(123doc) - Credit-Risk-Management-Case-Study-Of-Bidv PDF

MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECNOMICS HOCHIMINH CITY

---- K ---
BÙI NGUYÊN NGỌC
CREDIT RISK MANAGEMENT:

CASE STUDY OF BIDV
MASTES’S THESIS
In Banking
Ology code: 60.31.12
Supervisor: Dr. Nguyễn Văn Phúc
Ho Chi Minh City – 2010

ACKNOWLEDGMENT
I owe a debt of gratitude to many people who helped me complete this thesis. I
would like to acknowledge the help of all.
First of all I would like to express my deepest acknowledgement to my supervisor,

Doctor Phóc Nguyễn Văn, for his valuable advice and recommendations.
Then, I would like to thank my superiors and colleagues who agreed to be

interviewed and/or completed the survey questionnaires. The information they
provided, especially from managers/vice managers, allowed me to get deeper
understanding about credit risk management in BIDV and deriving the findings of
this study.
Finally, I want to express my sincere thanks to every member of my family for their
encouragement and support during the time I devoted to this dissertation.
Page i
ABSTRACT
Credit risk is one of the most popular risks in banks due to their intermediary
functions: lending and borrowing. An excessive level of credit risk may destroy not
only banks’ profitability but also the stability of global banking system. Therefore, it
is necessary for banks to develop an effective credit risk management strategy not
only to protect themselves but also to prevent banking crises.
In case of BIDV, BIDV is one of four State Banks established when Viet Nam
banking system is at a very early stage of development. For a long time, BIDV was
controlled in allocating loans by government. Therefore, credit risk management has
been the main challenge facing the board of BIDV managers. With the best try of
this board, since 2008, BIDV has controlled credit risk that comply with
international standard (non-performing-loan ratio was less than 3%). This is the
main reason that drove this study to describe credit risk management in BIDV, to
know why non-performing loan ratio in BIDV has been sharply reduced from 38.3%
in 2004 to 2.82% in 2009.
Both secondary data and primary data are needed for this study. Collected data is
analyzed by Statistical Package for Social Studies version 16.0 (SPSS). Cronbach
alpha is used to measure coefficient of reliability and t-test technique is used to test
the hypotheses about the four factors influence reduction of non-performing-loan
ratio in BIDV. These techniques and tools help collected data transform into
information that will answer the researcher’s questions.
Page ii
LIST OF FIGURES
Figure 1.1: Structure of chapter 1................................................................................ 2

Figure 1.2: Field of research problem ........................................................................ .4
Figure 1.3: Method of secondary data........................................................................ .7
Figure 1.4: Population and sampling.......................................................................... .8
Figure 1.5: Quota sampling method........................................................................... .9
Figure 1.6: Structure of the study.............................................................................. 12
Figure 3.1: BIDV Organization Chart ....................................................................... 40
Figure 3.2: BIDV’s non-performing loans ................................................................ 45
Figure 3.3: BIDV’s loan structure by collateral ........................................................ 46
Figure 3.4: BIDV’s loan structure by economic sector............................................. 47
Figure 4.1: Respondents’ position............................................................................. 57
Figure 4.2: Respondents’ working years in BIDV .................................................... 58
Page iii
LIST OF TABLES
Table 2.1: Level of specific provision ....................................................................... 20

Table 2.2: Example of a loan rating system and bond rating mapping ..................... 23
Table 2.3: Strategies for reducing and scoping with portfolio credit risk ................. 26
Table 3.1: BIDV’s key performance indicators......................................................... 41
Table 3.2: BIDV’s credit indicators .......................................................................... 43
Table 3.3: Loan classification in BIDV..................................................................... 49
Table 3.4: Summarize four factors influencing NPL ratio in BIDV.......................... 52
Table 4.1: Four variables with different aspects ....................................................... 58
Table 4.2: Level of agreement in survey questionnaire ............................................ 59
Table 4.3: The overall score of Cronbach’s alpha..................................................... 60
Table 4.4: The t-test result......................................................................................... 61
Table 4.5: Summary of hypotheses testing results .................................................... 64
LIST OF APPENDICES
Appendix A .............................................................................................................. 74
Appendix B................................................................................................................ 75
Appendix C................................................................................................................ 79
Page iv
TABLE OF CONTENTS
Acknowledgment ......................................................................................................... i
Abstract ....................................................................................................................... ii
List of figures .............................................................................................................iii
List of tables ............................................................................................................... iv
List of appendices....................................................................................................... iv
Table of contents ......................................................................................................... v
Chapter 1: Introduction ........................................................................................... 1
1.1 Introduction ........................................................................................................... 1
1.2 Rationale of the study............................................................................................ 2
1.3 Statement of the problem and the scope of the study ............................................ 3
1.4 Research questions and objectives ........................................................................ 4
1.5 Methodology ......................................................................................................... 5
1.5.1 Research design ............................................................................................ 5
1.5.2 Data collection .............................................................................................. 6
1.5.3 Data analysis............................................................................................... 10
1.6 Significance of the study ..................................................................................... 12
1.7 Structure of the study........................................................................................... 12
Chapter 2: Literature review ................................................................................. 14
2.1 Introduction ......................................................................................................... 14
2.2 Basic functions of banks...................................................................................... 14
2.3 Lending business................................................................................................. 15
2.3.1 The board of directors’ written loan policy ................................................. 15
2.3.2 Lending procedure ....................................................................................... 16
2.4 Credit risk in banks ............................................................................................. 17
2.4.1 Credit risk ................................................................................................... 17
2.4.2 Loan classification ...................................................................................... 19
2.4.3 Loan loss provision ..................................................................................... 20
Page v
2.4.4 Non-performing loan .................................................................................. 21
2.5 Credit risk measurement...................................................................................... 21
2.5.1 Traditional approaches................................................................................ 21
2.5.2 Modern approaches..................................................................................... 24
2.6 External factors that affect the level of credit risk .............................................. 27
2.6.1 Financial deregulation ................................................................................ 28
2.6.2 Supervision and re-regulation ..................................................................... 28
2.6.3 Competition................................................................................................. 29
2.6.4 The recent financial crisis........................................................................... 30
2.7 Internal factors that affect the level of credit risk ............................................... 30
2.7.1 Credit information....................................................................................... 30
2.7.2 Technology ................................................................................................. 32
2.7.3 Credit staffs................................................................................................. 33
2.7.4 Loan policy ................................................................................................. 34
2.8 Summary.............................................................................................................. 35
Chapter 3: Case study of BIDV ............................................................................. 37
3.1 Introduction ......................................................................................................... 37
3.2 Overview of BIDV............................................................................................... 37
3.2.1 Introduction................................................................................................. 37
3.2.2Organization structure ................................................................................. 37
3.2.3 BIDV business performance ....................................................................... 41
3.3 Lending business................................................................................................. 43
3.3.1 Overview..................................................................................................... 43
3.3.2 Non-performing loans and loan loss provision ........................................... 44
3.3.3 Loan structure ............................................................................................. 45
3.4 Internal factors that influence non-performing-loan ratio in BIDV .................... 47
3.4.2 Technology ................................................................................................. 48
3.4.3 Credit staff .................................................................................................. 50
3.4.4 Loan policy ................................................................................................. 51
Page vi
3.4.5 Suggesting hypotheses ................................................................................ 52
3.5 Summary.............................................................................................................. 55
Chapter 4: Data analysis and findings .................................................................. 56
4.1 Introduction ......................................................................................................... 56
4.2 Data collection results ......................................................................................... 56
4.3 Data analysis ....................................................................................................... 57
4.3.1 Descriptive statistic..................................................................................... 57
4.3.2 Measures of reliability ................................................................................ 58
4.3.3 Statistical hypotheses testing (t-test)........................................................... 60
4.4 Comparison and discussion of findings............................................................... 62
4.4.2 Technology ................................................................................................. 62
4.4.3 Credit staffs................................................................................................. 63
4.4.4 Loan policy ................................................................................................. 63
4.5 Result of hypotheses testing................................................................................ 64
4.6 Summary.............................................................................................................. 64
Chapter 5: Recommendation and Conclusion...................................................... 66
5.1 Introduction ......................................................................................................... 66
5.2 Reviewing research questions ............................................................................. 66
5.3 Recommendation for BIDV ................................................................................ 66
5.3.1 Credit information ................................................................................. 66
5.3.2 Technology............................................................................................ 67
5.3.3 Credit staffs ........................................................................................... 67
5.3.4 Loan policy............................................................................................ 68
5.4 Recommendation for other banks ....................................................................... 68
5.5 Limitation of the research ................................................................................... 69
5.6 Summarizing and concluding the dissertation..................................................... 69
References ................................................................................................................. 70
Page vii
CHAPTER
ONE
INTRODUCTION
1.1 Introduction:
This chapter provides a general introduction to the research study. The purpose is to
establish foundations for following chapters and the study as a whole, by providing
a general picture of the study. This chapter is structured into seven sections as
presented by figure 1.1.
Section 1.1 provides a general introduction to the chapter and section 1.2 examines
the research background where the research problem is identified. Section 1.3
defines the statement of the problem and scope of the study.
Section 1.4 which includes two subsections 1.4.1 and 1.4.2 defines the research
questions and research objectives. Subsection 1.4.1 addresses the research questions
that will be respectively answered in chapters of the study. Subsection 1.4.2 presents
research objectives that the study covers in the process of solving the research
problem defined.
Section 1.5 discusses the aspects of research methodology such as selecting from
alternative types of research, research design and research techniques. Section 1.6
points out the significance and scope of the study, and finally section 1.7 describes
overall structure of the thesis.
Chapter 1: Introduction Page 1

Section 1: Introduction
Section 2: Rationale of the study
Section 3: Statement of the problem and

scope of the study
Section 4: Research questions and objectives
Section 5: Methodology
Section 6: Significance of the study
Section 7: Structure of the study
Figure 1.1: Structure of chapter 1

1.2 Rationale of the study:
In today’s world, in order to meet customers’ requirements, there is a need for banks
to diversify their business including other activities such as payments, leasing, and
investments besides the two traditional functions of lending and borrowing.
However, lending still plays an important role in banks because banks’ revenue
primarily comes from lending revenue which contributes over a half of bank total
operating (about 70% in case of BIDV).
The traditional way that banks make their profit is to take risk in exchange for an
acceptable return to not only cover the cost of funding but also maintain their
profitability. Thus, the main business of banks is not, as everyone might assume,
taking deposits and making loans but minimizing the risk in collecting interest and
principle from the loans which is known as managing credit risk (Burton & Lombra
2006).

Credit risk is usually associated with banks because of their intermediary function
which is channeling funds from people who have fund surplus to those who have
fund deficit for their investment opportunities (Mishkin & Eakins 2006).
Historically, financial crises are usually derived from the failure of banks to manage
credit risk from poor quality loans or high probability of customers’ default
(Yarbrough & Yarbrough 2006).
In case of BIDV, BIDV is one of four State Banks established when Viet Nam
banking system is at a very early stage of development. For a long time, BIDV was
controlled in allocating loans by government. Therefore, credit risk management has
been the main challenge facing the board of BIDV managers. With the best try of
this board, since 2008, BIDV has controlled credit risk that comply with
international standard (non-performing-loan ratio was less than 3%). This is the
main reason that drove this study to describe BIDV credit risk management, to know
why non-performing loan ratio in BIDV has been rapidly reduced from 38.3% in
2004 to 2.82% in 2009.
1.3 Statement of the problem and scope of the study
This study conducts with particular emphasis on why non-performing-loan ratio in
BIDV has been rapidly reduced from 38.3% in 2004 to 2.82% in 2009.
Stemming from the reason mentioned in the rationale part, this research will focus
two main parts: First is credit risk management background; second is case study of
BIDV credit risk management. The first part provides some background knowledge
about credit risk, credit risk measurements, management and the factors that
influence credit risk. The second part analyses BIDV’s case in reducing non-
performing-loan ratio. This part presents three main subparts including overview of
BIDV; analysis credit activities, application of credit risk management theory to its
credit activity practice; consideration of four factors including credit information,
technology, credit staff and loan policy during the period 2004-2009, and suggesting
hypotheses. These analysis and consideration help the researcher realize that credit
risk management is one of significant achievements of BIDV because at the end of
2009, BIDV has controlled credit risk under international standard (non-performing-

loan ratio was less than 3%). Maybe there are many reasons leading the success of
BIDV. In scope of this study, four factors including credit information, technology,
credit staff, and loan policy will be examined as the main positive factors that
influence credit risk management of BIDV.
The four factors will be presented throughout this study. Firstly, this study reviews
literature related to the four factors and credit risk management theory. Secondly, by
analyzing BIDV’s credit business practice, this paper shows how the four main
factors influence BIDV on reducing non-performing-loan ratio. Finally, findings
from the survey by questionnaires confirm the above relationships.
Credit staffs
Credit NPL ratio in Technology

information BIDV
Loan policy
Figure 1.2: Fields of the research problem

1.4. Research Questions and Research Objectives:
1.4.1 Research Questions
Research questions involve the research translation of “problem” into the need for
inquiry (Zikmund, 1997, p.88). The research problem defined above leads to the
following research questions:
•What are factors that influence non-performing-loan ratio in BIDV?
•How has BIDV applied credit risk management theory to practice?
1.4.2 Research Objectives
This study is conducted with the purpose of:
•To know the main factors leading to BIDV success in reducing non-performing
loan ratio,
•To consider whether BIDV applies theory to manage its credit risk or not.
1.4.3 Research hypotheses
Aiming to confirm the influence of four factors including credit information,
technology, credit staffs and loan policy on reducing non-performing-loan ratio in
BIDV, the researcher assumes hypotheses as follows:
H1: Credit information variable influences non-performing-loan ratio in BIDV.
H2: Technology variable influences non-performing-loan ratio in BIDV.
H3: Credit staffs variable influences non-performing-loan ratio in BIDV.
H4: Loan policy variable influences non-performing-loan ratio in BIDV.
1.5 Methodology
The research methodology includes research design, data collection and data
analysis.
1.5.1 Research design: provide a road map of the whole research,
The researcher undertakes both qualitative and quantitative approach to this study
since both numerical data (BIDV’s performance indicators, BIDV’s business
lending indicators, level of agreement about factors that influence non-performing-
loan ratio, ) and non-numerical data (respondents’ background, position and their
suggestion to help BIDV continuously reduce non-performing-loan ratio, ) are
needed to answer the research questions.
According to G.Zikmund (1997), there are four basic design techniques: survey,
experiment, secondary data and observation. This research utilizes both survey and
secondary data methods. Based on the objectives of the research, survey method
helps the researcher collect primary data in order to indentify of four factors
influencing non-performing-loan ratio in BIDV while secondary data methods is
necessary for the researcher to understand credit risk background and describe
BIDV’s situation in managing credit risk or reducing non-performing-loan ratio.

