Corporate Finance: INS3007 Report on Risk Management at Vietcombank

This report, prepared by students, examines risk management within Vietcombank, a Vietnamese commercial bank. It begins with an overview of risk concepts, including credit risk, and classifies different types of risks. The report then details the risk management process, encompassing planning, identification, measurement, control, assessment, and response strategies. A significant portion of the report focuses on Vietcombank's credit risk management, analyzing its status, credit management organization model, and the implementation of its credit risk management process. This includes a review of the bank's plan, risk identification methods, measurement techniques, control mechanisms, assessment procedures, and response strategies. The report also provides solutions and concludes with references, offering a comprehensive analysis of risk management in a real-world financial institution context. The analysis includes the impact of economic fluctuations and internal factors like employee ethics on credit risk.

INS3007
REPORT
RISK MANAGEMENT
STUDENT NAME:
Lê Hồng Mai (17071123)
Hoàng Khánh Linh(17071285)
Đào Thị Phương Anh(17071003)
PROGRAMME:
Subject Name: Coporate Finance
Due date: 1/12/2020

INS3007
CONTENTS
A. Concept of Risk Management................................................................1
I. Risk Concepts..............................................................................................2
II. Risk classification......................................................................................3
III. Risk Management Process........................................................................4
B. VIETCOMBANK CREDIT RISK MANAGEMENT...............................6
I. Status............................................................................................................6
II. Credit management organization model.....................................................9
III. Organizing the implementation of credit risk management......................10
1. Plan..............................................................................................................10
2. Identifying...................................................................................................10
3. Measuring....................................................................................................13
4. Control.........................................................................................................14
5. Assessing.....................................................................................................16
6. Response......................................................................................................17
IV. Solution......................................................................................................20
V. Reference.................................................................................................22

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A. CONCEPT OF RISK MANAGEMENT
I. Risk Concepts
 Definition: Credit risk
Risk of financial loss owing to counter party failure to perform its contractual
obligations. Credit risk is one of the main reasons for many bank failures.
 Credit risk management is one of the management contents of a
commercial bank, including: identifying and assessing the level of risks,
implementing measures to limit the likelihood of risks occurring and minimize
losses when credit risks occur.
The cause of credit risk may come from the decline in business efficiency,
financial capacity of bank's customers, the decline of the industry in which
customers operate, etc...
 Factors affecting credit risk, including:
- Due to changes in government policies:
When the economy fluctuates, such as inflation, unemployment, etc., the
government must immediately introduce new economic policies to limit the
negative impact on the country's economy, macro factors such as inflation,
unemployment, GDP growth rate affect the credit risk of banks.
- The cause is from the borrower:
This reason is one of the main causes of credit risk for banks. The bank can be
identified through the process of understanding and grasping the situation of
customers nationwide, during and after lending. Borrower's cause may arise
from business risk or financial risk of the borrower

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- Causes from the legal environment:
Business activities of commercial banks are related to many sectors of the
economy, highly social. When the legal system is stable and healthy, the
business environment Business of commercial banks will have many
advantages. In contrast, if the legal environment is unstable, there are many
gaps, it is easy to be exploited, causing embezzlement, appropriation of assets...
The unstable socio-economic situation leads to many difficulties in business and
people can not pay money leads to defaulting on their banks.
- Natural environment:
when a disaster occurs, customers and lenders will be at risk of great losses,
business plans and projects with no revenue ... That means banks must share
the risk with its customers
- Socio-economic environment:
The socio-economic environment in a country is influenced by fluctuations
from the world economy, which is the cause of generating risks in business
activities of the economy.
- The causes from inside the bank:
 One of the internal causes of the bank is ethical, professional
qualifications of bank staffs. Irresponsible bank staffs, weak
qualifications, weak ethics leading to lending to businesses and
individuals who are ineligible for loans with poor performance with
problematic credit records.
 In addition, credit risk also occurs due to poor ethics in loan security,
which does not appreciate the value of collateral or incorrect collateral
valuation.

