UNIVERSITY OF ECONOMICS HO CHI MINH CITY
International School of Business
------------------------------

DUONG PHUONG LINH

SOLUTION TO REDUCE BAD DEBT
AT VIETINBANK – GIA LAI BRANCH
IN THE PERIOD 2017 - 2019

MASTER OF BUSINESS ADMINISTRATION

Ho Chi Minh City – Year 2020


UNIVERSITY OF ECONOMICS HO CHI MINH CITY
International School of Business
------------------------------

DUONG PHUONG LINH

SOLUTION TO REDUCE BAD DEBT
AT VIETINBANK – GIA LAI BRANCH
IN THE PERIOD 2017 - 2019

MASTER OF BUSINESS ADMINISTRATION

SUPERVISOR: DR. LE THI THANH XUAN

Ho Chi Minh City – Year 2020

TABLE OF CONTENT
Cover page
Table of content
CHAPTER 1. INTRODUCTION ....................................................................................... 1
1.1 Overview introduction about Vietinbank...................................................................... 1
CHAPTER 2. PROBLEM CONTEXT ............................................................................... 7
CHAPTER 3. PROBLEM IDENTIFICATION ............................................................... 10
3.1. Symptoms Analysis ................................................................................................... 10
3.1.1 Bad debt increased at Vietinbank - Gia Lai Branch from 2017 to 2019.............. 10
3.2. Potential problems ..................................................................................................... 12
3.2.1. Internal problems ................................................................................................ 12
3.2.1.1. Weak loan portfolio management ................................................................ 12
3.2.1.2. High workload ............................................................................................. 13
3.2.1.3. Employees lack of experiences and competences ....................................... 14
3.2.1.4. Loose process of loan management ............................................................. 15
3.2.2. External problems ............................................................................................... 16
3.2.2.1. Society problems .......................................................................................... 16
3.2.2.2. Problems from customers’ side .................................................................... 17
3.3. Problem validation ..................................................................................................... 19
3.4. Problem consequences ............................................................................................... 20
3.4.1. Reducing profit of the bank ................................................................................ 20
3.4.2. Affect the bank’s reputation................................................................................ 21
3.4.3. Indirect affect to other banks .............................................................................. 21
CHAPTER 4. CAUSES .................................................................................................... 23
4.1. Possible causes ........................................................................................................... 23
4.1.1 Internal causes ...................................................................................................... 23
4.1.1.1. Lack of full awareness of loan portfolio management ................................. 23
4.1.1.2. Tendency to follow immediate but lack of durable profit ........................... 24
4.1.1.3. Inadequate information analysing and forecasting ...................................... 24

4.1.2. External causes.................................................................................................... 25
4.1.2.1. Unpredictable changes of macroeconomic environment ............................. 25


4.1.2.2. The regulatory environment with the guidance and supervision of the
Central bank has not actively supported commercial banks in loan portfolio
management. ............................................................................................................. 26
4.1.2.3. The limited activity of the domestic financial market has limited banks'
ability to use a variety of tools to adjust the loan portfolio. ..................................... 27
CHAPTER 5. SOLUTIONS ............................................................................................. 30
5.1 Alternative solutions ................................................................................................... 30
5.1.1 Changing current loan porfolio management method ......................................... 30
5.1.1.1 Diversify the credit portfolio by economic sector ........................................ 31
5.1.1.2 Diversifying the credit portfolio by type of business.................................... 32
5.1.2 Developing a human strategy in accordance with risk management requirements
....................................................................................................................................... 32
5.1.3 Constantly renovating the training and professional development for staff at the
bank ............................................................................................................................... 33
5.2 Solution validation ...................................................................................................... 34
CONCLUSION ................................................................................................................. 38
CHAPTER 6. SUPPORTING INFORMATION .............................................................. 39
6.1 Methodology ............................................................................................................... 39
6.2 Interview transcript ..................................................................................................... 39
List of tables
List of figures
List of diagrams
Executive sumary
Reference
Appendix



LIST OF TABLES
Table 1.1 Shareholer structure by ownership ratio which holding 5% or more of the
charter capital
Table 1.2 Level of Vietinbank Branch
Table 2.1 Credit balance depend on customer category from 2017 to 2019
Table 2.2 Corporate customer classification principle
Table 2.3 Credit balance classification depend on loan duration
Table 2.4. Credit balance and bad debt of banks in Viet Nam in 2019
Table 3.1 Debt classification regulation
Table 3.2. Debt classification in Vietinbank – Gia Lai Branch in period 2017 – 2019

