SMEs
Many types of enterprises exist in the market economies Depending on different approaches, enterprises can be divided into different categories For example, based on operational scope, enterprises can be divided into large enterprises and small and medium enterprises (SMEs) Different countries have different definitions of SME, depending on their economic development and living standard On the basis of that, each country chooses different criteria which are suitable with its economic growth in each stage of the development to classify large enterprises and SMEs In general, the concept of SME is defined based on two popular factors: ownership forms and operational scope such as the number of employees, total capital or assets.
In Vietnam case, in the period 2001-2009, SMEs are defined as independent production and business establishments which make business registration according to the current law provisions, each with registered capital not exceeding VND 10 billion or annual labor not exceeding 300 people On the basis of the concrete socio-economic situation of each branch or locality, in the course of implementing the support measures and programs, both or either of the above-mentioned criteria on capital and labor may be applied in a flexible manner 2
Since 2009, the definition of SMEs is stated more clearly in Decree No.56/2009/ND-CP that: Small and medium businesses that have business registration in accordance with law are divided into three levels: micro, small and medium scale total
2 Vietnamese Goverrnent, Decree No 90/2001/ND-CP (23 November 2001) on support for development of SMEs, Article 3 capital (total capital equivalent to total assets is determined in the balance sheet of enterprises) or number of employees per year (total funding is the priority criteria), as follows 3 :
Micro enterprises Small-sized enterprises Medium-sized enterprises Number of laborers Total capital Number of laborers Total capital Number of laborers
Between over VND 20 billion and VND 100 billion
Between over VND 20 billion and VND 100 billion
Between over VND 10 billion and VND 50 billion
Aside from the basic characteristics of a common enterprise, SMEs have some unique features as follows:
SMEs are defined depended on their sizes regardless of the forms of ownership; SMEs thus can be private enterprises, state-owned enterprises, cooperatives, joint-stock
3 Vietnamese Goverrnent, Decree No.56/2009/ND-CP (30 June 2009) on assistance to the development of SMEs, Chapter I, Article 3
China – Vietnam SME Trade Exchange and Cooperation Seminar, Beijing 2010, The development of SMEs in Vietnam, http://businessinsides.com/development-vietnam-small-medium-enterprises.html companies, limited liability companies and so on SMEs also exist in almost all business sectors such as agricultures, forestry, fishery, industry, construction, trade and service.
SMEs just need a small amount of initial capital so their business cycle is often short, allowing quick capital recovery, creating more opportunities for SMEs to operate efficiently Therefore, many individuals and organizations in all economic sectors are attracted to invest in SMEs.
Compared to large enterprises, SMEs are much more active and flexible when facing with continuous vacillations of the market Producing a small quantity of products, they can easily navigate their businesses and change their products to meet the market demand They can also easily change their equipment because SMEs with small business scale do not require much additional capital
Insufficient capital hinders SMEs' ability to invest in advanced technological equipment, hampering their production capacity This limits product quality and competitiveness, hindering their growth and success in the market.
Limited information access hinders market research and product distribution for SMEs, stemming from inefficient marketing strategies Their small size and limited networks result in a lack of professional information systems, leaving them unaware of crucial market changes such as material availability, technological advancements, and competitive dynamics.
SMEs benefit from their simple organizational structures, enabling swift decision-making and efficient supervision while minimizing labor and administrative costs The close relationships within SMEs foster open communication, encouraging employee input that drives enterprise growth However, a common challenge faced by SMEs is the lack of technical expertise and management skills among their leaders Furthermore, attracting and retaining highly skilled managers can be difficult due to limited salary and benefit packages offered by SMEs.
SMEs suffer from limited market share and competitiveness due to their small scale and low capital Despite their need for financial support, SMEs face significant obstacles, particularly in accessing funds Traditional lenders, such as banks, are often hesitant to provide loans to SMEs due to their perceived lack of reputation and stability This lack of access to financing hinders SMEs' ability to expand, invest in technological advancements, and enhance their workforce, ultimately limiting their growth and competitive advantage.
In brief, despite some advantages, SMEs still have a lot of limitations on capital, technology, management methods which lead to their low competitiveness and low ability to access to the market These are the underlying factors causing risks for banks when lending to SMEs Therefore, SMEs need to overcome these constraints and banks must carefully consider before extending credit to these customers.
2.1.1.3 Roles of SMEs in the economy
Since 1986, Vietnam has achieved an extraordinary development with the application of renovation policies The economy was duplicated and the poverty was declined significantly, showing that Vietnam economy is in the progress of restructuring and integrating with the global economy In this situation, to successfully apply the strategies toward the industrialization target in 2020, Vietnamese government will maintain the stable economic growth, continue to reconstitute the economy with the lessons from two Asian countries which are Korea with concentrated industry and Taiwan with the success of SMEs In recent years, with the development policies unified from these two models, Vietnam has successfully established some large corporations in priority industries, boosting the private SMEs with very high growth rate, and continuing to equitize the state-owned enterprises 4
In general, SMEs play an indispensable and irrefutable role in elevating the economic growth and social development in Vietnam SMEs have made an evidential contribution to the country’s development process and heighten the efficiency and the
SMEs (Small and Medium Enterprises) play a crucial role in fostering economic flexibility in Vietnam, as highlighted by Nguyen Viet Long (2011) This is evident in the declining unemployment rate and the increased mobilization of funds from both domestic and international sources Notably, this financial support fuels business growth and contributes to the overall resilience of the Vietnamese economy.
SME credit
Credit extension means an agreement allowing an organization or individual to use a sum of money or a commitment allowing the use of a sum of money on the repayment
5 OECD, Promoting SMEs for Development (2004)
6 HTH, Thuong mai dien tu, http://www.taichinhdientu.vn/Home/Thuong-mai-dien-tu-Khong-so-thieu-cong-nghe- chi-so-thieu-niem-tin/20111/105655.dfis (Jan 2011)
7 Bashir Ahmad Fida, The Importance of SMEs in Economic Development (2008) principle by such professional operations as lending, discount, financial leasing, factoring, bank guarantee and other credit extension operations 8
In other words, bank credit is the provision of resources by the lenders (banks) to the borrowers (individuals, businesses and other entities) to use in a period of time specified in contracts The borrowers are responsible for the unconditional return of principal and interest to the banks when they become due 9
Credit activities play a significant part in the operation of commercial banks. Compared to other banking activities, not only do credit activities bring the most profit for the banks, but they also implicit the highest risk which may leads to the banks’ loss or even bankruptcy
Credit is a borrowing relationship based on trust Without trust, there are no credit relationships, because they can be established only when the lenders believe that the borrowers will efficiently use the resources and fully repay the principal and interest to the lenders.