Since this study applies perception survey which investigates the feeling of
respondents about the research problem, the findings are influenced by subjective
judgment of respondents. However, the researcher also utilizes secondary technique
for the purpose of exploring evidences to confirm the research problem.
1.5.2 Data collection
This section will describe the way in which data including both primary and
secondary data from a variety source of information was collected. Secondary data
was collected from available sources such as books, previous researches, BIDV’s
annual reports, financial journals and magazines while primary data was obtained
through surveys and interviews conducted by the author.
1.5.2.1 Secondary data
There are many advantages by using secondary data in conducting a research. First,
it is economical in the way that collecting available data is almost always less
expensive than collecting firsthand data through a study. In addition, collecting
secondary data help researcher save a huge amount of time spending analyzing and
interpreting the data collected. Second, in some cases, secondary data is the only
source that researcher can collect from the previous periods. Finally, unlike primary
data, secondary data is generally permanent and available in a form that is easily
checked and collected by others (Zikmund, 1997).
There are many types of secondary data such as documentary secondary data,
multiple source secondary data and survey based secondary data (Saunders, Lewis
& Thornhill 2007). However, this study focuses only on the documentary secondary
data source which includes BIDV internal materials (like BIDV regulations and
annual reports which collected from the internet and intranet website of BIDV) and
other written materials (such as previous researches, books, journals, newspapers
and magazines). These kinds of secondary data are important raw data sources for
this study.
For this study, the information from written materials like previous
researches, books, financial magazines, journals were used to build up
literature review while BIDV s annual reports and regulations which collected

from the official internet and intranet websites of BIDV were used to provide a
clear picture about credit risk management of BIDV.
Secondary data
Previous researches, books, Annual reports, regulations

journals, newspapers (BIDV internal data)
Figure 1.3: Method of secondary data collection

Based on the above advantages of secondary data, the researcher decided to use
secondary data as one of the sources of information in order to conduct this
study.
1.5.2.2 Primary data
Beside secondary data, the researcher uses primary data in order to get the
feelings of respondents about the problem of the study. The purpose of this study
is to know the factors leading to BIDV success in credit risk management.
Therefore, the target population in this research is all BIDV credit staff whose daily
work relevant to lending business
It would be impracticable for this study to collect all data available from the entire
population of all BIDV credit staffs because of the limited time and financial
sources. Thus, this research will be conducted with a sample size of 100 BIDV
credit staffs including 20 managers/vice managers, 30 credit department leaders and
50 credit officers.

20
managers
30 credit
Population dept leaders
(BIDV credit
staffs) 50 credit
officers
Sampling
Figure 1.4: Population, sample and sampling methods

Source: Adapted from G.Zikmund (1997)
The quota sampling technique is used in this study because of its advantages in term
of time, finance and convenience. Three steps of the technique are described as
below:
•First, the whole population of BIDV credit staffs is divided into three
significant classes: managers/vice managers, credit department leaders and
credit officers. This classification is based on the researcher judgment that
the higher position the credit staffs are in, the more reasonable feeling they
have.
•Secondly, each class is determined the desired proportion. Managers/vice
managers group occupies 20% of the sample, credit leaders group occupies
30% of the sample and 50% of the sample is credit officers group. The
determination is based on the researcher judgment mentioned in the first step.
Since this is a perception survey, the findings are influenced by subjective
judgment of respondents. Therefore, a half of selected sample are credit staffs
with high positions. Thanks to the advantage of being a member of BIDV, it
is quite easy for the researcher to communicate with managers/vice managers
and credit department leaders about the research problem.

In this study, number of credit officers occupies only 50% of sample while it
is 90% in Chau’s (2009). This is the main reason leads the researcher retest
the four hypotheses conducted by Chau (2009).
•Finally, quota sample (100 respondents) is fixed. The sample of this study is
about 100 respondents (over 5 times of observed variables) including 20
managers/vice managers, 30 credit department leaders and 50 credit officers.
This number was decided after considering some previous researches. For
example, see Tho & Trang (2008, p.35) or Trong & Ngoc (2008, p31).
To obtain the desired sample size, a total of 150 self-administered questionnaires
were distributed to the respondents by the researcher. Of these, 100 questionnaires
were returned making effective response rate 67%.
Managers/Vice
20
managers
staffs
Population
(BIDV credit staffs) Credit department 30
leaders staffs
Credit officers 50
staffs
Population Strata Sample
Figure 1.5 Quota sampling method

Source: Adapted from Adapted from G.Zikmund (1997)
This study utilizes two techniques to obtain primary data: interview (telephone
interview and face to face interview) and self administered questionnaire. Interview
method is used to gather response of manager group while self administered

questionnaire is used to collect response of credit department leader group and
credit officer groups.
Before conducting survey, the researcher carries out depth-interview and pretest in
order to increase quality of data collection.
Depth-interview
Beside reviewing different aspects of four factors including credit information,
technology, credit staff and loan policy via books, previous researches, the
researcher will also carry out an depth interview in order to draw other practical
aspects of the four factors such as: credit information selecting and systemizing,
credit staff competence and technology matching, frequency of facility
maintenance, important role of board of directors. The objects of this interview are
one manager and three credit department leaders.
Pretest
A list of questions used for getting information from respondents (Appendix A) was
created. In order to improve the response rate, the researcher implemented a pilot
test to refine the questions and make sure that respondents have no problems in
understanding or answering those questions.
This pilot test was conducted through a group of 10 people including one professor
and four classmates from UEH, one manager and 4 BIDV credit officers. The
feedback from these people who have practical experience and academic knowledge
helped the researcher to improve the questions in order to get the highest response
rate from respondents.
1.5.3 Data analysis
The process of analysis begins after the data have been collected (G.Zikmund, 1997,
p.507). Data collected must be analyzed in order to create meaningful findings for
the study. Data analysis plays an important role in analyzing the data. If the
collected data is not properly analyzed, the result may be invalid. SPSS software
version 16.0 was used for data analysis because of its many powerful statistical
features. The main objectives of the data analysis are to test the quality of the data
collected and the hypotheses studied (Sekaran, 2003).

•Firstly, collected data must be recorded by using numerical codes. By doing so,
the researcher can input the data quickly into the system using the numeric
keypad on the keyboard with very few errors.
•Second, once the collected data is input and coded, the researcher can then
enter them into the computer manually.
•Finally, when the data has been already recorded and entered, the researcher
can proceed to the data analysis phase.
Data analysis technique
The study uses descriptive statistics to summarize the background information of
respondents’ in the survey questionnaires. The detail about the frequency and
percentage of respondents’ working years, positions and backgrounds will be
showed in this section.
Reliability measures were used to test the meaning of the different variable
combinations. The four hypotheses in this study are the assumptions about the
effects of four variables to the effectiveness of credit risk management strategy.
Therefore, the survey questionnaire consists of 19 questions related to these four
variables. However, as it was difficult to test these hypotheses based on separate
individual aspects, the researcher decided to combine different aspects of each
variable into one. Therefore, it was necessary for the researcher to test the meaning
of this combination process. Cronbach’s alpha is a commonly used number to test
the reliability of the combination of different individual variables. The value of
Cronbach’s alpha varies between 1 (perfect internal reliability) and 0 (no internal
reliability). According to Bryman and Bell (2003), the value of 0.80 is an acceptable
level of internal reliability. However, many writers accept a slightly lower figure
like Vogt (2007) argued that an alpha of 0.70 or higher is often considered
satisfactory for most studies.
An application of hypothesis testing is used to quantify respondents’ perception of
research problem on a five-point scale, where 1 indicates strongly disagree and 5
indicates strongly agree. The scale is assumed to be an interval scale. T-test
technique is used to estimate confidence intervals for the mean.

The later chapter, chapter four: “Data analysis and findings” will discuss about
analysis technique in detail.
1.6 Significance of the study
This study helps readers realize the crucial importance of credit risk management
and know the main factors that influence the reduction of non-performing-loan ratio
in BIDV.
1.7 Structure of the study
Chapter 1: Introduction
Chapter 2: Literature Review
Chapter 3: Case study of BIDV
Chapter 4: Data analysis and findings
Chapter 5: Recommendations and conclusions
Figure 1.6: Structure of the study

This main purpose of the study is to understand the impact of credit information,
technology, loan policy and credit staffs on reduction of non-performing-loan ratio
in BIDV. Beside this chapter one currently discussed, the study also consists of the
following five chapters:
Chapter 2: Literature Review: This chapter will provide general theories related to
credit risk management. Furthermore, the researcher’s insights on these theories will
also be discussed.
Chapter 3: Case study of BIDV: This chapter provides an overview of bank for
investment and development of Vietnam (BIDV) and BIDV’s credit risk
management is the main part of this chapter.
Chapter 4: Data analysis and findings: analyzing the collected data in order to get
results to test the hypotheses and answer the research questions in chapter one.

Chapter 5: Recommendation and conclusion: based on these analysis and
findings from chapter five, some suggestions or recommendations about the credit
risk management strategies that BIDV can adopt to manage credit risk will be given.

CHAPTER
TWO
LITERATURE REVIEW
2.1. Introduction:
This chapter provides an introduction to the extant literature on commercial banks’
main business. Theories related the credit risk derived from lending activities will be
discussed. In particular, both external factors such as financial deregulation,
supervisory and re-regulation, competition and recent financial crisis and internal
factors such as information, loan policy, credit staff, and technology which affect
the level of credit risk in banks will be reviewed. In addition, credit risk
measurements will be taken into consideration. Excessive credit risk may limit not
only the profitability of the bank itself but also the stability of the whole banking
system and the global economy. The recent financial crisis is a convincing evidence
for this statement, the fast rising risks in banks resulted in the global recession, the
downturn of not only the U.S economy but also many other countries worldwide, as
well as the instability of the global financial system (Anita & Hawser 2008).
Therefore, banks should recognize the importance of credit risk management and
employ an effective strategy to manage credit risk in order to protect themselves
from credit losses.
2.2. Basic functions of banks:
In general term, a bank is an organization that engages in the business of banking -
it accepts deposits and makes loans. Banks perform three basic functions: (1) They
provide a leading role in the payment system; (2) They intermediate between
depositors and borrowers by offering deposit and loan products; and (3) They
provide a variety of financial services, encompassing fiduciary services, investment
banking (underwriting original issues of stocks and bonds), and off-balance sheet
risk taking (E.Gup & W.Kolari 2005)
Chapter 2: Literature Review Page 14

Traditionally, the main activity of banks is to mobilize funds from those with
surplus money to lend to those with shortage of money. In other words, banks play
an intermediary role between suppliers of funds (depositors) and the users of funds
(borrowers) (Ritter, Silber & Udell 2000).
2.3. Lending business
2.3.1. The board of directors written loan policy
According to Benton E.Gup & James W.Kolari (Commercial banking, 2005, p250-
251), a bank’s board of directors has the ultimate responsibility for all of the loans
made by the bank. Because the board delegates the task of making loans to others, it
must have a written loan policy that establishes the guidelines and principles for the
banks’ credit risk strategies and polices. The credit risk strategy must recognize the
goals of credit quality, earnings, and growth-that is the risk/reward tradeoff.
Loan policies vary widely from bank to bank. The loan policy for a small bank that
lends primarily to local customers is going to differ from the policy of a large bank
that specializes in lending to business concerns. In either case, the policy would
state that the bank is in the business of making sound and profitable loans.
Therefore, the loan policy must make it clear that an important part of lending
process is that all loans should have a repayment plan at the time the loan is made.
Other parts of the loan policy deal with:
•Loan authority: Who has the authority to make loans; the lending limits relative
to capital, deposits, or assets; the lending approval process.
•Loan portfolio: the types of loans the bank wants to make, such as consumer
loans, loan to start up businesses, loans to large businesses, farm loans,
international loans, and so on. The policy should also put limits on the
concentration of particular types of loans.
•Geography limits of the bank’s trade area where it may grant loans. The
overwhelming majority (97 percent) of small and medium-sized business use
financial institutions within 30 miles of their principal office.
•Policies for determining interest rates, fees, and contractual terms of the loans.

•Limits and guidelines for off-balance sheet exposures from loan commitments,
letters of credit, securitized loans, and derivative products (swaps, options,
and futures, etc.)
•A loan review process to evaluate lending procedures and the quality of the
loan portfolio.
2.3.2. Lending procedure:
Lending procedure is the process that banks loans are provided to borrowers through
proper evaluation of customers’ financial condition and credit worthiness (Rose &
Hudgins 2008). According to Hempel and Simonson (1999), although different
banks employ different methods to make their final lending decision, they normally
follow the standard lending procedure described in the following basis steps:
Step 1: Receiving application: Customers including individuals and corporations
apply for a loan from banks by filling out a loan application.
Step 2: Evaluating application: Bank credit officers evaluate the loan application.
Evaluating loan request or by interviewing customers in order to investigate their
characters and borrowing purpose. Furthermore, the banks can collect customers’
information or credit history from the banks’ database when customers have
existing relationship with the banks. Other banks and credit information agencies
are also other sources for banks to gather customers’ credit information.
Step 3: Lending decision: Refusing application or Granting credit
Refusing application: If credit officers realize that the customer is ineligible for
receiving the bank loan, they may reject the loan application. Credit officers will
then issue a formal announcement on the loan application status to the customers
within a certain period of time.
Granting credit: If the loan application satisfies the requirements from the banks
then a loan agreement may be issued and signed between customers and authorized
bank officer. Other activities must be taken into account when the agreement is
signed such as checking and collecting the property or other asset types considered
as collateral for the loans.