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 There are also reasons such as inappropriate lending policies,
inappropriate lending regulations, incorrect credit appraisal or due to the
bank's failure to comply with capital guarantees.
 Example: By the end of the first quarter of 2020, due to the effects of the
epidemic, nearly 20,000 enterprises stopped operating, tens of thousands of
enterprises had to narrow their production and business, and the revenue
dropped sharply, leading to financial imbalance. Many people have lost their
jobs, their incomes have dropped, including customers of credit institutions, and
thus lost their ability to repay consumer loans.
II. Risk classification
III. Risk Management Process
1. Plan

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- Attitude of the company with risk ?
- The company’s ability to bear loss ?
- Focus on which customers ?
2. Identifying
- Classify the events through listening, observation, monitoring, take notes.
- Estimating chance of happening.
3. Measuring
- Quality
- Quantify
- Measure the variance by standard deviation, beta (market risk sensitivity),
Credit Metrix value at risk (VAR)
4. Control
- risk survey ( scale of credit and investment activities.,ratio of bad debts,
set up risk provisions...)
- To what extent do businesses accept risks? how to manage it ?
5. Assessing
- What issues are suitable for the company ?
6. Response
- Reject if the risk is not suitable with corporate teste, appetite

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- Accept
- Transferring: transfer the risk to other person. Ex: contract or insurance.
- Diversification: based on systematic and unsystematic risk. If the risk is
unsystematic, the firm can be diversified in order to reduce risk. Ex:
buying stock portfolio, buying more than 2 types of stock and have the
opposite trend growth (price) in order to get profit if one of these fall,
the firm still get gain in the other.
- Sharing: the risk burden will be shared on more than two persons. Ex:
joint stock company..
- Mitigating: all solutions in order to reduce probability, and if the risk
occurs, it will reduce the loss as low as possible.

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B. VIETCOMBANK CREDIT RISK MANAGEMENT
I. Status
Credit risk is the type of risk that most frequently occurs and has the greatest
impact on a bank's income. If credit risk is managed well, the bank can limit
potential risks. Good credit risk control will help the bank reduce unnecessary
losses and will help the bank have a credit competitiveness with other banks. To
assess credit risk, commodity sectors often use overdue debt ratio, bad debt
ratio and provisioning rate, in which the bad debt ratio is mainly used:
(Source: Financial statements of Vietcombank 2012 - 2016)
In 2013, due to the fluctuations of the economy, the total debt and bad debt ratio
of the whole banking system in Vietnam increased, in which Vietcombank's bad
debt was 7,475 billion dong and bad debt ratio was 2.73% high. most of the
years. However, in 2016, Vietcombank's NPL and overdue ratio were low at
1.46% and 1.03%, meeting the AGM's target of 3%.

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(Source: Financial statements of Vietcombank 2012 - 2016)
- Bad debts are classified by currency
The ratio of NPLs by currency varies greatly between currencies
Currency because Vietcombank's lending features are mainly denominated in
foreign currencies. As a result, the NPL ratio of the major loaned currency is
usually higher than the NPL ratio of the currencies with a low lending rate,
specifically:
(Source: Financial statements of Vietcombank 2012 - 2016)
The table above shows that the bad debt ratio by currency, the bad debt ratio in
foreign currency accounts for the largest proportion, as of 2016 it was 3314
billion dong, equivalent to 47.8% of the total debt. bad bank. Because at

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present, Vietcombank's lending activities are mainly borrowed in foreign
currency and lending in gold and domestic currency is not much.
- Bad debt by economic sectors
There are also differences between different economic sectors:
(Source: Financial statements of Vietcombank 2012 - 2016)
The above analysis shows that the bad debt ratio for businesses and
organizations at Vietcombank always accounts for a large proportion with
approximately 80%. Thereby, it shows that the level of risk in lending of
businesses and organizations is quite large.

