credit approval process - In accordance with characteristics of organizations, activities, size, condition, capacity and features of decentralized, authorized persons/units. - Change decentralization and authorization annually for each branch, depending on business results of previous year, avoiding application of unreasonable decentralization, authorization for branches 3.2.2.2. Identify lending market for the bank - Bases on macroeconomic analysis, development trends, and potential financial risks of industry sectors, sectors in the economy, banks need to identify target market by identifying accepted business segments within the entire market. Factors as follows: + Internal risks derive from the goods themselves, the business environment, and the absolution + Position of sectors in the economy: industries have incentives development or not? + Prospects of sectors: consult experts in the industry; determine the location, competition, external factors + Position of industries in the business cycle: the industry is growing, saturated or recession phase? - Based on business strategy and ability to accept risk in the business of banking - Bases on the characteristics, strengths, limitations and available resources of bank on capital, facilities, qualifications and experience of staffs - Bank reviews, decides credit subjects in each stage to focus expansion of credit as following criteria: + By sector, discipline or key product + By region, territory + By customers + Selecting the suitable type of credit and other credit products for each period 3.2.2.3. Construct, improve policies on credit limit system - Policies for the credit limit for whole system: Bases on regulations of laws and the orientation of the state bank, depends on the business strategies of each bank, banks consider and decide credit limit in each period + Scale and rate of credit growth limit + Outstanding loans on total assets limit + List of industries and restrict lending domains - Credit limit for the industry, product, geographic Bases on analysis and reporting on development trends, capital requirements, risk level of industries, sectors and products in the market, limiting credit risk of main sectors - The bank builds credit limit in accordance with industry, product, geographic area in each period bases on financial capacity, bank's capital. + Credit limit for concentrated industries, products + Credit limit for key economy in each region + Credit limit for customers - The bank need to built credit limit for a group of banks and related customers bases on provisions of state banks, actual operation and development strategy. Improve credit scoring and rating System to internal credit ratings applied effectively, banks need to improve the direction of the following: Improve list of business fields Currently, business fields as processing of agricultural and food for animal products, packaging are not stipulated in list of business field for credit scoring system. VCB needs add to the list. Currently, VCB’s list of industries is divided into four sectors: agriculture-forestry-fisheries, trade services, construction, and industry. However, VCB should divides into multiple industry groups, such as distinguish mining and production industry in the industrial group. Improve financial indicators Currently, the credit scoring includes 11 full financial indicators, but it has not receivable and assets criteria... VCB need to adds more criteria to evaluates enterprises Coefficient = immediate cash payment / liabilities Number of days to pay = 360 x average value of accounts payable / cost of goods sold Number of days receivables = 360 x average value receivables / net sales Turnaround working capital = Net Sales / (average value assets and liabilities) Revenue growth Growth rate of net profit Coefficient of self-funded capital = equity / capital Improve non-financial indicators Currently, all businesses are used same in a scoring table. VCB requires grading table as for the scale of business: large enterprises, small and medium enterprises VCB should build different scoring table for the new establish business In addition, the VCB will also need to distinguish the financial report and audited financial statements not audited, because the accuracy of financial statements affected greatly to the establishment actual results Currently, all businesses are used same scoring table. VCB requires grading table as scale of business: large enterprises, small and medium enterprises Different scoring table for new establish business Improve information technology systems - Information system on credit limit must be built to ensure the provision of information, database of credit activities fully and clearly, accurately and regularly to help managers control credit activities effectively. VCB should have policies adapted to customers - Information are served directly to the construction credit limit + Build update and historical information systems for clients + Build information systems for administrative operations, credit reports, forecasting the development trend, analyzing and reporting credit trends,… Strengthen human resources The bank should concern to staff’s life, trains staffs regularly, takes care to material life, spirit of staffs, creates a friendly working environment, open solidarity, enhances professional ethics, monitors staff’s evolutions to eliminate collusion, concealing violations Hold professional training, processes, and guidance documents for credit officers regularly, especially texts of the VCB on credit limit for customers. Consist deeply to staffs about importance of using information and scoring financial and non-financial indicators, avoid raising levels of customers unreasonably VCB should organize quarterly and annually seminars for staffs exchange ideals, difficulties from practical works then draw business experience in improving efficiency management. In addition, for new and key business, VCB should hire foreign experts to build, manage, transfer and trains staffs VCB should have fair competition recruiting mechanisms to attract talent staffs. The bank should have a mechanism to encourage staffs as management