Step 4: Monitor loan: After granting credit, credit officers must monitor customers
in order to ensure that customers use the loan accordingly with the purpose stated on
the loan agreement. In addition, as credit officers can quickly assess customers’
financial condition or their ability to pay the loan back by a proper monitoring
process, banks managers and credit officers who are aware of the importance of this
process can effectively help preventing their banks from credit losses.
Step 5: Collecting loan: The duty of credit officers has not finished upon granting
the loan to customers. Their last and important mission is to collect debt and
liquidate credit agreement. However, one of four things can happen to an
outstanding loan: (1) It can be repaid on schedule; (2) It can be renew and extend;
(3) The bank can sell the loan to another investor; (4) The loan can go into default
and the bank may sustain losses. The first three are desirable outcomes. The last is
the worst-case scenario for the bank.
Before loans are granted, banks must evaluate the creditworthiness of the
prospective borrowers (step 2). The borrower’s character, financial condition, and
ability to repay the loan from future income or the sale of assets are of primary
importance. When the banks decide to grant a loan, all of the terms of the loan
(credit facility, amount to be borrowed, the term of loan, method and timing of
repayment, interest rate and fee, collateral if required, covenants or promises by the
borrower to take or not to take certain actions during the term of the loan) are put
into a contract called a loan agreement. After the loan is granted, the bank must
monitor the loan to assure repayment. The best outcome is that the loan is repaid in
full. The worst outcome is that it is charge of as a loss.
2.4 Credit risk in banks
2.4.1 Credit risk
Banking is the management of risk. Banks accept risk in order to earn profits. They
balance alternative strategies in terms of their risk/return characteristics with the
goal of maximizing shareholder wealth.
According to Jane E.Hughes and Scott B.MacDonald (2002, p.297), a banker’s job
is to manage risk, not avoid it. Banks face a variety of risks in their operations such

as: credit risk, market risk, liquidity risk, interest rate risk, operation risk, etc.
However, credit risk seems to be the most popular risk that most modern banks face
due to their main business functions: lending and borrowing.
Benton E.Gup et al. (2005, p247) defined credit risk as: “The credit risk of banks is
the risk of repayment, i.e., the possibility that an obligor will fail to perform as
agreed . Credit risk applies to loans, derivatives, foreign exchange transactions,
the investment portfolio, and other financial activities.
Based on the scope of this study, the above definition of credit risk is narrowed to
include only the lending activity of banks. Credit risk is the risk that borrowers
may default on their loans, causing losses to the lender. Therefore, if borrowers
pay back the promised amount of principal and interest of the loan at the specified
time then the banks will bear no credit risk. Otherwise, if borrowers settle a part of
principal or interest to the bank, no matter how their willingness or capacity to repay
the loan, then the banks will face credit risk, which means there is high probability
that the banks will lose their money from the customers.
Credit risk management plays an important role in preventing not only the banks’
lending business but also banks’ operations from failure (Madura 2006).
Furthermore, because of their crucial role in the economy and society, banks are too
important to fail. The failure of any bank can cause highly negative effects to the
household, the corporation sectors and the whole economy (Yarbrough &
Yarbrough 2006).
First, the problem of one bank may spread to others in the same country and around
the world (e.g. the recent subprime mortgage crisis in the U.S.). This is due to the
nature of banking business in which banks tend to be so closely related to each other
when doing business. When funds stop flowing into one bank, other banks in the
financial system that have placements or other credit positions with the failed bank
will see themselves short of funds in-flow. Again, banks who are behind these
“other banks” above-mentioned will face the same problem too. This domino effect
will eventually cause the whole banking system to collapse as it did during the
recent financial crisis (Yehning, Hasan & Iftekhar 2008).

Second, in market-oriented economies, banks channel fund from savers to those who
have investment opportunities. In order words, the role of banks is to improve the
fluency of the flow of fund in the economy.
Therefore, the more effectively banks can operate, the more fluency the flow of fund
can be or the more opportunities that profitability projects get funding. The problem
of one or few banks may become the problem of the whole banking system, the
global economy and society. If this is the case, savers will lose their savings and
interest earning opportunities while entrepreneurs will lose their investment
opportunities. This will affect the development of the economy and the welfare of
the society as fewer jobs are created. Thus, credit risk management is not only
important to one single bank but also to the whole banking system and the economy.
2.4.2 Loan classification
The governor of the State Bank of Vietnam (SBV) promulgated a decision 1 on loan
classifications and provisioning for bad debts of credit institutions in 2005. Based on
overdue indicator of debts, according to the article sixth of this regulation, a loan
portfolio is classified into five groups as follows:
-Group 1 (standard debts): includes undue debt, whose principal and interest are
assessed by credit institutions to be fully recoverable when they become due.
Debts under this category are not subject to provisioning (0% rate of
provisioning);
-Group 2 (debts to which attention shall be paid): includes debts overdue for less
than 90 days and rescheduled debts that are now no longer due according to
rescheduled terms. This group shall be provisioned at the rate of 5%;
-Group 3 (sub-standard): includes debts overdue between 90 and 180 days and
rescheduled debts overdue for less than 90 days according to the rescheduled
terms. This group shall be provisioned at the rate of 20%;
-Group 4 (doubtful debts): includes debts overdue for between 181 and 360 days
and rescheduled debts that are overdue for between 90 and 180 days
1
Decision 493/2005/QD-NHNN dated 22 April 2005

according to the rescheduled terms. This group is subject to a provisioning
rate of 50%;
-Group 5 (debts with potentially irrecoverable principal): includes debts
overdue for more than 360 days, debts frozen pending the government’s
handling, and rescheduled debts that are now overdue for more than 180 days
according to the rescheduled terms. This group shall be provisioned at 100%.
With respect to debt frozen by the government, specific provisions shall be
set up according to the financial capability of the credit institution.
In addition, according to the article seventh of the decision, credit institutions are
allowed to classify loans based on their credit rating system when their risk
provision policy was approved by SBV. In this case, a loan portfolio is also
classified into five groups.
2.4.3 Loan loss provision
According to Greuning et al (2009), loan classification provides a basis for
determining an adequate level of provision for possible loan loss. In the decision
number 493/2005/QD-NHNN, state bank of Vietnam regulates that loan loss
provision contains general provision and specific provision:
Loan loss provision = general provision + specific provision
General provision is equal 0.75% multiply by total loan value groups from group 1
to group 4:
General provision = 0.75% x loan value of groups (1 + 2 + 3 + 4)
Level of specific provision is determined correlative to each group as below:
Loan group Level of specific provision
1 0%
2 5%
3 20%
4 50%
5 100%
Table 2.1: Level of specific provision
Source: Adapted from decision number 493/2005/NHNN

2.4.4 Non-performing loan
According to the decision number 493, non-performing loan (or bad debt) is
defined as a loan classified under group 3, 4 or 5. NPL ratio is equal to NPLs
divided by total outstanding loans.
Non-performing loans
NPL ratio =
Total outstanding loans
NPL ratio shows credit quality of a credit institution: high NPL ratio shows low
credit quality.
2.5 Credit risk measurement
2.5.1 Traditional approaches:
Adapted from Anthony Saunders (2002, p.9), it is hard to differentiate between the
traditional approach and the new approaches since many of the better ideas of
traditional models are used in the new models.
The traditional approach is comprised of four classes of models
2.5.1.1. Expert Systems
In the expert system, the credit decision is left in the hands of the branch lending
officer. His expertise, judgment, and weighting of certain factors are the most
important determinants in the decision to grant loans. The loan officer can examine
as many points as possible but must include the five “Cs” these are: character,
capital, capacity, collateral and cycle (economic conditions):
1. Character: A measure of the reputation of the firm, its willingness to
repay, and its repayment history. In particular, it has been established
empirically that the age of a firm is a good proxy for its repayment
reputation.
2. Capital: The equity contribution of owners and its ratio to debt (leverage).
These are viewed as good predictors of bankruptcy probability. High leverage
suggests a greater probability of bankruptcy.
3. Capacity: The ability to repay, which reflects the volatility of the
borrower’s earnings. If repayments on debt contracts follow a constant
stream over time, but earnings are volatile (or have a high standard

deviation), there may be periods when the firm’s capacity to repay debt
claims is constrained.
4. Collateral: In the event of default, a banker has claims on the collateral
pledged by the borrower. The greater the priority of this claim and the greater
the market value of the underlying collateral, the lower the exposure risk of
the loan.
5. Cycle (or Economic) Conditions: The state of the business cycle; an
important element in determining credit risk exposure, especially for cycle-
dependent industries. For example, durable goods sectors tend to be more
cycle-dependent than nondurable goods sectors. Similarly, industries that
have exposure to international competitive conditions tend to be cycle-
sensitive. Taylor (1998), in an analysis of Dun and Bradstreet bankruptcy
data by industry (both mean and standard deviation), finds some quite
dramatic differences in U.S. industry failure rates during the business cycle.
In addition to the 5 Cs, an expert may also take into consideration the level of
interest rate.
2.5.1.2. Artificial Neural Networks:
Due to the time consuming nature and error-prone nature of the computerized
expertise system, many systems use induction to infer the human expert’s decision
process. The artificial neural networks have been proposed as solutions to the
problems of the expert system. This system simulates the human learning process. It
learns the nature of the relationship between inputs and outputs by repeatedly
sampling input/output information.
2.5.1.3. Internal Rating at Banks:
An internal rating system helps financial institutions manage and control credit risks
they incur through lending and other operations by grouping and managing the
creditworthiness of borrowers and the quality of credit transactions. Financial
institutions use internal rating system for originating and monitoring loans. (Bank of
Japan, August 2005).

Over the years, banks have subdivided the pass/performing rating category, for
example at each time, there is always a probability that some pass or performing
loans will go into default, and that reserves should be held against such loans. Banks
have developed internal rating systems for loans on a 1 to 9 or 1 to 10 scale.
Bond Rating Score Risk Level
AAA 1 Minimal
AA 2 Modest
A 3 Average
BBB 4 Acceptable
BB 5 Acceptable with care
B 6 Management attention
CCC 7 Special mention
CC 8 Substandard
C 9 Doubtful
D 10 Loss
Table 2.2: Example of a loan rating system and bond rating mapping.
Source: Adapted from Saunders A & Allen L, 2002.
2.5.1.4. Credit Scoring Systems:
Adapted from Benton and James (2005, p.217-218), credit scoring is the use of
statistical, operational research, and data mining models to determine the credit risk
of prospective borrowers. The credit score is a number that is calculated by a credit
bureau or another company, such as the Fair Isaac Corporation’s FICO score that is
used in making credit decisions and for other purposes.
The advantages of using credit scoring model are that they reduce the cost of
evaluating credit and increase the speed, consistency, and accuracy of credit
decisions.
Credit scores are based on the past financial performance of groups of borrowers
similar to the one being scored. In general, a high credit score signals low credit
risk. Each lender has its own cut-off points depending on the risks it is willing to
take. Thus, a lender may use a rating system such as:

• FICO scores of 720 and above: Excellent credit
• 680-719: Good credit
• 620-679: Conditional credit
•585-619: High risk credit
• 584 and below: Very-high-risk-credit
2.5.2 Modern approaches
2.5.2.1 Value At Risk (VAR):
Adapted from Anthony Saunders (2002), VAR is a technique used to estimate the
probability of portfolio losses based on the statistical analysis of historical price
trends and volatilities.
By assuming financial institutions care about the odds of a really big loss on loans,
VAR answers the question, "What is my worst case scenario?" or "How much
could I lose in a really bad month?"
To be more specific, a VAR statistic has three components: a time period, a
confidence level and a loss amount (or loss percentage). Keep these three let’s take
note of this as we give some examples of variations of the questions that VAR
answers:
• What is the most I can - with a 95% or 99% level of confidence - expect to lose in
default on loan repayment over the next month?
• What is the maximum percentage I can - with 95% or 99% confidence - expect to
lose over the next year?
2.5.2.2 Portfolio Approach
Since the 1980s, banks have successfully applied modern portfolio theory (MPT) to
market risk. Many banks are now using earnings at risk (EAR) and value at risk
(VAR) models to manage their interest rate and market risk exposures.
Unfortunately, however, even though credit risk remains the largest risk facing most
banks, the practical of MPT to credit risk has lagged (William Margrabe, 2007).
Banks recognize how credit concentrations can adversely impact financial
performance.

As a result, a number of sophisticated institutions are actively pursuing quantitative
approaches to credit risk measurement, while data problems remain an obstacle.
This industry is also making significant progress toward developing tools that
measure credit risk in a portfolio context. They are also using credit derivatives to
transfer risk efficiently while preserving customer relationships. The combination of
these two developments has precipitated vastly accelerated progress in managing
credit risk in a portfolio context over the past several years.
2.5.2.2.1. Asset-by-asset Approach:
Traditionally, banks have taken an asset-by-asset approach to credit risk
management. While each bank’s method varies, in general this approach involves
periodically evaluating the credit quality of loans and other credit exposures,
applying a credit risk rating, and aggregating the results of this analysis to identify a
portfolio’s expected losses. The foundation of the asset-by-asset approach is a sound
loan review and internal credit risk rating system. A loan review and credit risk
rating system enable management to identify changes in individual credits, or
portfolio trends in a timely manner. Based on the results of its problem loan
identification, loan review, and credit risk rating system management can make
necessary modifications to portfolio strategies or increase the supervision of credits
in a timely manner.
2.5.2.2.2. Portfolio Approach:
While the asset-by-asset approach is a critical component to managing credit risk, it
does not provide a complete view of portfolio credit risk, where the term risk refers
to the possibility that actual losses exceed expected losses. Therefore to gain greater
insight into credit risk, banks increasingly look to complement the asset-by-asset
approach with a quantitative portfolio review using a credit model.
Banks increasingly attempt to address the inability of the asset-by-asset approach to
measure unexpected losses sufficiently by pursuing a portfolio approach. One
weakness with the asset-by-asset approach is that it has difficulty identifying and
measuring concentration. Concentration risk refers to additional portfolio risk
resulting from increased exposure to a borrower, or to a group of correlated

borrowers. The below table summarizes strategies for reducing and coping with
portfolio credit risk.
Technique Advantages Disadvantages Implication
Geographic External shocks If the country is
Diversification (climate, price, small or the
natural disasters, Institution is capital
etc.) are not likely to constrained, it may
affect the entire not be able to apply
portfolio if there is this principle.
spatial
diversification.
Loan Size Prevents the Can be carried to Protects asset
Limits institution from the extreme where quality in the
(Rationing) being vulnerable to loan size does not short run but
nonperformance on a fit the business creates client
few large loans. needs of the client retention
and results in problems in the
suboptimal use and long run.
lower positive Inimical to
impact by client. relationship
Client could banking.
become dissatisfied
Over Assures the Excludes poor, Not a
Collateralization institution that low-income clients recommended
enough liquidation who are the vast technique if goal
value will exist for majority of the is to better serve
foreclosed assets. market. the low- and
moderate income
clients.

Credit Bank makes clients Databases and
Insurance purchase credit credit bureaus may
insurance. In event of not exist to permit
default, bank collects insurer to engage in
from insurer. this line of business
in cost-effective
manner.
Portfolio Lender bundles and Requires well Requires a well
Securitization sells loans to a third documented loans developed
party. and long time secondary
Transfers default risk series of market,
and improves performance data standardized
liquidity so that it to permit ratings underwriting
can continue to lend. and reliable practices, and
Allows lender to construction of existence of
develop expertise in financial rating companies.
analyzing projections.
creditworthiness in
one sector or niche.
Table 2.3: Strategies for reducing and coping with portfolio credit risk
Source: Adapted from Bank performance and credit risk management, Master
degree project of Takang Felix Achon, University of Skovde, Sweden.
2.6 External factors that influence NPL ratio
Due to their unique business, banks always maintain certain level of credit risk in
their operations in order to exchange for high profit at the end. However, the current
high level of credit risk in banks leads to the fragility of the global banking system.
This fact is further explained by the trend of deregulation, supervision and re-
regulation, high competition in the banking system and the recent financial crisis.
The following sections will discuss the relationship between these trends and the
level of credit risk in banks.

