Docsity
Docsity

Prepare for your exams
Prepare for your exams

Study with the several resources on Docsity


Earn points to download
Earn points to download

Earn points by helping other students or get them with a premium plan


Guidelines and tips
Guidelines and tips

CREDIT RATING TO CUSTOMERS IN COMMERCIAL BANKS: RATIONALITY AND ISSUES, Essays (university) of Banking and Finance

Credit Rating to customers in commercial bank in BIDV

Typology: Essays (university)

2021/2022
On special offer
30 Points
Discount

Limited-time offer


Uploaded on 04/14/2022

trangdao01
trangdao01 🇻🇳

4.8

(5)

1 document

1 / 45

Toggle sidebar

This page cannot be seen from the preview

Don't miss anything!

bg1
NATIONAL ECONOMICS UNIVERSITY
SCHOOL OF ADVANCED EDUCATION PROGRAMS
--------
GROUP ASSIGNMENT
TOPIC: CREDIT RATING TO CUSTOMERS IN
COMMERCIAL BANKS: RATIONALITY AND ISSUES
Group: 08
Class: Corporate Finance EEP 61A
Teacher: Do Hoai Linh
Ha Noi, 2022
TABLE OF CONTENTS
pf3
pf4
pf5
pf8
pf9
pfa
pfd
pfe
pff
pf12
pf13
pf14
pf15
pf16
pf17
pf18
pf19
pf1a
pf1b
pf1c
pf1d
pf1e
pf1f
pf20
pf21
pf22
pf23
pf24
pf25
pf26
pf27
pf28
pf29
pf2a
pf2b
pf2c
pf2d
Discount

On special offer

Partial preview of the text

Download CREDIT RATING TO CUSTOMERS IN COMMERCIAL BANKS: RATIONALITY AND ISSUES and more Essays (university) Banking and Finance in PDF only on Docsity!

NATIONAL ECONOMICS UNIVERSITY SCHOOL OF ADVANCED EDUCATION PROGRAMS ----  ----

GROUP ASSIGNMENT

TOPIC: CREDIT RATING TO CUSTOMERS IN

COMMERCIAL BANKS: RATIONALITY AND ISSUES

Group: 08

Class: Corporate Finance EEP 61A

Teacher: Do Hoai Linh

Ha Noi, 2022

TABLE OF CONTENTS

A. THE OVERVIEW OF CREDIT RATING ........................................ 3

I. Credit risk ................................................................................................ 3 II. Credit rating............................................................................................. 3 B. CREDIT RATING TO CUSTOMERS IN VIETNAM COMMERCIAL BANKS .......................................................................... 9 I. Credit rating for individual customers borrowing capital at commercial banks......................................................................................... 9 II. Credit rating method for corporate customers at commercial banks ………………………………………………………… C. SITUATION OF INTERNAL CREDIT RATE SYSTEM OF COMMERCIAL BANK IN VIETNAM (BIDV) ……………….. 13 I. Overview of BIDV …………………………………………………….. 13 II. The overview of BIDV Banking Activities…………………………… 14 III. BIDV's internal credit rating principles ……………………………… IV. BIDV Bank's internal credit scoring and rating process……………… D. RATIONALITY AND ISSUES OF CREDIT RATING TO CUSTOMERS IN COMMERCIAL BANKS ……………………. 31 I. Rationality……………………………………………………………..... II. Issue……………………………………………………………………. E. RECOMMENDATIONS TO COMPLETE THE CREDIT RATING TO CUSTOMERS IN VIETNAM COMMERCIAL BANKS ……….. I. Solution to complete internal credit rating system of BIDV Bank……... II. Solution to complete internal credit rating system of Vietnam………... REFERENCE……………………………………………………………... A. THE OVERVIEW OF CREDIT RATING

However, credit ratings only developed rapidly in the US after the economic crisis of 1929-1933 when a series of debt companies went bankrupt or defaulted. During this period, the US government had many regulations: prohibiting investment institutions (retirement funds, insurance funds, reserve banks) to buy bonds with low reliability below the level of safe investment in the credit rating. These regulations have made the reputation of credit rating companies increasingly high. However, for more than 50 years, credit rating was only popularized in the US, only from the 1970s until now, has the credit rating service expanded and developed quite strongly in many countries.

