Dissertation submitted in partial fulfillment of the UWE
Bristol
Requirement for the MSc in Finance

FINANCE DISSERTATION ON
Credit risk management at Vietcombank
NGUYEN MANH HAI
ID No: 17047737
Intake 1

Supervisor: Prof. Dr. PHAM QUOC KHANH

September 2018

1

University
of the
West of
England


ABSTRACT
The subject of this research is Joint Stock Commercial Bank for Foreign Trade of Vietnam
(Vietcombank) that the author focuses on the contemporary issues related to credit risk
management in the bank, whereby provides possible solutions. Vietcombank now is one of four
biggest commercial banks in Vietnam, along with Vietinbank, BIDV, and Agribank. From the
beginning of the business, Vietcombank has significantly contributed to the stability and growth
of national economy, played an important role as a key foreign trade bank of Vietnam, and had
impact on not only national economy but also international and regional financial community.

This research aims at answering the question related to relationship between credit growth and
level of non-performing loans at VCB. By using qualitative analysis of information taken from
reliable sources such as company annual reports, journal articles, and academic studies, the
research is able to identify the credit situation of VCB, associated with level of bad debt, as well
as the method bank uses to manage doubtful loans.
The findings of the analysis provided the possible explanations of the expanding credit growth
accompanied by an escalating increase in the amount of bad debt. It might reflect the insufficient
knowledge of the staffs, the issue of staff’s morality, the loosening management of the top
manager, or the need to make changes in the bank’s credit risk management model. There are
two models suggested by author with her own academic knowledge for Individual and Corporate
model. For Individual model, the combination between collateral asset rating and the credit
rating is proposed to score the individual credit more exactly. In Corporate model, the integration
of internal credit rating model and the Basel II approach is taken into consideration to enhance
the bank’s own method of protection from credit risk and to strengthen the supervisory and
regulatory role of the State Bank of Vietnam for an equally competitive banking market.
2


TABLE OF CONTENTS
ABSTRACT.................................................................................................................................... 2
TABLE OF CONTENTS.................................................................................................................3
LISTS OF TABLES AND FIGURES..............................................................................................6
CHAPTER 1: INTRODUCTION....................................................................................................7
1.1 Problem statement...............................................................................................................7
1.2 Research objectives and questions......................................................................................8
1.3 Research methodology........................................................................................................8
1.4 Research structure................................................................................................................8
CHAPTER 2: THEORETICAL FRAMEWORK............................................................................9
2.1 Commercial banks in Vietnam.............................................................................................9
2.1.1


Concepts and Functions............................................................................................9

2.1.2

Operation of commercial banks in Vietnam............................................................11

2.2 Credit risk in Vietnamese banking system...................................................................14
2.2.1............................................................................................Definition of credit risk
............................................................................................................................... 14
2.2.2..........................................................................................Categories of credit risk
............................................................................................................................... 15
2.2.3..........................................................................................Credit risk and bad debt
............................................................................................................................... 17
2.2.4......................................................Importance of credit risk management at banks
............................................................................................................................... 18
2.2.5..................................Current situation of credit at Vietnamese commercial banks
3


2.2.5.2............................................................................................Credit assessment
.........................................................................................................................21
2.3 Credit risk and credit risk management in Vietnamese banking sector.......................23
2.3.1....................................................................................Key players in credit market
............................................................................................................................... 23
2.3.2...........................................................................................Credit risk management
............................................................................................................................... 25
FOREIGN TRADE OF VIETNAM (VIETCOMBANK).................................................................. 27
3.1 Overview of Vietcombank.................................................................................................27
3.1.1


Business background............................................................................................... 27

3.1.2

Financial performance............................................................................................28

3.1.3

Business strategy..................................................................................................... 30