staff in the work, increasing wages for workers, creating competitive and promotion opportunities equality for all staffs Recommendations Recommendation to related agencies To the Ministry of Finance Release decision requiring all financial statements of the enterprise are audited. Vietnam has joined WTO, so all financial reports are required transparency to create prestigious brand for business, and create trust of the bank when making credit scoring and give the credit judgments. To do this, the Finance Ministry should guide enterprises aware of the importance of transparency and the role of audit for the survival of enterprises, especially in accessing to bank capital. Each enterprise must change their thinking about audit. To Agency Tax Agency Release regulations requiring accurate financial report by business. This help to improve trust fortrust in commercial banks’ activities, which will make it easier for them to to access bank capital. easier To general statistics office General statistics office (GSO) should construct average financial indicators for each sector. The average financial indicators are very important for commercial banks in evaluating business. Commercial banks use these average financial indicators to compare indicators of enterprises healthy or weak situation of the business. However, there is still not having any full statistical analysis and reliability of standard financial indicators to analyze and assess the financial situation of enterprises. So in coming time, the General Statistics Office should carry out researches and offer reliable average indicators system, and continuously update criteria in general economy. This not only facilitates banks to analyze and assess business but also creates favorable conditions for enterprises in financial analysis and improves management. Recommendation to the State Bank State Bank should improve quality of credit information. CIC is one information channel helps banks in evaluating customers. CIC implements collecting enterprise’s information and other information related to currency trading, service of commercial bank, state agencies, foreign and domestic information, and regulations of laws. Then CIC provides information to banks. However, information from CIC is still poor in quality and quantity. This limits analyzing of commercial banks. Therefore, CIC must not only expand the scope of information but also improve the quality of information. To do this, banks must comply with following measures: - Works closely with commercial banks, information centers and other state agencies to gather further information about companies operating in the territory of Vietnam - Modify or supplement the regulations of the CIC organizations as requiring banks to implement proper roles and responsibilities when participating provider and exploiter information from CIC. State bank should have measures to deal with credit institutions are not strictly followed the regulations on providing or jamming information. - Consolidates staffs rapidly, apply new technology, modernize and automate all processing stages to create more professional information products. Simultaneously analysis and evaluate, rank credit risk business, forecasts and warn risk timely. - State Bank needs to build a legal corridor on specific security, supply, mining and processing information. Establish board to inspect, evaluate and certify information to ensure the legality, reasonable accuracy of the information loosen source of credit information and objects to be exploited through credit information. CONCLUSIONS Credit activities of commercial banks take has a very important role in promoting the development of economy and society. In the context of Vietnam's economy is in the phase of integration and growing approach to international practice, the demand for credit is growing. So credit activities bring profit to of commercial banks. Researching and proposing solutions to improve the quality of construction credit limit for customers is important task of the banks in the current phase Bases on methods research, sticks objectivity and scope of research, thesis completes the following tasks: - Study basic theories on credit and credit limit - Analysis current status of credit limit system at Vietcombank and evaluateevaluates causes of the limitations to overcome - Propose solutions to improve the quality of the credit limit at Vietcombank - Propose some recommendations to the State Bank and other related agencies Hope this study contributes a small part in helping build Vietcombank credit limit for customers more precisely, control customer’s risks thereby improve credit quality as expected. LIST OF REFERENCES 1. website 2. 1. Nguyen Van Tien. 2009. Commercial banks. Statistics publisher 2. Nguyen Due. 2001. Banking management. Statistics publisher 3. Ho Dieu. 2000. Bank credit. Statistics publisher 4. Nguyen Minh Kieu. 2008. Credit. Financial publisher 5. Nguyen Thi Mui. 2008. Bank management. Financial publisher 6. Phan Thi Thu Ha. 2007. Commercial bank. NEU publisher 7. 3. website 4.1. Credit Manual of Bank for Foreign Trade of Vietnam 8. 52. Report on business operations of the Bank For Foreign Trade of Vietnam in 2005, 2006, 2007, 2008. 9. 63. Reported sales of loans, debt collection of the Bank For Foreign Trade of Vietnam in 2004, 2005, 2006, 2007, 2008 10. 7. Nguyen Due. 2001. Banking management. Statistics publisher 8. Ho Dieu. 2000. Bank credit. Statistics publisher 9. Nguyen Minh Kieu. 2008. Credit. Financial publisher 10. Nguyen Thi Mui. 2008. Bank management. Financial publisher 11. Phan Thi Thu Ha. 2007. Commercial bank. NEU publisherwebsite 11. website 4. Le Van Tu. Currency, credit and banking. Statistics publisher. 5. Nguyen Van Tien. Risk management in the banking business. Statistics publisher. 6. Nguyen Van Tien. 2009. Commercial banks. Statistics publisher. 7. Phan Thi Thu Ha. 2009. Commercial bank management. Transportation publisher. 8. Web sites: www.creditscoring.com www.sbv.gov.vn www.vneconomy.vn www.kinhdoanh.com.vn www.chamdiemtindung.com www.beta.baomoi.com www.vietbao.vn www.vietcombank.com.vn Bổ sung thêm danh mục tài liệu tham khảo ._.