Table of Contents

I. Overview of credit rating............................................................................................3

1. Credit.......................................................................................................................3
2. Credit rating............................................................................................................4
II. Credit rating system in BIDV....................................................................................7
1. An Overview of BIDV............................................................................................7
2. BIDV’s credit rating system to customers............................................................10
2.1 For individual customers.................................................................................11
2.2. For corporate customers..................................................................................15
III. Rationality and issues of BIDV’s credit rating system..........................................23
1. Rationality.............................................................................................................23
2. Issues.....................................................................................................................25
3. Solutions contributing to completing BIDV's customer credit rating model........26
I. Overview of credit rating
1. Credit
a. Definition
- Credit is the process of one party receiving financial (or other) resources of value
from another party and repaying at a later date. The most common form is bank
credit, where a bank lends money to a borrower who is then obligated to make
scheduled or periodic interest payments and repay the principal upon maturity to
them.
- Bank credit, like other types of commercial credit, is granted because the creditor
trusts in the credit recipient's ability to repay. Therefore, credit risk is constantly
linked to bank credit.
b. Types of credit
- By term:
+ Short-term credits: are loans with a loan term of less than 1 year
+ Medium-term credits are loans with terms from 1 to less than 5 years
+ Long-term credits are loans with a term of 5 years or more
- By collateral requirements:
+ An unsecured loan is a form of credit in which the borrower does not need to
pledge any collateral.
+ A mortgage loan is a form of credit in which the borrower needs to use assets or
valuable documents to ensure loan payment. Commonly used assets include houses,
land, vehicles, goods, etc. Commonly used valuable documents include land use
rights certificates and assets attached to land, car registration papers, etc.
- By way of credit granting: according to this classification, bank credit includes
discounting, lending, guaranteeing, and leasing activities.
+ Discounting commercial paper is when the bank advances money to the
customer corresponding to the value of the commercial paper minus the bank's
income to own an undue commercial paper (or a debt paper).
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 + Lending is a credit operation in which the bank permits the customer to utilize
the bank's money on the basis of a credit contract based on the payback principle.
+ Guarantee is the commitment of the bank to fulfill its financial obligations on
behalf of the customer. Even though they did not have to pay out money, the bank
allowed customers to use their reputation to profit.
+ Leasing occurs when a bank spends money to purchase assets to lease to
customers in accordance with specified agreements. After a specified period of time,
the consumer is required to pay both principal and interest to the bank. Leasing is
typically used as a medium to long-term kind of borrowing.
- By customer: credit for governments, financial institutions, businesses, and
individuals.
- By the purpose of capital use: production and business credit, consumer credit.
- By economic sector: industrial credit, agricultural, etc.
c. Credit risk
- According to 493/2005/QD-NHNN, credit risks in the banking activities of credit
institutions are potential losses that may arise in the banking activities of the credit
institutions due to the failure of their customers to perform or their not being able to
perform their obligations in accordance with their commitments.
- Credit risk is the probability of a financial loss resulting from a borrower's failure
to repay a loan. Banks can mitigate credit risk by analyzing factors about a borrower's
creditworthiness, such as their current debt load and income.
=> Banks have come up with a credit rating system of their own to assess the
credit risks of their current and potential customers.
2. Credit rating
a. Definition
- Credit rating in banking refers to the assessment of a borrower's creditworthiness
based on their credit history and ability to repay a loan. Banks use credit ratings to
determine the interest rate and terms of a loan, as well as the likelihood of repayment.
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 - A high credit rating shows that the borrower has the ability to repay debts without
difficulty. A poor credit rating indicates that the borrower may have difficulty making
payments or even be unable to repay the loan.
- Customer credit rating is intended to help commercial banks clearly know the
customer's status. Based on this result, the commercial bank will make decisions to
grant or refuse loans; increase or decrease line of credit; apply interest rate incentives
for customers to protect the interests of banks and customers.
b. Role of credit rating
- For businesses:
+ Increase opportunities for businesses when accessing the capital market. A
company with a high-ranking order will have more opportunities to access more
diverse financial markets at cheaper rates. Because banks' primary goals are safety
and profitability, they are willing to lend to borrowers who can demonstrate their
ability to repay.
+ Credit scoring also helps businesses evaluate their financial capacity and have
appropriate development and management strategies. Businesses can be aware of their
ability to repay debt and mobilize capital in the market based on the rating scale
provided by banks, from which they can take measures to build their financial
structure, policies, and proper investment policies, for development.
+ Enterprises with a high-ranking order are not only favored by banks, but they
also have the opportunity to boost their reputation, competitiveness, and brand name
in the market.
- For commercial banks:
+ Customer credit ratings assist commercial banks in improving their risk
management skills. This is the foundation for banks to propose solutions to problem
loans in order to avoid potential risks.
+ Credit ratings also help commercial banks improve their credit quality.