Credit is a borrowing relationship in which the borrowers only temporarily use the resources in a certain period of time After that period, the borrowers must reimburse the lenders.
The value of the repayment is often higher than the original value of the resources.
In other words, the borrowers have to pay an additional interest.
In the market economy, credit activities are always affected by objective laws such as: law of supply and demand, law of competition, law of value etc.
Credit activities of commercial banks in the market economy always contain potential risks because the borrowers can repay the banks only when they use the resources effectively Meanwhile, there are many factors affecting the borrowers such as market price fluctuations, natural disasters, economic crises, political instability etc
8 Vietnam Law on Credit Institutions 2010, Chapter I, Article 4
9 Dinh Duc Thinh and Pham Hong Yen, Bank Accounting, Banking Academy Pulisher (2011)
According to Vietnam Law on Credit Institutions 2010, credit institutions shall be entitled to extend credit to organizations and individuals in form of lending, discounting and re-discounting negotiable instrument and other valuable papers, providing bank guarantee, issuing credit cards, domestic and international factoring, and other forms of credit after obtaining the State Bank’s approval 10
Credit exists in many forms and many names; however, based on a number of different criteria, credit classification is the arrangement of credit loans in groups The classification of credit aims to establish appropriate procedures for lending and improve the efficiency of credit risk management Here are some ways that banks often use when analyzing and evaluating credit:
- Credit institutions shall extend short-term loans with term of less than one year to organizations and individuals to meet their financing requirements for production, business, services and living requirements.
- Credit institutions may extend medium-term loans with term from one to five years to organizations and individuals to purchase fixed assets, improve or renovate technology equipment, expand business scale, implement small-scale investment projects Medium- term credit is also a source of working capital for enterprises, especially newly established ones.
- Credit institutions may extend long-term loans with term of more than five years (maximum term can reach 20-30 years, or even 40 years) to organizations and individuals to meet their long-term requirements such as building houses, investing in large-scale equipment, establishing new production facilities etc 11
Based on different purposes, such as
- Real estate loans are loans are secured by real property – land, buildings, and other structures – and include short-term loans for construction and land development and
10 Vietnam Law on Credit Institutions 2010, Chapter IV, Section 2, Article 98
11 Vietnam Law on Credit Institutions 2010 longer-term loans to finance the purchase of farmland, homes, apartments, commercial structures, and foreign properties
- Financial institution loans include credit to banks, insurance companies, finance companies, and other financial institutions.
- Agricultural loans are extended to farms and ranches to assist in planting and harvesting crops and supporting the feeding and care of livestock
- Commercial and industrial loans are granted to businesses to cover purchasing inventories, paying taxes, and meeting payrolls
Personal loans encompass financing for purchasing automobiles, mobile homes, appliances, and other retail goods; home repairs and modernizations; and covering medical and other personal expenses These loans may be granted directly to individuals or indirectly through retail dealers, meeting the financial needs of individuals.
- Miscellaneous loans include all loans not listed above, including securities’ loans
- Lease financing receivables, where the lenders buys equipment or vehicles and leases them to its customers 12
Based on security for loans
- Secured loans: Loans can be extended on the basis of being secured by a mortgage or collateral of the borrower, guarantee by a third party It is not allowed to extend any loans on the basis of being secured by the shares of the lending institutions
- Unsecured loans: The extension of loans without security to customers shall be subjected to the Government’s regulations Unsecured loans generally offer higher interest rates and less flexibility than secured loans.
Based on the origin of loans
- Direct loans: The bank gives the loans directly to consumers Direct loans are applied for, arranged, approved and closed at the bank.
12Peter S Rose & Sylvia C Hudgins, Bank Management & Financial Services (2008)
- Indirect loansare applied for by the borrower at a retail outlet (e.g an automobile dealership), and after approval by the banks, loan funds are sent directly to the retail outlet.
SMEs play an essential role in activating and maintaining economic growth and equilibrate development in Vietnam Like other forms of enterprises, in the operational process, these companies use bank credit to meet their capital shortages as well as to optimize the efficiency of their capital
Bank credit plays a pivotal role in fostering the growth of small and medium-sized enterprises (SMEs), driving overall economic expansion By preferentially extending credit to highly profitable businesses and limiting it for lower-profit ones, banks influence the balance between supply and demand for goods and services, thereby shaping the economic landscape.
Bank credit plays a crucial role in enabling SMEs to invest in essential infrastructure and equipment, contributing to their growth and competitiveness For SMEs with limited capital and scale, credit provides a source of funding to enhance their capital structure and maximize profits Amidst the competitive business landscape, SMEs often rely on joint ventures, cooperation, and technological investments to gain a competitive edge However, these strategies necessitate significant funding that is often beyond the immediate reach of SMEs Bank credit serves as a viable solution, allowing them to seize investment opportunities and respond effectively to market demands.
SME credit quality of commercial banks 13
The concept of credit quality
Credit quality is a financial indicator reflecting the ability of bank credit to adapt to changes of subjective factors (e.g management capability, competence of bank managers), objective factors (e.g customers’ income, socio-economic growth) Therefore, credit quality is the result of the dialectical relationship between banks, borrowers, and the economy 13
Under the view of the economy:
Credit quality is about how credit activities take part in the development of the economy; whether it is appropriate with economic policies of the government; how credit policies can affect the economic growth; how the market demand for products and services is; how many jobs are created by credit activities etc.
Under the view of customers:
Credit quality is about whether it can meets customers’ capital requirements; how much profit customers can earn over the borrowed loans; how convenient the credit procedures are; when customers can repay principal and interest to the bank etc
Under the view of commercial banks:
Banks are profit-oriented institutions, so all activities of banks aim to generate benefit When implementing credit activities, banks always concern about the credit’s safety and profitability: whether they can collect payments sufficiently and timely, how they can measure credit risks, what appropriate credit procedures, payment schedule, and loan structure to implement to reduce credit risks and generate the maximum profit to the bank and so on.
