Gauging credit risk management benefits

What are the largest challenges to credit rating development in the current context?

Nguyen Quang Thuan

The difficulties come from a multitude of sides. First and most important is the need for credit rating agencies to convince customers about using their credit rating results. As such, these organisations must be prestigious, independent, and capable of rendering inclusive and in-depth analyses.

On the part of businesses, not every firm is willing to embrace credit rating as it depends on their growth strategy and particular business plans.

Another difficulty relates to the quality of financial information of businesses. Many big firms have member units who are issuers, yet the parent companies don’t have consolidated financial statements, and that makes it extremely hard for credit rating units to properly assess the firms’ debt payment capacity in the future.

This often takes place at unlisted firms, or those with a less efficient financial management system. Firms must pay due heed to this factor as this is part of the business scoring process. Not having a well-functioning financial reporting system and low efficiency with planning work and deployment oversight creates disadvantages when it comes to business scoring by credit rating agencies.

The financial statements of many banks show a decline in profit this year, which partly comes from the fact that they have abundant capital sources, while firms couldn’t access capital. What’s the role of credit ratings in this context?

Our survey reflects that post-pandemic, many sectors face multiple hardships due to lacking orders or incurring a shortfall of orders. In these cases, lending to them is less significant, and risk persists as firms might use this capital to invest in risky channels as stock trading.

Meanwhile, the State Bank of Vietnam incurs the pressure of pushing members in the system to boost credit growth. I believe banks have reasons not to lend out. It might depend on their risk appetite. Banks, of course, also have the credit rating of independent businesses.

Leveraging business data analyses, we found that not every business in the real estate sector faces the doldrums. What makes sense is that we need to base on the actual credit quality of this sector and each business to outline suitable policies on lending growth attuned to the government and relevant management agencies’ commitment, as well as the risk appetite of each lender.

It is important that the government’s orientations be more concretised based on current credit capacity and capital absorption of sectors and business groups.

For instance, real estate has different segments, in which the residential segment faces difficulties, yet the office segment continues to have stable capital flow. Why don’t we allow lending to the office segment? It is necessary not to give out vague and unspecific policies.

More local firms with a credit rating would pave the way for credit institutions to be able to apply international standard risk management methods, such as Basel III standards, which are being expedited by several local banks.

As such, the application of a standardised approach besides internal ratings-based approach could aid both credit institutions and relevant management bodies in bolstering credit growth rooted on credit quality, rather than sector-based as currently.

What has the credit rating of businesses contributed to banks’ profit picture at present?

The core principle in both credit and investment activities is that the level of risk tolerance to be going proportional to the profit level. Commercial lenders with prudent growth strategy often report better credit quality over those whose business strategy focuses on risk-prone fields, yet generating higher profit margins.

For example, there were times when consumer finance and property-oriented credit served as main income earners for banks, yet there were also times these very segments eyed a sharp decline. This is the choice of business strategy leveraging risk appetite of each bank.

Aside from an internal credit-scoring system, banks are mandated to retain a credit rating system when venturing into bond investment. Hence, having an independent credit rating system could bring high value, especially when banks want to trade these debt instruments such as distributing to the market or retain them on their balance sheets. In these cases, credit ratings can serve as a reference for banks in defining their risk ratio.

What factors are important to promote strong credit rating practice in Vietnam?

We have chiefly focused on the supply side, being bonds, while the factor of how to build up demand or expand the investor base garners little attention. To tackle this conundrum, different sorts of stakeholders must join in the game.

For instance, in some countries like Thailand, venture funds are liable to raise capital from the public, but when investing in bonds, they are mandated to invest in those bonds with a credit rating. Bonds with a high credit rating don’t mean that they couldn’t face default, but it requires an oversight process with continuous update and assessment.

Vietnamese banks expected to get better credit ratings Ratings of Vietnamese banks are expected to be continually improved thanks to Viet Nam’s positive sovereign credit rating.