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II. Credit management organization model
Broad of
Directors
Rrisk Management
Committee
Director
General
Risk Treatment
Committee
Customer Relations
Vice Managing
Director
Credit Risk Vice
Managing
director
Operational Vice
Managing Director
Professional
Departments at the
Head Office
Directors and Vice
Directors of Branches
Corporate
Customers
Department
Credit
Policy
Department
Credit Risk
Management
Department
Project
Investment
Department
Credit Policy
Department
Credit
Department
SME
Customers
Department
Individual
Customers
Department
Corporate
Customers
Department

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III. Organizing the implementation of credit risk management
1. Plan
Focus on the customer segment which have low risk such as the customers
have high income and the ability of credit – worthiness; building low-risk loan
products and hedging measures for each product (For example, for car loans,
customer has to buy car insurance and mortgage the assets formed from the loan
with certain types of vehicles....)
- Vietcombank is a bank with a low risk appetite, which building the right
development strategy, focuses on sustainable development and high
profitability.
2. Identifying
To identify credit risks, Vietcombank has set up related departments to receive
information about processing messages that show signs of credit risk checking.
Signs of credit risk may arise on its own, and may also arise from customers
during loan review. For the risk signs arising from banks, the Credit Risk
Management Division is responsible for regularly reviewing and evaluating
mainly based on the policies of credit growth banks, credit sectors. , loan terms,
target customers, credit reserves), but the credit officer force or administrative
capacity for group signaling from the client side, the bank's early identification
of credit risks right in the process of granting credit to customers.
The credit risk identification process is described through the following stages:
- Stage 1: Reception

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Receiving and verifying documents Customer relations officer, after instructing
and advising customers to prepare a credit application, will conduct a
preliminary examination of that credit application. The credit application form
has been prepared by the bank which requires customers to provide detailed
information for a credit evaluation in the future. Information and documents
provided such as basic information about customers, current financial situation,
loan purposes, collateral records, interest repayment basis, principal and
repayment plan will be rolled out. Vietcombank's credit suite uses many
different channels to check its validity and validity.
Next, VCB's credit department continues to evaluate the ability to
perform future obligations related to the credit that customers are applying for.
Vietcombank has put in place a system of credit appraisal standards to analyze
and appraise loan projects to determine the real capital needs, feasibility,
effectiveness of loan plans, debt repayment capability, collateral valuations and
possible risks to effectively screen credit applications. Based on the result of the
credit rating of the customer and the entire application file for credit granting,
the credit officer will prepare an appraisal report and submit it to the credit
approval authority (normally customer or transaction office), after receiving the
assessment report, the customer relationship officer submits to the leader of the
marine customer office, the transaction office directly working with the
customer to check and review the information on the sheet. submit to the
appraisal again. In order to be able to download and verify the application file,
cable leaders directly will review the validity and legality of all information and
documents in the loan application. In addition, other information serving the
assessment of credit scoring results and customer ratings performed by credit
officers are also reviewed by leaders to ensure no negligence.
At the same time, the head of the direct office will appoint the credit
application file to propose the credit limit that can be granted to the customer

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that has been submitted by the officer as eligible for the loan. The credit limit
that can be granted to customers will be based on a committee of factors
primarily the authority of the credit scoring results and customer ratings
department, and the need for a loan as stated in the credit application. . After the
credit officer has performed all the necessary work, the direct update will draw
conclusions about granting credit limit to customers for submission to
authorized authorities for approval.
- Stage 2: Independent credit risk assessment
However, the direct management's conclusions must be transferred to the Risk
Management Department for an independent credit risk assessment in
accordance with the bank's regulations. This work will be trusted by the officer
to directly transact with the customer to perform the supervision of the direct
leader of that employee. The credit officer will have to provide full customer
records, supplement necessary information as requested by the Risk
Management Department for the purpose of an independent appraisal
again.During the appraisal by the Credit Risk Department, the credit officer
must coordinate with the Credit Risk Management Department in direct contact
with guests. row to gather more information, capture the actual situation if
necessary. Credit scoring and customer ratings are also reviewed by this
department. In addition to the specific assessment of each credit application, the
credit risk management department of Vietcombank also considers the limits of
risk management such as the prudential ratios as prescribed by the State Bank.
rates of credit structure by type of guarantee, term ... according to
Vietcombank's regulations. The end result is the Credit Risk Appraisal Report,
which clearly states the risks that Vietcombank may face when approving this
loan, together with a measure to prevent risk mitigation. In case the credit limit
is too large, it is necessary to go through the appraisal and approval of the
Credit Council, the credit officer must also coordinate with the Credit Risk

