Specific risk management system at VBSP
(VBSP News) VBSP’s credit risk is divided into 2 groups. They are credit risks due to objective reasons and credit risks due to subjective reasons. In order to well manage risks, VBSP developed a special system as following:
Specific risk management system at VBSP
(1) VBSP conducts risk management by applying a specific model that is suitable with the Vietnam’s political, socio-economic and cultural characteristics. This model is based on the joint coordination and supervision of mass organizations, Savings and Credit Groups (SCGs), local governments and VBSP for borrowers throughout the process of customer selection, credit analysis, loan approval, disbursement and loan collection or debt settlement.
(2) Potential customers are identified and proposed by the SCGs Management Board and monitored by local mass organizations at grassroot level. All VBSP loans are required to have business plans. VBSP applies credit-worthy guarantee from SCGs and evaluates the borrower's ability to repay through SCG’s meetings being witnessed by local authorities and mass organizations to evaluate the group members' ability to repay.
(3) Right after receiving loan applications, VBSP check their validity, eligibility and the borrower's credit history at VBSP. For direct loans, by referencing data from the Credit Information Center (CIC), VBSP uses data analysis to make more accurate lending decisions, particularly for large loans.
(4) Entrusted mass organizations monitor lending to ensure that borrowers use loans for right purpose and on time repayment. Customers are notified by VBSP at least one month before the principal debt is due. The SCG leaders collect monthly loan interests from group members and pay to the VBSP at the commune transaction points in the presence of the entrusting mass organizations. The cash flow plan dictates how principal repayments are phased out. Loans are restructured or frozen in the event of objective risks affecting the repayment plan, depending on the severity of the loan damage and the borrower's ability to repay.
(5) Credit risk provisioning. At the time of making provision, the general provision is equal to 0.75 percent of the loan outstanding balance, excluding overdue and frozen debts; VBSP decides on a specific provision based on the results of debt classification and VBSP's financial capacity.
The principle of establishing the risk reserve fund is based on the Prime Minister's Decision, rather than the principle of general deduction of commercial banks based on the SBV's guiding circulars. On the one hand, because VBSP's credit feature is small loans, provisioning is subject to the overall average outstanding loan balance. Furthermore, debts written off from the risk reserve fund are applied to debts for objective reasons. To limit overdue debts and risky debts due to subjective reasons, VBSP takes strict debt management measures.
(6) The establishment of a strict supervision system via the management information technology is the foundation of credit activity quality management. Quality assessment indicators and a plan for implementing them to assign targets to commune-level mass organizations and internal management of each district-level transaction office and provincial-level branch include:
(i) The criteria for outstanding loan classification in accordance with regulations, including due, overdue and frozen debts. Overdue debt targets are monitored daily and the assignment of each borrower's overdue debt targets is monitored to each SCG, communal mass organizations and field credit officers in charge of each location, district transaction offices, provincial branches and credit schemes.
(ii) Overdue debts are also classified according to their debt status (the level of time they have been past due) and due, overdue, and frozen debts are divided into recoverable and unrecoverable categories.
(ii) The criteria for evaluating the SCG's operation quality are based on indicators of outstanding loan quality, frequency of monthly loan interest collection, deposit collection and group members; The criteria for evaluating the quality of commune transactions and credit by communes, transaction offices, provincial and city branches are largely based on quantitative indicators such as overdue debt ratio, due debt collection ratio, loan restructuring ratio (debt extension),...
(7) The remote monitoring warning information system aims to audit internal control at all management levels. VBSP develops a software system for remote monitoring and alert management based on quantitative indicators related to each loan/SCG member, (3 months of inactivation, overdue extension, outstanding interest, unresolved due debt and some indicators related to SCGs etc.).
(8) Handling risked debts for objective reasons with the following process: Because VBSP entrusts some steps in the lending process through mass organizations and delegating the SCG leaders to collect monthly loan interests, when confronted with risks due to objective reasons based on the customer's application, VBSP must collaborate with the Chairman of the commune-level People's Committee, SCG leaders, entrusted mass organizations and representatives of relevant specialized agencies (veterinary agencies, flood prevention and control agencies, health agencies)...) arrange a minute writing to identify the extent of capital and property damage and submit to competent authorities for consideration.
Concerning the risk reserve fund for debt settlement: VBSP is permitted to use the credit risk reserve fund to settle all debts, including due debts when customers meet with risks due to objective reasons and are eligible for the debt settlement as regulated by VBSP.
Concerning the authority to handle risked debts: For VBSP, the Prime Minister decided to write off debt (principal and interest) for customers if the amount of the write-off exceeds the VBSP risk reserve fund or outstanding debts that cannot be recovered at the request of the State Bank of Vietnam and the Ministry of Finance; The Chairman of the Board of Directors of VBSP shall decide on frozen debt and write-off for customers (in the event that the size of the debt write-off does not exceed the risk reserve fund of VBSP); The General Director of VBSP shall decide to extend the debt to customers while maintaining the principles of publicity, democracy, and socialization.
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