LIST OF FIGURES
Figure 1.1 Shareholer structure by ownership ratio
Figure 1.2 Vietinbank Gorvernance model and structure
Figure 1.3 Organisation chart
Figure 1.4 The short – term loans procedure

LIST OF DIAGRAMS
Diagram 3.1 Initial Diagram of symptom and potential problems of Vietinbank – Gia Lai
Diagram 3.2 Initial Diagram of symptom, potential problems and problem consequences
of Vietinbank – Gia Lai Branch
Diagram 4.1 Initial Cause and effect map
Diagram 4.2 Final cause and effect tree map


EXECUTIVE SUMARY
Risks are always present in the operation of commercial banks today, including
Vietinbank. Banks always try to develop credit scale but at the same time ensure safety in
operations. The rapid increase in bad debt can lead to serious consequences, possibly

even bankruptcy of the bank. As one of the credit-scale branches in the top of the big
branches of the Vietinbank system, Vietinbank Gia Lai branch has always controlled the
bad debt situation since its inception. However, in the past 3 years, the rapid increase of
bad debt has affected many aspects of the Branch's business operations. Therefore, the
urgent need is to find the underlying causes that lead to the rapid increase of bad debt
problems in recent years to find suitable solutions for sustainable development. Author
conduct this research to study the business activities of Vietinbank – Gia Lai Branch,
especially focus on the bad debt increasing in the period 2017 – 2019. The method of
comparison, interviewing were used to find out the main problem the Branch is facing,
the main cause leading to the problem and recommend some possible solutions to deal
with the problem. Author hope that the research will contribute a small effort in helping
the organisation develop and gain maximum profit in the future.


CHAPTER 1. INTRODUCTION
1.1 Overview introduction about Vietinbank
Vietinbank was established in July 8th in 1988 in accordance with Decree
No.53/1988/NĐ-HĐBT by the Minister Council. After more than 30 years development,
from the beginning equity with just 22 billion Viet Nam dong, at present Vietinbank has
archieved the equity beyond 67,455 billion Viet Nam dong (more than 3,000 times
higher) while authorized capital is 37,324 billion Viet Nam dong. Beside that, total assets
of Vietinbank also increased from 718 billion Viet Nam dong in 1988 to nearly 1,164,435
billion Viet Nam dong in 2018 which means encreased more than 1,600 times. At the
beginning, all system of Vietinbank just had 11,380 employees with the structure
including headquater in Hanoi (under 100 employees), 32 level I branches and 42 level II
branches. Now all the system has nearly 23,000 employees who are working at
headquater in Hanoi, 2 representative offices, 9 career units and 155 branches.
Vietinbank has not only operated in Viet Nam but also in other countries. Vietinbank has
established a 100% capital bank in Laos, 2 branches in Germany and set a representative
office in Myanmar. At this time, Vietinbank has cooperation with more than 1,000 banks

of more than 90 countries all over the world. Moreover, Vietinbank also contributed
capital in Indovina Bank which is known as the most efficient joint-venture bank in Viet
Nam. Its mission is “To be No.1 bank in Viet Nam baking system, providing modern
financial and banking products and services with full utilities and meeting international
standard”. The vision of the organisation is “To become a leading bank in Viet Nam and
a regional player, being modern and multi-functional that conforms to international
standards”.
State Bank of Viet Nam

5%
10%

MUFG Bank, Ltd.

20%
65%

IFC Capitalization (Equity) Fund, L.P.
Other shareholders

Figure 1.1 Shareholer structure by ownership ratio
(Source: Vietinbank annual report 2018)
1


Table 1.1 Shareholer structure by ownership ratio which holding 5% or more of the
charter capital
Shareholder structure

Number of shares


Ownership Percentage (%)

2,400,204,956

64.46%

734,604,384

19.73%

Fund, L.P.

200,864,399

5.39%

Other shareholders

387,730,817

10.41%

3,723,404,556

100%

Central bank of Viet Nam
MUFG Bank, Ltd.
IFC


Total

Capitalization

(Equity)

(Source: Vietinbank annual report 2018)