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Management Department to report the pre-appraisal results. grassroots credit
board
- Stage 3: Credit management and disbursement
Based on the appraisal report of the credit officer, to export the credit limit of
the leader of the customer office or transaction office and report the results of
independent appraisal by the Credit Risk Management Department for approval.
Approve or decline the application for credit along with credit limit (in case of
acceptance) will be officially announced. The disbursement process begins
when Vietcombank and the customer sign the loan agreement. Vietcombank's
basic principle in disbursement is never disbursed before the loan contract is
signed and other necessary conditions such as collateral are met. The
disbursement must be approved by the competent authorities, at least at the head
of the department or higher. For some credit contracts, due to a long period or a
large amount of the loan or due to an agreement between the two parties, the
approved credit may not be disbursed once but disbursed in large amounts.
different times. In that case, the principle of risk management is that it is
necessary to closely monitor between disbursements to recognize abnormal
signs in time. These unusual signs may include withdrawing an unusually large
amount of money or continuous withdrawals, debt other than the credit being
disbursed shows signs of bad debts, human resources problems. or large
fluctuations in the adverse direction of the business in which the customer is
operating.
3. Measuring
Continuing the success of projects that build credit risk models Probability of
default (PD), and Loss given default (LGD) and Exposure at default (EAD)
quantitative models for in the domestic retail customer portfolio, Vietcombank

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continues to announce the completion of building LGD and EAD models for its
corporate customer portfolio. This result has played a key role in the process of
improving risk management capacity, and contributed to making Vietcombank
a pioneer bank ready to apply the Basel II Capital Accord according to the
internal rating method ( IRB).
- PDs (Probability of default) are used to measure the likelihood of customers
being unable to pay their debts over a period of usually one year. In order to
estimate PD in a year, the bank must base on 5-year financial, non-financial
data and warning information related to the phenomenon of signalling the
solvency of customers.
- LGD (Loss given default) is the proportion of capital loss on the total loan
balance at the time the customer fails to pay the debt. LGD not only includes
loan losses but also takes into account other losses that arise when a customer
fails to pay such as due debt interest, and administrative expenses such as the
cost of disposing of mortgage assets , the cost of legal service
- EAD (Exposure at default) is the total outstanding balance at the time the
customer fails to repay the debt. EAD is determined based on the outstanding
balance of the customer at the time of evaluation and the undisbursed
commitment of the customer.
- EL (Expected loss): While it is never possible to know in advance the
losses a bank will suffer in a particular year, a bank can forecast the average
level of credit losses it can reasonably expect to experience.
EL = PD * EAD * LGD
4. Control

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To exercise the following control over credit risk, VCB does two main things:
checking compliance and building a problematic debt settlement system and
process. These parts of work have not been fully met, but have followed the
correct orientation of the principles of credit risk control that the banking
supervision has proposed.
To ensure that credit activities are in compliance with the Bank's policies and
procedures and within the framework of the guidelines of the Board of
Directors and the Board of Management, VCB has developed an internal
inspection and control system. Ministries under the General Director have the
functions and tasks of checking and monitoring the compliance with
requirements on credit operations in order to promptly detect and prevent risks
arising from violation of policies and procedures. and limits. In addition, in the
credit risk management department as well as the branches are actively
controlling risks before lending.
Control before lending includes: controlling the setting up of loan policies,
procedures, and procedures; check the process of preparing loan dossiers and
appraise, the inspectors compare with regulations to check the completeness and
legality of loan dossiers, check the accuracy of calculated data and credit record
reviews; check loan statements and related documents to find out the views of
the credit departments, the credit department's opinion, management review and
browse the case beyond the jurisdiction decided.
Controlling while lending: controlling again the credit contract, checking the
disbursement process including comparing customers' confirmation with data at
the bank to detect loan cases on behalf of loan disbursement records, false
declaration of collateral, credit officers collect debts, interest not paid to banks,
investigate whether customers' use of loan capital is for the right purpose of
loan application, regular supervision through loan.