2.6.1. Financial deregulation
Financial deregulation is defined by Casu, Girardone and Molyneuz (2006, p.37) as:
“The remove of controls and rules that in the past have protected financial
institutions, especially banks”. In the past, banks are strictly regulated by the
governments in order to ensure the stability of the country banking system.
Furthermore, governments tend to protect their domestic banks from competition,
especially from foreign banks by setting complicated barriers and requirements.
However, at this time the operation of banks has expanded outside their domestic
market because of the globalization trend. Therefore, the control of government may
harm their banks rather than protect them in such a high competitive banking
industry. Thus, financial deregulation is an inevitable trend in the modern banking
system.
The benefits from the financial deregulation come along with a variety of challenges
derived from this kind of trend. The loosening of banking control from governments
leads to the fact that banks have more freedom in running their business. However,
this also means that banks must take responsibility for their business without hoping
for protection from the governments. As a result, modern banks are threatened by
the high level of risk because they misused their freedom to extend their credit to
high risk business.
2.6.2. Supervision and re-regulation
Re-regulation is defined as: The process of implementing new rules, restrictions
and controls in response to market participants efforts circumvent existing
regulations (Casu, Girardone and Molyneuz, 2006, p.38).
It is clearly stated in the above section that, the consequence of deregulation process
is the increasing level of credit risk in the current banking system. Therefore,
according to Hubbard (2008), countries’ governments around the world try to
regulate the financial markets and institutions with the purpose of:
• Ensuring that all participants in the financial system have the opportunities to
access to timely and accurate information in order to make their financial
decisions

• Maintaining the stability and safety of the overall banking sector by
preventing the failures of banks
Recently, a project named “Financial reform: a framework for financial stability”
was launched by the group of thirty (G30) financial experts from the public, private
sectors and academic in July 2008. By examining the global financial crisis, the
project emphasized the importance of the supervisory systems, the role of central
banks in managing risk especially credit risk in order to ensure the stability of
global banking system (Williams 2009).
2.6.3. Competition
Before the deregulation process, in most countries, governments highly regulate and
control the banking industry and protect domestic banks from competition
especially from foreign banks. The main objective was to ensure the stability of
banking system and prevent banking crises (Lange et al. 2007).
There are many opposite opinions about the role of competition in improving the
stability of the banking system. Smith (1984), Keeley (1990 and Repullo (2004) (in
Schaeck et al. 2009) and Benton E.Gup et al. (2005) argued that high level of
competition lead banks to involve in more riskier business while other theoretical
studies done by Caminal and Matutes (2002) or Mishkin (1999) (in Schaeck et al.
2009) stated that uncompetitive banking industry or concentrated banking system
are more likely to encourage risk taking behavior by bank managers because bank
managers believe that they will be bailed out by the government in case of failures.
Although the above opinions are reasonable, the first argument is proved to be more
convincing with the supportive evidences from reality, especially from the recent
financial crisis. There is no doubt that the increasing competition leads to a high
level of risk especially credit risk in banking industry. Banks are now losing their
powers in lending business to the commercial paper market and securitization. This
fact threatens the profitability and the position of banks in the financial services
industry and banks are forced to involve in other potential risky business: subprime
mortgage loan and credit card to maintain their profit. Thus, the lending business of
banks is becoming more complicated for banks to monitor and control. Banks are

facing challenges in monitoring these new activities due to the lack of expertise and
resources (Mishkin 2007). As a result, this will cause the level of credit risk to
become higher in modern banks and the current financial crisis is a result of this
fact.
2.6.4. The recent financial crisis
The recent financial crisis which started from the U.S. has a great impact on the
global financial system in specific and the world economy in general. The collapse
of the housing market, the slowdown of the global economy, the difficulties of
global financial system and the rising of unemployment rate are effects of this
financial crisis which caused by the high level of credit risk in banks. This fact
encouraged financial experts and related parties around the world to think more
seriously about risk management, especially credit risk management in banking
industry (Brown & Davis 2008).
2.7. Internal factors that influence NPL ratio
Chau (2009) suggested the model for credit risk management strategy for Vietnam
banks. The model highlighted the importance of four main factors that have great
impacts on credit risk management: accurate and timely credit information, skilled
and moral banks staff, intensive investment on technology and innovation, well-
defined and well communicated loan policy.
2.7.1. Credit information.
Credit information that banks collect for making lending decisions is in terms of
borrower’s characteristics, loan purposes, the primary and secondary sources of loan
repayment (Sinkey 1998).
This kind of information is crucial in the bank lending practices because it can help
banks to determine the loan applicant’s willingness and capacity to implement the
repayment obligation. Therefore, credit information is one of the most important
factors that can help banks reduce the level of credit risk by granting loan to the
right customers. Based on the importance of credit information, banks must have
access to timely and accurate credit information because it is extremely difficult for
banks to make lending decisions without such information. Out-of-date and

inaccurate credit information may result in impairing of banks’ assets and
profitability due to wrong lending decision (Thomas 2006).
In “Commercial banking” (2005), Benton E.Gup and James W.Kolari mentioned
about the role of asymmetric information in credit risk management. The inequality
of information between the bank and the borrower is called asymmetric information.
Simply stated, asymmetric information means that the borrowers have more
information about themselves than is available to the banks and banks tend to attract
the higher-risk borrowers (adverse selection). The asymmetric information also
gives rise to a moral hazard problem after loan is made. Moral hazard is the risk that
the borrower, who now has loan, might use the funds to engage in higher-risk
activities in expectation of earning higher returns. The higher-risk activities increase
the probability of default on the loan.
Chau (2009) found the importance of credit information with four aspects including:
the impact of credit information, source of credit information, credit information
sharing and credit information checking in enhancing Vietnamese banks’ capacity
to manage credit risk.
According to Hempel and Simonson (1999), banks should have reliable sources of
credit information in order to improve the quality of credit and credit risk
management capacity. There are three fundamental sources that banks can collect
credit information from: customers, internal bank sources and external sources
available through institutions outside the bank. However, there are some problems
that may occur when collecting information from these sources:
First, there is a conflict interest between banks and borrowers in lending practices.
Obviously, borrowers will always have a better knowledge about their financial
situation than banks do. In some cases, borrowers tend to conceal their financial
situation in order to get the loans from banks. Thus, banks may be at risk if they
make the wrong judgments based solely on this source of information.
The second source that banks can collect credit information is the bank’s database if
borrowers already have a relationship with the banks. However, banks need to spend
huge amounts of money to upgrade the technology system in order to be able to

store and analyze its internal information. Furthermore, because this information is
provided by borrowers so banks must carefully investigate the accuracy and
timeliness of information.
Third, banks can collect information from a third party outside the banks such as
suppliers, credit rating agencies or other banks. This can provide another reference
source of information that can help banks make a right lending decision. However,
banks may again face the same dilemma as a result of the inaccurate third-party
information.
2.7.2. Technology
The development of technology is changing the way banks do their business,
especially the lending business. Banks now employ technology as an instrument in
storing, transmitting and analyzing credit information to come out with the lending
decisions. Most consumer loan decisions are made today with the assistance of
statistical techniques that can more accurately predict the probability of customers’
default. With the support of technology, the credit analysis process now is becoming
quicker and easier than before (Ritter, Silber & Udell 2000).
It is understandable to state that, the banking industry is information technology
intensive because of its unique products and services which are related to the huge
amount of customers’ money and confidential data. Therefore many billions of
dollars are spent annually by financial institutions worldwide in supporting
information technology needs such as computer systems, and/or technological
infrastructure to improve their competitive advantages (Seymann 1998).
Technology facilitates elimination of manual processes and allows information to be
managed in an efficient and effective way. Technology can help banks to lower their
operating costs by increasing the productivity and accuracy of banks staff.
Therefore, it will result in higher profit for the banks. Furthermore, technology is
also considered a risk management tool for banks based on its functions in
collecting, storing, processing and transmitting customers’ data (such as age, job,
size of family or income). The above functions of technology can help banks to

reduce the level of risk especially credit risk by well-managed customers’
information (Lange et al. 2007).
Chau (2009) found the importance of technology with four aspects including: the
impact of technology, frequency of technology maintenance, technology investment
and banks’ growth progress matching and modern technology in enhancing
Vietnamese banks’ capacity to manage credit risk.
2.7.3. Credit staffs
In the new economy, the competitive advantage is based on human knowledge
rather than on machines or manual works. Employees with their knowledge can
create value for the banks and becomes an intellectual capital which has a great
impact to the success or failure of the banks (Lengnick & Cynthia 2003). In the case
of lending activities, the most recent technology or innovation, a clear and well-
defined loan policy or a huge amount of credit information are useless when banks
cannot recruit and retain ethic and skilled employees.
2.7.3.1. Ethics
Ethics was defined by Blumberg, Cooper and Schindler (2005, p.92) as: The moral
principles, norms or standards of behavior that guide moral choices about our
behavior and our relationship with others . In other words, ethics is a set of
principles that control and influence one person’s behavior.
Obviously, the success of any bank heavily depends on the ethics of its employees
because customers’ decision to use a bank’s services is based not only on the quality
of services but also their confidence and trust that banks staff will not take
advantage of their positions for unethical gains. Since banks’ business is unique in
that they are dealing with large amounts of money and confidential information of
their customers, professional ethics is a necessary characteristic that ensures banks
staff will not cause any harm to the banks’ customers as well as its reputation
(Hempel & Simonson 1999).
2.7.3.2. Skills
Human skills are the abilities that help employees to performance their duties or
jobs (Lengnick & Cynthia 2003). Employees with knowledge and skills can create

economic value for the organization. Therefore, modern organizations tend to recruit
and retain skilled employees in order to ensure their growth progress. According to
Morgan (2009), skill sets can be broken down into the following components:
•Information gathering (perception skills) which refers to the capabilities of
sensory, perception and interpretation
•Information processing (cognitive skills): which reflects the ability to reason,
analyze and make decisions
•Communication skills: is the ability to listen, communicate and share
information and ideas
•Social skills: is the ability to interact, coordinate and collaborate productively
with others
The above four skills are necessary for a qualify credit officers to maintain the
reasonable level of credit risk in bank. Firstly, as stated before, credit information is
crucial in managing credit risk so gathering and processing information skills are
necessary for credit officers in making a right lending decision. Finally, the
communication skills and social skills encourage credit officers to effectively
cooperate with colleagues in managing credit risk and also dealing with customers.
Chau (2009) found the importance of credit officers with four aspects including: the
impact of credit officers, comprehensive of training course, proper supervisory
system and reward policy in enhancing Vietnamese banks’ capacity to manage
credit risk.
2.7.4. Loan policy
According to Hempel and Simonson (1999), loan policy can be defined as: “A policy
gives loan officers and management specific guidelines in making individual loan
decisions and in shaping the overall loan portfolio. It also lists some improper
activities or relationships that loan officers should avoid .
Therefore, one of the most important ways a bank can make sure its loans meet
regulatory standards and are profitable is to establish a well-written loan policy. By
setting a loan policy that defines the responsibility, obligations and rights of each
party in the lending process, banks can prevent credit losses. However, the loan

policy must be communicated among the banks’ staff to prevent any
misunderstanding and disagreement in the loan policy implementation. Finally,
banks have to frequently update the policy to better adapt to the changing internal
and external environment (Sinkey 1998).
Chau (2009) found the importance of loan policy with four aspects including: the
impact of loan policy, well-defined policy, well-communicated policy and frequency
of policy amendment in enhancing Vietnamese banks’ capacity to manage credit
risk.
This section will also discuss three important things in loan policy which mentioned
by Hempel and Simonson (in Bank management, 1999) as below:
2.7.4.1 Loan approval process
Loan approval process is lending process which was discussed in section 2.3.2.
2.7.4.2 Loan review and monitoring of the loan portfolio
Most banks conduct loan reviews to reduce losses and monitor loan quality. Loan
reviews consist of a periodic audit of the ongoing performance of some or all of the
active loans in the bank’s loan portfolio. The true purpose of loan review is a source
of some confusion. Most bankers would cite an “early warning” purpose wherein
loan review provides the basic defense against deteriorating credit quality.
2.7.4.3 Problem loan administration
After granting credit, credit officers attempt to maintain good rapport with their
borrowers. Any unexplained change in the borrower’s attitude toward the credit
officer or the bank may be a clue to the borrower’s financial difficulties. When a
problem loan is detected, the responsible loan officer should take immediate
corrective action to prevent further deterioration and to minimize potential loss.
2.8 Summary
This chapter is a combination of the two main parts: the theory about the credit risk
management. First, the theory part provides readers with an overall view about
credit risk management such as: the main functions of banks, the lending business,
factors that affect the level of credit risk in banks, credit risk measurement and
management. In addition, four critical internal factors in managing credit risk

including credit information, technology and innovation, loan policy, ethic and skills
of credit staff are also mentioned. In summary, literature review is a preparation step
which provides readers an adequate knowledge for the next chapters.

