Finalreport - Fix

THE UNIVERSITY OF DANANG
UNIVERSITY OF ECONOMICS
FINAL REPORT
STUDENTS SCIENTIFIC RESEARCH
CREDIT RISK MANAGEMENT: IMPLICATIONS

ON BANK PERFORMANCE AND LENDING
GROWTH IN THE VIETNAM BANK
Student: 1. Vo Hong Phuc. Class: 42K7.2

2. Le Thi Hong Phuong 42K7.2
Supervisor: Dr. Phan Dang My Phuong
Da Nang, 28 May 2020

FINAL REPORT
STUDENT SCIENTIFIC RESEARCH
CREDIT RISK MANAGEMENT: IMPLICATIONS

ON BANK PERFORMANCE AND LENDING
GROWTH IN THE VIETNAM BANK
Scientific field: BANKING
Principle Author: Vo Hong Phuc Male, female: Male

Class, Falcuty: 42K7.2 Year: 4 /Course duration: 4 years
Ethnic group: Kinh
Major: Banking
Author: Le Thi Hong Phuong Male, female: Female
Class, Falcuty: 42K7.2 Year: 4 /Course duration: 4 years
Ethnic group: Kinh
Major: Banking
Supervisor: Dr. Phan Dang My Phuong
Da Nang, 28 May 2020

TABLE OF CONTENT
CHAPTER 1: INTRODUCTION...............................................................................................8
1.1 RESEARCH BACKGROUND........................................................................................8
1.1.1 Why choosing this topic............................................................................................8
1.1.2 The urgency of the research.....................................................................................10
1.2 RESEARCH OBJECTIVES...........................................................................................13
1.3 RESEARCH QUESTION..............................................................................................13
1.4 OBJECT AND SCOPE OF THE STUDY.....................................................................13
1.5 STRUCTURE OF THE THESIS...................................................................................13
CHAPTER 2: THEORETICAL BACKGROUND AND LITERATURE REVIEW..............14
2.1. OVERVIEW OF THE SPECIFIC SECTOR.................................................................14
2.2. THEORETICAL BACKGROUND AND HYPOTHESIS DEVELOPMENT.............15
2.2.1 Commercial Loan Theory........................................................................................15
2.2.2 The Shiftability Theory...........................................................................................16
2.2.3 The Anticipated Income Theory..............................................................................18
2.2.4 The Credit Risk Theory...........................................................................................19
2.2.5 The Liability Management Theory..........................................................................20
2.3. EMPIRICAL RESEARCH............................................................................................21
CHAPTER 3: METHODOLOGY AND DATA......................................................................26
3.1. METHODOLOGY........................................................................................................26
3.2. DATA............................................................................................................................28
CHAPTER 4: RESULTS AND DISCUSSION.......................................................................30
4.1 Descripe data statistics....................................................................................................30
4.2 Research model results...................................................................................................31
CHAPTER 5: CONCLUSION.................................................................................................33
5.1 CONCLUSION..............................................................................................................33
5.2 Restrictions and impacts of current credit risk management policies............................36
5.2.1 The restricts.............................................................................................................36
5.2.2 The meaning of current credit management policy.................................................37
5.3 Solutions to improve the efficiency of bank risk management..................................39
5.4 Request...........................................................................................................................41
5.4.1. Propose to the State Bank.......................................................................................41
5.4.2 Recommendations to the Government....................................................................42
REFERENCES.........................................................................................................................43
LIST OF TABLES
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Table 1: Relationship between non-performing loans and bank lending growth.....................26
Table 2: List of commercial bank.............................................................................................28
Table 3: Statistics describe the variables..................................................................................30
Table 4: Estimation of Results and Interpretation....................................................................31
Table 5: Breush-pagan / Cook-Weisberg test for heteroskedasiticty.......................................32
Table 6: Pairwise Correlation test for Multicollinearity...........................................................32
Table 7: OV test for omitted variables.....................................................................................33
ABBREVIATIONS
CAR Capital Adequacy Ratio
CR Curent Ratio
CR-TE The credit risk technical efficiency
DEA Data envelopment analysis
DMBs Deposit Money Banks
JICA Japan International Cooperation Agency
IRS Interest Rate Spread
LDR Loan to Deposit Ratio
M2 Money Supply
MENA The Middle East and North African
NPL Non-Performing Loan
ROA Return on Asset
ROE Return on Equuity
SBV State Bank of Vietnam
TLA Total Loan and Advances
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INFORMATION OF RESEARCH RESULTS

1. General information:
-Topic title: CREDIT RISK MANAGEMENT: IMPLICATIONS ON BANK
PERFORMANCE AND LENDING GROWTH IN THE VIETNAM BANK
- Student: Vo Hong Phuc and Le Thi Hong Phuong.
- Class: 42K7.2 Faculty: Banking Year: 4 Course duration: 4
years
- Supervisor: Dr. Phan Dang My Phuong
2. Research objects:
Topic studies theoretical issues related to credit risk management for banking
operations and loan growth.
3. Novelty and creativity:
Credit risk can occur at any time in the business activities of commercial banks in
Vietnam. Therefore the study of credit risk management is necessary. Although not
creating a new theory, the author has compiled updated data sources until 2019 to
provide an additional empirical evidence confirming the implications on bank
performance and lending growth in the Viet Nam bank.
4. Research results:
The study results showed that sound credit management strategies can boost investors
and savers confidence in banks and lead to a growth in funds for loans and advancing
which leads to increased bank profitability while non-performing loans were also
positively related to lending growth.
5. Contributions to the socio-economic, education and training, security, defense

and applicability of the research:
6. Scientific publication of students from research results of the topic (specify the
journal name if any) or comments and assessments of the institution that applied the
research results (if any):
27 May, 2020
Student (principal author)
(sign, full name)
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Comment of the supervisor on the scientific contributions of students who
conduct the research:
27 May, 2020
Ratification of Faculty of Banking Supervisor