3.2 Current credit performance..........................................................................................31
3.3 Credit risk....................................................................................................................32
3.3.1.......................................................................Bad debt and non-performing loans
32
3.3.2........................................................................Potential factors causing credit risk
............................................................................................................................... 33
3.4 Credit risk management...............................................................................................36
3.4.1..............................................................................Credit risk management process
...............................................................................................................................36
3.4.2.................................................................................................Credit rating system
............................................................................................................................... 37
3.4.3...............................................................................................Internal credit rating
...............................................................................................................................39

4


3.4.4.......................................................VCB’s credit risk management SWOT analysis
...............................................................................................................................42

3.5 Solutions to current credit risk issues..........................................................................45
3.5.1
credit risk management

Comprehensive
individual
approach............................. 45

3.5.2..........................................................Corporate credit risk management approach
............................................................................................................................... 46
CHAPTER IV: CONCLUSION AND RECOMMENDATIONS...............................................50
REFERENCES..............................................................................................................................54

5


LISTS OF TABLES AND FIGURES
Table 1: Commercial banks’ primary and secondary functions (Academic Collective, 2016) ....
10
Table 2: Types of commercial banks by ownership (Tran et al., 2015)......................................12
Table 3: Matching corporate priorities and credit cultures (Strischek, 2017).............................20
Table 4: Vietcombank’s financial figures from 2012 to 2017 (Vietcombank,2018)...................29
Table 5: Vietcombank’s strategic target for 2018........................................................................31
Table 6: Vietcombank’s credit scoring........................................................................................39
Table 7: VCB’s credit scoring for individual clients (Vo, 2015).................................................40
Table 8: VCB’s financial scoring group......................................................................................41
Table 9: VCB’s SWOT Summary...............................................................................................43
Table 10: Comprehensive individual credit risk management approach......................................45
Table 11: Categorization of collateral scoring...............................................................................46
Table 12: List of commercial banks in Vietnam categorized by ownership as of 2016 (State Bank

of Vietnam, 2016)..........................................................................................................................64

6


CHAPTER 1: INTRODUCTION
1.1 Problem statement
Together with the development of the Vietnamese economy in the recent years, especially after
the 2008-2012 period of economic crisis, the system of commercial banks has also had
accelerating and evolving steps in playing the role of key channel to supply significant capital for
the economy. In the open market, credit offering undeniably is the basic function of any
commercial bank as interest income from lending constitutes primary revenues for the banks.
According to KPMG in its Vietnam Banking Survey 2013, the sector of loans and advances to
customer accounts for more than 50% of the banking assets and the revenues collected from
credit activities makes up approximately from half to two- thirds of the total revenues.
Despite the fact that commercial banks expand its operations by diversifying its products,
customers or market niche, there is always implication of risks attached to these activities,
namely: Credit risks, Market risk, Operational risk (Golin & Delhaize, 2013). Among the above
mentioned risks, the credit risk is considered to be the major concern as it forms the largest
portion and the most complex interrelationship with other risks. Credit risk once it happens
would have a significant effect on not only financial losses but also the bank’s reputation which
leads to the missing belief of citizens towards the whole system of banks. As a result of credit
risk’s spreading interrelation; credit risk can be the root for a financial or social crisis.
The leading sign of credit risk is the bad debt. The high bad debt rate means the incapability of
the bank to control the credit risk. During the conference to summarize the financial results of
the first 6-month of 2015, Mr. Thanh Nghiem, the Chairman of Vietcombank showed anxiety for
the quality of credit and bad debt. While the credit growth 7 was 6.52% higher than the average,

7



the certain bad debt was increased by 1.012 billion VND compared to that of the end of 2014.
During author’s internship at Vietcombank, this issue was repeatedly mentioned in every
meeting which stimulates author’s curiosity to figure out the reasons behind that and to some
certain extent provide a workable model of credit risk management.
1.2 Research objectives and questions
By analyzing the current situation of Vietcombank in the field of credit activities, credit risk and
credit risk management, the ultimate goals of the research are to draw the answers for two
research questions:

•

What do credit growth and bad debt of Vietcombank reflect?