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Control after lending: Controlling debt collection urging, independent internal
credit control, and credit policy reassessment.
Along with the development of risk prevention and mitigation system, VCB has
also focused on building a system to handle bad credit. When factors tend to be
biased such as: the credit size grows too quickly beyond the management of the
bank, or the credit structure is too focused on one industry, a risky field, or
Overdue debt expenses, bad debts have signs of exceeding the permitted
threshold, the head office will immediately request branches to report, inspect,
not allow or limit credit granting and must adjust the balance structure.
appropriately debt between industries, customers, focus on handling when there
are signs of bad debt. The policy of detecting, fixing early or resolving problem
credits has partly contributed to the improvement of the credit quality of the
bank.
5. Assessing
Vietcombank has developed and deployed a customer credit rating application
since 2003 under the guidance of the State Bank and consulting with financial
experts of the World Bank (World Bank). Up to now, this internal ranking
system has been revised many times to better suit the changed socio-economic
conditions and international treaties to which Vietnam is committed.
Vietcombank's internal credit rating system includes 3 groups of ratings for
businesses, financial institutions and individuals. For each different customer
class, the branch has different levels of credit approval. The maximum credit
limit and credit extension to collaterals for each customer are also determined
based on the customer's credit class. For each different customer class, the
branch has different levels of credit approval. The maximum credit limit and

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credit extension to collaterals for each customer are also determined based on
the customer's credit class.
6. Response
a. Reject
For example, after financial analysis of customer’s information on CIC system
in 5 years, Vietcombank found out customer had an overdue debt over 365 days
in another bank. They assess the customer fall in high risk customer segment
that perform low ability of credit-worthiness. Hence, Vietcombank reject this
case.
b. Transferring
The transfer risk response strategy is used when Vietcombank cannot manage
the risk on their own. For example, they are lacking resources, skills, or they are
busy with other activities, etc.
Here the management of the risk is transferred to a third party. If the risk
occurs, it will be their responsibility to manage it. Insurance is an example of
this risk response strategy. For example, though Vietcombank have asked a
third party to manage the risk, Vietcombank is responsible for the guarantee
with the client.
c. Diversification
Diversification in the field of business activities:
- Bank: is a leading experienced bank providing a full range of modern and
convenient banking products and services.
- Insurance: providing non-life insurance products suitably designed in the

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- Securities: providing a variety of brokerage, investment and investment
advisory services with the ability to rapidly develop a system of order-receiving
agents nationwide.
- Financial investment: capital contribution to establish businesses to invest
in projects, such as: Vietcombank and Fidelity National Information Services
(FIS) held a kick-off ceremony to launch the project "Investment in Debt -
Asset Management System and Internal Cost Transfer (ALM / FTP)"; Ngoai
Giao Doan urban area; FLC Twin Towers...
d, Sharing
- Foreign shareholders: Currently, the banks’ largest shareholder is the State
Bank of Vietnam (representative of the State capital at VCB) holds 74.8% of the
charter capital. The strategic shareholder Mizuho Corporate Bank. Ltd holds
15% of the charter capital. The other shareholders (including domestic and
foreign organizations and individuals) hold 10.2% of the charter capital of
VCB.
- Securities investment: : Vietcombank Securities Limited Company (VCBS)
- a subsidiary 100% owned by Bank for Foreign Trade of Vietnam (VCB) - was
established in compliance with Decision 27/27/QĐ-HĐQT dated 7/1/2002 of
Vietcombank’s Chairman.
With the principles of fairness, integrity and whole-heartedness, VCBS provides
brokerage services to all domestic and foreign institution customers through
various convenient transaction types, with fast, correct and secure order
processing.
VCBS was the first company providing investors with Internet ordering services
through VCBS Cyber Investor. With the basis of technology and human
resource, in many consecutive years, VCBS has been one of the companies that