INFORMATION OF PRINCIPAL AUTHOR
I. Student profile :
Ảnh 4x6
FINAL REPORT Page 6
Full name: Vo Hong Phuc
Date of birth: 17/09/1998
Birth place: Da Nang
Class: 42K07.2 Faculty: Banking
Address: 71 Ngu Hanh Son, Da Nang
Phone: 0376040234 Email: [email protected]
II. STUDY PROCESS (list the achievements of students from the 1st year until now):
* 1st year:
Major: Banking Faculty: Banking
Academic classification:
Summary of achievements:
* 2nd year:
* 3rd year:
* 4th year:
27 May, 2020
CHAPTER 1: INTRODUCTION
1.1 RESEARCH BACKGROUND
1.1.1 Why choosing this topic
In commercial bank operations, credit plays an important role because it provides the
main source of income to maintain the operation of the management apparatus,
simultaneously accumulates profits for banks and does obligations to the House.
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country. Therefore, the effectiveness of credit activities is always given top priority, to
improve the efficiency of credit activities, it is necessary to minimize credit risks.
Preventing and restricting credit risks is a difficult and complicated issue. Credit risk is
often difficult to control and leads to losses, loss of capital, and bank income. In recent
years, the problem of risk and risk management in credit operations of credit
institutions in Vietnam has become urgent when the figures of bad debts are published.
In the context of competition and integration today, one of the issues for the existence
and development of commercial banks (commercial banks) is the ability to manage
risks, especially credit risks comprehensively and systematically. Preventing and
restricting credit risks is a difficult and complicated problem. Credit risks are often
difficult to control and leads to losses, loss of capital, and bank income. The well-
implemented preventive and credit risk prevention activities will bring benefits to
banks such as (i) Reducing costs, improving incomes, preserving capital for
commercial banks; (ii) Creating confidence for depositors and investors; (iii) Create a
premise to expand the market and increase the reputation, position, image, market
share for the bank.
In recent years, in Vietnam, the credit institution system has maintained a stable step,
the financial management capacity of commercial banks, especially risk management,
has changed dramatically and effectively. pole, step by step meet the requirements of
international integration. The legal framework for safety and health safety standards of
credit institutions has been improved, moving closer to international banking practices
and standards, creating a foundation for credit institutions to operate more safely and
to promote restructure according to the set goals and orientations. Vietnamese
commercial banks have gradually implemented and applied Basel II capital safety
standards according to the schedule. However, risk management in the financial
market is still a problem that needs the special attention of Vietnamese commercial
banks, because the banking system is carrying a high number of bad debts compared to
international standards ...
Credit risk management (credit risk management) to protect credit institutions from
unforeseen losses, ensuring not to affect the competitiveness and viability of credit
institutions by reducing credit risk using measures to manage, monitor credit activities,
and control risks.
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Credit risk is the main cause of the loss of capital of credit institutions
The income of credit institutions is mainly from the income of credit activities. Credit
risk is the main cause of capital loss for credit institutions. Therefore, credit risk is
considered one of the most important factors, requiring credit institutions to be able to
analyze, evaluate, and manage credit risk effectively.
Credit risk measurement is a measure of the business capacity of credit institutions
The economic situation is more and more volatile, the financial markets, currencies,
and credit institutions are also more complicated, potentially risky, especially credit
risks. Although, before lending to credit institutions' employees, the market has been
researched and predicted the risks that may occur, the anticipation, detection of
potential risks and responsibilities of the credit institution's employees are limited
credit risks arise due to many reasons, can be due to objective reasons, subjective or
force majeure ...
Good credit risk management is a competitive advantage of credit institutions
Well implemented loan risk management will create favorable conditions for credit
institutions to filter out customers with good legal capacity, good financial capacity
and development potential, etc. to support the financial support of credit institutions. It
is effective and will create favorable conditions for credit institutions in the process of
competition.
Therefore, there is a need for a study on the impact of credit risk management on the
operation and growth of lending of commercial banks in Vietnam. The results of the
study are a scientific basis for bank managers to make reasonable decisions, limiting
risks to their banks, making bank stocks more attractive in the market. For that reason,
this study approaches a bank credit risk management mechanism to study the
relationship between banking activity and loan growth to credit risk management.
1.1.2 The urgency of the research
Researches in foreign countries up to now, there have been many theoretical studies of
experimental models related to credit risk management. There are many different
views on credit risk. There are also differences in the views on credit risks in different
countries and economies from the perspective of different entities. Credit risks for
businesses in commercial banking activities have a great impact and influence on
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business results, to profits as well as to the survival of a commercial bank and thereby
negatively affecting the development of the economy.
The time has come for bank CEOs not only to know how to lend, but also to mobilize
capital, but also to know credit risk management and especially credit risk
management according to the loan portfolio, specifically here is risk management.
credit to the business. If credit risk accounts for 90% of the commercial bank's total
risk, credit risk for enterprises accounts for nearly 70% of total credit risk.
In commercial bank operations, credit has an important role because it provides the
main source of income to maintain operations of the management system,
simultaneously accumulates profits for banks, and performs obligations to the
Government. Credit activities in general and lending activities in particular make up
the bank's main source of income, so credit risk affects the bank's stability.
According to economists: A. Saunder and H. Lange [Financial Institutions

Management - A Modern Perpective], credit risk is defined as "a potential loss when a
bank provides credit to a customer, means that the ability of the estimated income
sources brings from bank loans which cannot be fully realized in both quantity and
time". According to the Basel Committee concept: "Credit risk is the ability that a
borrower or a partner of a bank fails to fulfill its agreed commitments" [Basel
Committee on Banking Supervision (September 2000), Principal for the Management
of Credit Risk].
Credit risk is the possibility that the actual return on an investment or loan extension
will deviate from that, which was expected (Conford, 2000). Coyle (2000) defines
credit risk as losses from the refusal or inability of credit customers to pay what is
owed in full and on time. The main sources of credit risk include limited institutional
capacity, inappropriate credit policies, volatile interest rates, mismanagement,
inappropriate laws, low capital and liquidity levels, directed lending, massive license
for the bank, poor credit guarantee, reckless lending, poor credit assessment, non-
executive directors. To minimize these risks, the financial system is required; banks
have well-capitalized, service to a wide range of customers, share the information
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about borrowers, stabilize interest rates, reduce bad debts, increase bank deposits and
increase credit for borrowers.
In the context of the market economy today, commercial banks compete with each
other more and more fiercely, one of the problems for the existence and development
of each bank is the risk management ability, especially credit risk management
comprehensively and systematically.
To solve the problem of credit risk management in Vietnam, in the project

"Strengthening the capacity of the State Bank of Vietnam (SBV)" in 2010, Center
Bank cooperated with the Japan International Cooperation Agency (JICA) that
organized an overview of the Basel I and Basel II Accords. Both agreements
emphasize the importance of capital adequacy in reducing credit risk, which addresses
the impact of sudden financial losses on banks (Iwedi, & Onuegbu, 2014 ).
To achieve this goal, to limit credit risks for businesses and overcome the above
limitations and shortcomings, in addition to unifying minds, considering risk
management is a professional and cultural task of commercial banks. ; Considering the
management of the loan portfolio, firstly, lending to enterprises is a "breakthrough
step", a key point in the system of bank credit risk management, it is necessary to build
and agree on principles and contents. , analyzing the current situation of credit risk
management for enterprises in recent years to find effective solutions that are both
immediate (near future) and long-term (far future). ensure the development and
development of Vietnam commercial banks to keep up with other commercial banks in
the region and the world.
Facing the trend of integration and opening up of the financial-banking services

market with new types of banking services, the application of Basel II in Vietnam is an
urgent requirement to enhance operational capacity and minimize risks to commercial
banks.
After Vietnam's accession to the World Trade Organization (WTO), the Center Bank
of Vietnam and credit institutions have made great efforts in perfecting the legal
system on monetary and banking activities as well as improving the governance and
management capacity, especially, the risk management capacity of commercial banks

gradually progresses to international practices and standards. Accordingly, the step-by-
step application of Basel II standards is focused, especially after the global financial
crisis and recession.
On the management side, Center Bank issued regulations on safety ratios in the
operation of credit institutions (Circular No.13/2010/TT-NHNN dated May 20, 2010)
and are completing to issue new regulations on debt classification, setting up and using
provisions to deal with credit risks in the operation of credit institutions. This is an
important step forward in gradually applying Basel II standards in Vietnam.
For Vietnamese credit institutions, Basel II has had a great influence in improving the
governance capacity, especially risk management capacity. Also, to comply with
Center Bank's mandatory regulations, credit institutions are making great efforts to
further improve their bank's risk management system to suit the specific operating
conditions of each bank and step by step approach to the standards of Basel II.
The study seeks to examine the relationship between credit risk management for
deposit bank performance and loan growth. This study covers the period from 2010 to
2019, from the period of strong banking activity, falling in bad debt to the
restructuring process. The objective of the study is to investigate the impact of credit
risk management on bank operations and loan growth.
1.2 RESEARCH OBJECTIVES

The main objective of this study is to investigate the impact of credit risk
management on the performance of the Bank of Vietnam and its loan growth over 10
years (2010 - 2019). To determine the relationship between the credit risk management
and profitability of commercial banks in Viet Nam.
1.3 RESEARCH QUESTION

Analyze the relationship between the efficiency of bank performance and loan
growth for credit risk management?
1.4 OBJECT AND SCOPE OF THE STUDY
Research objects: Topic studies theoretical issues related to credit risk
management for banking operations and loan growth.

Research scope: Secondary data for 10 years: 2010-2019 through the annual
reports of 30 banks.
1.5 STRUCTURE OF THE THESIS

Chapter I: Introduction
1.1. Reseảch background
1.2. Research objective
1.3. Research question
1.4. Object and scope of the study
1.5. Research structure
Chapter II: Theoretical background and literature review
2.1. Overview of the specific sector
2.2. Theoretical background and hypothesis development
2.3. Empirical research
Chapter III: Methodology and Data
3.1 Methodology
3.2 Data
Chapter IV: Results and Discussion
4.1 Describe data statistics
4.2 Research model results
Chapter V: Conclusion
5.1 Conclusion
5.2 Restrictions and impacts of current credit risk management policies
5.3 Solutions to improve the efficiency of bank risk management
5.4 Request

CHAPTER 2: THEORETICAL BACKGROUND AND LITERATURE
REVIEW
2.1. OVERVIEW OF THE SPECIFIC SECTOR
The risks in operations of the Bank are diverse and complex, coming from
banking operations with different levels, but the most profound and serious impact is
still credit risk because Credit is the basic and most profitable activity for the Bank, as
well as the loss for the bank.
Credit risk is the risk of losses due to borrowers' default or deterioration of credit
standing. Default risk is the risk that borrowers fail to comply with their debt
obligations. The default triggers a total or partial loss of the amount lent to the
counterparty. Credit risk also refers to the deterioration of the credit standing of a
borrower, which does not imply default but involves a higher likelihood of default.
The book value of a loan does not change when the credit quality of the borrower
declines, but its economic value is lower because the likelihood of default increases
(Joel Bessis, 2015)
This is not only expressed in theory but is also evidenced by the Bank's business
practices. Last time witnessed a series of weak banks were bought back by the State
Bank for 0 dongs such as Construction Bank, Ocean Bank, and a series of banks under
special supervision. Banks are alarmed due to lax credit activities as well as loose
credit risk management, which carries many risks…
Credit risk management is an extremely important activity in the operation of banks.
Because credit risk is one of the problems that all commercial banks can face, if the
credit risk prevention and restriction activities are well implemented, it will bring
great benefits for banks such as high income, reduce costs, preserve capital, create
confidence for customers and investors when using the bank's services, create a
premise to expand the market and increase prestige, position, image, market share for
the bank... Also, prevention activities to limit good credit risks will benefit the whole
economy. In the current era of economy, financial institutions are closely related, if a
commercial bank is in trouble, it will immediately affect the chain to other banks.
Therefore, credit risk management brings safety and stability to the market.