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 + Furthermore, credit score results are used to estimate the amount of loaned
capital that will not be recovered in order to set up credit risk provisions.
c. Credit rating process
- Each bank has its own credit rating system for each sort of customer. However, a
simple credit rating procedure entails the following steps:
+ Collect data on the criteria used in analysis and evaluation. In addition to the
information provided by consumers, credit officers can acquire information from
sources such as CIC, etc during the collection process.
+ Analyze by model to conclude the rating, using financial and non-financial
criteria simultaneously.
+ Monitor customer credit status to adjust rating. Summarize the results obtained to
compare with the actual risk, and then consider altering the rating model.
d. Factors affecting credit ratings
- Quality information about customers: the collection of information about
customers is a crucial step that has a direct and decisive impact on the correctness of
credit scores. This requires that the information be thorough and precise, correctly
reflecting the borrower's financial status and ability to repay debt. As a result, before
being utilized to evaluate customers, this information must be properly filtered and
validated.
- The physical conditions and information systems in the bank also have a large
impact on the effectiveness and dependability of the credit rating system. Credit
scoring is complicated and demands great accuracy, so information must be stored,
processed, and updated using advanced, current, and scientific software.
- Credit officers qualifications and capabilities. Credit officers must be
professionally certified, comprehend risk management in credit operations, and be
familiar with credit rating application software. Furthermore, credit officers must
have professional ethics in order to ensure that the scoring process is honest and
dependable.
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 e. Credit rating criteria
- Business type
- Non-financial indicators
- Financial indicators
+ Profit indicators: ROA, ROE, ROAA, etc.
+ Financial leverage indicators: D/E
+ Performance indicators: working capital turnover, inventory turnover, etc.
+ Liquidity indicators: current ratio, quick ratio, etc.
II. Rationality and issues of BIDV’s credit rating system
1. Rationality
- Unification in measuring credit risk: Ernst & Young created BIDV's credit
socialization system according to the State Bank's guideline model and the
characteristics of this bank's credit activities and development strategy. As a result, it
assures that it still adheres to the State Bank's criteria while continuing to conform to
international regulations. The credit socialization model developed by BIDV follows
a strict structure that includes: a set of evaluation criteria and weighted ratings; How
to calculate the value of each assessment criterion; converting values to points After
scoring, how should client groups be classified. The credit rating system has unified
the measuring and detection of credit risks at BIDV branches. The method for
calculating the targets is explained clearly and simply, making it simple, and making
implementation simple for credit officers.
- Improved ability to prevent credit risks: Group of indicators forecasting the
impact of the State's protection policies, the level of competition in the business field
of enterprises, and the degree of dependence on conditions is naturally included in the
group of non-financial indicators to enhance the ability to predict the risk of financial
difficulties of customers in the future. Since BIDV implemented the credit rating
system (in 2006), the ability to predict credit risks has increased and the bad debt ratio
in the overall system has steadily decreased over the years, particularly in the period
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before and after the credit rating system was implemented. The bad debt ratio in 2021
and 2022 is 0.82% and 0.83%, respectively, and has maintained below 3% until now.
BIDV additionally evaluates and re-ranks consumers based on their credit balance at
BIDV on a regular basis to boost accuracy and take quick action against potential
issues.
- Credit rating results are the basis for credit limit decisions: Before the
implementation of the credit rating system at BIDV, the evaluation of customers'
financial condition and credit rating was mainly reliant on the personal assessments of
credit officers. Because loan granting decisions lack flexibility and impartiality,
BIDV's entire company operations suffer as a result of a high bad debt percentage.
BIDV's credit rating system is tailored to each customer group, with particular criteria
and score scales for economic organizations, people, and credit institutions, as well as
specified by industry and field of activity. In addition, non-financial factors are
interlaced to reduce the subjective effect of raters. Furthermore, credit rating data are
used by banks to determine credit limitations for each customer group, assisting in the
improvement of quality and credit risk management.
- Creating credit-based consumer regulations: According to document No.
"1131/QD-HQT" dated November 11, 2011, there will be regulations, credit
regulations connected to calculating interest rates, collateral, loan forms... for each
customer group based on credit rating data. Customers with high credit ratings (from
AAA to BBB) will be given priority in credit, and those with a strong credit history
will benefit from incentives such as loosened lending restrictions and collateral
requirements, as well as lower loan interest rates. The following policies are
additionally tightened for low-rated clients (BB and below).
- Loan decision support has become quick and simple: The credit rating system,
with every criteria fully described on scoring and weighting conducted with
computerized software, has enabled credit officers to evaluate consumer credit more