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have the biggest brokerage market shares, with broad base of customers
including foreign and domestic financial institutions as well as large domestic
corporations.
e, Mitigating:
Due to both subjective and objective reasons, internal inspection and control are
not really effective as expected. Through controlling activities, it is possible to
detect, prevent and correct errors in the credit operation process.
Strengthening the internal inspection and control system in credit risk
management
About internal control:
- Special attention should be paid to improving the risk management and
monitoring capacity of the internal control system.
- To ensure that the bank's internal control team is fully capable and agreeable
in the context that the banking system is developing in both width and depth.
- Develop and establish a culture of careful control in banking operations.
About internal audit activities:
- To seriously inspect and review the quality of the audit, regularly and
continuously evaluate to timely detect, prevent and propose appropriate risk
treatment solutions.
- Focus on the quality of the auditors.
- Increase the independence of the internal audit.

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- Applying well the internal audit method.
IV . Solution
1. Enhance internal inspection and control system in credit risk management
2. Ensure capital safety for the bank.
- It is necessary to develop a capital raising strategy with reasonable capital use
to ensure sustainable capital development and reduce dividend pressure.
- Consider and select strategic shareholders at home and abroad to issue shares
issued on the basis of mutually beneficial cooperation, learn technology
management experience ... to improve reputation and brand Bank.
- Ready to apply capital adequacy regulations under Basel ii. VCB needs to
have the following implementation strategy: ensuring equity capital
development, gradually forming a capital buffer against economic cycle risk
and capital against systemic risks resulting from market continuity.
- VCB needs to have a strategic vision in the balance of interests between
shareholders, which is to create reputation and confidence of investors.
3. Completing the information system:
When building an information system to serve the credit risk management,
Vietcombank must meet the following basic requirements:
- This system must support the calculation of prices at risk VaR
- Stored information enables chronological analysis of events, from single
events,
- Ability to measure current and future operating value with each other partner

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- Meeting all three above requirements with different levels of banking
operations, different groups of risks, different types of products and many
different partners.
4. Continuing to build and perfect the information technology system:
To pay more attention to information technology investment to serve the
analysis, assessment and measurement of risks, including credit risks. Continue
to perfect the internal information, statistics and reporting system to build a
modern, centralized and unified management information system and database.
Deploying internal information networks throughout the system on the basis of
the application of information technology and network technology. Continue to
upgrade the wide area network and information technology infrastructure with
technical solutions and communication methods suitable to Vietcombank's
development level. Complete and develop basic banking management methods;
management and operational processes and procedures according to
international practices and standards; at the same time towards modernization,
automation and integrated into a complete and centralized banking
administration system. Strengthening the system of safety, information, data
security and network security. Implement projects to renovate and upgrade
solutions for network security, data confidentiality, asset safety and banking
operations. Building information, data and network security systems,
researching and building data transmission lines, linking with national
information networks to create an active position for banks.

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V. Refference
1.https://ub.com.vn/threads/luong-hoa-ton-that-tin-dung.4870/?
fbclid=IwAR1CqNBxT9ARGXoxjYiFDP98BmBnDuNFm9fUE7YuNgDNrrIjGCBM
W-M9NWc
2.http://digital.lib.ueh.edu.vn/handle/UEH/59610?fbclid=IwAR3AZzhgaBhfyX-
ZYttxVLHZzDzaF8QLcOj7pt1v5NvPtWkuRzxreQFRcPM
3.https://portal.vietcombank.com.vn/content/Investors/Investors/B%C3%A1o%20c
%C3%A1o%20th%C6%B0%E1%BB%9Dng%20ni%C3%AAn/N%C4%83m
%202016/B%C3%A1o%20c%C3%A1o%20th%C6%B0%E1%BB%9Dng%20ni
%C3%AAn%202016.pdf