2.2. THEORETICAL BACKGROUND AND HYPOTHESIS DEVELOPMENT
2.2.1 Commercial Loan Theory
The commercial loan or the real bills doctrine theory states that a commercial
bank should forward only short-term self-liquidating productive loans to business
organizations. Loans meant to finance the production, and the evolution of goods
through the successive phases of production, storage, transportation, and distribution
are considered as self-liquidating loans.
This theory also states that whenever commercial banks make short term self-
liquidating productive loans, the central bank should lend to the banks on the security
of such short-term loans. This principle assures that the appropriate degree of liquidity
for each bank and appropriate money supply for the whole economy.
The central bank was expected to increase or erase bank reserves by rediscounting
approved loans. When the business started growing and the requirements of trade
increased, banks were able to capture additional reserves by rediscounting bills with
the central banks. When business went down and the requirements of trade declined,
the volume of rediscounting of bills would fall, the supply of bank reserves and the
amount of bank credit and money would also contract.
Smith (1776) argues that commercial lending is mainly short-term. With this
assumption, the bank is certainly at high risk during a financial crisis even if its loan
portfolio is consistent with theoretical standards, as in most commercial transactions.
This is the theory of asset management that emphasizes liquidity, banks can maintain
the liquidity necessary to meet customers' deposit withdrawal requirements. Wilson,
Casu, Girardone, and Molyneux (2010) argue that when the financial market is not
highly developed, lending is the bank's largest asset, so to maintain liquidity, the bank
needs to hold funds and commercial loans. While banks 'sources are mostly short-
term, short-term commercial financing of enterprises' current assets to ensure term
suitability is the best method to ensure liquidity.
The theory of commercial lending, besides analyzing the liquidity of commercial
loans, did not pay attention to the liquidity of capital of non-commercial loans, so it
did not guarantee the liquidity of banks. Many deposits are not withdrawn at maturity
but continue to renew, such funds can be used for medium and long-term loans.
Therefore, the theory implies that banks are always in high-risk situations, known as
liquidity risk, and the more the loan is increased, the higher the liquidity risk is.
2.2.2 The Shiftability Theory
This theory was proposed by H.G. Moulton who insisted that if the commercial
banks continue a substantial amount of assets that can be moved to other banks for
cash without any loss of material. In case of requirement, there is no need to depend on
maturities.
This theory states that, for an asset to be perfectly shiftable, it must be directly
transferable without any loss of capital loss when there is a need for liquidity. This is
specifically used for short term market investments, like treasury bills and bills of
exchange which can be directly sold whenever there is a need to raise funds by banks.
But in general, circumstances when all banks require liquidity, the shift ability theory
needs all banks to acquire such assets which can be shifted on to the central bank
which is the lender of the last resort.
Moulton (1918), one of the founders of this theory, asserted that "Liquidity is the
ability to change". The theory is that banks can best hedge liquidity risk by
maintaining a large proportion of highly liquid assets. The theory of ability to change
diverts the attention of banks and authorities and suggests that loans and investments
are the sources of banking liquidity. The theory of the possibility of change is only true
in the spatial scope for a bank but not for the wider space, as all banks increase their
reserves of additional money by moving assets together. As a result, from 1929 to
1933, all banks wanted to sell assets and none of them wanted to buy. What is needed
now is the need for an agency outside the banking system to be able to pump liquidity
into all banks by buying what banks want to sell. But the federal reserve system could
not provide the liquidity needed for many reasons and many banks failed.
Toby (2006) studies the origin of liquidity risk of US banks based on shift ability
theory that explains that a bank's liquidity depends on its ability to convert. short-term
assets (short-term instruments in the open market) at a predictable price. This theory
holds that assets held by a bank can be transferred easily in the market. Commercial
banks will be able to meet liquidity needs if there are ready assets for sale. If a large
number of depositors decide to withdraw their money, all banks need to sell the
investments and pay the depositors. The theoretical study of (Toby, 2006) provides

two opposing views on bank capital and liquidity. Firstly, bank capital tends to hinder
the creation of liquidity through two separate effects: the "fragile financial structure"
and "the structure that encroaches on deposits". The impact of the "fragile financial
structure" is characterized by lower capital, which tends to increase liquidity (Diamond
and Rajan, 2001) while the impact of "structure predominates deposit" is higher. can
overwhelm deposits and thus reduce liquidity (Gorton and Winton, 2014). The
"crowding out structure" effect on the condition that higher capital tends to mitigate
the financial disruption due to bank advantages in negotiating, diversifying investment
sources, participating in venture capital activities, which hinder the bank's
commitments to depositors, etc. Therefore, larger capital tends to reduce credit. In the
second view, higher capital increases the creative bar. Liquidity creation means
increasing the customers' resistance to risks by increasing the availability of liquid
assets to meet their liquidity needs (Allen and Gale, 2004). The greater the bank
capital, the greater the risk it will be in banks (Repullo, 2004). Thus, according to the
second view, the higher the bank capital, the higher the liquidity, the lower the risk of
financial collapse. This theory holds that commercial lending does not guarantee
liquidity for commercial banks when the crisis occurs. This theory proves that the
main issue to ensure liquidity is the bank's ability to generate income (increase in
accumulation capacity) and the ability to convert assets. With the development of the
financial market, banks need to proactively reserve highly convertible assets to ensure
liquidity when meeting liquidity requirements. Therefore, banks can make non-
commercial loans while ensuring the bank's liquidity.
The shift ability theory has positive elements of truth. Now banks obtain sound assets
that can be shifted on to other banks. Shares and debentures of large enterprises are
welcomed as liquid assets accompanied by treasury bills and bills of exchange. This
has motivated term lending by banks.
Although there are several benefits, the Shift ability theory has its demerits. Firstly, the
only shift ability of assets does not provide liquidity to the banking system. It
completely relies on the economic conditions. Secondly, this theory neglects acute
depression, the shares and debentures cannot be shifted to others by the banks. In such
a situation, there are no buyers and all who possess them to want to sell them. Third, a
single bank may have shiftable assets in sufficient quantities but if it tries to sell them

when there is a run on the bank, it may adversely affect the entire banking system.
Fourth, if all the banks simultaneously start shifting their assets, it would have
disastrous effects on both the lenders and the borrowers.
2.2.3 The Anticipated Income Theory
The theory of predictive income developed by (Prochnow, 1949) expresses the
ideas of short-term loans by the US commercial banks. This theory holds that property
earnings occur not only when the asset is due, but also at multiple points during the
life of the asset. For example, if the bank provides medium and long-term loans, but it
collects debts over multiple loan terms, then income is expected to increase the
liquidity of assets. This theory lays an important foundation in the study of the
maturity of assets and capital sources, considering it as the main content to manage the
maturity of assets. Building a plan to collect a debt, collect interest ... based on the
expected return of the property is a measure to ensure the liquidity of the property. In
short, bank managers can maintain a portfolio of assets that is more profitable than
liquidity and use new deposits as the main method to meet liquidity needs.
This theory dominates the commercial loan theory and the shift ability theory as it
satisfies the three major objectives of liquidity, safety, and profitability. Liquidity is
settled to the bank when the borrower saves and repays the loan regularly after a
certain period in installments. It fulfills the safety principle as the bank permits a
relying on good security as well as the ability of the borrower to repay the loan. The
bank can use its excess reserves in lending term-loan and is convinced of a regular
income. Lastly, the term-loan is highly profitable for the business community which
collects funds for medium-terms.
The theory of anticipated income is not free from demerits. This theory is a method to
examine a borrower's creditworthiness. It gives the bank conditions for examining the
potential of a borrower to favorably repay a loan on time. It also fails to meet
emergency cash requirements.
2.2.4 The Credit Risk Theory
Credit risk according to Vistor Castro (2012) refer to the risk of a loan not
being (partially or totally) paid to the lender.Traditionally, it refers to the risk that a
lender may not receive the owed principal and interest, which results in an interruption
of cash flows and increased costs for collection. To reduce the lender's credit risk, the

