CREDIT RATING

IN COMMERCIAL BANKS
RATIONALITY AND ISSUES

GROUP 1
TABLE OF CONTENT

1. WHAT IS CREDIT RATING?

2. CREDIT RATING PROCEDURE IN US AND VIETNAM

COMMERCIAL BANKS

3. CREDIT RATING SYSTEM: REMAINING ISSUES

1. WHAT IS CREDIT RATING?

Credit rating is an assessment of a borrower’s creditworthiness in general terms or to a

particular debt or financial obligation, assigned to any entity that seeks to borrow money –
an individual, corporation, state or provincial authority, or sovereign government.
1. WHAT IS CREDIT RATING?

■ Credit rating in commercial banks

■ The way commercial banks evaluate their customers’ ability to pay the loan.
■ For commercial banks, a credit rating system helps them control the risk by:
■ + Assess the risk of customers before lending to support their decision-making.
■ + Classify loans by risk to evaluate the quality of their credit portfolio.
1. WHAT IS CREDIT RATING?

•Difference in credit rating between in US and VN

  USA Vietnam

Expression Letter grades Letter & Number

Subjects Big business and government Any individuals or companies

Provided by Credit rating agencies: S&P, Fitch, Each commercial bank

Moody’s CIC
 
2. CREDIT RATING PROCEDURE IN US AND
VIETNAM COMMERCIAL BANKS
2.1. Credit rating procedure in US commercial banks

Business
Classify
and borrowers
government

• Apply for
a loan USA • Provide
commercial credit
banks rating

• Request Credit
credit rating
rating
agencies
2. CREDIT RATING PROCEDURE IN US AND
VIETNAM COMMERCIAL BANKS

2.1. Credit rating procedure in US commercial banks

■ In US, credit rating agencies pay a vital role in evaluating the borrowers =>
commercial banks depend deeply on their credit result to decide whether give
the loan or not
■ There are 3 big credit rating agencies in the US:
– S&P conducts ratings based on the subject's probability of default (ρ(d)).
– Moody's focuses on damage forecasting (Le).
– Fitch's rating is a combination of the two factors above. The institution
focuses on the probability of default until default occurs, after which point,
will rank based on a forecast recovery index.)
2. CREDIT RATING PROCEDURE IN US AND
VIETNAM COMMERCIAL BANKS

2.2. Credit rating procedure in Vietnam commercial banks

■ Is there any “credit rating agency” in Vietnam?
– This system is called Credit Information Center (CIC)
– Vietnam National Credit Information Center is a public non-business organization directly
under the State Bank of Vietnam, performing the function of national credit registration;
collecting, processing, storing and analyzing credit information.
– Store the information of more than 30 million borrowers, with the participation in information
reporting of 100% of credit institutions operating in Vietnam, 1000 people's credit funds and
microfinance institutions as well as other organizations inside and outside the banking.
– However, many commercial banks in Vietnam use CIC’s information just for reference
because each bank will have different credit rating system.
2. CREDIT RATING PROCEDURE IN US AND
VIETNAM COMMERCIAL BANKS

2.2. Credit rating procedure in Vietnam commercial banks

- The credit rating between two commercial banks: Techcombank and BIDV.
 Comparing the internal credit rating system between the two banks for individual customers 
Criteria Techcombank BIDV
Income and personal The Information Collected includes: Income information includes:
information scores Age, sex • Age
• Academic level • academic level
• Job • Criminal
• Working time • Status of Residence
• Working time • number of followers
• Age, gender. • family structure
• Academic level • life insurance
• Job • Current job accumulation
• Working time • current job time
• current job time • occupational risks
• Status of Residence Similar
• Marital status, family structure
• number of dependents
• Personal income/year
• Family income/year
Other information
Collecting and grading  Relationship with other credit institutions • Monthly net income
communication with  Relationship with techcombank •Payables/income ratio
banks • Services used
• Principal and interest repayment status
Total score The total score will be calculated Personal score = Score for personality indicator *
equals the sum of the points according to the Weight for personality indicator
previously calculated step + Score for the indicator of solvency * Ratio for
the indicator of solvency
+ Proportion for the indicator of personality: 40%
+ Ratio for the indicator of ability to repay: 60%
  Different
Compare the internal credit system between the two banks for institutional customers
Techcombank BIDV
classification of Main line of business customer's system is The main production and business activities
professions returning over 50% of sales for 3 are the activities that bring back 50% of the
consecutive years. revenue or more of the total annual revenue
of the customer.