Measurements of SME credit quality
Credit quality is evaluated by the growth, safety, and the capability to generate profits to both banks and the borrowers Here are some selected indicators of quality assessment for bank credit
13 Pham Ngoc Quang, Solutions to improve credit quality of commercial banks (2011)
This criterion reflects the scale of SME credit activities
Loan to SMEs ratio = Total loan to SMEs / Total outstanding loan (%)
This ratio reflect the importance of SMEs in banks’ lending activity
Total outstanding loan / Total mobilized capital ( % )
This criterion reflects how much the bank lend compared with the amount of mobilized fund, and the bank’s capacity to raise fund from local area
SME credit growth (the increase in loan amount in a period of time)
SME loan structure based on loan terms, currencies, interest rates
Types of SME credit (number of products)
Among important indicators of credit safety are the ratios of overdue debt and bad debt According to Vietnamese laws, debts are classified as follows:
Debts that are not due and the borrower is able to pay the principle and the
Debts that the borrower is able to pay the principle and the interest of debts interest of debts in full and in a timely manner in full and in a timely manner
Debts that are overdue less than 90 days and rescheduled debts that are not due
Debts that the borrower is able to pay the principle and the interest of debts in full but there exists a sign of decreasing payment ability
Debts that are overdue from 90 to 180 days and rescheduled debts that are overdue less than 90 days
Debts that the borrower is not able to pay the principle and the interest of debts in full and in a timely manner and some loss of principle and interest is possible
Debts that are overdue from 181 to 360 days and rescheduled debts that are overdue from 90 to 180 days
Debts in relation to which the loss of principle and interest is highly probable
Debts that are overdue more than 360 days, rescheduled debts that are overdue more than 180 days and debts that are subject to rescheduling arrangements as directed by the government
In Vietnam case, the five-category system classifies bank loans according to their inherent risks as “pass”, “special-mention”, “sub-standard”, “doubtful” and “loss”, which is primarily based on the period that payments of principal and interest are overdue. (Table 2.2) 14
Overdue debt ratio = Overdue debts / Total outstanding loans (%)
Overdue debts are debts which part or all of their principal and interest is overdue, or debts from category 2 to category 5 in Table 2.2
Bad debt ratio = Bad debts / Total outstanding loans (%)
Bad debts are debts from categories 3, 4, 5 in Table 2.2.
14 Decision No 18/2007/QD-NHNN dated April 25, 2007 of the SBV on amendment of and addition to a number of articles of the Regulations on classification of debts, and establishment and use of reserves to deal with credit risks in banking operations by credit institutions, issued with Decision 493/2005/QD-NHNN of the SBV dated April 22, 2005
Overdue debt ratio and bad debt ratio evidently reflects the safety of bank and credit quality Banks always try to keep these ratios as low as possible The overdue debt ratio of lower or equal to 3% is considered acceptable The formula shows that the overdue debt ratio is proportional to overdue debt and inversely proportional to total outstanding loan balance; therefore, a high ratio means the banks have to face with high credit risk; while a ratio of no more than 3% is considered a good sign, ensuring the safety and profitability of the bank due to high total loan
SME lending revenue / Total lending revenue
Usage of capital to invest in technology, diversify products, improve the enterprise’s competitiveness, create jobs etc.
Factors affecting credit quality 16
Factors from the banks
The banks’ policies on credit activities must be consistent with the Government's development orientation, ensuring the harmonious combination of benefits to depositors, borrowers and the banks themselves Appropriate credit policies must ensure the profitability of credit activities, on the basis of risk diversification and legal compliance. Nowadays, most commercial banks have recognized the importance of SME lending; they have considered SME lending as an effective activity to stimulate customer expansion as well as credit growth.
However, there are some issues needed to be concerned such as the risk aversion of banks, small scale of loans, high interest rate The banks’ credit policies toward SMEs sometimes are not clear so some scammers can take advantage of loopholes to delay the repayment of bank loans. b/ Credit procedure
To mitigate credit risks and ensure loan quality, commercial banks should establish and refine their credit procedures These procedures typically involve six essential steps: credit application, thorough assessment, informed decisions, disbursement, ongoing monitoring, collection, and termination Credit appraisal is paramount, requiring banks to meticulously evaluate various factors influencing a borrower's creditworthiness, including legal compliance, financial health, business potential, and repayment capacity Based on this assessment, banks determine loan approval, type, and repayment terms that align with both customer needs and regulatory guidelines Adhering to these procedures helps banks maximize repayment likelihood and timely collection, contributing to the overall financial stability of both the borrower and the institution.
Information is pivotal in credit management, enabling bank managers to assess loan customers' character, financial standing, and collateral External sources provide crucial information for evaluating these aspects and mitigating credit risks Rapid and accurate information acquisition reduces the likelihood of defaults, emphasizing the significance of timely and reliable data for effective credit management.
15 Nguyen Minh Kieu Ph.D, Credit procedure of commercial banks, http://www.saga.vn/Taichinh/Thitruong/Nganhang/12258.saga (2008) information sources, from the Credit Information Center (CIC) 16 , from customer-supplied financial statements, from experience of other lender with the borrower, from credit bureau reports on a borrower’s credit history, from mass media and so on The process of obtaining and reviewing SME customers’ information can be much more difficult than large enterprise customers because financial statements and other reports of SMEs are often not available Checking if the information is relevant and accurate is an essential step in order not to make wrong credit decisions. d/ Fund mobilization
Mobilized fund plays a very important role to improve the banks’ credit quality If the bank's fund is plentiful enough to meet the demand of customers, it will generate profits for banks, thereby improving the quality of credit Mobilized fund of banks includes deposits from customers, amounts due to the State Bank of Vietnam, borrowings from other credit institution, other borrowed and entrusted funds and valuable papers issued Interest rates must be reasonable, on one hand to compete with other banks, on the other hand to cover costs and fluctuations in the market e/ Organizational management
The banks’ organizational structure must ensure the effective coordination and rapid communication among different departments as well as the close relationships between banks and legal agencies, which will create favorable conditions for the banks to manages effectively and reduce credit risk f/ Internal control
This is an activity that banks should conduct regularly and continuously to maintain the quality and efficiency of its business, ensuring its business results meet the scheduled goals and every activities are carried out in proper manner To make this work, banks should set up a team of professional trained officers who have the ability to acknowledge the bank’s current issues and promptly make decisions, ensuring the credit policies and procedures are conducted properly, improving the credit quality.