lender may perform a credit check on the prospective borrower, may require the
borrower to take out appropriate insurance, such as mortgage insurance, or seek
security over some assets of the borrower or a guarantee from a third party. The lender
can also take out insurance against the risk or on-sell the debt to another company. The
higher the risk, the higher will be the interest rate that the debtor will be asked to pay
on the debt. Credit risk arises when borrowers are unable to pay due willingly or
unwillingly.
2.2.5 The Liability Management Theory
Liability management is the practice by banks of maintaining a balance between
the maturities of their assets and their liabilities to maintain liquidity and to facilitate
lending while also maintaining healthy balance sheets. In this context, liabilities
include depositors' money as well as funds borrowed from other financial institutions.
A bank practicing liability management looks after these funds and also hedges against
changes in interest rates.
This theory was further developed in the 1960s. This theory says that lenders don't
need to liquidate loans and maintain working assets themselves because they can
borrow money in the market. Currency field whenever needed. A bank can keep
reserves by building additional debt to itself through various sources. These sources
include issuing certificates of term deposits, borrowing from other commercial banks,
borrowing from central banks, raising capital through issuing shares and by plowing
profits.
One of the first literary references to the term of liability management was in an
article published in 1967 by G. Walter Woodworth. In this article, he referred to the
new practice by stating that banks were now more
liquid because "reserve money can be borrowed or 'bought' in the money market
whenever a bank experiences a reserve deficiency." In articles and textbooks, various
authors defined the practice in a similar vein. For example, the author Arnold Dill
stated the practice very concisely: "... the banking practice of buying reserves through
the marketing of liabilities in the money market." Another noted author, Paul S.
Nadler, stated that liability management is the " . . . buying (of) growth whenever loan
demands and investment opportunities were strong enough ...to make it a profitable
approach."

One article by Lacy H. Hunt solves the definition problem by stating that liability
management is '•... .the aggressive development of new sources of funds and the more
intensive use of existing sources of funds." In another article, Nadler also defines the
practice as follows: "... the aggressive buying of liquidity and lendable funds ... " Dill
also refers to the concept as "the practice of buying reserves, chiefly for meeting
lending commitments and reserve requirements through various means ... " Donald C.
Miller
simply states that liability management is just "...purchased money management." The
concept of liability management is synonymous with "... the growing
recourse to purchase money ... " states a writer in the Commercial Financial Chronicle.
Liability management also has been referred to by Thornton and Still as the practice by
bankers ".. . of relying for funds on sources other than demand and savings deposits."
Vaidyanathan (1999) has defined ALM as the process by which an organization
manages its Financial Status Report to allow alternative liquidity and interest rates.
That is the reality of managing risks arising from the mismatch between assets and
liabilities of banks. Asset liability management is an approach that provides
organizations with mechanisms to make such risks acceptable. ALM's short-term goal
in a commercial bank is to ensure liquidity while protecting income and the long-term
goal is to maximize economic value.
The bank's current value, which is the present value of the commercial bank, the
expected net cash flow, is defined as the expected cash flow on the assets minus the
expected cash flow on liabilities plus the expected net cash flow. on the positions of
the balance sheet (OBS) (Basel Banking Supervision Committee, 2006).
2.3. EMPIRICAL RESEARCH
The issue of managing credit risk and the performance of financial institutions
in ensuring that banks can achieve their goals has been well researched by many
scholars. Shafiq & Nasr, (2010) examined the main determinants of the credit risk of
commercial banks on the banking systems of emerging economies compared to
developed economies. They found that regulation is very important for banking
systems that provide a wide range of products and services, and the quality of

governance is important in cases where banks dominate lending in emerging
economies.
Hassan, A. (2009), conducted a Risk Management Practices study by Brunei

Darussalam Islamic banks, to assess the extent to which Islamic banks in Brunei
Darussalam conducted and implemented them. by using different techniques to cope
with different types of risks. Research results show that, like the conventional banking
system, Islamic banks are also exposed to risks due to a wide range of products
provided in addition to conventional products. The results show a remarkable
understanding of risk and risk management by employees working at the Brunei
Darussalam Islamic Bank, showing the ability to pave the way for successful risk
management. The main risks facing these banks are foreign exchange risk, credit risk,
and operational risk. A regression model has been used to build the results showing
that Risk Identification and Analysis and risk analysis are the most influential
variables and Islamic banks in Brunei need more attention. to those variables for more
effective Risk Management practices by understanding the true application of the
Basel-II Agreement to improve the effectiveness of the Islamic Bank's risk
management systems.
Koziol and Lawrenz (2008) provided a study in which they assessed the risk of bank
failure. They say that assessing the risk associated with bank failure is a top concern of
bank regulations. They argue that to assess a bank's default risk, it is important to
consider its financial decisions as an endogenous dynamic process. The research study
provides a continuous-time model in which banks choose the volume of deposits to
trade off the benefits of making deposit insurance premiums compared to the costs that
would occur when adjusting the capital structure. Future. The main findings suggest
that dynamic endogenous financial decisions provide an important self-regulatory
mechanism.
Al-Tamimi and Al-Mazrooei (2007) provided a comparative study on banking risk

management of UAE national and foreign banks. This study helps them realize that the
three most important risks facing UAE commercial banks are foreign exchange risk,
followed by credit risk and then operational risk. They find that UAE banks are
somewhat effective in managing risk; However, variables such as risk identification,
evaluation, and analysis have proven to be more influential in the risk management
process. Finally, the results indicate that there is a significant difference between the
National and Foreign banks of the UAE in the practice of risk assessment and analysis
risk monitoring and control.
Boland (2012), studying the impact of banking regulations, concentration, financial

and institutional development on profits and profits of commercial banks in the Middle
East and North African countries. (MENA) from 1989-2005 and found that bank
capitalization and credit risk had a positive and significant impact on banks' net
margins, cost-effectiveness, and profits.
Kargi (2011), assessing the impact of credit risk on the profits of Nigerian banks.
Financial ratios such as a measure of bank performance and credit risk are data
collected from secondary sources primarily from the annual reports and accounts of
banks sampled from 2004 - 2008. Descriptive, correlation, and regression techniques
were used in the analysis. The findings suggest that credit risk management has a
significant impact on banks' returns.
Das, & Ghosh, (2007), examining the factors affecting problem loans of Indian state
banks during 1994-2005, taking into account macroeconomic factors as well as
microeconomic variables. The findings show that at the macro level, GDP growth, and
the bank level, real lending growth, operating costs, and bank size play an important
role in influencing loans. problem.
Moti, Masinde, & Mugenda, (2012) to evaluate the effectiveness of the credit
management system for lending activities of microfinance institutions to establish the
validity of credit terms and appraisals. customer assessment, credit risk control
measures, and credit collection policies. Using regression analysis, he found that bad
debt or credit risk, liquidity risk and capital risk are the main factors affecting the
bank's performance when profit is measured by profit. on assets while the only risk
that affects profit when calculated as return on equity is liquidity risk.
Harvey & Merkowsky (2008) examined the relationship between the quantitative
effectiveness of credit risk management for the operations of Nigerian Deposit Banks