•

Is it possible to build up an effective model of credit risk management for Vietcombank?

1.3 Research methodology
The research method used throughout the research is the qualitative analysis. The research helps
to understand the lying problems of credit risk at Vietcombank, and based on the findings, the
author suggests to a model serving as a sound base of the decision making of loan granting. The
primary data related to Vietcombank was obtained through its official website, annual reports.
Moreover, there were reliable articles on newspapers or reports from reputed financial
institutions used to solidify the statements. There was an interview conducted with credit expert
working in Department of Bad Debt handling at Vietcombank to extend the knowledge of the
bank’s credit activities.
1.4 Research structure
The research is divided into four main chapters. It starts with the introduction to give the overall
view of the research on where the topic comes from, what author aims to achieve by the end of

8


COMMERCIAL BANKS
the research, which tools author used throughout the research. Then, the second chapter explains
Despite being defined differently among countries, commercial banks are categorized into two
the theoretical framework of credit risks in the banking industry and how commercial banks
main functions, namely primary and secondary functions (Nguyen, 2016). Sepcifically, the
generally manage the credit risks. In this chapter, the overall Vietnamese banking industry is
activities of commercial banks falling into each function group are presented in the following:
introduced in accordance with the theory. The next chapter analyses and evaluates the situation
of Vietcombank mainly in the last three years, from 2012 to 2014, and the first 6-month of 2015
concerning the credit activities. It also discusses the posed problem of credit growth and high bad
debt rate at Vietcombank. The third chapter presents the suggested idea of the author to have a
working credit risk management. Last but not least, the brief conclusion is given in the last
chapter to summarize the findings of the research.

CHAPTER 2: THEORETICAL FRAMEWORK
2.1 Commercial banks in Vietnam
2.1.1

Concepts and Functions

Commercial banks are different from other banks based on their services provided to the
economy. According to Leaf (1927), banks become commerical banks when they deal in money
and credit for profit. In other words, commercial banks are financial institutions that take the
deposits from the public for safety and lend those deposits to person/organization who need the
funds (Gobat, 2012). In the United States, a commerical bank is defined to be an institution that
obtains federally insured deposit, paying interest to depositors, and at the same time, makes
residental and commerical loans, underwrites securities such as U.S. Tresuries, commerical

paper, and bonds (Getter, 2016). Meanwhile, in Asian countries, commerical banks often provide
various services such as traditional banking services (lending and depositing), commercial
banking, investment banking, insurance, and asset management (Laeven, 2005).
9


Primary functions
•

Secondary functions

Accepting deposits from fund savers
(current

account

•

deposits,

deposits, and saving account deposits)

•

of

exchange

or


bundles

fixed

•

Discounting bills

•

Overdraft facility

•

Agency functions: transferring funds,

Making loans and advances in form of

collecting funds, making payments of

cash credit, demand loans, overdraft,

tax, insurance and bills as per the

and short-term loans

direction of customers, purchasing and

Investment:


in

securities

such

as

selling securities, collecting dividends,

Government securities, other approved
securities, and other securities.

etc.
•

Performing general utility services such
as locker facility and underwriting
securities.


Table 1: Commercial banks’ primary and secondary functions (Academic Collective, 2016)

Based on their characteristics and functions, it cannot be denied that commercial banks have
significantly important role to not only national banking system but also the whole economy.
According to Olokoyo (2011), commercial banks provide the biggest capital savings,
mobilization and financial allocation to the economy, contributing to the economic growth and
development. To be specific, the importance of commercial banks is presented in three
10



dimensions, including information processing, risk sharing, and money creation (Mehta & Fung,
2008). Information is collected from both depositors and borrowers to evaluate and ensure the
financial health and capital flows of the transactions. Moreover, when making loans to
borrowers, banks share the risk with depositors in case borrowers are not able to complete their
obligations (Martin et al., 2018). Last but not least, commercial banks enable money supply by
creating credit, which is also named as money creation. Bank’s money creation is determined by
primary deposits (money deposited by savers), and secondary deposits (reserve requirements)
(Academic Collective, 2016). Hence, by performing this function, commercial banks give a great
support to Government in term of controlling and generating mony supply for its expenditures on
social, economic, and polical activities (Mehta & Fung, 2008).
2.1.2