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precisely and rapidly. We may then discover potential consumers and research and
assess other criteria before deciding whether to give or deny a loan.
- In conclusion, the rationality of credit rating to customers of commercial banks is
essential for a sound banking system. Credit ratings provide a measure of a customer's
creditworthiness and help banks assess the risks associated with lending. Overall,
credit ratings help banks make informed decisions, maintain prudent lending
practices, and minimize the risk of defaults. They also provide transparency and
accountability in the banking system, benefiting both customers and financial
institutions. In addition to the reasons mentioned above, credit ratings also play a
crucial role in the overall stability of the financial system. By evaluating the
creditworthiness of customers, commercial banks can manage their lending portfolios
effectively, mitigate potential risks, and prevent undue exposure to bad loans.
2. Issues
- BIDV's credit rating system has been improved over time. In general, this system
includes almost all important criteria in evaluating and ranking a customer. However,
besides the achieved results, BIDV's credit rating system still exists. under certain
limitations.
- Information on credit rating input data: The current customer credit rating
methodology used by BIDV is based on an examination of two sets of financial and
non-financial variables. For the non-financial indicators, credit officers gather the
figures by analyzing the results of a survey that the bank provides to customers to fill
out themselves. It is nearly impossible to check and assess the accuracy of some of
these non-financial indicators. As a result, consumer evaluations and ratings are
erroneous.
- Determine main business lines and enterprise-scale: BIDV is now identifying the
primary business lines of corporate clients based on the overall revenue of that
industry, which must be greater than 50% of total revenue. As previously stated, such
a conclusion is not acceptable in the Vietnamese economic climate since local firms
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frequently diversify their business lines. Furthermore, the size of a business is
determined by four criteria: equity, number of employees, net income, and total
assets, according to BIDV's credit rating methodology. The use of total assets criteria
still does not appear to represent the level of operational efficiency of the firm, which
is one of the concerns in credit risk management.
- Criteria for evaluation
+ BIDV only has the indicator of medium and long-term principal repayment
ability factor in the category of cash flow capacity indicators. As previously stated,
this indication may not be appropriate for enterprises with short-term loans.
+ Non-financial indicators now used at BIDV are divided into five categories:
debt repayment capabilities from cash flow, management level, and internal
environment, interaction with banks, external variables, and other considerations.
Additional operational features In which the indication of bank relationship accounts
for the greatest amount (37%). It must be recognized that the majority of the
indicators in this group are judged subjectively. If a client is establishing a credit
connection with BIDV for the first time, or if the customer has not had a lengthy
relationship but is a customer with strong business operations, a low score in these
criteria indicates that there is a bias in correctly evaluating consumers.
- Concerning credit officers' abilities and experience with credit ratings: It is
obvious that credit officers have a substantial effect on ranking outcomes. It is
determined by the credit officer's qualifications, experience, and ability.
3. Solutions contributing to completing BIDV's customer credit rating model
- Improve input data quality: Collecting non-financial information includes more
than simply collecting information from consumers; credit officers must also carefully
examine the accuracy of the information supplied in a variety of methods, such as
checking client information held at the Credit Information Center (CIC).
- Finish the evaluation criteria system: Reduce the industry's revenue percentage as
the basis for establishing the major business industry from 50% to 40% of total
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revenue. BIDV should explore employing a broad principal repayment coefficient,
like in VCB's credit rating model, rather than a coefficient that solely measures the
capacity to repay medium and long-term principal.
- Employee training on the internal business credit rating system: BIDV should
conduct training sessions for credit officers to help them understand and use the credit
building system as effectively as possible, as well as training on comprehensive
customer evaluation methods. more detailed and scientific. At the same time, the
guiding papers must be updated in a consistent, precise, and easy-to-understand
format, with any relevant appendices properly attached.
- Improve the information technology system so that it can support the internal
consumer credit rating system. Because BIDV's internal credit rating system has been
fully automated using credit rating software. As a result, BIDV must provide a staff of
IT professionals to not only the Head Office but also the branches in order to quickly
resolve technical issues and update system changes and additions.

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