Figure 1.2 Vietinbank Gorvernance model and structure
(Source: Vietinbank annual report 2018)
In the past few years, Vietinbank has always been one of banks have
breakthrough growth, develop modern products and services, develop efficiently and
sustainably. In 2017, Vietinbank made an impression in deploying the new CoreBanking
successfully. This is the largest and the most complex project in Viet Nam Banking
Industry until now and has met the technology requirements for longterm and sustainable
2


development. At the same time in 2017, Vietinbank also released to the public 4,200
billion Viet Nam dong secondary bonds. This is the most enomous amout of secondary
bonds among Viet Nam Commercial Banks which has confirmed the trademark and
position of Vietinbank on the market. Beside that, Vietinbank has archieved many
arwards and accolades in 2018 such as First-class Labour Medal (for the second time)
and Government’s Emulation Flag, Top 400 Most Valuable Bank Brands Worldwide,
Top 2000 Largest Enterprises Worldwide, Viet Nam Value, Viet Nam Excellent Brand,
Best Trade Finance Service,…
In 2018, total assets of Vietinbank was more than 1.16 million billion Viet Nam
dong, increased 6.3% when compared with 2017 and increased 22.78% when compared
with 2016. In this year, Vietinbank continued to be the commercial bank which had

largest asset scale in the market. However, the competition in the banking system to win
and retain customers is increasingly fierce.
Vietinbank is established in 1988. After 31 year of development, Vietinbank has
affirmed its position as a leading commercial bank, holding a key role of Viet Nam's
curency market. Vietinbank has a strong network of 148 branches in 63 provinces and
cities nationwide. Vietinbank – Gia Lai Branch is known as a large branch in the system
with 3 trillion dong of capital and outstanding loans of up to 13 trillion dong.
Vietinbank – Gia Lai Branch was established in 1999. The organisation structure
is as the figure below:

Figure 1.3 Organisation chart
(Source: Vietinbank – Gia Lai Branch internal report)
3


The main departments which bring profit to the bank is corporate department and
retail department.
Normally, it often takes two weeks for a new corporate customer and a week for old
customer to finish a procedure to borrow the money from the bank. Firstly, the customer
has to prepare all the documents meet the bank requirement. Secondly, the bank officer,
normally the corporate banking division, will verify the documents and prepare a report.
This step is the one which need most of the time in the procedure and often take for a week.
Afterthat, the report will be send to the upper level in the bank in order to be approval.
After being approval, the supporting credit department will check again all the document to
make sure that there is no mistake. And finally, they will do the financing for customer. If
there is any mistake in any step of the procedure, the total time will be longer.
Short – term loans procedure of corporate customers when they first time borrow
money at Vietinbank includes 5 steps, which are:
Step 1: Credit officer collect documents from customers and check them. At this
step, credit officer often present to customers about loan conditions and instructions for

establishing the loan documents. Also, credit officer will check the completeness and
accuracy of legal documents, loan documents, collateral records and especially the
legality of the loan purpose. After checking the documents, credit officers will depend on
the policies and the orientation of Vietinbank in order to identify whether customers are
subject to credit restriction or non-credit extension or not.
Step 2: Credit officer review credit conditions, prepare and submit appraisal
report. Depending on the documents collecting from customers and other sources, credit
officer analysis and review the financial situation, business plan and ability to repay
principal and interest of customers. Credit officer will give comments and suggestions on
the lending method, loan amount, loan duration, loan security measures, disbursement
schedule and other conditions.
Step 3: Appraisal report approval. Depending on the appraisal report of Corporate
Customer Department, the Board of Directors will consider and decide the credit limit of
customers. In case of exceeding the authority of the Branch’s Board of Directors, the
report will be submitted to higher level, normally related to the Head Office, to get
approval.
4


Step 4: Completing collateral records, drafting and signing credit contracting and
disbursing. Once the credit limit has been approved, collateral contract and credit contract
will be prepared after reaching agreement with customers on clause of the it. Afterthat,
disbursement can be made based on the customers’ needs and loan purposes.
Step 5: Checking, supervising and recovering debt. This is the process of steps
after lending to ensure customers had used capital for the right purpose and effectively.
This will help detect risks and errors to have actions promptly. Therefore, this step will
help improving the quality of loans and ensuring the benefits of the bank.
In short, the loan procedure is discribed as below:

Figure 1.4 The short – term loans procedure

(Source: Vietinbank Internal report)
In Vietinbank system, every Branch has a different level depend on its point. In
order to calculate the points, there are a list of criterias including criterias measuring
effectiveness, credit risk, management skills and operating risk rating. Each criteria is
described in Apendix 1. Depend on the total points after grading depends on these
criterias, every Branch of Vietinbank will have a level corresponding. There are five
levels as the table below:
Table 1.2 Level of Vietinbank Branch
Level

Number of points

1

Above 80 points

2

From 75 to 80 points

3

From 70 to under 75 points

4

From 60 to under 70 points

5


Below 60 points
(Source: Vietinbank Internal report)