Operation of commercial banks in Vietnam

Talking about the nature of the business, commercial banks in Vietnam can be classified into
either wholesale or retail banks despite the fact that most of them provide both types of services
(Hull, 2010). While wholesale banks focus on corporate lending, retail banks target individual
and small business as their main customers. For instance, among foreign banks operating in
Vietnam, ANZ Banking Group (which has been recently acquired by Shinhan Bank) is
considered the only banks targeting retail banking, whereas most foreign banks pay higher
attention to commercial corporate and wholesale banking activities by funding FDI projects
instead of domestic private sector enterprises (Vuong, 2010).
When it comes to ownership, commercial banks in Vietnam can be categorized into three main
types, including State-owned commercial banks (SOCBs), Joint-Stock Commercial banks
(JSCBs), and wholly foreign owned banks (WFOBs) (Tran et al., 2015). By July 2018, Vietnam

11



Types of

Description

Example banks in
Vietnam

commercial
banking sector has 4 SOCBs, 31 JSCBs, and 8 WFOBs

1

which are supervised and regulated by

the State Bank
of Vietnam
(SBV) as the
Central
Bank (International
SOCBs
Agribank, Trade Administration,
• 100%
or majority-owned
by the
Government
2018). The characteristics
in BIDV,
the table below:
Vietcombank,
(or SBV) of each type of commercial banks are summarized


•

Traditional

customers

are

state-

Vietinbank

owned

•

enterprises (SOEs) and non-SOEs
More diversified shareholding structure than MB Bank, SCB, EIB,
SOCBs since they are listed on the stock VIB, SHB
market

JSCBs

•

Focusing on making loans to Small & medium
enterprises (SMEs) and retail banking

•


WFOBs

Present in Vietnam since early 1990s after the HSBC,
country opened the doors for foreign business.

Shinhan,

•

100% foreign-own capital

Standard Chartered,

•

Strictly complying with Vietnamese laws.

Woori.


Table 2: Types of commercial banks by ownership (Tran et al., 2015)

1

List of commercial banks by ownership (See more in Appendix 1)

12



Among three types of commercial banks, SOCBs still hold the significant stake in Vietnamese
banking sectors with over 44% of total assets, followed by JSCBs with 42% and 11% held by
foreign banks (Tran et al., 2015)

Vietnamese banking sector by assets

■

SOCBs

■

JCSBs

■

Foreign banks

■

Others

Figure 1: Vietnamese banking sector by assets (Tran et al., 2015)

Despite the smallest number, SOCBs still lead the market with the largest market share. Four
SOCBs are the largest banks in Vietnam, including Agribank, Vietnam Joint Stock Commercial
Bank for Industry and Trade (Vietinbank), Bank for Investment and Development of Vietnam
(BIDV), and Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) (State
Bank of Vietnam, 2016).


