Current situation of credit activity and solutions to the credit crisis at the military commercial

INTRODUCTION

1. Rationale

Risks are an inevitable issue in any business in which the more profit a business can

bring out, the more risky it is. In the banking sector in which money is the key

goods, if risks, in general, or credit risks, in specific, occur, it is believed to be such

diversified forms and far-reaching scale that it can distort and adverse the business

achievements. Therefore, there has been great concern about credit risk

management nowadays.

In the early 1990s, the collapse of the credit collective societies and the bankruptcy

of banking based loan enterprises is a proof for the incompetent credit system that

was not nimble enough with the transitional economy. In another word, policy￾driven lending practice throughout 1990s and limited credit assessment skills in the

wake of rapid credit growth, led to the accumulation of non-performing loans. To

address this concern, the Vietnam government embarked on an important overhaul

of the banking system through a multi-year restructuring and recapitalization

program. Although a host of adjustments has been implemented, a credit risk is a

tricky issue for the banks to deal with. Nowadays, given the current global financial

crisis that brings many financial institutions to its knee and ravages every economic

sector, Vietnam cannot step outside the overwhelming trend.

A commercial Military bank, though newly founded, achieved great success in its short

life span. Yet, credit risk continues to be the leading source of problems. As the result, I

chose “Current situation of credit activity and solutions to the credit crisis at the

Military commercial bank the period of 2005-2007” as the title for my thesis.

2. Scope of the study

Due to the restriction of knowledge as well as the late release of annual report 2008,

in this thesis, the author only concentrates on the situation of credit and the

management of credit risk of MB during 2004-2007

3. Objectives of the study

The objectives of the research study are:

- To identify the factors which make MB vulnerable to credit risk

- To determine the difficulties or problems in MB’s credit management

- To provide recommendations for the MB and implication to the Vietnamese

authorities with a view to improve the credit quality

4. Methodology

The author took advantage of 2 information sources : primary sources which was

collected from diligent observation during the author’s internship and secondary

sources from newsapaper, the internet, the company’s catalogue and annual report,

together with the record of department of credit management., the author made an

analysis on the data collected to bring out the most exact assessment and solution.

5. Structure

The thesis includes three parts. The first part named " theoretical background’”

which gives you the basic knowledge about the banking system in Vietnam, the risk

types that any commercial bank must confront and specific information about credit

risks-its signal and its characters.

The second chapter is “The current situation of credit at MB” which embodies the

financing activities, credit offerings as well as my own evaluations on those

activities. Besides, in this chapter, I also mention the current measures being used to

minimize the credit risks.

After analyzing the situation to grasp the overall picture of credit activities and

credit risks, chapter 3 named “Suggestions to prevent and minimize the credit

risks”, I would like to make some recommendations to MB. With the aim to reach a

synchronized set of measures I also make implications to the government, State

bank and local authority.

CHAPTER 1: THEORETICAL BACKGROUD

1.1. Overall the Vietnamese banking system

Different from other Western countries where there are three types of banks: state

bank, commercial banks and investment banks, Vietnam legislation system

acknowledge two main types of banks: state bank and commercial bank.

Table 1.1. Vietnamese banking system

Each country only has one and only Statebank. The main function of

Statebank of Vietnam is to issue note as well as to manage, implement and

supervise the monetary policy. State bank is also the last resort for commercial bank

in case it is on the verge on bankruptcy. However, according to Vinacapital

assessment, unlike other State bank of other countries, Vietnam’s Statebank also

takes part in money trading as the main shareholder of six state-own commercial

bank, which, therefore, more or less, resulted in the inequality in competition

between state-own commercial banks and other banks.