In the case of a business organization that does not have a turnover of more than 50%, the
main business line is the industry with the most developed functions in the future.

the size of a business based on net revenue, equity, total assets, based on equity size, labor size, net revenue,
import and export payment turnover, foreign total outstanding loans to banks.
currency sales, number of employees, ...

payment target Ability to pay quickly

Compare the internal credit system between the two banks for institutional customers
Techcombank BIDV
Operation Inventory turnover Working capital turnover
Average collection period Inventory turnover
Asset efficiency Accounts Receivables
Efficiency of using fixed assets

Debt Liabilities/Total assets Total liabilities/Total assets Long-term

Liabilities/Equity debt/Owner's equity
Overdue debt / Total outstanding balance at
the bank

Income Total income before tax / Turnover Gross profit/Net revenue

Total income before tax/Total assets
Total income before tax / equity
Operating profit Sales/Revenue pure
Profit after tax/Equity
Profit after tax/Average total assets
(Profit before tax + Expenses) interest expense)/
Interest expense
Compare the internal credit system between the two banks for institutional customers
Techcombank
Non-finance citeria Cash flow metrics
Indicators on management qualifications
Indicators on credit relationship (credit
relationship with other credit institutions,
credit relationship with Techcombank)
Indicators of the organization's business
environment
Other performance evaluation indicators
proportion distribution The proportion of financial indicators - The
of indicators proportion of non-financial indicators is
distributed as follows:
• State-owned enterprises: 50%- 50%
• Foreign-invested enterprises: 40%-60%
• Other enterprises: 60%-40% (Bonus points
for audited financial statements: +6 points)
BIDV
Ability to repay from cash flow Management
level and internal environment of enterprises
Relationship with the bank
External factors
Operational characteristics of borrowers
The proportion of financial indicators - The
proportion of non-financial indicators is
distributed as follows:
• For audited financial statements: 35% - 65%
• For unaudited financial statements: 30% -
65%
2. CREDIT RATING PROCEDURE IN US AND
VIETNAM COMMERCIAL BANKS

2.2. Credit rating procedure in Vietnam commercial banks

- Disadvantage of Techcombank credit rating system
• The system of urinals has not been fully built yet
• Unspecified evaluation criteria in time series
• There is no distinction in ratings for each different loan
■ Disadvantage of Techcombank credit rating system
• Currently, BIDV is determining the main business lines of corporate customers based on the total
revenue of that industry, which must be over 50% of total revenue. As mentioned, such identification
is not appropriate in the business environment in Vietnam because companies diversify their
industries.
• In addition, determining the size of an enterprise based on equity, number of employees, net revenue,
and total assets has not clearly shown the efficiency level in the operation of the enterprise.
3. CREDIT RATING SYSTEM:
REMAINING ISSUES
3.1. Difference in credit rating systems
■ Credit information can vary based on different rating agencies (in US) or commercial
banks (in VN)
 Benefit the borrowers (their credit rate can be higher)
 Confuse the lenders (commercial banks)
3. CREDIT RATING SYSTEM:
REMAINING ISSUES
3.2. Non-disclosure of significant information
■ Firm being rated may not provide significant or material information, which is likely to
affect the investigation team of the credit rating company or commercail bank.
■ A large amount of Vietnamese prefer cash to credit card
 It’s hard for the commercial banks to deeply investigate the credit history of the
customers
3. CREDIT RATING SYSTEM:
REMAINING ISSUES
3.3. Rating might be biased
■ This is an internal factor from the commercial banks and credit rating agencies
■ Credit officers are the ones who directly carry out the steps in the credit scoring and
customer rating process.
■ There are many cases when the borrowers want a higher rate than their actual
performance => send commissions to credit officers who take charge of their credit
profile => falsify the actual credit rating
3. CREDIT RATING SYSTEM:
REMAINING ISSUES
3.4. External conditions
■ Due to the Covid 19 pandemic, the world is encountering many obstacles
 More people and companies want to get a loan to continue their lives and
businesses
■ However, their financial situations make their credit rating lower -> less likely to get a
loan -> might end up borrowing from back credit operations with high interest rate
3. CREDIT RATING SYSTEM:
REMAINING ISSUES
3.5. Rating mechanisms, procedures and policies
■ In USA, the giving loan decisions of many commercial banks are hugely influenced by
credit rating from agencies.
• However, ratings are legally considered opinions -> rating agencies cannot be
sued due to their errors.
■ In VN, the CIC works directly under SBV -> higher responsibility.
• However, the rating result from CIC remains unpopular and commercial banks
only take it for reference during the rating procedure.
• Besides, it is estimated that there is only around a thousand of enterprises taking
part in the CIC system -> a modest number
3. CREDIT RATING SYSTEM:
REMAINING ISSUES
3.6. The level of banking technology system
■ In VN, each commercial bank has a different rating system. The credit scoring and
business rating system is very complicated and requires high accuracy, so in order to
achieve high efficiency, the bank must invest in modern facilities and information
systems to collect and process information for rating evaluation.
■ -Recently banks have begun to appreciate the role of data and data management.