(DMBs) and loan growth of the Bank in 17 years (1998-2014). They find a linear
relationship between credit risk and bank returns.
Hosna & Manzura, (2009) investigated the impact of credit risk management on
profitability at four commercial banks in Sweden. They find a strong relationship
between the risk components and the financial performance of a bank.
Chen and Pan (2012) studied the operating efficiency of 34 Taiwanese commercial
banks over the period 2005-2008, and investigate the performance based on the
financial ratios with data envelopment analysis (DEA) approach. They noticed that the
credit risk parameters of the banks have a serious impact on productivity. Then they
used the credit risk technical efficiency (CR-TE) at each bank over this period for
measurement of the competitiveness and the profitability of each bank.
Iwedi & Onuegbu, (2014) examined the effect of credit risk and performance of
banks in Nigeria for over 15 years (1997-2011). They found that there is a positive
relationship between the ratio of non-performing loans to loan and banks' performance.
Afriyie & Akotey, (2011) examined the impact of credit risk management on the
profitability of rural and community banks in the Brong Ahafo Region of Ghana. They
applied the financial statements of ten rural banks from the period of 2006 to 2010
(five years) for analysis. In the model, profitability indicator based on Return on
Equity (ROE) and Return on Asset (ROA) while management indicators were Non-
Performing Loans Ratio (NLPR) and Capital Adequacy Ratio (CAR).
Kolapo, Ayeni, and Oke (2012) investigated the impact of credit risk on banks'
performance in Nigeria. An estimation of banks from 2000 to 2013 was done using the
random effect model framework. They found to show that credit risk related to
negative and bank performance, it measured by return on assets (ROA). This suggests
that a decrease in bank profitability concerning an increased credit risk. They found
that total loan has a positive and significant impact on bank performance.
Osuka & Amako, (2015) studied the quantitative effect of credit risk management on
the performance of Nigeria's Banks over 17 years (1998- 2014). They showed that
sound credit management strategies can promote investors and savers confidence in
banks and lead to a growth in funds which leads to increased bank profitability. The
result shows that credit risk management has an insignificant impact on the growth of
total loans and advances by Nigerian Deposit money banks.

CHAPTER 3: METHODOLOGY AND DATA
3.1. METHODOLOGY
Use multiple normal regressions (OLS) to determine the effect of independent
variables on the dependent variable. Statistical testing of estimates Parameters will be
conducted using R2, Fcal, Standard Error, T-cal, and at the 5% significance level.
Model specification
To consider the relationship between loan growth and bank loan growth, a function in
which the bank's loan growth depends on bad debt, interest rates, the actual liquidity
ratio, the Lending and money supply are prescribed as follows:
Default model:
TLA = f (NPL, IRS, R, LTDR, M2) … (1)
Clear model:
TLA = β0 + β1NPL + β2IRS + β3CR + β4LDR + β5M2 + U ... (2)
Taken from the financial statements of 30 banks:
Table 1: Relationship between non-performing loans and bank lending growth
No Variables Explanation Reason for inclusion
1 Non-Performing We use the NPL to show the ability of Indicator for credit
Loan (NPL) Vietnam Bank to manage credit risk. risk management
Economists examine NPL ratios to
predict potential instability in financial
markets. Investors can view NPL ratios
to choose where to invest their money;
they can view banks with low NPL ratios
as being lower-risk investments than
those with high ratios. Because a lower
NPL is an evidence of a good credit risk
management strategy.
2 Interest Rate This shows the difference between the Cost benefit analysis
Spread (IRS) average yield that a financial institution
receives from loans—along with other
interest-accruing activities—and the
average rate it pays on deposits and
borrowings.
3 Current Ratio The current ratio is a liquidity ratio that Liquidity ratio
(CR) analysis
measures a company's ability to pay
short-term obligations or those due
within one year.
4 Loan to Deposit A loan-to-deposit ratio shows a bank's Analysis of

Ratio (LDR) ability to cover loan losses and depositors
withdrawals by its customers. Investors contribution to total
monitor the LDR of banks to make sure loan
there's adequate liquidity to cover loans
in the event of an economic downturn
resulting in loan defaults. Also, the LDR
helps to show how well a bank is
attracting and retaining customers.
5 Money Supply The money supply is all the currency and Loanable fund
(M2) other liquid instruments in a country's contribution to the
economy on the date measured. The bank & economy
money supply roughly includes both cash
and deposits that can be used almost as
easily as cash. M2 includes M1 and, in
addition, short-term time deposits in
banks and certain money market funds.
6 Error Term (U) Represent disturbances in the sample

population. This represents variables not
adequately captured by the estimation
technique.
7 β0, β1, β2, β3, The independent variables
β4, β5
3.2. DATA
Credit risk management policies for commercial banks were identified as
conservative, stringent, lenient and customized and globally standardized credit risk
management policies. Data on the amount of credit, bank performing and lending
growth were collected for the period 2010 to 2019.
Table 2: List of commercial bank
1 ABB An Binh Commercial Joint Stock Bank OTC

2 ACB Asia Commercial Joint Stock Bank HNX
3 Joint Stock Commercial Bank for Investment
BID HOSE
and Development of Vietnam
4 BVB Bao Viet Joint Stock commercial Bank OTC

5 Vietnam Joint Stock Commercial Bank of
CTG HOSE
Industry and Trade
6 EAB DONG A Commercial Joint Stock Bank OTC

7 Vietnam Export Import Commercial Joint
EIB HOSE
Stock
8 GDB Viet Capital Commercial Joint Stock Bank OTC

9 Ho Chi Minh city Development Joint Stock
HDB HOSE
Commercial Bank
10 KLB Kien Long Commercial Joint Stock Bank UPCOM

11 LPB Lien Viet Post Bank UPCOM
12 MBB Military Commercial Joint Stock Bank HOSE
13 The Maritime Commercial Joint Stock Bank OTC
MSB
14 NAB Nam A Commercial Joint Stock Bank OTC

15 BAB BAC A Commercial Joint Stock Bank UPCOM
16 NVB National Citizen bank HNX
17 Petrolimex Group Commercial Joint Stock
PGB OTC
Bank
18 Vietnam Public Joint Stock Commercial
PVF OTC
Bank
19 SCB Sai Gon Commercial Joint Stock Bank OTC
20 Southeast Asia Commercial Joint Stock Bank OTC
SEAB
21 SGB Saigon Bank for Industry & Trade OTC

22 Saigon-Hanoi Commercial Joint Stock Bank HNX
SHB
23 STB Saigon Thuong Tin Commercial Joint Stock HOSE

Bank
24 Vietnam Technological and Commercial

TCB HOSE
Joint Stock Bank
25 TPB TienPhong Commercial Joint Stock Bank HOSE

26 VAB Viet A Commercial Joint Stock Bank OTC
27 Joint Stock Commercial Bank for Foreign
VCB HOSE
Trade of Vietnam
28 Vietnam International Commercial Joint

VIB UPCOM
Stock Bank
29 Vietnam Commercial Joint Stock Bank for

VPB HOSE
Private Enterprise
30 Vietnam Thuong Tin Commercial Joint

VBB UPCOM
Stock BanK
CHAPTER 4: RESULTS AND DISCUSSION

4.1 DESCRIPE DATA STATISTICS
Table 3: Statistics describe the variables
Variable Observations Mean Std. Dev. Minimum Maximum
NPL 300 0.0214903 0.0178584 0 0.114

IRS 300 14.50885 150.3599 0.019 1784
CR 300 1.100986 0.0617424 1.03 1.502
LDR 300 0.9170818 0.6556511 0 10.4128
M2 300 9038.303 20954.51 6024.76 202379.2
As shown in Table 3, we used the data sheet of 30 banks between 2010 and 2019
with 300 observations for our study. Descriptive statistics show average values,
standard ratios, maximum values, and minimum values for these variables.
The average value of the NPL variable is 0.0214, which shows that the average value
of commercial banks in Vietnam, holding about 0.021 risk ratio at banks. The
smallest NPL value of banks is 0 and the largest NPL value banks maintain is 0.114
The average value of the IRS variable is 14,508, which shows the average value of
commercial banks in Vietnam, holding about 14,508 bad debt ratios at banks. The
smallest IRS value of banks is 0.019 and the largest IRS value of banks is 1784
The average value of the CR variable is 1,10098, which shows the average value of
commercial banks in Vietnam, holding about 1,1009 debt payment coefficients. The
smallest CR value of banks is 1.03 and the biggest CR value of banks is 1,502
The average value of the LDR variable is 0.91708, which shows that the average
value of Vietnamese commercial banks, holding about 0.91708, is the credit balance
ratio. The smallest LDR for banks is 0 and the largest LDR for banks is 10,4128
The average value of the variable M2 is 9038,303 which shows the value of
Vietnamese commercial banks, holding about 9038,303 cash flow ratios. The bank's
smallest M2 value is 6024.76 and the biggest M2 value of the banks is 202379.2
4.2 RESEARCH MODEL RESULTS
Table 4: Estimation of Results and Interpretation
Variables Coefficient T-stat P > ItI Standard [95% conf. Interval]

error
NPL 25.12548 1.22 0.235 20.3547 [-19.85471 73.01038]
IRS -166.7401 -1.58 0.122 99.2214 [-375.369 50.86899]
CR 51.22493 1.16 0.256 42.80236 [-44.03343 147.6533]