2. Definition of credit rating We can go through some definitions of credit rating as follows:

  • According to Bohn, John A writes in “Risk Analysis in Transitioning Markets”, “Credit rating is an assessment of the ability of an issuer to make timely payments of both principal and interest to security during its life.”
  • As defined by Merrill Lynch Securities, “A credit rating is a rating agency's current assessment of the credit quality of an issuer of debt securities, for a given amount of debt. In other words, it is a current assessment of credit quality being considered in a forward-looking setting, reflecting an issuer's willingness and ability to pay principal and interest on time. The credit rating results also contain the subjective opinions of the credit rating experts.”
  • According to Moody's, “A credit rating is an opinion on an issuer's ability and willingness to make timely payments on a given debt over the life of the debt.”
  • According to the stock market dictionary, “Credit rating is the official estimate of the creditworthiness of an individual or a company to date of its ability to pay, including all test data, analysis, records, records. records of the creditworthiness of individuals and business companies.” In many countries around the world, most large companies and lending institutions have established credit ratings for their current and future customers. From the above definitions, we can understand as: “Credit rating of an enterprise is an assessment of the financial capacity, current operating situation and future development prospects of a rated corporation, from which it can be determined the level of risk of default and the ability to repay in the future”.

3. Credit rating in Viet Nam Credit rating has long been no stranger to the world. Most developed countries in Southeast Asia have organizations operating in this field. However, in Vietnam, credit rating is still very new and this activity is only at the beginning. In Vietnam, there are organizations implementing credit rating, such as the Credit Information Center of the State Bank, credit information businesses, and commercial banks. - Credit Information Center of the State Bank (CIC): To provide information to commercial banks about borrowers, the State Bank of Vietnam has established a Credit Information Center (CIC: Abbreviated from Credit Information Center). In the first years, CIC only provided credit institutions with customer information about the number of related credit institutions, outstanding balances at those credit institutions, and this information was incomplete and not up-to-date. Therefore, the significance of this information to prevent credit risk is not high. Currently, the information provided by CIC is more complete, including financial analysis information, the number of related banks, outstanding balance, and status about debt, which has partly met the requirements of credit institutions.

  • Credit information corporation: In addition to the credit information center of the State Bank and the internal credit rating system of commercial banks to assess the creditworthiness of borrowers, currently in Vietnam, there are only two enterprises operating in the field of providing credit information are "Corporate Information and Rating Company (C&V) for short", which was separated from Vietnam Solution Company in 2004 and "Central Vietnam". Vietnamnet Credit Assessment Center (abbreviated as CRV)” went into operation on June 4, 2006. The main services of C&R are providing credit information, corporate credit ratings, and market surveys by the economic sector. Meanwhile, even though the ambition of CRV has just been born, it is not small when it claims to provide a lot of related services such as information collection, assessment, and rating of business norms, etc. The objects of C&V and CRV are the investors, businesses, or the domestic and international banking system.

d. According to the credit operation territory:

  • Domestic credit: A credit relationship arising within the territory of the country
  • International credit: A credit relationship arising between countries or between a country and an international financial-credit institution. e. According to the purpose of using the loan:
  • Goods production credit: For enterprises and other business entities to use for the goods production and circulation purposes.
  • Consumer credit: A form of credit for individuals to meet personal consumption needs such as building houses, vehicles, etc.
  • Study credit: Applied to students for school fees or studying abroad. f. According to risk: Classified by 5 groups of debts: According to Clause 1, Article 10 of Circular 11/2021/TT-NHNN
  • Group 1: Qualifying debt
  • Group 2: Debts needing attention
  • Group 3: Sub-standard debt
  • Group 4: Doubtful debt 4.2. The overview of credit rating to customers in commercial banks 4.2.1. Definition of credit rating to customers in commercial banks: Internal credit rating is a commercial bank's assessment of the customer's ability to repay debt, the level of risk of the loan, thereby serving as a basis for granting credit, managing risks, and developing appropriate policies for customers with each customer according to the ranked results. “The internal credit system is a system consisting of: a) Sets of financial and non-financial indicators, processes for assessing customers' solvency and payment ability based on qualitative and quantitative terms of finance, business situation, governance, reputation customer credit b) Methods of assessment and rating for each group of different customers, including those subjects to credit restrictions and their related people”. (“According to Clause 1, Article 5 of Circular 11/2021/TT-NHNN”)

4.2.2. Classification of credit rating to customers in commercial banks: The internal credit rating system uses a separate scoring and rating method for each subject:

  • Group of individual customers.
  • Group of corporate customers.
  • Group of financial institutions customers. 4.2.3. Principles of building internal credit rating system: According to “Clause 2, Article 5 of Circular 11/2021/TT-NHNN” , the internal credit rating system is built according to the following principles:
  • “First, build on the basis of data and information of all customers that have been collected during at least one year preceding the year of building the internal credit rating system;
  • Second, at least once a year, the internal credit rating system must be reviewed, revised, and supplemented on the basis of data and customer information collected during the year;
  • Thirdly, there are regulations on corresponding ratings with risk from low to high;
  • Fourthly, be approved by the Board of Directors (for credit institutions being joint-stock companies), Members' Council (for credit institutions being limited liability companies), General Director or Director (for credit institutions being limited liability companies). for foreign bank branches) for approval.” 4.2.4. Credit rating process Based on the credit policy and relevant regulations of each bank to establish the credit rating process. A credit rating process includes the following basic steps: (1) Collecting information related to the criteria used in the analysis and evaluation, the rating information of other credit institutions related to the rating object. In the process of collecting information, in addition to the information provided by the client himself, the appraiser must use many other sources of information from the mass media, … (2) Analyzed by the model to conclude the rating. Using both financial and non-financial indicators at the same time. Especially, non-financial indicators must be used very flexibly, objectively, suitable for each type of business and each