5


Normally, grading and classifying branches is often perfomed quaterly. It is a way
to control the quality and operation of all branches effectively. If the level of a brach
decreases, the headquater will have some actions to manage the problem like reducing the
competence of the Branch’s Director, more strict requirements when granting credit…

6


CHAPTER 2. PROBLEM CONTEXT
The Corporate Customer Department and Retail Customer Department currently
holds most of the Branch’s credit balance.
Table 2.1 Credit balance depend on customer category from 2017 to 2019
Unit: million dong
Year 2017

Year 2018

Year 2019

retail

4,661,000

5,235,620


5,404,660

Credit balance of corporate

6,192,000

6,356,000

6,270,800

10,853,000

11,591,620

11,675,460

Credit

balance

of

customers

customers
Total

(Source: Internal report of Vietinbank - Gia Lai Branch)
At present, The Corporate Customer Department is including three Division,

which are Small and Medium Enterprise (SME) Division, Large Enterprise Division and
FDI Division. The classification principle of two Division SME and Large enterprise is
based on the customers’ revenue described as the table below:
Table 2.2 Corporate customer classification principle
Corporate customer

Customers’ revenue

classification
Micro Enterprise

From 20 billion dong to under 60 billion dong

Small Enterprise

From 60 billion dong to under 200 billion dong

Medium Enterprise

From 200 billion dong to under 500 billion dong

Large Enterprise

Over 500 billion dong
(Source: Vietinbank Internal report)

Especially, for the business which has revenue under 20 billion per year will be
classified as retail customers.

7



Table 2.3 Credit balance classification depend on loan duration
Unit: million dong
Year 2017

Year 2018

Year 2019

Short-term loans

5,826,000

6,398,620

6,173,460

Medium and Long-

5,027,000

5,193,000

5,502,000

10,853,000

11,591,620


11,675,460

term loans
Total

(Source: Internal report of Vietinbank - Gia Lai Branch)
At December 31, 2019, short-term debt balance was VND 6,173 billion, a
decrease of VND 225 billion compared to the beginning of the year, the rate decreased by
3.52%; medium and long-term loan balance is VND 5,502 billion, an increase of VND
309 billion compared to the beginning of the year. Medium and long-term loan at
December 31, 2019 was VND 5,502 billion, accounting for 47.13% of the total loan
balance, the increased rate was 5.95% compared to the beginning of the year. Medium
and long-term loans are mainly loans for investment in hydropower projects such as Se
San 3 Hydroelectric Plant, Se San 3A Hydroelectricity, Ry Ninh II Hydroelectricity,
Hoang Anh Thanh Hoa Hydroelectricity, etc and some project in construction sector like
BOT project of National Highway 14, some hotel projects. Regarding investment
structure by economic sectors: The Branch continued to expand capital investment for
production and business households and non-state enterprises in order to spread risks and
grow over the years.
Table 2.4. Credit balance and bad debt of banks in Viet Nam in 2019
Unit: Billion dong
Bank

Bad debt
31/12

31/12

/19


/18

Credit balance
(+/-)%

31/12

31/12

/19

/18

Bad debt ratio
(+/-)% 31/12

31/12

/19

/18

VPBank

8,798

7,766

13.28


257,184

221,962

15.87

3.42%

3.50%

PGBank

663

653

1.43

23,697

22,052

7.46

2.80%

2.96%

SeABank


2,280

1,266

80.10

98,614

83,910

17.52

2.31%

1.51%

ABBank

1,312

984

33.34

56,803

52,184

8.85


2.31%

1.89%
8


MaritimeBank

1,300

1,466

(11.29)

63,594

48,762

30.42

2.04%

3.01%

SaiGonBank

282

301


(6.20)

14,557

13,671

6.48

1.94%

2.20%

SacomBank

5,733

5,647

1.53

296,030

256,623

15.36

1.94%

2.20%


Orient

1,309

1,288

1.62

71,091

56,316

26.23

1.84%

2.29%

4,857

5,199

(6.58)