16 Credit Information Center – State Bank of Vietnam website, http://www.cic.net.vn/
Human resource is the decisive factors determining the success or failure of banks’ activities, especially credit management The rapid growth and expansion in banks’ activities increasingly require the higher quality of banks’ officers who have the ability to use the modern working facilities, who directly participate in credit process, assess and monitor the loans Therefore, the recruitment and training process must be concentrated.
Factors from SMEs
SMEs face challenges in loan repayment due to limited financial capabilities, weak business acumen, and poor financial management These limitations hinder their ability to generate profits to repay loans effectively, potentially leading to business plan failures and impaired repayment capabilities.
For instance, SMEs create feasible business plans when applying for bank loans, but they do not pay enough attention to the market volatility, leading to business losses. Another example, companies use bank’s medium and long-term loans to purchase work equipment, but inaccurate project analysis leads to the situation that the purchased equipment do not take effect, and the companies cannot generate profit to pay the bank. b/ SMEs’ business ethics
When borrowing from the bank, enterprises also need to have business ethics In fact, some customers provide the bank with inaccurate information of their business results or the feasibility of their investment projects; some others use bank loans with different purposes and plans stated in the contracts As a result, they use bank loans inefficiently and even cannot repay the bank Therefore, it undeniable that the bank need to be careful in monitoring and supervising processes. c/ Business risk
Business risk is the possibility that a company will have less than expected profits, or that it will suffer a loss rather than a profit There are multiple factors affecting business risk such as competition pressure, sales volume, output price, input costs, overall economic situation, legal factor and so on These risks lead to the company’s losses,which reduce their ability to make repayments to the bank.
Other factors
(Source: PESTLE analysis http://www.marketingminefield.co.uk/pestle-analysis/) a/ Political and social factors
Political factor represents the way and the extent to which a government affects the economy and enterprises Political factors consist of labor law, tax policy, tariffs, trade restrictions and even environmental law On the other hand, social factors include factors like safety, career attitudes, population growth rate, cultural aspects, age distribution and health consciousness 17 A stable political and social environment will create favorable conditions for banks and SMEs operate develop sustainably. b/ Economic factor
Factors such as inflation, exchange rate, interest rate, business circle always have strong influences on the financial capability of the borrowers Unfavorable economic
17 See more clearly in PESTLE analysis, http://www.marketingminefield.co.uk/pestle-analysis/
Organizations environment will cause difficulties to the business operations of enterprises, affecting the repayment ability, thus affecting the credit quality of the bank Conversely, the favorable economic environment will bring advantages to the business operations of enterprises, help them to recover the investment capital quickly and make high profits; then their ability to repay the banks will be higher, the loan will be paid on time, increasing the credit quality For example, the growth stage is marked by the enterprise’s expansion in operations and the increase in sales and profits SMEs then have more opportunities to repay the bank in full In contrast, SMEs will have to face with difficulties or even bankruptcy if the economy experiences crisis The trend of globalization is another example of business environment If domestic enterprises cannot compete with a large number of international enterprises which are entering the market, they will not able to sustain their position in the market. d/ Technological factor
This factor refers to the rate of technological change, innovation potential, R&D activity, information and communications, etc Advancements in technology have positive impacts on other aspects such as increasing productivity, enhancing product and service quality, reducing labor costs, making conditions for mass production, etc Needless to say, technology improvement can always be used as a competitive advantage for banks and enterprises. e/ Legal factors
Government policies significantly impact the economy and business outcomes Monetary and interest rate policies, as well as export and import regulations, can provide opportunities or challenges for banks and enterprises Laws governing enterprises and credit institutions should be well-conceived to support small and medium-sized enterprises (SMEs) and encourage banks' lending activities Clear, stringent, and consistent regulations are essential to prevent loopholes and ensure a fair and transparent business environment.
In the multi-sector economy where enterprises working in the sector of agriculture, forestry and fisheries account for a large proportion, the natural environment factor becomes very important Natural disasters such as floods, droughts can prevent enterprises from executing business activities, leading to their difficulty in repaying debts, making the credit quality declined
In the conditions of the market economy like Vietnam, the demand for capital source remains very high, requiring banks to make continuous efforts to satisfy that demand Not only do bank need to find solutions to meet the demand for loans, but they also have to focus on quality of loans The goal of sustainable development requires banks to pay a lot of attention to credit activities, understand credit quality from the perspective of banks,customers, and the economy In addition, banks need to evaluate the factors that affect credit quality before having methods to improve it.
CHAPTER III: THE FACTS OF SME CREDIT QUALITY AT
History and development
Address of the Head office: No 32 Nguyen Cong Tru Street, Ward I, Vi Thanh town, Hau Giang province
Chairman: Mr Duong Cong Minh
Chief Executive Officer: Mr Le Hong Phong
Business registration number: 6300048638 provided by Hau Giang Province Department of Planning and Investment
Auditing firm: KPMG Limited Company
Lien Viet Post Joint Stock Commercial Bank, which was formerly known as Lien Viet Joint Stock Commercial Bank, was granted it operation license No 91/GP-NHNN on March 28, 2008 by the Governor of the State Bank of Vietnam and became the first newly established joint stock commercial bank since 1993 18 Entering the market as a latecomer, LienVietPostBank has surprised everyone who concern about banking-finance sector by the rapid and sustainable development
An important event in the history of LienVietPostBank is that The Prime Minister has signed a decision on February 21, 2011 agreeing Vietnam Post Corporation (VNPost) to contribute capital in Lien Viet Commercial Bank (LienVietBank), using money and the value of its subsidiary Postal Saving Service Company as capital contribution The
18 LienVietPostBank official website, http://www.lienvietpostbank.com.vn/en/about/introduction/content/about-us-111111 merged entity is called Lien Viet Post Commercial Joint Stock Bank and at that time had a capital of VND 5,000 billion, up from the bank’s current capital of VND 3,650 billion 19 After four years of many opportunities and challenges, LienVietPostBank now has chartered capital of VND 6,460 billion, total asset of over VND 40,000 billion The network of LienVietPostBank expands seven times (from seven transaction offices in
2008 to 50 in 2011), and the number of employees increases about three times (476 employees in 2008 to nearly 1,500 in 2011) LienVietPostBank has become one of the ten largest joint stock commercial banks in Vietnam In 2010, LienVietPostBank achieved a number of reputable rewards, such as Certificate of Merit and Cup of Sao Khue Award as a representative illustration of Vietnamese corporation in applying information technology, Certificate of Merit for outstanding achievement in the implementation of the statistical reporting regime awarded by the governor of SBV etc
Among shareholders of LienVietPostBank, VNPost holds a 27% stake post-merger, Him Lam Corporation has 18% while the Saigon Trading Group (SATRA) and Southern Airport Service Company (SASCO) hold 4.57% and 2.43% respectively.