LDR 60.85244 2.22 0.021 20.52422 [12.75283 121.8904]
M2 0.802547 10.66 0.00 0.0707855 [0.65366 0.92487]

_cons -6420.894 -1.79 0.174 4552.645 [-17183.98 3574.665]
R2 0.9771
Adju.R2 0.953
F-stat F(4,12) =
200.54
Prob > F 0.0004
ROOT 512.35
M.S.E
The Adjusted R2 is 0.97 which means that 97% of the variations in the
dependent variable are explained by the independent variables. The F-stat result is
significantly high at 200.54, showing that the independent variables jointly explain the
variations in the model. Using the t-stat values, we found that just two independent
variables are statistically significant at 5% level of significance. Money supply is
statistically significant at 5% level of significance. Holding other variables constant, a
unit change in the money supply will lead to an 80% change in the total loans and
advances. Loans to deposit ratio is statistically significant at 5% level of significance.
Holding other variables constant, a percentage change in the loans to deposit ratio will
lead to 6,085% change in the dependent variable. Non-performing loans is positively
related to the dependent variable but statistically insignificant at 5% level of
significance. Interest rate spread is not statistically significant at 5% level of
significance and is negatively related to total loans and advances. Actual liquidity ratio
has a linear relationship with total loans and advances but the independent variable is
not statistically significant at 5% level of significance. The constant is not statistically
significant at 5% level of significance. Assuming all the independent variables were
zero, total loans and advances will be -6420.
Table 5: Breush-pagan / Cook-Weisberg test for heteroskedasiticty

chi2(1) 0.71
Prob > chi2 0.3674
Source: compilation computed using STATA 10.

We reject the hypothesis that there is no constant variance in the error term.
Table 6: Pairwise Correlation test for Multicollinearity
NPL IRS CR LDR M2

NPL 1.0000
IRS -0.0369 1.0000
CR 0.1671 0.0260 1.0000
LDR 0.0450 -0.0316 -0.0385 1.0000
M2 0.0185 -0.0202 -0.1018 -0.0481 1.0000
There is no presence of perfect multicollinearity in the model.
Table 7: OV test for omitted variables
F(3,8) 1.15
Prob > F 0.3245
We accept the hypothesis that the model has no omitted variables

CHAPTER 5: CONCLUSION
5.1 CONCLUSION
The study results showed that sound credit management strategies can boost investors
and savers confidence in banks and lead to a growth in funds for loans and advancing
which leads to increased bank profitability while non-performing loans were also
positively related to lending growth. This may be because depositors usually do not
evaluate the credit risk management effectiveness of banks before placing deposits in
the banks. Interest rate spread was also found to be negatively related to total loans and
advancing as savers are reluctant to deposit cash with the bank when the deposit
interest rate is too low and banks encounter difficulty in finding credible borrowers
when the lending rate is too high. Banks are to ensure that funds are allocated to
borrowers with decent to high credit ratings. We conclude that money supply and loan
to deposit ratio have the biggest influence on bank lending growth. The effect of credit
risk on bank lending measured by the total loans and advancing is statistically
insignificant. That is other factors like money supply and loans to deposit ratio have a
stronger bearing on the lending ability of deposit money banks and increase
profitability. It is necessary to state that effective credit risk management allows the
banks to source for capital internally from their profits instead of depending heavily on
external borrowings and liability. The findings reveal that bank loans and advances
may not be handicapped by their non-performing loans suggesting that savers and the
Central Bank might have continued to increase the amount of money available for
lending regardless of the size of the non-performing loans portfolio.
Research results show that reasonable credit management strategies can motivate
investors and save the trust in banks and lead to loan growth and progress leading to
increased bank profits. while inactive loans are also positively related to loan growth.
This may be because depositors often do not evaluate the effectiveness of banks' credit
risk management before placing deposits in banks. The difference in interest rates was
also found to be negatively related to the total amount of loans and advances because
savers do not want to deposit cash with banks when deposit rates are too low and
banks face difficulties in finding reliable borrowers when lending rates are too high.

Vietnamese commercial banks are developing strongly and being a channel of special
capital for the economy, which is like the lifeblood of the whole economy. A measure
of "health" of the entire economy through the "health" of the banking industry.
Because the smooth, healthy banking system is a premise for financial resources to be
circulated, allocated, and used effectively, thereby sustainably stimulating economic
growth. The bank's credit activities are both profitable and potentially risky. However,
the complete elimination of risks in credit investment is unrealistic. In the course of
operation, each bank must know to accept a certain degree of risk to get the best
business results, so it is necessary to prevent and limit risks. Managing bad debts to
gradually improve the financial health of commercial banks is a key activity in the
current process of restructuring commercial banks. Because high bad debt limits the
ability to expand and improve credit quality. NPLs have a direct impact on the bank's
financial ability, reducing its competitiveness and position in the development and
integration process. Recently, although banks have considered governance issues
Credit risk for businesses is very important in their management work, and there are
many measures to limit credit risk. However, the achieved results are not really as
expected. Therefore, finding positive solutions to improve the credit risk management
system for businesses is always urgent and important in the long term. Therefore, it is
urgent to enhance and improve credit risk management for businesses.
With the issues posed in the integration stage, Inside Magazine (2017) stated that the
banking industry is at the peak of change and uncertainty. The competitive
environment is growing among banks, non-banks, and financial technology companies
(FinTech). At the same time, the low-growth economic environment and low-interest
rates are putting pressure on the traditional way of earning profits. The problem of
unresolved NPLs which still exist is a big risk of Vietnamese commercial banks.
Besides, Industrial Revolution 4.0 with the foundation of the internet connecting
everything, big data, and cloud computing is also impacting and contributing to the
rapid improvement of the information technology infrastructure of the banking
industry. line.
With this perspective, it is necessary to have the most comprehensive and

comprehensive risk management framework. Accordingly, the Basel II standard is

considered the most complete standard in commercial bank management which needs
to be thoroughly understood and applied appropriately.
Moreover, the risks caused by the Industrial Revolution 4.0 have a great impact on the
security of banking information, so the problem of customer accounts and the
protection of internal databases also need to to the proactive technological solutions
associated with increasing the capacity of the team and practicing professional ethics.
Also, several other issues to note to improve the efficiency in bank credit risk
governance are: Improving the system of early warning of credit risk, in which, early
warning indicators need to be covered. The main causes of insolvency for corporate
customers are business prospects, financial situation, solvency, collateral and credit
records, changes in management, or strategy ... At the same time, increase the use of
automatically calculated targets such as the rate of usage of the limit, the number of
overdue days, the fluctuation of cash flow in and out ... to increase the efficiency and
ensure the updated data. Update in real-time.
Also, commercial banks need to focus on improving and improving the quality of
credit appraisal. Besides the traditional methods, commercial banks should apply
credit analysis and appraisal using cash flow simulation. At the same time, develop
separate policies for specific and key industries; Strengthening the management and
supervision before and after disbursement, raising the qualifications of the bank
staff ...
The study recommends that commercial banks should perform credit risk
management in a strict process from risk detection, risk measurement, risk control, and
risk handling. The four steps in the process of credit risk are closely related and greatly
determine the effectiveness of credit risk management. In these 4 steps, steps 1 and 3
are considered the most important. Because the risk is discovered as soon, the risk
management and detection are more proactive to minimize the loss in credit activities.
5.2 RESTRICTIONS AND IMPACTS OF CURRENT CREDIT RISK
MANAGEMENT POLICIES
5.2.1 The restricts