Borrower ratings mainly predict default risk according to three basic levels of danger, warning and safety based on the probability of default (PD). The basis of this probability is data on the customer’s past debts within the previous 5 years, including outstanding debts, outstanding debts and uncollectible debts. The data is grouped into three groups: a) Group of financial data related to the financial ratios of customers as well as the ratings of rating agencies; b) Group of non-financial qualitative data related to management level, ability to research and develop new products, data on industry growth; c) A group of warning data related to signal of insolvency, deposit balance, overdraft limit. These groups of data are put into a predefined model for processing, from which the probability of customers’ default is calculated. It can be a linear model, a unit probability model and is usually built by professional consulting organizations. Loan ratings are based on borrower ratings and factors including collateral, loan term, total outstanding balance at credit institutions, and financial capacity. The risk of a loan is measured by the probability of expected risk EL (Expected Loss). This probability is calculated by the formula EL = PD x EAD x LGD. In which, EAD (Exposure at Default) is the total outstanding balance of the customer at the time of default, LGD (Loss Given Default) is the estimated loss ratio.

3. Methods of individual credit rating: Internal credit rating for individual customers uses 2 main methods: expert method and statistical method. Expert method Statistical method Concept A method of collecting and processing predictive assessments by gathering and consulting experts in the banking and finance sector to determine the risk and quality of a credit. It is a method based on practical data such as debt level, the capacity of repayment and systematic testing method to detect variables affecting credit risk. Advantages Easy to build, simple - Objective assessment.

  • Credit rating results are

highly reliable Disadvantage s -It is costly and time-consuming due to the large number of experts involved. -The result of subjective assessment => deviation in assessment Requires the data set to be large enough and accurate. II. Credit rating method for corporate customers at commercial banks

1. Concept of corporate credit rating A corporate credit rating is an opinion of an independent agency regarding the likelihood that a corporation will fully meet its financial obligations as they come due. A company’s corporate credit rating indicates its relative ability to pay its creditors. It is important to keep in mind that corporate credit ratings are an opinion, not a fact. 2. Indicators in corporate credit rating The purpose of corporate credit rating is to quantify the credit risk of an enterprise in a certain period of time. Therefore, the necessary criteria in the analysis of corporate credit rating must include the following criteria: qualitatively and quantitatively to reflect the following three types of business risks:

  • Business risk (including qualitative and quantitative indicators)
  • Financial risk (including qualitative and quantitative indicators)
  • Risks due to macroeconomic fluctuations. Group of financial indicators is quantitative indicators, taken directly or calculated based on given financial statements such as balance sheet, cash flow statement, income statement, …

When enterprises pay their debts in full and on time, it shows that enterprises have trust with credit institutions and use capital effectively.

- Liquidity from cash flows: This is the ability to repay the medium and long-term principal in the future. This indicator is most effective when the investment project or production and business plan has high efficiency, the ability to repay debt from cash flow will be large. - Management qualifications of business leaders: Management level is reflected in professional experience, leadership ability, executive ability, dynamism in business, education level ... When the leadership of the enterprise has education, capacity and High expertise will create more trust in the relationship with the bank. - Other indicators: Indicators affecting business activities of enterprises such as state policies, consumers, suppliers, substitute products, natural conditions, etc. external influences, the level of credit will be higher for businesses with less dependence. C. SITUATION OF INTERNAL CREDIT RATE SYSTEM OF COMMERCIAL BANK IN VIETNAM (BIDV) I. Overview of BIDV Established on April 26, 1957, BIDV-Bank for Investment and Development of Vietnam (English name is Bank for Investment and Development of Vietnam). After many years of development, BIDV has become one of the top 10 largest state-owned banks in Vietnam and the largest commercial bank in Vietnam in terms of total assets. By the end of the second quarter of 2021, the bank's total consolidated assets have reached over VND 1.64 million billion. With an extensive network of nearly 1,100 domestic and foreign branches and transaction offices, establishing partnerships with 2,300 financial institutions globally. For many consecutive years, BIDV has been ranked among the top 2,000 largest and most powerful public companies in the world (voted by Forbes Magazine), and the top 300 most valuable banking brands in the world (voted by Brand Finance). BIDV is an investment and development bank in all fields, achieving great success. In each field, BIDV always tries to create and launch services and