13


2.2 Credit risk in Vietnamese banking system
2.2.1

Definition of credit risk

Credit risk is closely linked to fundamental functions of commercial banks which are taking
deposits from savers and making loans to individuals and organizations. Because of their unique
functions, banks have to deal with a greater number of risks than other financial institutions, and
credit risk is the major risk among them. According to Van Greuning & Bratanovic (2009),
approximately two thirds of commercial bank’s balance sheet is related to risk management.
Credit risk often comes from lending activities of banks such as loans to individuals and
organizations, financial guarantees, letter of credits, investment portfolio, and acceptance of
credits (Bandyopadhyay, 2016). However, the major sources of credit risk at banks are loans to
individuals and corporates which account for half to three-fourths of total value of bank assets
(Papin, 2014).
In literature, credit risk is defined in various ways by economist, policy makers, as well as
researchers. Rose (2002) describes credit risk as the probability that some of bank’s assets (e.g.
loans) will drop in value, even become worthless. Basel Committee on Banking Supervision
states that credit risk is the potential that bank borrower fails to meet his obligations in
accordance with agreed terms with bank. According to Sironi & Resti (2005), credit risk is
simply defined as the “the possibility that an unexpected change in a counterparty’s
creditworthiness may generate a corresponding unexpected change in the market value of the
associated credit exposure”. Meanwhile, in the study conducted by Koch & MacDonald (2009),
credit risk is believed to be associated with the quality of individual assets and the likelihood of
default, meaning that “the potential variation in net income and market value of equity resulting
from the nonpayment or delayed payment of the principal and interest income”. Credit risk is
14



considered on the of main reasons for cash flow problems and liquidity issues at banks (Sironi &
Resti, 2005). In the Act of 493/2005/QDDNHNN, 2005, the State Bank of Vietnam (SBV) refers
credit risk as the possibility of losses in banks as borrowers reject to make the repayment or fail
to execute their committed payment.
Based on the definition of credit risk, it can be concluded that credit risk happen when individual
or corporate borrowers are unable to repay their loans to banks, causing a financial loss in bank’s
balance sheet. Suffering financial loss of net income will strongly affect bank’s profitability as
well as its liquidity in case of depositors’ massive withdrawals. Despite risk, it cannot be denied
that involving in lending activities allows banks to generate more return since the lending interest
rate is significantly higher than deposit interest rate. Because of this attraction, commercial banks
may not be able to remove lending activities from their service portfolio.
2.2.2

Categories of credit risk

Credit risk is a part of financial risk, and can be divided into two main sub-risks, including
transaction risk and portfolio concentration risk (Figure 4). Both of these risks may originate
from issuers or counterparties.

15


Figure 2: Types of credit risk at commercial banks

In lending activities, transaction risk, according to Comptroller of the Currency (1998), occurs in
the loan disbursement and credit administration processes, which violate credit policy of banks.
Transaction risk is related to the adequacy of information systems and controls, the quality of
operating procedures, and the capability and integrity of employees. In other word, it could arise

when bank’s staff is reluctance or fail to investigate borrowers’ creditworthiness and select the
positive clients. It could be the lack of hedging approach for banks in case of credit default, or
the inability of bank staff to handle and resolve the bad debt problems when they happens (Spjut,
2018). For instance, bank increase transaction risk and credit risk when its information system
fail to provide adequate information to identify borrower’s entities, facilities or financial
statements. In that case, if banks make loan to corporate that is going to bunkruptcy, the
possibility of financial loss is significantly high to them.
Meanwhile, porfolio concentration risk refers to the situation when the bank londing portfolio
cannot be perfectly diversified due to large portion of the portfolio is exposed to a small group of
clients (Grippa & Gornicka, 2016). Another saying that when the lending portfolio of bank
concentrates on a small group of customers, the risk cannot be diversified, causing high
possibility of instability for banks as well as the whole banking systems. For example, lending
portfolio exposures to large borrowers such as Enron and WorldCom resulted in financial
problems of some U.S. banks in early 2000s, while the global financial crisis is the consequence
of housing crisis combined with concentrated mortgage portfolios resulted in a number of bank
failures (Grippa & Gornicka, 2016).