CHAPTER
THREE
CASE STUDY OF BIDV
3.1 Introduction:
This chapter provides BIDV business practices, especially credit activities. It
includes five main parts: 3.1 Introduction, 3.2 Overview of BIDV, 3.3 Lending
business, 3.4 Internal factors that influence NPL ratio in BIDV, and 3.5 Summary.
There are many factors that make BIDV success, however this study takes into
consideration four main factors: credit information, technology, credit staffs, and
loan policy.
3.2 Overview of BIDV:
3.2.1 Introduction:
Bank for Investment and Development of Vietnam (BIDV) was established under
Decision No. 177/TTg dated 26th April, 1957 by the Prime Minister. Forty eight
years of development have witnessed a profound transformation of BIDV with
several name changes as follows:
• Bank for Construction of Vietnam (26/04/1957-24/06/1981)
3.1 Introduction
• Bank for Investment and Construction of Vietnam (24/06/1981-14/11/1990)
• Bank for Investment and Development of Vietnam (from 14/11/1990)
BIDV is the first to be established among four largest State-owned Commercial
Banks in Vietnam and it is a special State-owned enterprise organized as a State
General Corporation. As of 31st Dec, 2009, the Bank’s total assets reached
approximately VND billion 292,198.
BIDV functions as a universal commercial bank providing a full range of currency,
credit, banking and non-banking services, and acting as authorized agency funding
projects with source from domestic and international financial institutions. With its
experience investing in key projects, BIDV plays the leading role in development
investment and project financing in Vietnam.
3.2.2. Organizational Structure:
Chapter 3: Case study of BIDV Page 37
Organizational structure has been transformed toward the model of a modern,
international financial group. At present, BIDV comprises four units namely
Subsidiaries, Administrative, Joint-Venture Unit, and State-owned Commercial
Bank unit (including 3 transaction centers and 108 branches nationwide). Total
employees of the whole system reached 14,550, those who are well equipped with
expertise and knowledge of modern banking technology.
In recent years, with supports from international institutions, Vietnamese
government has made a great effort to appeal and grant sizable aids for banking
and finance sector, aiming at comprehensively reforming the banking system in
terms of structure, policies and functional activities in order to create favorable
conditions for Vietnamese banks to gradually change their operations towards best
international standards and practices.
Technical Assistant Project of restructuring BIDV (referred to as “TA”) funded by
ASEM, managed by World Bank is a part of a comprehensive program of
reforming Vietnamese banking system which is carried out by international
consultants from prestigious financial corporations in the world.
TA concentrated on improvement of fundamental operations such as management
of transformation of corporate governance and organizational structure; treasury;
risk management; asset-liability management; internal audit; marketing; business
strategies; IT development strategies; products and services development strategies.
These operations were analyzed comprehensively, consulted supported on technical
aspects. Concurrently, professional procedures of a modern commercial bank were
studied and applied under the consultants’ supervision.
As a key part in TA, the component of consultancy on changing corporate
governance and organizational structure has essential function of supporting BIDV
to restructure the Bank’s organization model. Basically, BIDV’s organizational
structure was changed to meet the following requirements:
•Transforming from a traditional bank to a centralized multi-functional
bank. Head Office controls products and financial plans for each targeted
customer group through each distribution channel. Thus, Head Office

executes directly some strategic activities such as treasury, large-scale
credit, trade finance, etc. Branches are considered distribution and sale
channels for Head Office and narrowed down in their functions,
responsibilities, and operational scale.
•Ensuring separation in responsibilities. The principle is that there is none
staff who both discusses with customers and bears responsibility for
payment. Front Office groups transact and negotiate with customers but are
not eligible to input or update data into accounts. They are only allowed to
retrieve information about such accounts. Back Office and Support groups
do not contact with customers but they key in data into accounts, support on
the matters of risks, operation and finance.
•Centralizing some functions to Head Office such as human resources,
treasury, asset- liability management, trade finance, IT, internal control,
wholesale credit, etc., in order to increase the effectiveness of the system’s
corporate governance.
The restructuring of BIDV is an indispensable tendency deriving from BIDV’s
reality, the requirements of international integration. BIDV’s previous
organizational model as well as risk management pattern did not completely
comply with international practices: the branches operated as one- stop small
banks. This model did not allow the Bank to control risks and manage business
operations effectively. Moreover, it is an indispensable requirement for the whole
economy in general and for the domestic banking system in particular to integrate
deeper into the world economy after Vietnam’s accession to WTO. As a result,
BIDV, like other domestic banks, has to face with challenges and pressures caused
by fierce competition from overseas banks; forcing it to drastically and
comprehensively reform its organizational structure and managerial patterns
towards international practices in order to actively attract capital and approach
technologies, techniques, management experiences which are helpful for
competition and development strategies.

BIDV
JOINT VENTURES
VID-PUBLIC BANK
LAO-VIET BANK
VIETNAM- RUSSIA BANK
BIDV-VIETNAM PARTNERS INVESTMENT

MANAGEMENT JOINT VENTURE COMPANY
BIDV-TOWER JOINT VIENTURE COMPANYS
BANKS
108 BRANCHES
3 TRANSACTION CENTERS
ADMINISTRATIVE UNITS
BIDV INFORMATION TECHNOLOGY CENTER
BIDV TRAINING CENTER
SUBSIDIARIES
2 BIDV FINANCIAL LEASING COMPANIES
BIDV INSURANCE
COMPANY
BIDV SECURITIES COMPANY
BIDV ASSET MANAGEMENT COMPANY
Figure 3.1: BIDV Organization Chart

3.2.3 BIDV business performance
In 2006, Vietnam held successfully the 14th APEC Summit, became a member of
the WTO and enjoyed permanent normal trade relationship with the USA. In
tandem with those outstanding events, BIDV has made outstanding strike,
especially in areas of assets quality, technology, transparency, organizational
structure and human resources.
Management of asset quality is strongly enhanced. Non-performing loans are
reduced to match with international practices. BIDV has well-performed the goal of
hiking growth quality in association with sustainable factor. In 2006, BIDV was the
first enterprise in Vietnam rated by Moody’s, confirming BIDV’s pioneer role in
applying international standards and practices.
Since 2008, the global economy in general and the Vietnamese economy in
particular have been in recession due to the U.S. financial crisis. This has lead
negative impacts on the operation of BIDV. However, thanks to the close and
drastic direction of the Board of Directors and the entire system’s effort, BIDV has
got the remarkable achievements. Most of financial indicators were up to
international standards. Here is the brief report of BIDV’s key performance
indicators:
Unit: billion VND
No Items 2004 2005 2006 2007 2008 2009
1 Total asset 102,716 121,403 161,223 204,511 243,867 292,198
2 Total outstanding
67,831 79,383 93,453 126,616 154,176 198,979
loans
3 Total outstanding
66% 65% 58% 62% 63% 68%
loans/Total Asset
4 CAR 4.60% 3.36% 5.50% 6.70% 6.62% 7.55%
5 NPLs/Total
outstanding loans 38.30% 31.30% 9.60% 3.98% 2.71% 2.82%
(NPLs ratio)
6 Net profit (billion
38.34 114.39 538.99 1,604.75 1,780.01 2,520.00
VND)

7 Total owner’s
3,091 3,150 4,428 8,405 9,969 13,977
equity
Table 3.1: BIDV’s key performance indicators
Source: BIDV annual reports
Total assets have increased over years. As at 31/12/2009, total assets reached VND
292,198 billion, 21% increased over that of 2008. The asset quality of BIDV has
been stable improved during the past 6 years, reflecting at the shifts in the asset
structure to be more reasonable and effective. Specifically:
- Total outstanding loans accounted a large portion (67%) of total assets in 2009.
The bank reduced loan to state-owned enterprises to VND 49,795 billion,
making proportion of loans to state-owned enterprises over outstanding loans
decrease from 30% in 2008 to 26.04% in 2009. Beside, state-directed and
policy loans have not arisen new debts since 2002 but reduced through years.
This implicates that BIDV has no longer granted loans that indicated by
government since 2002. Since then, all loans granted based on BIDV’s analysis
and evaluation through their regulations and policy.
- CAR is a measure of bank’s capacity to cushion unexpected risks without
affecting the bank’s core capital. BIDV’s CAR increased year by year during
the period. At 31/12/2009, BIDV maintained CAR at 7.55%, approaching
international standard (according to Basel 1, financial institutions are required
to maintain CAR at minimum 8%).
- NPLs ratio (which indicates credit quality or asset quality): The significant
decline in BIDV’s NPLs from 31.3% of 2005 to 9.6% of 2006 and to 2.82% of
2009 showed the bank’s effort in effectively controlling credit quality, settling
bad debts and in clearing balance sheet. Thus, BIDV really obtained success in
credit management under international standards.
- Net profit has been continuously gone up year by year, especially in 2007 (up by
98% as compared to that of 2006). The increase in net profit indicates BIDV’s
success in managing risk to make profit.

- Owner’s equity has been continuously increased year by year, especially in 2007
(up by over 96% as compared to that of 2006). It reached VND 13,977 billion,
equivalent to USD 779 million, increased 40% compared to that of 2008. This
helped BIDV enhance their financial capacity, leading to the increase of CAR
ratio.
3.3 Lending business
3.3.1 Overview
BIDV’s risk management has improved significantly in recent years. BIDV’s
business activity has been carried out under the principle of decentralizing for each
operation, business unit and management level. Accordingly, responsibility and
authority in business management were relatively clarified and fully regulated.
BIDV has issued and performed credit policies, periodical policy of credit risk
management; processes and regulations guiding the credit activity to match with
the circumstance of each stage; decentralization of credit approval to organizations
and individuals who take part in the process of credit appraisal and approval; built
and assigned credit planning norms to units; review portfolio, classified loans and
set provisions in accordance with regulations of state bank of Vietnam; checked
and controlled periodically, suddenly or by projects.
Unit: billion VND
No Items 2004 2005 2006 2007 2008 2009
Total Asset (billion
102,716 121,403 161,223 204,511 243,867 296,622
1 VND)
Total outstanding
67,831 79,383 93,453 126,616 154,176 198,979
2 loans (billion VND)
State-directed Loans
6,520 5,096 3,156 1,967 1,245 753
3 (billion VND)
Total outstanding
66% 65% 58% 62% 63% 68%
4 loans/Total Asset
5 Credit Growth 14.10% 20.90% 14.50% 25.70% 26.50% 19.63%
Mid-long term
45.70% 42.10% 40.20% 38.40% 37.50% 44.50%
6 loans/ Total

outstanding loans
Loans to non state-

owned enterprises
35.90% 48% 58% 70% 70% 75%
/Total outstanding
7 loans
Secured loans/Total
54.50% 66% 70% 70.70% 70% 73%
8 outstanding loans
NPLs/Total
outstanding loans 38.30% 31.30% 9.60% 3.98% 2.71% 2.82%
9 (NPLs ratio)
Net interest income/
Total operating 61.61% 91.05% 80.42% 81.23% 80.59% 69.59%
10 income
Table 3.2: BIDV’s credit indicators
Although BIDV has been shifted their income structure towards modern bank:
increase proportion of service income, decrease proportion of interest income, net
interest income still occupies 69.59% of total operating income. Thus lending
business plays critical role in profitability of BIDV.
3.3.2 Non-performing loans (NPLs) and loan loss provision
Thanks to tight and systematic control, proportion of non-performing loans
reduced gradually, showing an increase in lending quality and its capacity of
controlling lending safer and more accurate. Conformity and requirement for
transparency of over-due loans and non-performing loans continued to be highly
valued by BIDV in order to reflect precisely over-due loans, non-performing loans,
setting up enough compulsory reserve, settling non-performing loans to achieve
good lending quality.
Thanks to International Credit Rating System, BIDV has classified loans
according to the 7th Article of the Decision No 493. BIDV has successfully
executed the control of credit quality and the NPLs resolution. Some critical
methods that BIDV has applied to reduce NPLs ratio as follows:

•Accurately assessing customers and classifying loan as per international
standards;
•Frequently reviewing loan portfolio;
•Strictly controlling credit quality of each loan and to each customer;
•Restricting loan to customers having bad debts;
•Actively recovering bad debts;
•Setting collaterals to recover debts;
•Restructuring debts, handling risks
•As well as selling bad debts.
BIDV has well performed the goal of hiking growth quality in association with
sustainable factors. Management of asset quality is strongly enhanced. Realizing
that comprehensive resolution of NPLs in one of BIDV’s prior goals in its plan to
meet international standards, BIDV has made efforts to control credit quality,
settling bad debts. NPLs ratio has significantly reduced since 2006 (it was 31.3%
in 2005, 9.6% in 2006, 3.98% in 2007, 2.71% in 2008 and 2.82% in 2009).
Thus, BIDV obtained success in credit management, non-performing loans are
reduced as planned to match with international practices (NPLs ratio less than 3%).
50
38,3
40 31,3
30
20 9,6
10 3,98 2,71 2,82
0
2004 2005 2006 2007 2008 2009
Figure 3.2: BIDV’s non-performing loan

According to BIDV annual report 2009, BIDV has set sufficient provision for loan
loss in accordance with the decision number 493 of State Bank of Vietnam since
2008. Provision coverage ratio (provision for loan loss/NPLs) was 163% in 2009.
This indicates that provisions for loan losses have been sufficient for absorbing the
NPLs.
3.3.3 Loan structure

BIDV is one of four state-owned banks of Vietnam which address the needs of
some particular sectors. Before economic reform in 1986, BIDV was controlled by
government in allocating credit to a few main economics. Therefore, BIDV could
not be active in decide its lending structure but government. In recent years
(exactly since 2006), BIDV’s lending structure has been changed towards positive
trend.
Loan structure by collateral

BIDV has shifted loan structure towards positive trend through years. Realized the
significance of collateral in lending business, BIDV has made every effort to
reduce unsecured loans portion. Proportion of secured loans has increased from
year to year and reached 74% in 2009.
100%
80% 35,9 48 58 70 70
60% 73
40% Secured loans
64,1 52
20% 42 Unsecured loans
30 30 27
0%
2004 2005 2006 2007 2008 2009
Years
Figure 3.3: BIDV’s loan structure by collateral

Loan structure by economic sector
The customer’s structure has been shifted towards the current development
tendency, which prioritizes SMEs and non state-owned enterprises. BIDV has
shifted loan structure towards increase proportion of loans to non-state owned
enterprises and decrease proportion of loans to state owned enterprises.