265,204

216,989

22.22


1.83%

2.40%

19,451

18,802

3.45

1,116,925

988,739

12.96

1.74%

1.90%

EximBank

1,933

1,921

0.63

113,255


104,043

8.85

1.71%

1.85%

LienViet Post

2,030

1,680

20.82

140,523

119,193

17.89

1.44%

1.41%

HDBank

1,997


1,885

5.93

146,324

123,132

18.84

1.36%

1.53%

TechcomBank

3,078

2,803

9.79

230,802

159,939

44.31

1.33%


1.75%

539

444

21.51

40,919

35,495

15.28

1.32%

1.25%

1,235

861

43.39

95,644

77,185

23.91


1.29%

1.12%

MB Bank

2,898

2,860

1.33

250,331

214,686

16.60

1.16%

1.33%

Vietinbank

10,813

13,709

(21.12)


935,271

864,926

8.13

1.16%

1.59%

342

278

23.13

33,480

29,472

13.60

1.02%

0.94%

5,724

6,223


(8.02)

734,707

631,867

16.28

0.78%

0.98%

498

488

2.07

72,933

63,979

13.99

0.68%

0.76%

1,449


1,675

(13.47)

267,021

228,574

16.82

0.54%

0.73%

Commercial
Bank
Saigon Hanoi
Bank
BIDV

Bank

VietBank
TienPhong
Bank

Kien

Long


Bank
Vietcombank
Bac A Bank
ACB

(Source: VietStock Finance)
As can see from the table above, the average bad debt ration of banking industry
in Viet Nam in 2018 was 1.78%. This ratio was declined in the next year which was
1.63%. Bad debt ratio of Vietinbank was under average in two years and has had a
significant change from year 2018 to 2019.

9


CHAPTER 3. PROBLEM IDENTIFICATION

3.1. Symptoms Analysis
3.1.1 Bad debt increased at Vietinbank - Gia Lai Branch from 2017 to 2019
Credit activities is the main source bring profit of not just Vietinbank but all
Comercial Banks in Viet Nam. In recent years, Vietinbank has grown strongly and
created value for both itself and the economy. Viswanadham (1) has affirmed the role of
banking in the economic development. However, this growth also means that credit risk
is higher and can lead to many great loss. Reinhart and Rogoff (2) stated that bad debt
ratio can be used as a sign of credit risk which can then lead to debt crisis.
In Decision No 493/2005/QD-NHNN, outstanding debts is debts that is in part or
in whole principal and interest overdue. More specific, outstanding debts is credits which
are not repaid on time and are not eligible to be restructuring. Outstanding debts in Viet
Nam commercial banks are classified into 5 groups depending on length:
Table 3.1 Debt classification regulation
Debt classification


Debt group name

Characteristics

Group 1

Standard debt

The original debt or interest on overdue
below 10 days

Group 2

Watch debt

the original debt or interest on overdue more
than 10 days and below 90 days

Group 3

Substandard debt

The original debt or interest on overdue
more than 90 days and below 180 days

Group 4

Doubtful debt


The original debt or interest on overdue
more than 180 days and below 360 days

Group 5

Loss debt

The original debt or interest on overdue
more than 360 days
(Source: Decision No 493/2005/QD-NHNN)

Bad debts or non-performing debts are debt in group 3, 4 and 5.
In the period from year 2017 to year 2019, standard debt (group 1 debt) acount for
a high proportion in total credit balance and this proportion reduced sharply through
years.
10


In 2018, bad debt increased both in number and percentage. Total bad debt at the
end of 2018 was 302 billion dong, 279 million dong equivalent with more than 12 times
higher than which of 2017. More specific, irrecoverable debts was increased sharply
which is more than 5 times higher when compared with last year. In this year, the debt of
all groups increased sharply due to the difficult economic situation in the province.
Starting from the difficulty of agricultural sector; unfavorable weather, prolonged hot
weather, has led to sharply reduced production and price of pepper, coffee and affected
the entire commercial and production activities of corporates in the province such as
agriculture enterprises experienced large fluctuations in prices, and electricity producers
and distributors such as the Sesan 3A hydroelectric suffered from severe water shortages,
resulting in low electricity production ... Debt groups from 3 to 5 accounted for about 2%
of total credit balance but tended to increase.