The most important strategic partners of LienVietPostBank are Vietnam Bank for Agriculture and Rural Development, Wells Fargo Bank (The US), Credit Suisse Bank (Switzerland), Oracle Financial Services Software Limited 20
Along with the development and expansion of LienVietPostBank network, LienVietPostBank Hanoi, a level-one branch located on Tran Hung Dao Street, Hanoi has been established At this time, the branch has four transaction offices, or sub-branches and one head office with total asset reaching nearly VND 1,000 billion (2011) 21 :
Table 3.1 Transaction offices of LienVietPostBank Hanoi
19 VNPost invests in LienVietBank, http://www.vnpt.com.vn/en/News/NewsEvents/View/tabid/219/newsid/13825/ seo/VNPost-invests-in-LienVietBank/Default.aspx (2011)
(Source: https://www.lienvietpostbank.com.vn)
Mission and vision
Mission: Bringing the best benefits to our staff, shareholders and community
- Committing to make contribution to the sustainable growth and security of the banking system as well as the whole economy of Vietnam.
- Being there for customers, passionate about customers’ success, delighting customers with innovative products that are customized to their needs Acting with honesty and integrity in all business dealings.
- Aiming to create sustainable economic value for shareholders and strategic alliances.
-Being an attractive employer for employees, advisors and collaborators Helping people to grow, enabling individuals within LienVietPostBank to make a difference.
Vision: Aiming to occupy a leading position in terms of innovation, professionalism and trust
- LienVietPostBank strives to position itself to be in the top ten of the commercial banks in Vietnam within the first 5 years in operation.
- LienVietPostBank aims to be a leading, efficient, customer-oriented Financial and Banking group in Vietnam after 10 years.
LienVietPostBank focuses on delivering excellent services, combining retail and whole-sale banking and doing multi-functional businesses 22
22 LienVietPostBank website, http://www.lienvietpostbank.com.vn/en/about/introduction/content/about-us-111111
17 Lieu Giai, Cong Vi, Ba Dinh, Hanoi
Main duties and functions
LienVietPostBank Hanoi is a level-one branch, a member of LienVietPostBank system Having its official seal, LienVietPostBank Hanoi operates under the regulations and the current provisions of LienVietPostBank It supplies multiple banking services, which can meet the demand of customers from all economic sectors.
The main duties and functions of LienVietPostBank Hanoi branch:
Mobilizing short, medium and long term capital in VND and foreign currencies.
Providing short, medium and long term loans in VND and foreign currencies for all economic sectors.
Implementing banking services under the Law on Credit Institutions.
Identifying its potential customers are individuals, business households, newly established enterprises and equitized enterprises, LienVietPostBank Hanoi is continuously searching for new customers not only in its operating area but also in other areas of Hanoi and its surroundings LienVietPostBank Hanoi Branch has many customers from the suburbs of Me Linh, Soc Son and so on, which proves that the branch is so active and dynamic in the process of finding customers.
With the aim of expanding in both scale and quality of capital mobilized and credits,not only does LienVietPostBank Hanoi expand its market segments but it also constantly maintains customer relationships, supporting loyal customers who are making transaction with the bank As a result, LienVietPostBank Hanoi is always appreciated because of high-quality services as well as the enthusiasm and attitude of the staff.
Organizational structure
LienVietPostBank recognizes human resources as its primary asset It actively seeks young individuals with professional training and practical experience in the economic sector This focus on attracting and developing talent has resulted in a significant increase in the number of employees within the LienVietPostBank system, growing from 467 to a more robust workforce today.
2008 reached over 1.500 in 2011 Among them, 77.14% have bachelor degrees, 9.11% have college degrees in banking – finance 23 The HR policy including competitive salary and bonus encourages employees to make long-term dedications to the bank’s development
Furthermore, the young and dynamic personnel structure with the number of under- 30-year-old employees including young managers dominate at 77.62% and substantially contribute to the dynamic, flexible, constant expansion and service quality improvement of the bank
Based on the functions and operational requirements, the bank set its organizational structure for branches as follows:
Figure 3.1 Organizational structure of LienVietPostBank branches
Operational results of LienVietPostBank Hanoi from 2009 to 2011
Firstly, we will have a very broad view of how LienVietPostBank operates in recent years before looking closer to the result of each business activities.
Figure 3.2 Overview of LienVietPostBank Hanoi operations (2009-2011)
(Source: LienVietPostBank Hanoi Annual Report 2011)
Showing impressive growth, LienVietPostBank's total assets surged from VND 1,480 billion in 2009 to VND 2,468 billion in 2011, representing an increase of 166.76% This remarkable expansion suggests the effectiveness of the bank's initial capital investments and its ability to generate consistent and rapid asset growth, indicating a strong and stable financial performance.
Besides, the amount of fund mobilized followed the same pattern as the total assets. Actually, the bank’s amount of mobilized fund in 2011 reached VND 2,285 billion, increasing 59.01% in comparison with that of 2009 This number indicates that the branch’s policies to attract deposits from customers are becoming effective
The situation of fund utilization also showed a good sign Especially, in 2011 the total value of loans was added VND 1,838 billion which almost doubled the value of
2009 This significant climb derived from supporting policies from the government and the recovery of the Vietnam economy after the financial crisis; in this period, many enterprises expanded their scale and a large number of enterprises were established.
During the 2009-2011 period, LienVietPostBank Hanoi successfully mobilized significant capital funds from various sources This capital mobilization activity is a core function of the bank and has been executed effectively.
Figure 3.3 Amount of mobilized funds of LienVietPostBank Hanoi (2009-2011)
(Source: LienVietPostBank Hanoi Annual Report 2011)
As shown in the chart above, despite the impacts of fluctuations in market interest rate and market exchange rate, the amount of capital mobilized of LienVietPostBank Hanoi rapidly and stably increased, which implies the success in customer base development (both corporate and individuals) and the bank’s relationship in the interbank market By the end of 2011, the amount of mobilized funds reached VND 2,285 billion, which is equal to 1.21 times the amount in the end of 2010, or 1.59 times the amount in 2009.