Restrictions on credit risk management of Vietnamese commercial banks related to
cultural issues and the view that risk management is just a backyard, a supporting
activity.
The weaknesses in the credit risk management of Vietnamese commercial banks also
have similarities with the situation in developing countries.
Firstly, the cultural and habitual issues of officials in risk management or related
officials often consider risk management as a daily, more procedural work. For
example, when a customer comes to apply for a loan, there will be a list of conditions
to check and only check on it, see what is available, what is not available ...
Management The risk is not so simple.
Second, many Vietnamese banks still consider risk management as a supportive

activity. This is a wrong perspective. The recent financial crisis has shown that banks
underestimate risk management will lead to huge disruptions.
Therefore, risk management is now considered a partner, an integral part of the bank
when setting strategic business plans or growth goals. Because the bank also needs to
identify its risks, how willing it is to accept risks, to propose measures to overcome
risks and limit its risk portfolio.
5.2.2 The meaning of current credit management policy
Credit risk management is understood as the process of identifying, analyzing risk

factors, measuring risk levels, on which basis, choosing to implement measures and
manage credit activities. to limit and eliminate risks in the process of credit extension.
In credit risk management, maximizing profit for owners, becoming the best
commercial bank in credit risk management, and using assets in credit granting
activities are two core goals.
Based on international risk management standards, the credit capital risk management
system includes basic issues such as The legal basis for credit operations must be
complete and standard; quality of human resources in risk management; building a
system of market segmentation and customer segmentation; appraise and approve
credit files; system structure of departments involved in finding customers, reviewing

and deciding credit; develop specific and clear procedures to regulate credit
operations; early warning issues; debt restructuring and debt recovery.
For commercial banks, credit risk management is important because of the following
factors:
Firstly, credit risk is one of the problems that all commercial banks have to face.
Preventing credit risk restriction is a difficult and complicated problem because credit
risk is indispensable and objective, always associated with credit activities, and at the
same time is very complex and complicated, credit risk is often difficult to control and
leads to loss of capital and income of the bank.
Secondly, if the prevention of credit risk restriction is done well, it will bring benefits
to the bank such as: reducing costs, improving income, preserving capital for
commercial banks; create a trust for depositors and investors; create a premise to
expand the market and increase the prestige, position, image, market share for the
bank.
Third, good prevention of credit risk prevention benefits the economy as a whole. In
this era, financial institutions are closely related, if a commercial bank encounters
problems, it will immediately affect the chain to other banks. Therefore, Credit risk
governance brings safety and stability to the market.
Fourth, because the bank's equity to total assets is very small, a small percentage of the
problematic loan portfolio will put a bank at risk of bankruptcy. In particular, with
corporate loans, because they are often of high value, losses that occur if the loan is
not recoverable will cause great damage to the bank.
The management of credit risk in commercial banks is usually carried out according to
a strict process, from risk detection, risk measurement, risk control, and risk handling.
Specifically:
Risk detection: Identifying credit risk is a continuous and systematic identification

process. Any loan can be problematic, early identification of the problem and prompt,
professional follow-up measures to help minimize problems and losses. The warning
signs will help banks be able to identify and solve problems early. Common signs
often focus on borrowers' financial and non-financial signs.
Measurement of credit risk: Measurement of credit risk is a measure of the level of
risks as well as knowing the probability of occurrence of risks, the level of losses when
risks occur to consider the bank's ability to accept it. This is the basis for the bank to
make lending decisions as well as build appropriate and quick responses to credit risk
when this situation occurs. To measure credit risk, banks often build appropriate
models to quantify risks.
Managing and controlling credit risk: Managing and controlling credit risk is the most
important step in the management of credit risk of a commercial bank, this is the focus
of the process of credit risk. Credit risk management and control is a system of tools,
policies, standards, and measures to prevent and handle credit risk in a bank: credit
policy, credit process, Credit risk governance apparatus, credit limits.
Dealing with credit risk: Handling credit risk is the last step in the management of
credit risk. At this step, the bank will make decisions and measures to fund, overcome,
and minimize the risk and loss costs that credit risk has caused the bank.
The four steps in the process of credit risk are closely related and greatly determine the
effectiveness of credit risk management. In these 4 steps, step 1 and step 3 are
considered the most important step, the more proactive the bank is in managing and
controlling risk, the less loss of credit activities is. From there, it can be seen that the
key problem in bank credit management is to provide solutions and ways to detect
risks early. Currently, many banks have built up a risk early warning system,
implemented credit appraisal, strengthened the credit management information
reporting system, etc. These are ways to detect credit risk early.
5.3 Solutions to improve the efficiency of bank risk management
To minimize bad debt risk, in the coming time, banks need to implement some key
solutions as follows:
Firstly, in December 2017, the Basel Committee published the document "Basel III:
Completing reforms after the crisis", with the reform of many standards to implement
capital calculation for risk types such as Credit risk. , credit rating adjustment risk, or
operational risk. The Basel Committee has come up with a whole new standard when
it comes to calculating capital for operational risk - the standard method, effective
January 1, 2022, for international banks. The introduction of this standard has a

significant impact on the bank's internal loss data, as well as how data is manipulated
to provide business value and risk management in depth. Therefore, banks need to
build a risk management system following international standards.
Secondly, completing the credit risk early warning system, in which, risk early
warning indicators should cover the main causes of default for corporate customers
such as business prospects, situation. finance, solvency, collaterals and credit records,
changes in management or strategy ... At the same time, increase the use of
automatically computable indicators such as the utilization rate level, several overdue
days, fluctuation of cash flow in and out ... to increase efficiency, ensure updated data
in real-time.
Thirdly, strengthen the management and supervision before and after disbursement,
improve the qualifications of bank staff ... This will help the steps of the credit risk
governance process to be implemented more effectively and stricter... At the same
time, it is necessary to improve and improve the quality of credit appraisal, in addition
to traditional methods, credit analysis and appraisal should be applied using cash flow
simulation. This method is very suitable for the evaluation of credit for transactions
where the credibility of customers is based primarily on the future cash flow of the
sponsored asset.
Commercial banks also need to determine the bank's risk management strategy. The
bank's credit risk needs to be considered in both aspects - opportunities and challenges
and not only on its impact on quantitative aspects such as economic capital, the level
of income volatility. Select modern risk management methods, use quantitative
methods in risk assessment in each specific period.
Fourthly, develop new behaviors and mindsets because, in the view of many banks,
operational risks and associated losses are unavoidable costs in business operations
and are what The bank has little control.
Fifth, there is a need to document procedures and procedures for identifying,
collecting, and processing data on internal losses, including minimum thresholds.
Policies on policies, procedures for identifying and reporting operational risk events
should be considered as a starting point in managing data collection and data quality.
Sixth, establishing effective infrastructure for data collection, aggregation, and risk
reporting. The loss data collection activities are not only compliant but also serve the

purpose of making predictions of possible loss, as well as estimating the extent of the
impact of losses.
Seventh, change behavior and corporate culture. Recently, many risk events occurred
related to corporate governance culture, risk management at banks, posing the need for
improving behavior/awareness about risk management. operate at the bank.
Effective implementation of the above solutions, banks can refer to the BCBS 239
document of the Basel Committee, which specifically addresses the principles of
effective risk reporting and aggregation. These principles are perfectly relevant when
banks implement effective infrastructure settings for operational risk data, namely
internal loss data. The scope of the rules includes Governance and overall
infrastructure, the capacity to aggregate risk data, risk reporting activities, monitoring
and supervision, monitoring, and coordination tools.
5.4 REQUEST
5.4.1. Propose to the State Bank
5.4.1.1. Capital raising activities
For good lending activities requires banks to have strong enough capital, in which,
working capital is essential for the bank. If the bank does well in mobilizing capital, it
will not only expand its lending but also bring more and more profits to the bank. To
increase the mobilized capital, several measures must be taken:
Diversify forms of capital mobilization to attract customers to deposit money. Develop
new services such as payment cards and ATM cards.
Constantly improving the quality of services to meet the increasing needs of
customers; provide them with convenient, fast, safe, and accurate payment facilities,
complete the computer network to withdraw and deposit money at any branch.
Strengthen banking marketing activities. Expanding operation scope throughout the
country.
Building a staff of dynamic, enthusiastic, good communication and mastering
professional skills to retain old customers and attract new customers.
Make guaranteed deposits for customers
5.4.1.2. Lending activity
Diversifying forms of credit: banks need to use multiple lending methods to
increase sales as well as borrowers in their units. Credit products with utility as well as

convenience when using will be more easily accepted by customers. Focusing on
expanding the product to limit, reserve limit, overdraft, discount valuable papers,
guarantee...
Completing the credit process is important in reducing errors, limiting risk, and
improving the quality of each loan. Credit processes have been issued quite closely
and concretely according to each type of credit. However, it is necessary to be more
specific with each loan, each type of customer.
There is a process of appraising the loan plan scientifically, reasonably, assessing
relatively accurately the input and output of the loan plan to ensure the ability to repay
the loan. Adjust the debt term to suit the market and business characteristics of the
business.
The paperwork is simple, compact, but must ensure the safety of customers and
banks. Depending on the size of the loan; Object for the loan; type of loan;
competition intensity that banks need to reduce some procedures. But there are two
unappealing procedures: loan applications and legal documents.
Deploying customer surveys, to assess the quality of banking services provided
and have a basis to adjust banking operations, customer policies to suit the overall
situation and further meet the requirements. KH's bridge. Find ways to approach
customers directly to understand the aspirations, capital needs, and services that
customers need. From there, consult and guide the methods as well as loan conditions
suitable to each type of customer.
Strengthen close coordination with the credit information center to help the bank
have the more necessary information to serve as a basis for effective credit investment,
avoid capital loss, and prevent arising debts. out of date.
5.4.2 Recommendations to the Government
Correct asymmetric information situation. Concerning the handling of bank debt
and perfecting legal regulations related to the bank's creditors' rights and loan security.
Expanding debt trading and developing the bad debt trading market of the bank,
boosting the financial market.

