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Credit Rating to customers in commercial bank in BIDV
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NATIONAL ECONOMICS UNIVERSITY SCHOOL OF ADVANCED EDUCATION PROGRAMS ---- ----
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:
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.
d. According to the credit operation territory:
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:
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.
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:
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
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