In 2019, bad debt continously increased a lot while standard debt reduced. Total
bad debt in 2019 was 1,896 billion dong which was more than 6 times higher than 2018.
Standard debt in this year decreased largely, even lower than that of 2017. It just counted
for only 83.76% in total credit balance, decreased 13.37% when comparing with 2018.
This really a serious warning in credit activities in Vietinbank – Gia Lai Branch.
Table 3.2. Debt classification in Vietinbank – Gia Lai Branch in period 2017 – 2019
Unit: million dong
Year
Debt

2017

2018

18/17

2019
19/18

Credit

Propor

Credit

Propor-

Credit

Propor-


balance

-tion

balance

tion

balance

tion

Group 1

10,830,835

99.80%

11,289,362

97.39%

11.83%

9,779,786

83.76%

Group 2


4,216

0.04%

41,945

0.36%

281.80%

1,451,748

12.43%

Group 3

11,500

0.11%

43,862

0.38%

26.74%

57,131

0.49%


30.25%

Group 4

4,050

0.04%

79,082

0.68%

107.60%

128,692

1.10%

62.73%

Group 5

2,399

0.02%

137,369

1.19%


584.40%

258,103

2.21%

87.89%

classification

11

-13.37%
3361.08
%


Bad debt
(including
group

3,

17,949

0.17%

260,313


2.25%

119.50%

443,926

3.80%

70.54%

10,853,000

100%

11,591,620

100%

13.45%

11,675,460

100%

0.72%

4, 5)
Total

(Source: Internal report of Vietinbank - Gia Lai Branch)

The increase in bad debt has led to many subsequences. In 2019, level of
Vietinbank – Gia Lai branch moved from level 1 to level 4 due to the points reducing a
lot. When the level reduced, the authority to make credit decisions of the Board of
directors also reduced and credit activities of branch was control more strictly by the
Head Office.
From the information in Table 2.4, bad debt ratio of Vietinbank Gia Lai in 2019 is
3.80% and is more than 3 times higher than which of Vietinbank. Beside that, most of
banks in Viet Nam have bad debt ratio in 2019 lower than 3.50%. When comparing with
the average bad debt ratio of Vietinbank and other bank, it can be seen clearly that this
ratio of Vietinbank Gia Lai is really high and cannot be ignored.
3.2. Potential problems
With the symptoms “Increasing bad debt at VietinBank Gia Lai”, the author have
plan and conducted the interview with three kind of informants: the person who is
responsible for the symptom, the person who is directly related to the symptom, the
person who is have the knowledge of the symptom.
Recent research (1) indicated that the problems of bad debt increasing are related
to both internal and external factors. According to the analyses depending on the financial
reports, the meeting and indepth interviews with members of Vietinbank – Gia Lai
Branch, some potential problems are listed as following:
3.2.1. Internal problems
3.2.1.1. Weak loan portfolio management
Credit risk of the loan portfolio is one of the most important areas of risk
management. It plays an important role primarily for banking institutions. They try to
develop their own credit risk assessment models to increase the quality of the bank's
portfolio (3). Weak loan portfolio management was found to be one of the largest factor
12


contributed to non-performing loans (4).
According to Mr. Thinh who is Director of the Branch, he shared that “The

problem which the bank is facing is the number of current customers is not big enough.
Most of the credit balance is focused on a small number of main customers. Therefore, if
just one of these customers has difficulty in business, it will affect a lot to the credit
balance structure of the bank. Beside that, due to the region’s characteristic, most of the
loan purpose is related to agriculture (mainly coffee and pepper). Most of the coffee and
peeper which is traded is raw materials. And this is depend a lot on the weather
conditions. That will lead to a consequence that if the weather is not good, the crops will
be effected and cause a huge impact on the bank.”
Loan portfolio management is the inherent process of risk in the managed and
controlled credit process. Credit risks can be originated by an undiversified loan
portfolio. A tool which is always used in credit risk management in banks of all over the
world is loan portfolio management. Loan portfolio management reduces the risks
through identifying, forecasting and controlling risk level of any different markets,
customers, credit products and operating conditions. Many researches have been believed
that diversifying is the best way to prevent credit risks. A loan portfolio which depends
on an industry or a few customers is very unsafe cause all the industries have risks. It can
say that poor loan porfolio management can become the major cause of bank losses and
failures.
Moral hazard hypothesis suggested that relatively low capital banks encourage
moral hazard by increasing the portfolio's risk level which will lead to higher average
non-performing loans in the future (5). The research also found that a bank can has higher
bad debt ratio than other banks because it specialised more in some type of loans. Beside
that, the loan portfolio is very important of the operation of a bank. It should be
proactively positioned in order to manage threats and maximize opportunities (6).
3.2.1.2. High workload
Swalehe (7) found out that the proportion of loan defaulters decreases due to
proper and thorough pre-screening made by credit officers before loan disbursement.
When conduct the interview with Mr. Chung Quang Vu, an employee who is managing
the bad debt customer, the author receive the answer: “Although I know that it is very
13