REFERENCES
1. Afriyie, H. & Akotey, J. (2011) “Credit Risk Management and Profitability of
Selected Rural Banks.
2. Alalade S. Binuyo, B. & Oguntodu, J. (2014). “Managing Credit Risk to
Optimize Banks’ Profitability: A Survey of Selected Banks in Lagos State,
Nigeria”. Research Journal of Finance and Accounting, Vol.5, No.18, 2014, pp
76-84
3. Alshatti, A. (2015). “The Effect of Credit Risk Management on Financial
Performance of the Jordanian Commercial Banks”. Investment Management and
Financial Innovations, Vol 12, Issue 1, PP 338 – 344
4. Boland. O. (2012). Managing Risk on Global basis. Journal of accounting and
Finance
5. Das, A. & S. Ghosh, (2007). Determinants of credit risk in Indian state-owned
banks: An empirical investigation. Economics and Statistics, 58(2): 355-372
6. Ghana”. Catholic University College of Ghana. pp 1-18
7. Harvey, N. and Merkowsky, M. (2008). The Role of Credit Ratings in Managing
Credit Risk in Federal Treasury Activities, Financial System Review, pp. 61-66.
8. Hosna, A. & Manzura, B. (2009) Credit Risk Management and Profitability in
Commercial Banks in Sweden, University of Gothenburg, Graduate School of
Business, Economics and Law, Master of Science in Accounting.
9. Ibrahim, A. (2002). “The Effects of Credit Management on Profitability of
Nigerian Banks” PhD Thesis submitted at Ahmadu Bello University, Zaria
10. Iwedi, M. and Onuegbu, O. (2014). “Credit Risk and Performance of Selected
Deposit Money Banks in Nigeria: An Empirical Investigation”. European Journal
of Humanities and Social Sciences, Vol. 31, No.1
11. Kargi, H.S. (2011). Credit Risk and the Performance of Nigerian Banks,
AhmaduBello University, Zaria.
12. Kim, D. and A.M. Santomero, (1988). Risk in banking and capital regulation.
Journal of Finance, 43(5): 1219-1233.

13. Kithinji. O. (2010). “Credit Risk Management and Profitability of Commercial
Banks in Kenya”. School of Business, University Of Nairobi, Nairobi – Kenya
14. Kolapo, T.F. Ayeni, R.K & Oke, M.O. (2012). Credit risk and commercial
banks’ performances in Nigeria: a panel model approach”, Australian journal of
business and management research, vol. 2, No.2. pp. 31-38
15. Moti, H.O, Masinde, J.S, & Mugenda, N.G(2012).Effectiveness of Credit
Management Systems on loans performance: Empirical evidence from micro
finance Sector in Kenya. International Journal of Business, Humanities and
Technology 2(16),99-108.
16. Nawaz, M., Munir, S., Siddiqui, S. A., Tahseen-ul-Ahad, F. A., Asif, M., &
Ateeq, M.(2012). Credit risk and the performance of Nigerian banks.
Interdisciplinary Journal of Contemporary Research in Business, 4(7), 49-63.
17. Osuka, B. and Amako, J. (2015). “Credit Management in Nigeria Deposit Money
Banks (2003-2013) (A Study of Selected Deposit Money Banks)”. International
Research Journal of Education and Innovation (IRJEI), Vol 1, No3, pp 66 – 103
18. Owojori, A.A., I.R. Akintoye & F.A. Adidu, (2011). The challenge of risk
management in Nigerian banks in the post consolidation era. Journal of
Accounting and Taxation, 3(2): 23-31.
19. Salas, V. and Saurina, J. (2002). Credit Risk in Two Institutional Regimes:
Spanish Commercial and Savings Banks, Journal of Financial Services Research,
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Commercial Banks in Pakistan, International Review of Business Research
Papers, vol. 6 No. 2, pp. 308-325.

APPENDIX
Appendix 1: Summary statistics of the variables
Variable | Obs Mean Std. Dev. Min Max

-------------+---------------------------------------------------------
NPL | 300 .0214093 .0178584 0 .114
IRS | 300 14.50885 150.3599 .019 1784
CR | 300 1.100986 .0617424 1.03 1.502
LDR | 300 .9170818 .6556511 0 10.4128
M2 | 300 9038.303 20954.51 6024.76 202379.2
-------------+---------------------------------------------------------
CK | 300 14.5 8.092211 1 30
Appendix 2: Estimation of Results and Interpretation
------------------------------------------------------------------------------
Variables | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------

NPL | 25.12548 20.3547 1.22 0.235 -19.85471 73.01038
IRS | -166.7401 99.2214 -1.58 0.122 -375.369 50.86899
CR | 51.22493 42.80236 1.16 0.256 -44.03343 147.6533
LDR | 60.85244 20.52422 2.22 0.021 12.72583 121.8904
M2 | .802547 0.0707855 10.66 0.00 .65366 .92487
_cons | -6420.894 4552.645 -1.79 0.174 -17183.98 3574.665
F(4, 12) = 200.54

Prob > F = 0.0004
R-squared = 0.9771
Adj R-squared = 0.953
Root MSE = 512.35
Appendix 3: Correlation coefficient matrix
| NPL IRS CR LDR M2

-------------+---------------------------------------------
NPL | 1.0000
IRS | -0.0369 1.0000
CR | 0.1671 0.0260 1.0000
LDR | 0.0450 -0.0316 -0.0385 1.0000
M2 | 0.0185 -0.0202 -0.1018 -0.0481 1.0000

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THE UNIVERSITY OF DANANG

CREDIT RISK MANAGEMENT: IMPLICATIONS

Student: 1. Vo Hong Phuc. Class: 42K7.2

Supervisor: Dr. Phan Dang My Phuong

Da Nang, 28 May 2020

CREDIT RISK MANAGEMENT: IMPLICATIONS

Scientific field: BANKING

Principle Author: Vo Hong Phuc Male, female: Male

Supervisor: Dr. Phan Dang My Phuong

Da Nang, 28 May 2020

FINAL REPORT Page 3

CAR Capital Adequacy Ratio

CR-TE The credit risk technical efficiency

DEA Data envelopment analysis

DMBs Deposit Money Banks

JICA Japan International Cooperation Agency

IRS Interest Rate Spread

LDR Loan to Deposit Ratio

MENA The Middle East and North African

NPL Non-Performing Loan

ROA Return on Asset

ROE Return on Equuity

SBV State Bank of Vietnam

TLA Total Loan and Advances

FINAL REPORT Page 4

INFORMATION OF RESEARCH RESULTS

5. Contributions to the socio-economic, education and training, security, defense

FINAL REPORT Page 5

Ratification of Faculty of Banking Supervisor

THE UNIVERSITY OF DANANG

INFORMATION OF PRINCIPAL AUTHOR

FINAL REPORT Page 7

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FINAL REPORT Page 9

According to economists: A. Saunder and H. Lange [Financial Institutions

FINAL REPORT Page 10

To solve the problem of credit risk management in Vietnam, in the project

Facing the trend of integration and opening up of the financial-banking services

FINAL REPORT Page 11

1.2 RESEARCH OBJECTIVES

1.3 RESEARCH QUESTION

FINAL REPORT Page 12

1.5 STRUCTURE OF THE THESIS

FINAL REPORT Page 13

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2.3. EMPIRICAL RESEARCH

FINAL REPORT Page 20

Hassan, A. (2009), conducted a Risk Management Practices study by Brunei

Al-Tamimi and Al-Mazrooei (2007) provided a comparative study on banking risk

Boland (2012), studying the impact of banking regulations, concentration, financial

FINAL REPORT Page 22

FINAL REPORT Page 24

Table 1: Relationship between non-performing loans and bank lending growth

No Variables Explanation Reason for inclusion