products with many features to meet the needs of customers. Specifically: The field of financial investment; Banking sector; Insurance sector; Securities sector. II. The overview of BIDV Banking Activities In terms of business efficiency: Operational safety norms are always ensured in accordance with State regulations with a capital adequacy ratio (CAR) of over 8%. Asset situation: BIDV's total assets as of June 30, 2021 reached VND 1,642,336 billion; up 8.3% compared to the beginning of the year – Affirming its position as the joint-stock commercial bank with the largest total assets in Vietnam. Capital mobilization: BIDV always has a capital mobilization source to fully meet the needs of capital use, ensuring the safety and liquidity of the whole system. By the end of June 2021, capital mobilization reached 1,391 million billion; up 7.9% compared to the beginning of the year.

(Source: BIDV Annual Report 2020 and Consolidated Financial Statement 2021) According to the Consolidated Income Statement, BIDV's net interest income in the first 6 months of 2021 reached more than VND 23,527 billion; increased by

more than 74% over the same period in 2020. However, the actual income from interest and other income of BIDV only reached about VND 50,023 billion and almost did not increase compared to last year (VND 49,993 billion). In the first 6 months of the year, BIDV increased its total assets to more than 1.6 million billion VND, credit balance increased by 6.8%, but interest income did not increase, but mainly due to reduced input costs. net income. This means that BIDV's increase in assets and loan expansion has not been really effective. Credit activities of BIDV in 2020: TT Criteria 2019 2020 % compared to 2019

1 Outstanding Credit and Investment

Include: outstanding balance of business organization and individuals corporate bond

2 Loans to customers 1.116.997 1.214.296 1.297. 2 Non-performing loan ratio – Circular 02/2013/TT-NHNN

(Source: Report of business results for 2020 and Consolidated financial statements of 2021)

outstanding loans for BT and BOT projects in the transport sector decreased by 4.8% (the whole industry decreased by only 1.8%). Bad debt ratio: Despite being one of the leading large banks in the industry, BIDV's bad debt ratio is considered to be quite good compared to its competitors. BIDV's bad debt ratio in 3 years 2019, 2020 and semi-year 2021 are all below 2%, showing that the bank is handling the bad debt problem well. As of June 30, 2021, the bad debt ratio according to Circular 02 is 1.39% (decreased by 0.15% compared to the beginning of the year); debt ratio of group 2 is 1.38% (decreased by 0.06%) compared to the beginning of the year

  • BIDV is currently controlling the bad debt problem well, so credit quality has improved positively compared to the beginning of 2021. III. BIDV's internal credit rating principles According to Clause 2, Article 5 of Circular 02/2013/TT-NHNN promulgated by the Governor of the State Bank of Vietnam, the principles of building an internal credit rating system have also been established. types of assets, level of deduction, method of setting up risk provisions and use of provisions to deal with risks in the operation of credit institutions, foreign bank branches. BIDV has also built its internal credit system based on issued principles. The bank's internal credit rating system is built on the basis of data and information of all customers collected during at least 1 year preceding the year the bank built the system. internal ratings. Therefore, every year, banks will need to review, amend and supplement the internal credit rating system at least once a year based on previous data as well as customer information collected in the year. Information about the internal credit rating system must always be complete and available to be provided at any time upon request of the internal audit, independent audit organization and other authorities when performing independent inspection, supervision or audit. For BIDV, the internal credit rating system has met the conditions for building an internal credit rating system according to the regulations of the State Bank. With the goal of continuing to implement Basel II in accordance with regulations, BIDV has scored and rated customer credit. Since then, customers are divided into 3 groups: corporate customers, individual customers and financial institution customers. In particular, according to credit scoring software, corporate customers are the core.

In addition, at present, BIDV is using the scoring results as one of the leading criteria to appraise and evaluate customers and as a basis for decentralizing credit judgment authority. From there, the bank can determine the level of credit for each certain customer. For each different passenger class, the branch will offer different authorization levels. In addition, the credit rating of each customer will also be a factor determining the credit level and the maximum credit extension ratio compared to the customer's collateral. IV. BIDV Bank's internal credit scoring and rating process

1. For individual customers 1.1. Scoring criteria on personal identity and debt repayment ability BIDV's individual scoring criteria Criteria Initial score Weight 100 75 50 25 0 Part 1: Private Information 1 Age 36-55 26-35 56-60 20-

60 or 18-

Education Level Post- graduate Undergraduate College Secondary education Under secondary education

3 Criminal No Yes 10% 4 Residency status Owner With Family Rent house Others 10% 5 Number of dependanc