Summary On Credit Risk Management Banks
In the process of economic development appears inevitable credit relations between individuals and organizations in the economy. The rotation of capital flows between a party and a party capital SHOULD HAVE idle capital appeared credit relations.
Bank is a financial intermediary function: Acceptance of deposits of the population, financial economics, finance and credit ... and lend the economic sectors with the appropriate interest rate. Banks have an important role in ensuring the liquidity in the economy.
Currently, the management of credit risk is extremely important role for banks in particular and the financial system in general. The assessment, evaluation and proper management of loans, disbursed amounts intended to limit the credit risk that the bank will encounter, and inevitably will reduce bad debt for banks
Bank credit is the relationship between the parties: the Bank (the lender) and a side of object borrowers (people, parts of the economy ...) on the principle of reimbursement. At maturity, customer pays the bank the principal and interest, the credit relationship is successful. However, for a loan, in the process of implementation, banks are required to establish a risk provision signal from the object risk borrowers.
Here we will go in-depth analysis of credit risk in subjects as various financial business economy.
Credit risk is seen under two angles: Risks and Risk objectively subjective.
1. Risk objectivity
When customers receive disbursements from the bank, they will use the capital to the business purpose such as: Investment in the production line, investors buy raw materials ... In the process of production and business, will inevitably play born unwanted risks that sometimes the unexpected now as:- Risk of unstable economy.
- Risks due to legal proceedings in the local cumbersome.
- Risks of market distortion by smuggled goods.
When conducting business production process, never now also assess the market situation as well as providing forecasts of market development, sales growth forecast. If the world economy as well as the domestic economy operated in orbit, the enterprise has forecast will implement the plans set out.
However, we know that our country's economy is now heavily dependent on the agricultural industry and the service industry of agriculture. But these industries depend heavily on weather risks.
As the world economy in crisis, will inevitably influence on export firms. The items that Vietnam has advantages such as textiles, agricultural products export (export coffee, cashew nuts, export pangasius, ..) at risk of not selling the world economy in crisis. Or a change in import policy (raising taxes, reducing quotas, change the import criteria) in the host country affecting exports.
Risks due to legal procedures
Delays, cumbersome in licensing procedures, customs procedures ... sometimes affect the business opportunities of the enterprise. We know that the business opportunity of taking the time now, but it will not be done quickly otherwise be "unleashed" by the legal process. The delay will lead to the consequence of a series of economic contract stalled, the investment project "forcing" must "hang" on paper. This causes major losses in economic terms for business loans.
Can take a simple example to illustrate this risk:
One firm X proceedings export a lot of goods are agricultural products to the country Y to perform export contracts signed with foreign firms. Under the contract, on 20 - 10 - 2009, the shipment will be shipped to foreign firms. On 18 - 10 - 2009 shipments transported to seaports. But because of delays from customs procedures, shipments were suspended to conduct checks. This delay makes enterprise X delays in contract performance. And meanwhile, their partners may refuse to perform the contract and shall impose compensation contract.
Risk of smuggled goods entering the country
Goods smuggled into Vietnam through border road has long been an obsession of domestic enterprises. Smuggled goods cheaper on price advantages, abundant type whacked the needs of the majority of consumers with low incomes. The items in electronics, metal, clothing, cosmetics is a testament to the phenomenon.
The basic risks has affected production and business situation of the enterprises. Once the capital that now go into production lending business without recouped, inevitably pushes the business to lose their ability to repay. Banks also face a risk of difficult to recover loans.
2. Risks subjective
Subjective risk comes from both sides and Enterprise Bank Borrowing:a. For Bank
Bank performed lending to businesses.
The occupations of the borrower's business is diverse. Most loan officers Bank may not have sufficient information and understanding of the business line that businesses are investing in the business. Moreover, the bank staff is also very difficult to appraise the financial data provided by the enterprise with "right" and absolutely accurate or not.
Recall that the current corporate cost accounting work yet to be done professionally goods, recorded continuously clear. Therefore, when the bank staff to use financial reports provided by enterprises to analyze the evaluation work will make wrong views lack precision. Therefore very difficult to assess the financial situation of enterprises, should banks tend to prioritize loan applications have collateral, guarantees. However, when the treatment leads to recovery of debts is also very difficult.
According to the guidelines enforced debt recovery are clearly stated: "In the business case does not ensure solvency, the Bank has the right to dispose of assets of debt". In fact, the Bank is an economic organization, not an organ of state power, no function to force the client to perform the obligation to repay. Moreover the legal procedures and conditions to carry out the court handling the mortgaged property is also very cumbersome, causing costs to the Bank.
The level of loan officers sometimes quite limited. There are also many loan officers for their material interests willing abetting falsifying business records and documents to apply for loans. This has led to huge risks right from the disbursement. Moreover these firms have much financial situation is not transparent, does not meet the conditions for disbursement of the proposed bank.
b. For Businesses
Many businesses underestimate the risks when using the capital, to assess the cost of capital as well as the profitability of capital. Most enterprises using capital in the production process of business usually invest in expanding production scale, investment in infrastructure which is the most important investment in developing the skills of its workforce company. As enterprises scale up the management thinking has not changed, the qualifications of the management team are not guaranteed, enterprises must inevitably face the risk management capabilities of production, leading to many Mistakes in the process of decision-making of business management.
Many businesses used for improper purposes in the initial registration dossier for a loan. Unused capital purposes will inevitably difficult to control capital flows and risk control of the capital.
Example: A production business enterprises when borrowing on the capital used a borrow to invest in the stock market. When the stock market plummeted, inevitably make "losses" have poured into the capital. Consequently, businesses will not gain interest from investments, interest from manufacturing sector can not make.
Steps credit risk management
The management of credit risk is very important for the bank. To ensure this work is done well, the bank takes the specific steps:Calculations to determine risk
- Appraisal of Risk Assessment for each disbursement: The financial situation of the applicant for a loan, sector specific analysis of loan business, competitive analysis, product salability of business compared with rivals of the same type on the market. Analysis of systemic risk, economic risk situation ...
- Leadership competency assessment of corporate officers.
- Using analytical tools, analytical indicators to calculate, measure the risks shown by the numbers.
- Managing and monitoring the use of funds business. If there are signs now funded wrong purposes: Stop the disbursement, business proposals and requests explanations comply with contractual commitments disbursed.
- No disbursement for contract non-compliance with financial conditions
- Do not accept the contract have high risk (Collateral is not guaranteed, the investment sector is not clear ...)
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