The reason why the bank can attract a large number of deposits from customers is that it offers customers with flexible forms of savings deposits such as usual savings,contributed savings, ladder savings with different terms such as demand deposits, one- month to 12-month deposits that can satisfy a wide range of customers It also provides product packages for large investments in short term of weeks, helping customers utilize their idle funds, or actively schedule their financial plans for each stage of their lives LienVietPostBank Hanoi’s good result in mobilizing capital also derives from its efforts in widely introducing its products to local areas For example, the bank simultaneously applies various forms of advertising such as introducing its products on all kinds of mass media: newspaper, televisions, radios, leaflets, mail, e-mail, and the internet The bank also attracts more customers by opening free cards for students, giving free gifts or discounts on special events such as Tet holiday, birthday or when opening new transaction offices or launching new services Moreover, LienVietPostBank usually sends its staff to universities and enterprises in Hanoi to introduce about the bank’s services; on the other hand, it coordinates with universities and institutions in order to locate ATMs in these areas which have high population, making it easier for customers to access the bank’s services.
We will have a deeper look to the branch’s deposit structure to see whether there are any changes in three years:
Figure 3.4 Deposit structure based on customer segments (2009-2011)
(Source: LienVietPostBank Hanoi Annual Report 2011)
Most funds are sourced from retail customers at LienVietPostBank Hanoi, which has targeted this market segment In 2011, deposits from individuals reached VND 1803 billion, accounting for 78.91% of the total and increasing by 48.15% over 2009 Corporate deposits also increased steadily over the three-year period, reaching VND 300 billion in 2011, while deposits from financial institutions remained a small proportion of the total.
182 billion, which is three times higher than that in 2010.
Figure 3.5 Deposit structure based on types of currencies (2009-2011)
(Source: LienVietPostBank Hanoi annual report 2011)
LienVietPostBank Hanoi mobilizes customer deposits in both VND and foreign currencies, catering to diverse needs While deposits in both currencies have grown steadily over the years, Figure 3.5 reveals a slight uptick in the proportion of foreign currency deposits relative to the total This favorable trend suggests that the bank is successfully attracting corporate clients from various industry sectors.
Table 3.2 Lending activity result based on customer segments (2009-2011)
(Source: LienVietPostBank Hanoi Annual Report 2011)
The branch’s total value of outstanding loans increased over year, especially in 2011 total outstanding loan reached VND 2,790 billion, increased VND 788 billion or 39.36% compared to that of 2010 On average, loans to enterprises make up about 60%, loans to individuals accounts for about 35%, and other loans occupy about 5% We can see that loans to enterprises play the most important role in LienVietPostBank’s operations.Although the proportion of loans to enterprises did not change very much, the absolute values are remarkable: In 2011, loans to enterprises reached VND 1,690 billion,increasing 486 billion compared to 2010 and 1,120 billion compared to 2009 These numbers indicates the growth in credit activities of LienVietPostBank With a large number of credit services, the bank can attract lots of customers and increase its revenue.
Table 3.3 Bad debt ratio of LienVietPostBank Hanoi (2009-2011)
Bad debt ratio to SMEs 1.41% 1.58% 1.52%
(Source: LienVietPostBank Hanoi Annual Report 2011)
Bad debt ratio which is non-performing loans divided by total outstanding loans slightly increased from 2009 (1.12%) to 2011 (1.35%) Fortunately, the statistics show that bad debt ratio was always much lower than 3%, which is the maximum ratio allowed by SBV’s regulation Bad debt ratio of LienVietPostBank was quite low, which was the result of the bank’s efforts in credit investigation and monitoring and risk management
LienVietPostBank Hanoi branch also provides customers with a number of other products and services such as international payments, foreign exchange, guarantee, card services and so on Facts have shown that the branch’s net service revenue has an increasing trend in three recent years However, the net service revenue of the branch is enjoying such a small proportion (about 1.1%) compared with total assets in 2011 This number is not commensurate with the potential of the branch It should diversify services, at the same time invest more in research and development so as to create new types of services that will generate a greater profit and attract more customers In this research, I will only list here a number of typical services of LienVietPostBank Hanoi. a.Card services
Table 3.4 Card services results of LienVietPostBank Hanoi (2009-2011)
2009 2010 2011 Average annual growth rate International credit card
Credit card issued by LPB Hanoi
Number of facilities accepting cards 202 378 461 51.07%
(Source: LienVietPostBank Hanoi Annual Report 2011)
LienVietPostBank cards offers customers payment solutions for various forms of transactions such as retail storefront, mail/phone order, home-based, professionals, service industry, internet and so on The period of 2009-2011 sees a stable increasing trend in the turnover of all kind of cards provided by LienVietPostBank Hanoi branch Those positive figures show that the branch possesses a competitive advantage in operating card services.
In general, both the issuance and the turnover of all types of cards increased at a steady speed and surpassed the targets, not to mention the fact that the number of debit card issued considerably decreased in 2010 In the period 2009-2011, the numbers of cards such as credit card issued by the branch, ATM and international debit card have jumped a long step, with the former enjoying 27.07% annually, the latter 69.07% and the last21.64% The turnovers of these cards were 38.93%, 46.60%, 62.27%, respectively In addition, not only does LienVietPostBank Hanoi pay attention to the number of new issuance and the turnover of card services, it also focus on expanding the network of card services The number of facilities which accept payments by LienVietPostBank cards has considerably climbed from 202 in 2009 to 461 in 2011. b.Foreign exchange activities
Table 3.5 Foreign exchange results of LienVietPostBank Hanoi (2009-2011)
2009 2010 2011 Average annual growth rate Buying turnover
(Source: LienVietPostBank Hanoi Annual Report 2011)
Facts have shown that the number of foreign exchange transactions decline dramatically in 2010 before rising a little bit in 2011, but still stay at a lower level than in
2009 (except for JPY) The average annual growth rate indicates that the foreign exchange turnover experienced a decreasing trend in three years (except for JPY with slightly growth of about 5.4% annually) The reason for this drop was the wild fluctuation in market exchange rate and the shortage of foreign currency supply LienVietPostBank branch is still facing with difficulties in improving its foreign exchange activity results c.Guarantee activity
Table 3.6 Guarantee results of LienVietPostBank Hanoi (2009-2011)
(Source: LienVietPostBank Hanoi Annual Report 2011)
A bank guarantee ensures a financial sum to a beneficiary, similar to a line of credit This sum is solely disbursed when the obligated party fails to adhere to their contractual responsibilities By establishing a bank guarantee, parties can protect themselves from potential losses or damages resulting from non-performance within the contractual agreement.