important to observe the cash flow and business situation of customers to realise any sign
of bad debt, I don’t have enough time for this activity. My KPI is quite high and I need to
find lots of new customers to archieve the KPI. I often feel stress due to the huge amount
of work. Therefore, it is hard for me to manage time for so many activities such as finding
new customers, observing the cash flow and business situation of customers, realising
sign of bad debt and dealing with bad debt.”
In order to attract the customers and archieve high KPI, credit officer may ignore
some steps in loan procedure to make it easier or lower the “perceived credit risk” cause
it depend on a person’s judgement (1). Waweru and Kalani (8) claimed that bank
managers found it was difficult to follow prudent credit policies due to the pressure of
higher profits in an extremely high competitive market.
3.2.1.3. Employees lack of experiences and competences
Mr. Dang Quoc Thinh, Director of the Branch, said: “Experiences and
competences of employees is very important. In recent years, there are lots of new
employees has been recruitment due to high demand. This has led to many employees
were graduate students who didn’t have enough experiences. Beside that, cause some
good employees has moved to another bank, it’s very difficult for Vietinbank – Gia Lai
branch to recruite and train new employees to meet the requirement in a short time.”
Beside that, Mr. Ta Quang Binh, manager of Human Resources Department, said
that the time and schedule for training new employees is depending on the Head Office
arrangement. Normally, it takes 3 – 4 weeks to completing the traing program of the
Head Office. However, new employees have to move to HCM city to join in the training
program. All new employees can not join in the program at one time because this will
lead to the lacking of human resource working directly at the bank. Therefore, it often
takes a long time for all the newcomers to complete the training program. After being
trained, they still need a time to adapt to the environment, understand customers and have
acumen at work.
In fact, as Andersson’s idea cited in Beisland et al (9), experience has the

influence on the decision – making. Emloyees that don’t have enough experiences and
competences likely to cause credit risk. More specific, if an employee lack of knowledge
as well as experiences, he won’t be able to expertise and process information then
14


evaluate customers unexactly. This will lead to low credit quality and high risk. Beside
that, if credit employee doesn’t follow loan proceduce such as financing before collecting
enough documents or doesn’t check out the loan purpose, capital losing can easily
happen. Moreover, if credit employee doesn’t have responsibility and easily to be
temped, he may be affected by the relationship with the borrowers and dismiss the
necessary conditions.
According to Schreiner as cited in Beisland et al (9), experience has been
approved to have association with risk. Credit officers learn to avoid risky customers
when they have more experience.
3.2.1.4. Loose process of loan management
Ms. Le Thi Nhu Kieu, an employee who is working in bad debt dealing
department, said that “As from my understanding, the bad debt increased this year is
related to many loans in the years before. It could be a good loan at that time but
because customer management competences is quite loose and loan management process
has many gap has led to this situation.”
Credit risk can come from the lack of following closely in management activities.
Credit officer need approval of higher manager levels before disbursement. Therefore, if
managers don’t examine and evaluate whether the credit officer’s decision is suitable,
credit risk will be very high.
Beside that, the bad debt ratio in the past was been used by Salas and Saurina (10)
or Klein (11) to examine the relationship with current bad debt. These studies suggest
that a high level of non-performing loans in the past shows poor banks' ability to manage
risks in lending and will have a positive impact on current bad debts.
An incomplete, inconsistent and unified credit policy will lead to improper credit

provision, potentially risky for the bank. On the other hand, in order to attract customers
and gain market share, many commercial banks have ignored some steps in the credit
process, the lending mechanism has been simplified, arbitrarily lowered customer
evaluation standards. For example, the 2008 global financial crisis stemming from the US
financial market had the deep root from subprime loans. These are low quality loans with
a high level of risk. These loans are not scrutinized for solvency such as: annual income,
career biography, assets... and are usually guaranteed by very little or no proof of the
15


borrower financial capacity. Although these loans represent only 16% of the total loan, it
accounts for more than 50% of bad debt in the United States at that time.
The task of the inspection and control is to early detect violations in lending
activities to prevent risks. However, if the inspection and control of banks are too weak
and loose, it will lead to the untimely detection and handling of violations and non
performing loans are inevitable.
3.2.2. External problems
3.2.2.1. Society problems
Like all other objects in the market, commercial banks also are affected by many
factors such as economic environment, politic, legal, culture, ect… When the economy is
stable and tend to develop healthily, demand for investment in society will increase and
bring convenience to credit activities.
Several studies (12-14) have examined the effect of changing in the
macroeconomic environment to non-performing loan. Rajan and Dhal (15) through
analysing bad debt of commercial banks in India had showed that high GDP growth
reflects favorable macroeconomic conditions and good business environment which
make the bad debt tends to decrease. Fofack (16) examined the relationship between
credit risk and non-performing loan in Sub-Saharan Africa in 1990. The research
highlight the negative impact of GDP on non-performing loan. A prolonged economic
crisis and inflation will encrease bad debt.