100%
80% 35.9
48 58
60% 70 70 75
40% Nonstate -owne d e nte rprise s

64.1 State -owne d e nte rprise s
52
20% 42
30 30 25
0%
2004 2005 2006 2007 2008 2009
Ye ars
Figure 3.4: BIDV’s loan structure by economic sector

Loan structure by industry
At the beginning stage of development, BIDV was addressed for dealing with
investment and development projects. This leads the highest proportion of
construction industry in BIDV loan structure. The proportion occupied over 45% in
2004 (when loan portfolio contained less than ten industries). Since BIDV applied
international theory into their practices in 2006 such as internal credit rating
system, diversification technique, and many written regulations relevant to credit
activities, the loan structure has shifted into positive trend. At the present time,
there are thirty five industries in BIDV’s loan portfolio and proportion of
construction industry occupies about 20%, sharply decrease (25%) to it in 2004.
The industry diversification is one of techniques help BIDV reduce credit risk level.
3.4 Internal factors that influence non-performing-loan ratio in BIDV
3.4.1 Credit information
Credit information plays critical role in granting credit and reducing non-performing
loan ratio in BIDV because of the two following reasons:
-BIDV’s lending process requires credit information is sufficient and reliable for
credit staffs to make credit decision. Firstly, credit officers collect the
information from various sources like customer, suppliers, and other reliable
source (CIC, State bank of Vietnam, etc) in active manner. Then, they check,
select and systemize information for their credit appraising through expert
system technique and internal credit rating system technique. Once loan is

approved, in order to minimize credit risk from moral hazard problem, BIDV
credit officers keep on monitoring and reviewing the loan as well as updating
customers’ change during the loan life.
-Credit information has been stored systematically and public to the whole system
thanks to the technology improvement through information management system
and internal knowledge management portal in recent years. The sharing of
information has a meaningful significance in reducing non-performing-loan
ratio.
3.4.2 Technology
BIDV has continued to boost investment in technical infrastructure and information
technology (IT) human resource development since 2004 (when modernization
project carried out). In BIDV organization structure, IT department duty is to handle
tasks relevant to technology such as: set up application program, solving technical
problems, computer maintenance, updating technology, etc for effective technology
operation and reducing manual works. Technology investment has been focused on
applications which help BIDV develop and diversify their services, support business
operation, risk management and security. Internal credit rating system is a
remarkable achievement in BIDV technology application. It has played an important
role in reducing BIDV’s non-performing-loan ratio since BIDV applied internal
credit rating system in 2006.
International credit rating system
With the support of international consultants, in 2006, BIDV was the first
Vietnamese bank to set up and apply internal credit rating system (ICRS) in
accordance with international practices. Since then, it is convenient for BIDV to
review their loan portfolio and apply asset to asset approach to measure credit risk.
Loan review is required to carry out quarterly at least to identify changes in loan
and increase supervision of credit in a timely manner.
This system helps BIDV control their all credit portfolio as well as assess
customers systematically. This system is the foundation for BIDV to make the
united and systematic assessment during the process of knowing customer,
considering investment project, evaluating analysis, appraising and making
decision on credit providing, evaluating loans and setting provision. ICRS
according to international practices is the premise for BIDV to complete lending
procedures, then improving credit quality of BIDV.
The system was put into operation according to the 7th Article of the decision
number 493, reflecting accurately credit quality of BIDV. On November 14th, 2006
the State Bank of Vietnam gave official agreement to BIDV for classifying loans
and setting up provisions according to Article 7- Decision 493 since the fourth
quarter of 2006. BIDV has then issued the policy of loan classification and
provision setting according to the 7th Article – Decision 493.
Credit rating process consists of three main components:
-Scale rating (5%): capital and number of employees are two main indicators to
rating customer’ scale.
-Financial rating (or quantitative rating: 35%): Financial rating comprises an
analysis of the financial data available for the credit applicant. The analysis
of annual financial statements (backward-looking approach) has a central
position in this context. Automated program is used to calculate indicators
from the annual financial.
-Non-financial rating (or qualitative rating: 60%): Qualitative rating requires
comprehensive knowledge of the borrower to be successful. It contains
credit-worthiness, management capacity, internal environment, customer‘s
relationship history with BIDV, competitive environment, operating
characteristic and prospective development.
Combining and weighting scale, financial and qualitative marks, this system
categories loans into ten classes/five groups in terms of risk level as follow:
Specific Definition
No Class Group Risk Level
Provision (according to the 7th Article)
1 AAA 1 Current 0% Debt whose principal and interest are
2 AA assessed by credit institutions to be fully

3 A recoverable when they become due
4 BBB Debt whose principal and interest are
assessed by credit institutions to be fully
Special
2 5% recoverable when they become due but
5 BB mention
there are signals that borrower repayment
capacity decreased
6 B Debt whose principal and interest are
7 CCC assessed by credit institutions not to be
fully recoverable when they become due.
3 Substandard 20%
Credit institutions doubt that there is
8 CC
possibility of their partial principal and
interest loss
Debt which credit institutions evaluate that
9 C 4 Doubtful 50% there is a high possibility of their principal
and interest loss
Debt which credit institutions evaluate that
10 D 5 Loss 100% there is impossibility of their principal and
interest repayment
Table 3.3: Loan classification in BIDV
Source: Adapted from decision number 4130 of BIDV which regulates loan
classification and making provision policy.
3.4.3 Credit staffs
BIDV credit appraising utilizes both expert system and internal credit rating system
which heavily weight subjective judgment of credit staffs. Therefore, BIDV realizes
the importance role of credit staffs whose daily work relevant to lending business. In
order to ensure credit staffs quality, BIDV’s recruitment has been improved year by
year. Up to now, their recruitment process has been implemented in a transparent,
public and well-organized manner. Credit staffs recruited by BIDV need to be either
skilled or ethic employees. Skills help credit staffs enough qualified to operate
modern technique as well as collect and process information for their credit

appraising while ethics help them enough ability to avoid money seducement or
taking their position advantage for unethical gains.
After recruitment, training has been taken into account by BIDV. Many training
courses (218 courses in 2009) specialized according to topics, skills help staff
quality improved significantly. In addition, “penalty and reward policy” issued in
2005, then edited and supplemented in the next years is one of aspects that
influence credit staffs quality.
Therefore, quality (both skill and ethic) of BIDV credit staffs have been
significantly improved in recent years.
3.4.4 Loan policy
In BIDV, loan policy has been well established in writing since 2004 according to
decision number 6079/QD-QLTD1 dated 22/10/2004. It gives credit staffs certain
guidelines in making credit decision and in shaping overall loan portfolio.
In 2006, BIDV succeeded in launching internal credit rating system (ICRS). Loan
classification result from ICRS help BIDV shape their loan portfolio and make
customer policy in order to improve credit quality. Thus, credit policy has been
improved step by step and frequently updated in order to adapt to internal and
external environment. Besides, this has been communicated among staff through
seminars, instruction training.
BIDV’s lending process which issued in 2008 and updated in 2009 contains five
steps as Hemple and Simonson suggested in Bank mangement (1999). The process
provide not only procedures in credit grating but also sample forms and guidlines
appendices which instruct credit officers to evalutate loan under specific standard. In
addition, it is well-defined with respect to responsibilities, authorities of each party
involved.
Up to now, BIDV has achieved significant improvement in updating, perfecting
credit policy and regulations. Therefore, credit controlling and managing task was
set up closely through regulations system, including credit principles, credit
processes, credit risk management policy, level arrangement and authority of

granting credit regulation, loan classification policy, internal credit rating,
customer policy, collateral regulation, credit restructuring regulation, This makes
remarkable contribution in improving credit quality, building appropriated credit
structure.
3.4.5 Suggesting hypotheses:
Thanks to NPLs ratio indicator (NPLs ratio decreased remarkably from 2005
(31.3%) to 2006 (9.6%), and gained 2.71% in 2008, 2.82% in 2009), the following
table summarizes four factors that may affect credit risk over three periods:
Items To 2006 2006 - before 2008 2008 - now
The main source Database has been Database has been
that the bank stored systematically stored systematically
collected and public to the and public to the
information is whole system thanks whole system thanks
from customers. to international credit to ICRS. Information
BIDV has not rating system (ICRS). is updated frequently
installed database Information is through asking
management updated frequently customers: requiring
system. through asking them to supply
Credit Customers’ customers: requiring financial status,
Information profiles were them to supply unscheduled survey
mostly stored by financial status, of current status
individual credit unscheduled survey of customers’ business;
officers/branches current status refer to suppliers and
that grant credit to customers’ business; Credit Information
them. They are refer to suppliers and Center.
scattered, not Credit Information
systemized and Center.
public to all
branches.

Modernization Modernization project BIDV successfully
project stage 1 (TA1) was carried out
(Technology completely operated modernization
Assistant stage 1 - through whole project stage 2
TA1) was carried system. The (TA2). Credit
out in pilot remarkable origination
branches. achievement of BIDV department (front
Financial items is that they office) and credit
were manually successfully launched operation
calculated. This ICRS. The system department (support
lead credit risk due help BIDV evaluate, office) are defined
Technology
to subjective granting credit, separately. Front
judgment. review loan portfolio, office has not had
then improve credit the right to enter
quality. data. Support office
has entered data
instead. This helps
BIDV to reduce
credit risk because
of avoiding credit
origination officers’
fraud.
Training activity BIDV’s management Training courses
was not properly strategy on human specialized
taken into account. resource orients to the according to topics,
Credit Training courses scientific skills help staff
staffs were hold in management. Besides quality improved
general topics, taking training significantly.
unspecialized activity into proper Recruitment process
topics. Training consideration, BIDV has been held in

activity was has perfected reward, transparent, public
ineffective. encouragement and and well-organized
promotion policies for manner.
labor in order to
attract and retain
talent staffs as they
are precious resource
for BIDV
development.
Credit activities Credit granting policy The regulations have
have been based on ICRS. This continuously been
regulated in policy regulated improved towards
written words and principles of perfect credit risk
discussed marketing, granting management policy.
frequently among credit, required Remarkably, lending
credit staff, collateral and credit process has been
especially credit pricing with respect to well-defined with
handbook 2005. each customer group. respect to
Customer policy Regulations have responsibilities,
Loan policy was issued and been improved step authorities of each
became effective by step and party involved and
in 2004. communicated the proper steps in
Customers were among staff through
lending process.
classified into seminars,
various groups instruction training.
based on financial Both traditional and
items, non- modern techniques
financial items.
have been applied in
These items were
credit risk
standardized in

terms of management.
calculation and
scale.
Table 3.4: Summarize four factors influencing NPL ratio in BIDV.
Therefore, it is suggested four hypothesizes as follows:
H1: Credit information variable influences non-performing-loan ratio in BIDV.
H2: Technology variable influences non-performing-loan ratio in BIDV.
H3: Credit staffs variable influences non-performing-loan ratio in BIDV.
H4: Loan policy variable influences non-performing-loan ratio in BIDV.
3.5 Summary:
This chapter introduces three main parts: an introduction of BIDV, BIDV’s lending
business and factors that influence NPL ratio in BIDV. First, the introduction part
provides readers with an overall view about BIDV such as: BIDV history,
organizational structure and business performance. The second part mentions about
BIDV lending business. This part presents the factors that influence non-
performing-loan ratio in BIDV. The hypotheses are also suggested in this part. In
summary, this chapter analyzes BIDV credit activities and suggests four
hypothesizes for the next chapters to test.

CHAPTER
FOUR
DATA ANALYSIS AND FINDINGS
4.1. Introduction
This chapter presents the study’s findings through a data analysis process. The
collected data (primary data) was analyzed using SPSS software (Statistical Package
for the Social Sciences) version 16.0 and diagrams. The results derived from the
analysis were used to answer the research questions and to test the four hypotheses
suggested in the previous chapter. Finally, a summary of hypotheses testing will be
included in this part to remind readers about the researcher’s achievements.
4.2. Data collection results
In order to ensure the timeliness of the collected data, the secondary data collection
has been started from the beginning of the study till this point of time. This data
helps the researcher form the literature review about credit risk management
(chapter two) and describe business lending of BIDV (chapter three). The two
chapters focus on four factors including credit information, technology, credit staff
and loan policy which influence NPL ratio. In addition, the researcher tried to gather
primary data through the survey questionnaires and interview method to achieve the
study objectives.
Thanks to being a member of BIDV, the researcher takes advantages in collecting
primary data. Therefore, number of superiors who response in the survey is high,
occupies a half of the sample (twenty branch managers/vice managers accepted to
be interviewed via telephone, thirty credit department leaders and fifty officers fill
in the research questionnaire and give back to the researcher. The data collected
from these managers were extremely important in answering the research questions
because of the sensitivity and reliability of the information provided. Furthermore,
survey questionnaires were distributed to a list of 150 target credit staffs. After one
week, the researcher received feedback from 100 respondents. Since 100
Chapter 4: Data analysis and findings Page 56

respondents are considered an acceptable number to derive the findings for this
study (adapted from Trong & Ngoc, 2008), the implementation of the delivery and
collection questionnaires is unnecessary.
4.3. Data analysis Collected data (primary data) was analyzed using SPSS software
version 16.0. The detail of the study findings which derived from the above analysis
will be presented and discussed.
4.3.1. Descriptive statistic
Descriptive statistic is a useful tool in describing background data such as: age,
income and education status of respondents in the research (Orcher 2005).
Therefore, this study employed this method to present the respondents’ information
in term of working years, respondent’s current position and respondent’s
background/faculty. This information is fundamental for judging the reliability of
collected data from those participants.
4.3.1.1 Respondents position
It is necessary for this study to approach different position levels to improve the
quality and reliability of collected information because different levels tend to have
different perspectives or knowledge about the same object. Since a lot of effort has
been made, 50% of participants are from top management levels and the rest are at
staffing levels.
Current position
Frequency Percent Valid Percent Cumulative Percent

Valid Manager/Vice
20 20.0 20.0 20.0
Manager
Credit department
30 30.0 30.0 50.0
leader
Officer 50 50.0 50.0 100.0
Total 100 100.0 100.0
Figure 4.1: Respondents’ position

Source: derived from SPSS analysis (Appendix B)
4.3.1.2 Respondents length of time working in BIDV

Obviously, the understanding and knowledge of people about an industry or certain
areas depend on the length of time they have worked in that industry and areas.
Therefore, respondents’ working years is one criterion to access the reliability of
their answers. Figure 5.2 shows a small percentage of only 1% participants who
have less than 1 year working experience in banking industry whereas the
percentage of 1-3, 3-5 and 5-10 working-years credit officers are 18%, 14% and
25% respectively. Respondents with more than 10 years working experience
accounts for the largest proportion (42%).
Member of BIDV

Valid Less than 1 year 1 1.0 1.0 1.0
1-3 years 18 18.0 18.0 19.0
3-5years 14 14.0 14.0 33.0
5-10years 25 25.0 25.0 58.0
More than 10
42 42.0 42.0 100.0
years
Total 100 100.0 100.0
Figure 4.2: Respondents’ working years in BIDV

Source: derived from SPSS analysis (Appendix B)
4.3.2. Measures of combination reliability
Four hypotheses with their assumptions about the relationship between those
variables: credit information, technology, credit officers and loan policy have been
developed at the beginning of this study. However, each variable is affected by a
variety of following individual aspects:
Variable name Aspects
1. Impact of credit information
2. Source of credit information
Credit information 3. Credit information selecting and systemizing
4. Credit information sharing
5. Credit information updating