16


Based on the analysis, a commercial banks cannot get rid of credit risk since lending activities
are one of the biggest source of income for them. Therefore, credit risk management is related to
minimizing the level of credit risk, whereby protect banks from massive losses.
2.2.3

Credit risk and bad debt

Credit risk has strong relationship with bad debt since bad debt is considered the main cause of
credit risk for banks. Bad debt is defined as the debt that cannot be collected from debtors and
therefore becomes worthless to creditors (banks) (Smith & Butters, 1949). The higher bad debt

is, the greater troubles to banks because it affects not only the profitability of banks but also their
ability to pay back to depositors. Another source of credit risk at banks is non-performing loans
(NPLs), which refers to loans who payment are due more than one year and having no repayment
(Waqas et al., 2017). Since both of them are major source of credit risk, bad debt and NPLs can
be calculated to measure the credit risk to banks. Bad debt ratio and NPLs ratio are calculated as
follows:

•

Bad debt ratio = Bad debts/ Gross customer loans

•

Non- performing loans (NPL) ratio = Non- performing loans/ Gross customer loans

Based on the analysis, credit risk of commercial banks can be calculated using bad debt ratio and
NPLs ratio. However, the level of NPLs also depends on internal and external factors. For
instance, Akter & Roy (2017) argue that banks which charge relatively higher lending interest
rate and make excessive loans are likely to suffer higher level of NPLs. Therefore, when
managing credit risk to banks, policy makers need to taken into account the external and internal
factors that cause high NPLs and bad debt.

17


2.2.4

Importance of credit risk management at banks

As mentioned earlier, the credit risk has strong impact on not only banks’ profitability but also

their ability to pay back to depositors. Therefore, credit risk management is able to “maximize a
bank’s risk adjusted rate return by maintaining credit exposure within acceptable parameters”
(Bank for International Settlements , 2000). In other words, credit risk management enables
commercial banks to achieve an appropriate level of credit risk without harming its profitability,
whereby maintain the soundness of banks and the whole banking system. However, the level of
credit risk depends on a lot of factors such as borrowers (individuals or organizations),
constitution of counterparty, the purpose of loans, and the maturity period (short term, medium
term, and long term) (Joseph, 2013). The borrower/counterparty in loan transaction could be
individuals, households, or corporate; while the loans can be used for personal consumption,
education, business, or investment purpose. In order to accurately evaluate the level of credit risk
in a lending transaction, commercial banks have to consider all these factors for better
management. The determination of loans and borrowers using risk assessing techniques plays a
key role in management and minimization of credit risk at banks (Boffey & Robson, 1995). It
means that only after identifying the level of credit risk by each loan and borrower that banks can
conduct management activities to control loan portfolio as a whole (Konovalova et al., 2016).
2.2.5

Current situation of credit at Vietnamese commercial banks

2.2.5.1

Credit culture

A study conducted by Muhamet & Arbana (2016) shows that 98% of bank failures come from
banks’ incidents related to poor asset quality due to factors such as poor loan policies, a non
compliance with policies and guidelines and a poor supervision. The authors highlight that they
are factors of a poor credit culture. Colquitt (2007) defines bank’s credit culture as “the attitude,
18



style,
Corporate
perception
priorities
and are
behavior
determines
that will
based
be exhibited
on various
by the
elements
bank and
suchis as
largely
banks’
determined
objectives,
by
the
strategy,
attitude
customers
of management
base, banktowards
size, and
credit
types
riskof and

ownership.
could actually
Strischekbe(2002)
in conflict
argueswith
that the
no
policies
matter which
of thepriorities
bank”. Simply,
are determined,
credit culture
the successful
refers to the
credit
relationship
risk management
between must
banksensure
and their
the
customers.
profitability,Credit
asset quality,
culture and
allows
growth
banks
of banks.

to connect
Basedand
on associate
priorities, credit
there are
riskfour
objectives,
types of credit
policies
culture, with
including
credit strategy.
values According
driven, immediate-performance
to Barr & McWhorter (1992),
driven, a production
good credit culture
driven, starts
and
from
unfocused
the top
driven
down
culture
to the(Strischek,
bottom of2002).
banks through communication, meaning that all people at
banks from top management to officers fully understand the lending policies and lending
process. Credit culture is able to strengthen the credit risk management of not only individual

bank but also the whole banking system because of the interbank market by which the single
credit culture of each bank can be unified and supported to each other (Guseva & Rona-Tas,
2014).
The process of developing a strong credit culture is presented in Figure 5:
Corporate Priority