Ali and Daly (17) used comparative analysis method to investigate
macroeconomic variables that are important for Australia and the United States. They
also study the effects of macroeconomic shocks on default rates in both countries. The
results indicate that the same set of macroeconomic variables display different default
rates for the two counties. Additionally the study finds that the US economy is much
more susceptible to adverse macroeconomic shocks when comparing to Australia. Polat
(18) also concluded that countries with different macroeconomic conditions have
different non-performing loan ratios when analysing data of Turkey and Saudi Arabia.
However, when economic problems occur like inflation or price fluctuation at
some items which affect to a group of industry on the market, banks will likely face to
credit risks. Some customers can adapt and overcome the difficulties but there are also
16


many customers who loss and cannot payback loans for the banks. Beside that, changing
in economic and political policies also affect banks and corporates using capital from
loans. Therefore, incomplete economic and political policies can bring difficulties for
corporates in the ability to payback loans and threaten the safety of the banks in lending.
Economic strength of Gia Lai is products of industrial plans like coffee and
pepper. In 2015, the dried pepper price was 10 USD/kg and the farmers have borrowed
lots of money from banks in order to invest in planting pepper. However, in recent years,
due to the affect of the weather conditions and the macroeconomic components, the
pepper price has been reduced sharply and just be at 2 USD/kg at present. This situation
has affected a lot to the farmers’ ability to repay the loan for banks. Coffee price also
have the same situation with pepper’s although the reduction in price is not so high.
Based on Mr. Dang Quoc Thinh’s opinion, Director of Vietinbank Gia Lai, this is not the
only problem of Vietinbank Gia Lai but the problem of all the banks in the area.
Therefore, actually, this is not the most serious problem of Vietinbank Gia Lai at present.
3.2.2.2. Problems from customers’ side
In some cases, this can be the main reason which lead to credit risk. It can be

separated into many types:
Fisrtly, due to business loss, customers cannot payback the loans although at the
beginning, they worked effectively. Low financial capacity of enterprises is will directly
affect their business performance. On the other hand, the poor management also leads to
ineffective business operations, thereby affecting the ability to repay bank debts.
Secondly, the main problem is that customers were dishonest. Nowadays, tricks to
fake document are more and more delicate. If credit employees don’t have enough
experience or the appraisal process is not careful, bank can easily be cheated. Moral
hazard within the financial system can be one of the main elements which brings bank
crisis (19).
Some enterprises intentionally report inaccurate financial figures, which cause
deviations in appraisal and credit provision and lead to difficulties in recovering bank
debt. Or maybe the enterprise itself lacks awareness of loan using and debt repayment
despite its financial capacity. Some businesses have the thought of breaking the law to
cheat, use capital for the wrong purpose to make a profit and borrow money with no
17


intention to repay the debt. This is also known as moral hazard.
Finally, maybe the problem from customers’ side is their loan purpose. After
disbursement, customers uses the loans not for the original purpose. Cause these purposes
are not been analysed and evaluated by the bank, it can be uneffective and lead to credit
risk.
Ms. Nguyen Thi Hoa, chief accountant of Duc Phu Gia company, said that the
company just borrow money from Vietinbank Gia Lai from 2016 until now. The
company at present owns hotel chains named Cicilia which is located in Nha Trang, Da
Nang and HCM city. She knows that it takes a lot of time to collecting data, checking
invoices and disburesement documents and completing the loan approval. However, she
was very satisfied with the employee’s attitude and support. Beside that, she also
appreciated Vietinbank in having new ideas to reducing the time of waiting and

encreasing the productivity.

18


Diagram 3.1 Initial Diagram of symptom and potential problems of Vietinbank – Gia Lai
Branch
3.3. Problem validation
Through the customers’ opinion, although they are not 100% sastified with
Vietinbank Gia Lai’s service, they still think it is acceptable. And cause the outside
problems especially the macroeconomic situation cannot be control by the bank, the
author just focus on inside problems in order to find out the causes and suggest the most
suitable solution.
As Mr. Dang Quoc Thinh, Director of Vietinbank Gia Lai, who is the one has the
overview about the operation of the organization and decides strategy for the Branch,
ensures that the main problem the organization is facing is “The number of customers is
19