General evaluation of LienVietPostBank’s operation
LienVietPostBank Hanoi has seen a number of achievements in four years of operation Under the leadership of the Board of directors and endless efforts of the whole staff, the branch has follows the government’s policies and regulations, having suitable business strategies in each stage of development The total assets, the amount of mobilized capital, loans to customers have seen a remarkable improvement These results play important part in heightening the branch’s reputation in the market
- In fund mobilizing activities: Despite the influence of wild fluctuations in market interest rate and market exchange rate, the amount of capital mobilized of LienVietPostBank Hanoi stably increased The branch always searches for suitable policies involving raising funds, especially from idle savings of the population The
24 The difference between a bank guarantee and a letter of credit, http://www.investopedia.com/ask/answers/06/202005.asp#axzz1urxSRgSB (2008) increasing amount of mobilized capital derives from the branch’s customer strategies, diversified services, and attracting interest rate which are suitable to the market demand
- In credit activities: The branch has achieved a rather high and stable credit growth; aside from that, it has done a good work in bad debt management Actually, the bad debt ratio was always below 3%, which is the maximum ratio allowed by the SBV. LienVietPostBank Hanoi is increasingly attracting enterprises and corporation to make transactions with the bank In general, through lending activities, on one hand the branch increase its revenue, and on the other hand it stimulates the development of privates businesses, enterprises and traditional craft villages, preserving the country’s cultural identity and creating jobs.
- Other activities: Guarantee services also enjoy rapidly increasing figures in the period of 2009-2011 Thanks to the improvement of guarantee service quality as well as the expansion of relationships between the branch and many other investors, enterprises and institutions, the turnover of issued guarantee increased 40.02% in 2011 The number of high-value guarantee letters also increased
Banks' operations are highly susceptible to market volatility, economic shifts, and regulatory oversight To adapt, they regularly fine-tune their strategies and enhance service quality However, challenges and barriers can hinder their progress and must be promptly addressed These issues have a profound impact on banks' success or failure, necessitating their immediate resolution.
- Fund mobilizing activities: The imbalanced deposit structure of the branch is a problem that must be considered Most of the funds mobilized come from retailed customers; the proportion of deposits from enterprises remains too low in comparison with other branches in LienVietPostBank system, and also other banks in the economy In the future, the branch should focus more on enterprises and corporation sectors because this is also a potential market for the bank to mobilize capital.
- Other services: Income from service fees of the branch is still enjoying such a small proportion (about 1.1%) compared with total assets in 2011 This number is not commensurate with the potential of the branch It should diversify services, at the same time invest more in research and development so as to create new types of services that will generate a greater profit and attract more customers.
The facts of SME credit quality at LienVietPostBank Hanoi 38
The growth of SME credit
The growth rate of SME outstanding loans
Table 3.7 The growth of SME outstanding loans by duration (2009-2011)
(VND billion) (%) (VND billion) (%) (VND billion) (%) (%)
(Source: Corporate Banking Department of LienVietPostBank Hanoi)
In 2009, the government implemented an economic stimulus package worth USD 8 billion to mitigate the impact of the financial crisis This package included measures such as income tax and VAT deductions, and 4% interest rate support for medium-term and short-term loans These policies facilitated access to affordable investment capital for SMEs and encouraged banks to lend Consequently, the total loan balance to SMEs reached VND 230 billion in 2009, rising to VND 484 billion in 2010 (an increase of 110.43%) and VND 770 billion in 2011 (a further increase of 59.09%) This surge in lending supported SME growth and the establishment of new businesses.
Figure 3.6 Loan structure based on loan terms 2009-2011
25 Edmund Malesky, Dinh Tuan Minh, To Trung Thanh, Nguyen Duc Thanh, The effects of interest rate subsidy policies on the operation of enterprises (2010)
(Source: Corporate Banking Department of LienVietPostBank Hanoi)
Short-terms loans dominated among loans to SMEs in three years at about 54% due to SMEs’ high demand in this type of loan to cover production costs SMEs can simultaneously invest in many different projects to satisfy various needs of the market; moreover, short-term capital is also much more flexible when the SMEs want to change the investment plans In the other hand, long-term loans made up for smaller proportion partly because some SMEs needed them but they cannot meet the bank’s requirements when applying for long-term loans
Although the number of medium and long-term loans accounted for a smaller proportion in total SME outstanding loans, they also experienced an increasing trend with average annual growth rate standing at over 80% during this period In 2011, medium and long-term loans reached VND 353 billion, increasing 59.73% compared with 2010. Accessing to more medium and long-term capital source, SMEs will have more opportunities to expand production and enhance their competitiveness in the market.
On the other hand, the structure of SME loans based on type of currencies was witnessed as follows:
Table 3.8 Loan structure based on types of currency 2009-2011
(VND billion) (%) (VND billion) (%) (VND billion) (%) (%)
Total outstanding loans to SMEs 230 100 484 100 770 100 82.97
(Source: Corporate Banking Department of LienVietPostBank Hanoi)
Through the table we can see that outstanding loans in both VND and convertible currencies witnessed impressively increasing trends in three years, with the average annual growth rate of more than 80% In particular, in 2011 the amount of outstanding loan in convertible foreign currencies reached VND 163 billion, increasing 58.25% in comparison with that of 2010.This result is a good sign to both bank and SMEs Besides, the rising demand for foreign currency loans indicated that SMEs needs capital to import materials from foreign countries to expand production The increasing in the amount of outstanding foreign currency loan also means that the bank can attract a large number of SMEs operating in various sector of the economy
Besides, the amount of outstanding loan in VND still accounted for a stable and large proportion in total outstanding loan to SMEs (about 78% in three years), and continuously rise at a very high average growth rate of 83.64% annually After reaching VND 180 billion in 2009, loans in VND reached 381 billion, increasing 201 billion in
2010, and continued to rise in the following year since the government maintained interest rate subsidy policies, the economy recovered opening a huge amount of investment opportunities for enterprises SMEs then had increasingly high demand for bank credit.