1. Technology operation
2. Credit staff competence and technology matching
3. Frequency of facility maintenance
Technology
4. Technology investment & BIDV's growth progress
matching
5. Modern technology
1. Characteristic of credit staffs
2. Comprehensive training course
Credit staff 3. Proper supervision system
4. Important role of board of directors
5. Reward policy
1. Impact of loan policy
2. Well-defined loan policy
Loan policy
3. Well-communicated loan policy
4. Frequency of amendment
Table 4.1: Four variables with their different aspects
Since the research utilizes perception survey, the survey questionnaire was designed
to ask respondents to provide their response in a predetermined level of agreement:
Rate Level of Agreement
1 Strongly disagree
2 Disagree
3 Normal
4 Agree
5 Strongly agree
Table 4.2: Level of agreement in survey questionnaires.
In order to make it easy for the researcher to test those hypotheses and create the
study findings, those aspects that belong to each variable were combined into one.
Each variable was computed by average of its aspects. Thus, Cronbach’s alphas
were used to decide whether the combination is reliable. Based on the result derived

from SPSS version 16.0 (Table 4.3), all the values of Cronbach’s alphas are greater
than 0.70 so the combination is really reliable. This cut-off value 0.7 was
implemented because if the alpha values were any lower, the R2 or “coefficient of
determination” would be less than 0.5: 0.70 x 0.70 = 0.49 (Vogt 2007).
In addition, if any item (aspect) of the four factors is deleted, Cronbach’s Alpha will
be less than the current Cronbach’s Alpha (see Appendix C). Therefore, none of
predetermined aspect should be deleted.
Variables Number of Items Values of Cronbach s
alpha
Credit information 5 0.703
Technology 5 0.817
Credit staff 5 0.819
Loan policy 4 0.851
Table 4.3: The overall score of Cronbach’s alpha
Source: Computed by SPSS (Appendix C)
4.3.3 Statistical hypothesis testing
T-test technique is used to test the suggested hypotheses in the previous chapter. The
technique help researcher determine mean of each variable is really greater than 3 or
the respondents agree that the four factors including credit information, technology,
credit staff and loan policy positively affect level of credit risk or non-performing
loan ratio in BIDV.
In this study, the researcher believes that four variables positively affect credit risk
management (or mean of each variable is greater than 3). The researcher formulates
the null hypothesis that the means are equal to 3. In the other words, the researcher
assumes that four variables including credit information, technique, credit staff and
loan policy don’t influence non-performing-loan ratio in BIDV.
The null hypothesis is that the means are equal 3:
Ho: µ = 3
The alternative hypothesis is that the means are not equal 3:
H1 : µ # 3
One-Sample Statistics
N Mean Std. Deviation Std. Error Mean
Credit information 100 4.086 0.465587 0.046559

Technology 100 3.976 0.485157 0.048516
Credit staff 100 4.044 0.542035 0.054204
Loan policy 100 4.030 0.583095 0.05831
One-Sample Test
Test Value = 3
t df Sig. (2- Mean 95% Confidence
tailed) Difference Interval of the
Difference
Lower Upper
Credit information 23.32537 99 0.00 1.086 0.993617 1.178383
Technology 20.11718 99 0.00 0.976 0.879734 1.072266
Credit staff 19.26075 99 0.00 1.044 0.936448 1.151552
Loan policy 17.66435 99 0.00 1.030 0.914301 1.145699
Table 4.4a: The t-test results
Source: Computed by SPSS (Appendix)
Std. Lower Upper Region of
Variables Mean
Deviation Limit Limit rejection
Credit
4.086 0.465587 2.90762 3.09238 <2.90762 >3.09238
information
Technology 3.976 0.485157 2.90373 3.09627 <2.90373 >3.09627
Credit staff 4.044 0.542035 2.89245 3.10755 <2.89245 >3.10755
Loan policy 4.030 0.583095 2.88430 3.11570 <2.88430 >3.11570
Table 4.4b: The t-test results
Source: Computed according to Zikmund (1997)
The t-test results in the tables 4.4a&b help the researcher reject the null hypothesis
at the confident level of 95% because of two reasons. Firstly, t-value of each
variable is greater than the t-value associated with the confidence level of 95%
(1.984) (Trong & Ngoc, 2008 and Zikmund, 1997). Secondly, mean of each variable
is contained in the region of rejection because the mean is greater than upper limit
(Zikmund, 1997).

The results indicate that mean of each variable is greater than 3 or the respondents
agree that the four variables positively affect level of credit risk or non-performing
loan in BIDV.
4.4 Comparison and discussion of findings
After collected data has been analysed and the model for the effective credit risk
management strategies has been set up, this section will discuss those findings and
compare with the extant literature.
The findings from data analysis indicated that the credit information variable has a
positive effect on the reduction of non-performing-loan ratio in BIDV. Therefore, by
improving the quality of credit information variable, BIDV can effectively manage
their level of credit risk.
Furthermore, the combination of five aspects that influence the quality of credit
information (CI): the impact of CI, source of CI, CI selecting and systemizing, CI
sharing and CI updating is reliable based on high Cronbach alpha (0.703). Thus,
BIDV should focus on improving these aspects in order to upgrade their quality of
information.
The findings confirm the importance of credit information in reducing non-
performing-loan ratio. Beside the aspect of credit information reviewed in chapter 2
including source of CI (Hempel and Simonson 1999), CI sharing (Chau 2009) and
CI updating (Thomas 2006), the findings also underline the importance of CI
selecting and systemizing in enhancing BIDV’s capacity to manage credit risk
management.
4.4.2 Technology
The findings from data analysis indicated that the technology variable has a positive
effect on the reduction of non-performing-loan ratio in BIDV. Therefore, by
improving the technology variable, BIDV can effectively manage their level of
credit risk.
Furthermore, the combination of five aspects that influence the effectiveness of
technology: effective technology operation, credit staff competence and technology

matching, frequency of facility maintenance, technology investment & BIDV
growth progress matching and modern technology is reliable based on high
Cronbach alpha (0.817). Thus, BIDV should focus on improving these aspects in
order to upgrade their technology capacity.
The findings confirm the importance of technology in reducing non-performing-loan
ratio. Beside the four aspects of technology which Chau (2009) mentioned, the
findings suggest one more aspect: credit staff competence and technology matching.
4.4.3 Credit staff
The findings from data analysis indicated that the credit staffs variable has a positive
improving the credit staffs variable, BIDV can effectively manage their level of
credit risk.
Furthermore, the combination of five aspects that influence the quality of credit
staff: characteristic of credit staff, comprehensive training course, proper
supervision system, important role of board of directors and reward policy is reliable
based on high Cronbach alpha (0.819). Thus, BIDV should focus on improving these
aspects in order to upgrade their credit staff quality.
The findings of this study assert the importance of two aspects which mentioned in
chapter 2, including ethics (characteristic aspect and proper supervision system
aspect) and skills (training course aspect) of credit staff in credit risk management.
The findings confirm the importance of credit staffs in credit risk management.
Beside the four aspects of credit officer which Chau (2009) mentioned, the findings
suggest two more aspects: characteristic of credit staff and important role of board
of directors.
4.4.4 Loan policy
The findings from data analysis indicated that the loan policy variable has a positive
improving the loan policy variable, BIDV can effectively manage their level of
credit risk.

Furthermore, the combination of four aspects: impact of loan policy, well-defined
policy, well-communicated policy and frequency of policy amendment is reliable
based on high Cronbach’s alpha (0.851). Thus, BIDV should focus on improving
these aspects in order to upgrade the effectiveness of their loan policy.
The findings are quite similar to literature. Sinkey (1998) and Chau (2009)
suggested ways to improve the effectiveness of loan policy: loan policy must be
well-defined, well-communicated and frequently amended.
4.5 Result on Hypotheses testing
This study aims to confirm the influence of the four factors on reducing non-
performing-loan in BIDV. In order to do this, the researcher used the t-test
technique to test the hypotheses by testing the influence of four variables: credit
information, technology, credit staff and loan policy on reducing non-performing-
loan in BIDV. The result from t-test analysis indicates that all four hypotheses were
rejected and confirms that the four factors positively affect the reduction of non-
performing-loan ratio. The following table is a summary of the hypotheses testing
results:
No Null Hypotheses Testing Evidence
Credit information does not influence Section 2.7.1 & 4.4.1
1 Rejected
non-performing-loan ratio in BDV. Table 4.3, 4.4a & 4.4b
Technology does not influence non- Section 2.7.2 & 4.4.2
2 Rejected
performing-loan ratio in BDV. Table 4.3, 4.4a & 4.4b
Credit staffs do not influence non- Section 2.7.3 & 4.4.3
3 Rejected
Loan policy does not influence non- Section 2.7.4 & 4.4.4
4 Rejected
Table 4.5: Summary of hypotheses testing result
4.6 Summary:
The purpose of this chapter is to create the findings for this study which derived
from a data analysis process. First, a descriptive statistics was used to summarize the
respondents’ background: working years and positions. The result from this statistic

reveals the quality of collected data based on respondents’ experience and
knowledge. Second, the researcher implemented a reliability measurement with the
purpose of testing the possibility of combining individual aspects to one variable.
High Cronbach’s alpha values (0.7 and above) proved that the combination purpose
is satisfied. Third, the researcher used t-test technique in order to test the influence
of four variables: credit information, technology, banks staff and loan policy and the
reduction of non-performing-loan ratio. The result from this analysis reveals that the
four factors positively affect the reduction of non-performing-loan ratio.

CHAPTER
FIVE
RECOMMENDATION AND CONCLUSION
5.1 Introduction
Chapter four has already provided the study’s findings with further discussions and
comparison with the extant literature. Furthermore, the researcher will review all the
answers for the two research questions. In this chapter, the researcher will also give
some recommendations for BIDV to develop their credit risk management
strategies. Finally, the limitations of the research will be discussed.
5.2 Review the research questions
Two following questions were suggested in the chapter 1 of this study:
•What are factors that influence non-performing-loan ratio in?
•How has BIDV applied credit risk management theory into practice?
The two questions have been answered in chapter three and chapter four. Here are
the main points:
First, the answers for the first question (related four factors including credit
information, technology, credit staff and loan policy) were stated in theory section
2.7 and the evidence about the influence of the four factors on reducing non-
performing-loan ratio in BIDV was provided in section 4.5 of chapter 4.
Second, the answer for the application credit risk management theory to practice of
BIDV was stated in section 3.3.2 of chapter 3. BIDV has applied credit risk
management as below:
•Both traditional (expert system and internal credit rating system) and modern
technique (portfolio approach: diversify loan portfolio and asset to asset
approach: review loan) have been applied.
•Lending progress has been applied.
5.3 Recommendations
Chapter 5: Recommendations and conclusions Page 66

Obviously, every factor that leads to improvement of credit information quality
(source of credit information, credit information sharing, selecting, systemizing and
updating) is important and need to be taken into account when developing credit risk
management strategy for reducing non-performing-loan ratio. After collecting
information from reliable sources, BIDV credit officers should carefully select and
systemize useful information according to outline of BIDV standard forms for their
credit appraisal. Once loan is granted, they should continuously monitor it and
update the changes of borrowers and the loan in order to have proper and timely
response and ensure loan collection. Furthermore, BIDV should keep on sharing
credit information (BIDV has been public credit information to whole system) in
order to reduce credit risk
5.3.2 Technology
Technology facilitates elimination of manual processes and allows information to be
managed in an efficient and effective way. All suggested aspects of technology need
to be taken into account when BIDV develops credit risk strategy. Firstly, investing
in modern technology is always the best choice for improving the technology
capacity however it is sometimes too expensive. Therefore, BIDV should carefully
consider the cost and benefit of technology investment. If BIDV cannot afford to
reinvest in modern technology, they can frequently maintain their current
technology system. Although technology maintenance might not enable banks to
improve their technology capacity, at least it can help banks to prevent sudden
problem from occurring during their operations. In addition, BIDV should invest in
technology based on their operation expansion and growth. Because by doing this,
their operation is running effectively. The last but not least is the aspect of credit
staff competence and technology matching. This implicates that BIDV credit staffs
must have sufficient qualify for operating and explore technology applications.
Because only when sufficient competence, they can apply technology effectively in
order to reduce credit risk level.
5.3.3 Credit staff

Obviously, human play an important role in the success or failure of the banks.
Therefore, BIDV should focus on improving the performance of their staff.
Characteristic of credit staffs and board of directors play the most important role in
credit risk management. Thus, recruitment, human management and promotion play
important role in order to improve characteristic of credit staff and board of
directors. Beside, training is considered as an effective way to improve the skills of
banks staff and enhancing their performance. If banks cannot afford to provide a
comprehensive or solid training course for staff, on-job training can be the best
choice in this case. Staff can improve their capacity to perform their work by
learning from the banks intranet, their colleagues or supervisors. Furthermore, job
rotation is another way to improve the skills and knowledge of banks staff. In
addition, supervision is important in prevent the banks’ staff from making mistakes.
According to the findings, another important factor affects the quality or
productivity of credit officers is the reward or promotion policy of the banks. Until
recently, skilled staffs in BIDV are still continuously attracted by other banks which
providing them better salary or promotion opportunities.
5.3.4 Loan policy
It is not wasteful when BIDV has spent more time and effort to improve their loan
policy especially in defining the rights and obligations of each party related to the
lending process. By doing this, they can help credit officers realize their
responsibilities which hopefully, results in better performance. Furthermore, loan
policy must be revised and, if necessary, amended frequently to be up-to-date to the
changing external environment (economy, customers). However, even a well-
defined, frequently revised, amended loan policy will become useless if BIDV fail to
communicate it among bank staffs especially those who are directly involved in the
lending process. A misunderstanding or disagreement from banks staff about the
loan policy can result in unexpected losses for banks. Therefore, BIDV should
consult credit officers when revising, amending the loan policy.
5.4 Recommendations for other banks

Chau (2009) suggested the model for credit risk management strategy for Vietnam
banks. The model highlighted the importance of four main factors that have great
impacts to the effectiveness of credit risk management strategy: credit information,
technology, loan policy and bank staff. The findings of this study have confirmed
that the model can be applied for BIDV whose outstanding loans occupied about
70% of total assets. Therefore, the above recommendations related to the four
mentioned factors are not only for BIDV but also for other banks whose outstanding
loans occupies large portion of total asset similar to BIDV.
5.5 Limitations of the research
Although the researcher has spent a lot of efforts conducting this study it is
impossible to state that the study has no limitations or weaknesses. The time and
financial limit may affect the quality of result of this study.
Firstly, since perception survey is used to conduct the study, the findings are
influenced by subjective judgment of respondents.
Secondly, credit risk management is old but complicated issue for not only bankers
but also researchers all over the world to investigate. This study concentrates on
analyzing the influence of four factors including credit information, technology,
credit staffs and loan policy on reducing non-performing-loan ratio in BIDV. Credit
risk measurements like expert system, internal rating system, VAR, portfolio, etc
were also discussed but not deeply analyzed by quantifying measurements in
numerical.
Based on the limitations of this study, further study can be carried out in the future
in order to overcome it.
5.6 Summarizing and concluding the dissertation
The primary objective of this study is to describe BIDV credit risk management. The
study approved that BIDV has applied credit risk management theory into practice
and confirm the influence of the four variables including credit information,
technology, credit staffs and loan policy on reducing non-performing-loan ratio in
BIDV. By the way, the researcher has recommended other banks to take the four
factors into consideration in order to manage credit risk effectively.