Credit Culture

1.
Asset
quality;
long-term
consistent
_________performance _____________________________
2. Immediate earnings, stock price

1. Valuesdriven
2. Immediate-performance driven

3. Market share, market domination, loan
growth, volume

3. Production driven

4. No clear priorities

4, Unfocused

Figure 3: Credit culture establishment process (McKinley & Barrickman, 1994)


19


Table 3: Matching corporate priorities and credit cultures (Strischek, 2017)

Each credit culture has its own characteristics (Figure 6). Values driven credit culture focuses on
long-term and consistent performance, aiming at strong credit environment contributed by few
credit policy exceptions and great communication from top management to bottom workers.
Meanwhile immediate-performance driven credit culture is mainly concerned with profitability
by maintaining credit quality when national economy is strong and increasing riskier investment
during period of weak loan demand. Market share and loan growth is the main purpose of
product driven credit culture, meaning that banks care more about the loan volume commitment.
However, this culture has drawbacks that when bank officers are pressured to achieve the loan
volume target, they could be produce loans regardless of lending policy. Therefore, if bank
chooses this culture, they have to ensure to have a very strong management of loan approval
20


process with low empowerment. Last but not least, unfocuses credit culture does not focus on
any priorities so that management may changes frequently according to changes. This is the least
prefered culture since bank’s people would easily get confused by inconsistency and changing
priorities all the time (Strischek, 2017).
In short, credit risk management is strongly affected by credit culture of bank. Therefore,
identifying the priorities and selecting credit culture are able to decide how credit risk should be
managed in order to achieve credit objectives and strategies of banks.
2.2.5.2

Credit assessment

Credit assessment is one of the most important steps in credit risk management at banks, making

the biggest contribution to the credit achievement. Different commercial banks have different
credit assessment system, but in general, the credit risk assessment of banking borrower consist
two dimensions, including qualitative and quantitative assessment (Konovalova et al., 2016).
Quantitative dimension of credit assessment collects the information regarding borrower through
data gathering, processing, and interpreting activities. The information gathered by this approach
enables bank to analyze, evaluate and forecast the future development of debtors’ activities, the
future capacity of debtors to repay the loans through analyzing future flow of capital and
expenses, and the ability of debtors to stay with shocks (Haralambie & Ionescu, 2016).
Meanwhile, qualitative dimension of credit assessment “involves gathering and updating
information relating to the financial responsibility of the debtor, determining the real purpose of
the loan, identifying what risks the borrower may face and estimating the debtor’s reliability and
commitment” (Haralambie & Ionescu, 2016). According to Brown & Moles (2016), quantitative
and qualitative credit assessment comprises four methods, namely (1) expert systems, (2) credit

21


scoring, (3) rating systems, and (4) market-based models. Each method will be discussed in the
following part.
2.2.5.2.1

Qualitative credit assessment methods

Expert system is a qualitative credit assessment method, considering 6 elements of credits (6Cs)
including character, capacity, capital, collateral, conditions and compliance (Brown & Moles,
2016)

•

Character: makes borrower different from others such as credit history which show

whether he fulfilled all his obligations in the past. If this C is fulfilled, bank is willing to
make loan to the borrower.

•

Capacity: means borrower’s flows of earnings and expenses, so that bank could evaluate
whether or not borrower is able to pay back his loans to bank.

•

Capital: is the amount of money that can ensure that in case borrower is not able to fulfill
his obligation, bank still can compensate the losses by liquidating this capital.

•

Collateral: the asset mortgaged from borrower to receive the loan and the security for the
bank in case of default.

•

Conditions: external factors that may affect repayment ability of borrower such as natural
disaster, economic distress, or political changes.

•

Compliance: the lending process must comply with regulation at both corporate and
national level.

2.2.5.2.2


Quantitative credit assessment methods

22