Commercial banks’ main function is the bridge among individuals and

corporate in which they inject idle money to the place of demand. More

specifically, commercial bank accept deposits( liabilities) which include current

account and term account and make loans (credits) which is composed of personal,

commercial and real estate loans. The spread between mobilized interest and the

lending interest a huge profits that commercial banks can reap at the cost of

increasing risk such as credit risks, operational risks and liquidity risks. Perceived

from the definition, commercial banks in Viet Nam are comprised of: 38 licensed

joint-stock urban banks, 5 state-own commercial banks, 33 branches of foreign

banks and five joint-venture banks. The representative offices of foreign banks do

State bank

Urban

joint-stock

banks (38

licensed

Represent

ative

offices of

foreign

Joint￾venture

banks (5

banks)

State-own

commerci

al bank (6

banks)

Branches

of foreign

banks (33

branches)

Rural

joint-stock

bank

not perform commercial function because its main function is to make market

research and to supervise the projects, which are sponsored by foreign institutions.

Based on Vinacapital’s report 2007, although four main state-own

commercial banks account for nearly 70% capital market, their market share

gradually shrinks by 0.5% per year due to the accelerating competitions from the

joint-stock banks and foreign banks. Yet, three state-own banks still holds the

largest assets in which Agribank is VND 15,000 billion, Viettinbank is VND 9,000

billion and BIDV is VND 7,500 billion. In 2008, Vietcombank with VND 4,430

billion capital went public to be the largest joint-stock commercial bank, yet, SCIC

hold more than 90% of share total.

While the total asset of 37 joint-stock banks is about VND 30 billion which

means each bank only possess about 1 billion VND. This fact restrains their lending

activity due to insufficient capital. Besides, Vinacapital’s judgment shows that

Vietnamese banking market lacks tranquility which is manifested by the fact that a

bank must count on relationship to borrow idle money from other banks on the inter

–banking market rather than its competence.

1.2. Banking risks

1.2.1. Def of risk and banking risk

When doing business, beyond your expectation, you have to face with risks.

However, if the incoming risks are anticipated to some extends, company would

minimize losses from the risks. So what is risk? Risk is defined as the mishap that

results in damage or the certain mishap that is related to unexpected event. Risk is

considered as the cause and the result of ineffective business activities. Standing

against risk, there are two options for enterprises: being eliminated or striving.

Banking risks are those likely-happened events which deal a heavy blow on banking

expense, profit, reputation as well as asset. Unlike other business, the commercial

not only compete with others on the expertise field but also on relations with

customers. Therefore, the risks a bank has encountered also double.

1.2.2. Classification of banking risks

It is obvious that banking risks can be categorized by various criteria. However,

because this thesis is about to analyze the credit risk of Military Bank, it would be

appropriate to classify risks based on the activity scope. There are seven types of

banking risks:

a. Credit risk

Credit risk is defined as the potential that a bank borrower fail to meet its

obligations in accordance with specified terms in the credit agreement.

b. Price fluctuation

c. Interest risk

Interest risk occurs when interest has to be modified beyond expectations, which

leads to the decline in spread between mobilized interest and lending interest. This

cause of risk may lie in the fluctuation of the market interest at the certain time. It

also the result of the long-term imbalance in the equity and investment or using a

fixed interest rate for the medium and long-term lending project.

d. Foreign exchange risk

This type of risk adheres to the foreign exchange variation which may result in the

loss value or added value for foreign-currency loan that put bank or lender at

jeopardy.

e. Liquidity risk

In finance, liquidity risk is the risk that a given security or asset cannot be traded

quickly enough in the market to prevent a loss (or make the required profit).

However, with regard to the banking term, liquidity risk is the sudden surge of

withdrawals that can leave the financial institution in the condition of liquidating its

assets in a short period at low price.

To survive in that situation, commercial banks have no option but borrow cash from

inter-bank market or Statebank’s injection

f. Operation risks

Operation risk is inevitable for any type of business. The larger scale the bank is,

the more types of service it offers, the riskier a bank may take. These risks emerge

from non-financial issues such as technology (ATM breakdown), employees (staff’s

morality), customer relations (contractual dispute), and capital assets (destruction of

flood or drought)

g. Legal risk

Legal risks take their roots from the uncertainty in interpretation of contracts, laws

and regulations. As the results, commercial banks can get so confused that they may

follow one rule, which is against the other rules.