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Page 73
APPENDIX A
MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HOCHIMINH CITY
Bïi Nguyªn Ngọc
CREDIT RISK MANAGEMENT:

CASE STUDY OF BIDV
MASTER S THESIS
In
Banking
Ology code: 603112
Supervisor
Dr. NguyÔn V¨n Phóc
Ho Chi Minh City - 2010
Page 74
APPENDIX B
QUESTIONNAIRE
Dear sir/ madam

This questionnaire is one part of a research project to understand and improve the
credit risk management in BIDV. Your responses are important in enabling me to
obtain a full understanding of this topical issue.
The questionnaire may take you about ten minutes to complete. Please follow the
instruction to answer the questions. If you wish to add further comments, please feel
free to do so. The information you provide will be treated in the strictest confidence.
The finding from your questionnaire and others will be used as the main data set of
my dissertation for my master course in Ho Chi Minh City University of Economics
(HUE)
I hope you will find completing the questionnaire enjoyable. Please return the
completed questionnaire to the person who delivered it to you/ or just simply reply
to this email address.
Thank you for your help.
SURVEY OF
CREDIT RISK MANAGEMENT IN BIDV
SECTION 1: Back ground

Instruction: for the following questions please tick your most favorite answer to
each question.
Question 1: How long have you worked in banking industry?
[ ] Less than 1 year [ ] 1-3 years [ ] 3-5 years
[ ] 5-10 years [ ] More than 10 years
Question 2: How long have you worked in BIDV?
Page 75
[ ] Less than 1 year [ ] 1-3 years [ ] 3-5 years
[ ] 5-10 years [ ] More than 10 years
Question 3: What is your current position in your department/bank?
[ ] Manager [ ] Supervisor [ ] Staff
Question 4: What best describes your background?
[ ] Banking [ ] Economics [ ] Technical field
SECTION 2: Credit risk management in BIDV

(Factors influencing credit risk (non-performing-loan ratio in BIDV)
Instruction: Each below question has five choices of answers which are arranged in
increasing of agreement level order (Number 1 is Strongly disagree, number 2 is
disagree, number 3 is normal, number 4 is agree, number 5 is strongly agree). For
the following questions, please circle the most appropriate number to each question.
Level of agreement
No Question Low High
Normal
disagree agree
1 The quality of credit information has a great 1 2 3 4 5
impact to the reduction of non-performing-
loan ratio in BIDV. What is your viewpoint?
2 The quality of credit information depends on 1 2 3 4 5
the source that they are collected from? What
do you think?
the information selecting and systemizing
progress of BIDV? What is your viewpoint?
4 If banks are willing to cooperate in sharing 1 2 3 4 5
credit information, the quality of credit
information will be improved significantly.
What is your opinion?
Page 76
the information updating progress of BIDV?
What do you think?
6 Effective technology operation has a great 1 2 3 4 5
impact to BIDV’s level of credit risk. Do you
agree with this statement?
7 The effectiveness of technology can be 1 2 3 4 5
improved if BIDV staffs have enough
competence to operate and explore
technology facility’s functions. Do you agree
with this statement?
8 The effectiveness of BIDV technology 1 2 3 4 5
depends on the frequency of facility
maintenance. How is your view point?
9 The effectiveness of technology can be 1 2 3 4 5
improved if the technology investment is
matching with the growth progress of BIDV.
What do you think?
10 The effectiveness of BIDV technology 1 2 3 4 5
depends on the frequency of update. What is
your viewpoint?
11 Characteristic of credit officers play an 1 2 3 4 5
important role in reducing NPL ratio in
BIDV. What do you think?
12 If BIDV frequently provides comprehensive 1 2 3 4 5
training courses, the skills of BIDV credit
staff can be improve significant. Do you
agree?
13 The strict and proper supervisor system is 1 2 3 4 5
needed to prevent the ethic issues of credit
Page 77
officers. Do you agree?
14 Board of directors plays an important role in 1 2 3 4 5
reducing NPL ratio in BIDV. What is your
opinion?
15 Suitable reward policy plays an important 1 2 3 4 5
role in improving the quality of credit
officers. What is your opinion?
16 Loan policy is a critical factor affect to the 1 2 3 4 5
level of credit risk. What do you think?
17 A well-defined loan policy is important in 1 2 3 4 5
reducing the level of credit risk. What do you
think?
18 A well-communicated loan policy is 1 2 3 4 5
important in reducing the level of credit risk.
What is your opinion?
19 Loan policy must be frequently amended in 1 2 3 4 5
order to adept internal and external
environment. What is your viewpoint?
SECTION 3: Suggestion for future

Instruction: please state your own idea to answer this question.
What suggestions would you make to help BIDV continuously reducing non-
performing-loan ratio?
Thank you for your help and cooperation!
Page 78
APPENDIX C
Descriptive statistics
Impact of credit information

Strongly
2 2 2 2
Valid disagree
Disagree 1 1 1 3
Normal 4 4 4 7
Agree 54 54 54 61
Strongly agree 39 39 39 100
Total 100 100 100
Source of credit information

Valid Disagree 6 6 6 6
Normal 8 8 8 14
Agree 72 72 72 86
Total 100 100 100
Credit information selecting and systemizing

Normal 17 17 17 18
Agree 60 60 60 78
Total 100 100 100
Credit information sharing

Normal 3 3 3 6
Agree 60 60 60 66
Total 100 100 100
Credit information checking
Page 79
Normal 17 17 17 20
Agree 63 63 63 83
Total 100 100 100
Technology operation
Strongly
1 1 1 1
Valid disagree
Disagree 1 1 1 2
Normal 10 10 10 12
Agree 62 62 62 74
Total 100 100 100
Credit staff competence and technology matching

Normal 13 13 13 18
Agree 70 70 70 88
Total 100 100 100
Frequency of facility maintenance

Normal 18 18 18 20
Agree 66 66 66 86
Total 100 100 100
Technology investment & BIDV's growth progress matching

Normal 11 11 11 12
Agree 69 69 69 81
Page 80
Total 100 100 100
Modern technology
Normal 15 15 15 18
Agree 71 71 71 89
Total 100 100 100
Characteristic of credit staffs

Valid Normal 25 25 25 25
Agree 45 45 45 70
Total 100 100 100
Comprehensive training course

Normal 26 26 26 28
Agree 50 50 50 78
Total 100 100 100
Proper supervision system

Normal 16 16 16 18
Agree 62 62 62 80
Total 100 100 100
Important role of board of directors

Valid Unimportant 2 2 2 2
Normal 21 21 21 23
Important 48 48 48 71
Very important 29 29 29 100
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Total 100 100 100
Reward policy
Valid Normal 11 11 11 11
Agree 57 57 57 68
Total 100 100 100
Impact of loan policy

Normal 10 10 10 15
Agree 64 64 64 79
Total 100 100 100
Well-defined loan policy

Normal 15 15 15 17
Agree 56 56 56 73
Total 100 100 100
Well-communicated loan policy

Normal 16 16 16 19
Agree 53 53 53 72
Total 100 100 100
Frequency of amendment
Normal 15 15 15 17
Agree 67 67 67 84
Page 82
Total 100 100 100
Case Processing Summary
N %
Cases Valid 100 100.0
Excludeda 0 .0
Total 100 100.0
a. Listwise deletion based on all variables
in the procedure.
Reliability Statistics
N of
Cronbach's Alpha Items
.703 5
Item Statistics
Std.
Mean Deviation N
Impact of credit information 4.2700 .76350 100
Source of credit information 3.9400 .67898 100
Credit information selecting
4.0300 .65836 100
and systemizing
Credit information sharing 4.2500 .65713 100
Credit information checking 3.9400 .67898 100
Item-Total Statistics
Scale
Variance Corrected Cronbach's
Scale Mean if if Item Item-Total Alpha if Item
Item Deleted Deleted Correlation Deleted
Impact of credit information 16.1600 3.651 .406 .681
Source of credit information 16.4900 3.525 .562 .611
Credit information selecting
16.4000 3.960 .392 .681
and systemizing
Credit information sharing 16.1800 3.745 .488 .643
Credit information checking 16.4900 3.747 .461 .654
Page 83
N %
Exclude
0 .0
da
Total 100 100.0
a. Listwise deletion based on all variables in the procedure.
Cronbach's Alpha N of Items
.817 5
Item Statistics
Std.
Deviati
Mean on N
Technology operation 4.1100 .69479 100
Credit staff competence and
3.8900 .66507 100
technology matching
Frequency of facility
3.9200 .63054 100
maintenance
Technology investment &
BIDV's growth progress 4.0600 .58292 100
matching
Modern technology 3.9000 .61134 100
Scale Corrected Cronbach's
Scale Mean if Variance if Item-Total Alpha if Item
Item Deleted Item Deleted Correlation Deleted
Technology operation 15.7700 3.815 .585 .790
Credit staff competence
15.9900 3.707 .678 .760
and technology matching
Frequency of facility
15.9600 3.978 .600 .784
maintenance
Technology investment &
BIDV's growth progress 15.8200 4.068 .628 .777
matching
Page 84
Modern technology 15.9800 4.121 .560 .795
RELIABILITY
/VARIABLES=CS1 CS2 CS3 CS4 CS5
/SCALE('ALL VARIABLES') ALL
/MODEL=ALPHA
/STATISTICS=DESCRIPTIVE SCALE
/SUMMARY=TOTAL.
N %
Excludeda 0 .0
Total 100 100.0
a. Listwise deletion based on all
variables in the procedure.
Cronbach's
Alpha N of Items
.819 5
Item Statistics
Std.
Mean Deviation N
Characteristic of credit
4.05 .744 100
staffs
Comprehensive training
3.92 .748 100
course
Proper supervision
4.00 .667 100
system
Important role of board
4.04 .764 100
of directors
Reward policy 4.21 .624 100
Page 85
N %
Excludeda 0 .0
Total 100 100.0
Characteristic of credit
16.17 4.728 .638 .776
staffs
Comprehensive training
16.30 4.838 .592 .790
course
Proper supervision
16.22 5.103 .597 .788
system
Important role of board
16.18 4.715 .616 .783
of directors
RELIABILITY
/VARIABLES=LP1 LP2 LP3 LP4
/MODEL=ALPHA
/SUMMARY=TOTAL.
N %
Excludeda 0 .0
Total 100 100.0
a. Listwise deletion based on all
variables in the procedure.
Cronbach's
Alpha N of Items
.851 4
Page 86
N %
Excludeda 0 .0
Total 100 100.0
Item Statistics
Std.
Mean Deviation N
Impact of loan policy 4.01 .718 100
Well-defined loan
4.08 .706 100
policy
Well-communicated
4.06 .750 100
loan policy
Frequency of
3.97 .627 100
amendment
Impact of loan policy 12.11 3.149 .697 .808
Well-defined loan
12.04 3.109 .736 .791
policy
Well-communicated
12.06 3.107 .670 .821
loan policy
Frequency of
12.15 3.482 .669 .821
amendment
RELIABILITY
/VARIABLES=CI TECH CS LP
/MODEL=ALPHA
/SUMMARY=TOTAL.
Page 87
N %
Excludeda 0 .0
Total 100 100.0
a. Listwise deletion based on all variables in the procedure.

Cronbach's
Alpha N of Items
.787 4
Item Statistics
Mean Std. Deviation N

Credit
4.0860 .46559 100
information
Technology 3.9760 .48516 100
Credit staff 4.0440 .54204 100
Loan policy 4.0300 .58310 100
Scale Mean if Scale Variance if Corrected Item- Cronbach's Alpha
Item Deleted Item Deleted Total Correlation if Item Deleted
Credit
12.0500 1.692 .611 .730
information
Technology 12.1600 1.726 .539 .761
Credit staff 12.0920 1.557 .590 .737
Loan policy 12.1060 1.408 .651 .705
Page 88

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MINISTRY OF EDUCATION AND TRAINING

UNIVERSITY OF ECNOMICS HOCHIMINH CITY

BÙI NGUYÊN NGỌC

CREDIT RISK MANAGEMENT:

Supervisor: Dr. Nguyễn Văn Phúc

Ho Chi Minh City – 2010

First of all I would like to express my deepest acknowledgement to my supervisor,

Then, I would like to thank my superiors and colleagues who agreed to be

Figure 1.1: Structure of chapter 1................................................................................ 2

Table 2.1: Level of specific provision ....................................................................... 20

Chapter 1: Introduction Page 1

Section 2: Rationale of the study

Section 3: Statement of the problem and

Section 4: Research questions and objectives

Section 6: Significance of the study

Section 7: Structure of the study

Figure 1.1: Structure of chapter 1

Chapter 1: Introduction Page 2

Chapter 1: Introduction Page 3

Credit NPL ratio in Technology

Figure 1.2: Fields of the research problem

Chapter 1: Introduction Page 5

Chapter 1: Introduction Page 6

Previous researches, books, Annual reports, regulations

Figure 1.3: Method of secondary data collection

Chapter 1: Introduction Page 7

Figure 1.4: Population, sample and sampling methods

Chapter 1: Introduction Page 8

Population Strata Sample

Figure 1.5 Quota sampling method

Chapter 1: Introduction Page 9

Chapter 1: Introduction Page 10

Chapter 1: Introduction Page 11

Chapter 2: Literature Review

Chapter 3: Case study of BIDV

Chapter 4: Data analysis and findings

Chapter 5: Recommendations and conclusions

Figure 1.6: Structure of the study

Chapter 1: Introduction Page 12

Chapter 1: Introduction Page 13

Chapter 2: Literature Review Page 14

Chapter 2: Literature Review Page 15

Chapter 2: Literature Review Page 16

Chapter 2: Literature Review Page 17

Chapter 2: Literature Review Page 18

Chapter 2: Literature Review Page 19

Chapter 2: Literature Review Page 20

Chapter 2: Literature Review Page 21

Chapter 2: Literature Review Page 22

Chapter 2: Literature Review Page 23

Chapter 2: Literature Review Page 24

Chapter 2: Literature Review Page 25

Chapter 2: Literature Review Page 26

Chapter 2: Literature Review Page 27

Chapter 2: Literature Review Page 28

Chapter 2: Literature Review Page 29

Chapter 2: Literature Review Page 30

Chapter 2: Literature Review Page 31

Chapter 2: Literature Review Page 32

Chapter 2: Literature Review Page 33

Chapter 2: Literature Review Page 34

Chapter 2: Literature Review Page 35

Chapter 2: Literature Review Page 36