The safety of SME credit
Table 3.9 Overdue debts and bad debts to SMEs 2009-2011
(Source: Corporate Banking Department of LienVietPostBank Hanoi)
The overdue debt and bad debt ratio of LienVietPostBank Hanoi are still controlled at average level Statistics illustrate that in 2009, LienVietPostBank's bad debt ratio was posted at 1.41% of total outstanding loans; and it rose to 1.58% in 2010 In 2011, this ratio was reduced 0.06% compared with 2010, reaching 1.52%, which derived from the bank’s more active strategy in managing credit quality However, this number still stayed at a higher level than 2009 The branch is continuously trying to keep the overdue debt ratio as low as possible
After reaching 1.46% in 2009, the overdue debt ratio rose to 1.62% in 2010 and continued to increase slightly in 2011 We can see an improving trend in the ratios of both overdue debt and bad debt, although this improvement was not very remarkable The branch had done an acceptable but not very good job at managing its loans and collecting payments In the beginning of this year, LienVietPostBank bank had established an overdue debt treatment committee to better control the increase of bad debt ratio, but it did not operate efficiently enough
Although these ratios of SME lending always stayed at lower level than the maximum level allowed by the SBV, compared to the overall bad debt ratio of the branch,SME bad debt was a bit higher in the period 2009-2011 (as seen in Table 3.3) The problem occurred because unlike corporate or larger commercial entities, most of small businesses are not required to file annual accounts; therefore, traditional data for lending such as financial ratios including assets, liabilities, profitability, are not available forSMEs Requesting such information of SMEs is very difficult for loan officers, and the information collected is likely to be out of date The financial behavior of SMEs is also more difficult to identify than individual customers as businesses can vary substantially.Moreover, the difference in entity types (sole trader, partnership, limited company) creates complexity in tax and financial accounting treatment; and the diversity of operation (consultancy, manufacturing etc.) requires different interpretation of the cash flow and balance sheet 26 , which may lead to mistakes when banks evaluate the financial capacity of the borrowers.
Table 3.10 SMEs loan loss reserve 2009-2011
(Source: Corporate Banking Department of LienVietPostBank Hanoi)
Table 3.11 clearly indicates that the branch’s amount of SME loan loss reserve fund increased over years SME loan loss reserve was VND 2.09 billion in 2009, then increased to VND 6.05 billion; by the end of 2011, the amount increased to VND 7.61 billion (average annual growth rate of about 72.51%) It can be seen that in 2011SME credit quality is greatly improved because the rate of loss reserve was very low compared with the total outstanding loan to SMEs The branch has implemented some method to improve SME credit quality such as focusing on customer advisory The branch’s loan loss reserve fund has been established in accordance with Decision No.493/2005/QD- NHNN dated April 22, 2005 and Circular No.15/2010/TT-NHNN dated June 16, 2010 on loan classification, provisioning and use of provisions against credit risks in operations of micro financial institutions of the SBV
The data and analysis above have partly indicated the importance of SMEs in the customer system of LienVietPostBank Hanoi Aside from focusing on extending credit to large enterprises, the bank also need pay more attention to the improvement of SME
26 Nigel Rusby & Stephen Gildert, Origination for SME Lending – Management of high volume, low ticket value lending (2007) credit quality Not only will this help the bank to strengthen its reputation in the area, but it also directly provides financial supports to small and medium domestic enterprises,helping them to develop sustainably, and at the same time bringing profits to the bank.
The profitability of SME credit
Table 3.11 Revenue from credit to SMEs 2009-2011
Revenue from SME credit activity 685 24.82 1,103 26.95 1,363 28.40 41.06
(Source: Corporate Banking Department of LienVietPostBank Hanoi)
The increase in revenue is one of the most important signs reflecting the growth of credit activity in both quantity and quality The revenue from credit to SMEs which reached VND 695 billion in 2009 increased 61.02% in 2010 and continued to rise remarkably in 2011 The period 2009-2011 saw a rapid climb in the amount of revenue from SME credit activities, which is one of the main elements contributing to the total revenue of the bank.
Assessment of SME credit quality at LienVietPostBank Hanoi 45 1 Achievements
Limitations and reasons
The above analysis has shown that SME credit quality was not as good as expected
We can list here some evidences:
- In term of credit growth: Outstanding loans for SMEs increased over years; however, the growth rate lacked of stability The proportion of SME loans in total outstanding loans was still low Besides, the SME loan structure was imbalanced In terms of maturity, the amount medium and long-term loan increased in 1010, 1011, yet still cannot satisfy SMEs’ demand for medium and long-term loans The number of loans to projects is still low, especially five-year or above projects
Regarding credit safety, LienVietPostBank exhibited a relatively high proportion of bad debt, particularly within its SME portfolio However, its bad debt ratio surpassed prominent banks like Vietinbank (1.20% in 2011) while remaining below the industry average of 2.16% in 2010 and 3.21% in 2011.
3.3.2.2 Reasons for limitations a/ Subjective causes from the branch
- Inefficient and inflexible marketing policies
+ LienVietPostBank has created a number of new products and services, but the process of launching new services and introducing new services to customers take a really long time On the other hand, these new products attract a not very large number of new customers, and there is a declining trend in the number of loyal customers.
+ The branch was not active in introducing its services on mass media, and requesting customers’ feedbacks
+ The process of searching for new investment projects encounters high competitive pressure from many other commercial banks, especially Bank for Investment and Development of Vietnam (BIDV) which is considered to have a high reputation and a lot of advantages in funding projects.
The limitation in expanding credit forms is a reason for the limited amount of outstanding loan The branch’s credit service system remained simple in comparison with other banks in the market It only offer a few number of services such as lending, discounting valuable papers, providing bank guarantee, issuing credit cards Syndication is a relatively new method for the banks now, so the number of projects disbursed stays few.
Despite the potential benefits, information resources are inadequately utilized for credit risk management The branch lacks strong connections with the credit information central and auditing company Customer information is primarily self-reported, potentially leading to inaccuracies or incomplete data This reliance on customer-provided information hinders the branch's ability to effectively mitigate credit risks.
Financial institutions like Vietinbank face challenges with dishonest customers who misrepresent their financial status to obtain loans This practice reduces the bank's ability to receive timely loan repayments Furthermore, weak information management systems hinder the collection, classification, and analysis of accurate and timely data, leading to inefficient processes and unreliable information.
Collateral evaluations are typically performed by lenders using their own standards, except for high-value or specialized assets Small and medium-sized enterprises (SMEs) have raised concerns about the fairness of this system, claiming it can lead to subjective valuations of collateral.
The bank’s process of credit appraisal and customer refinement has not been paid enough attention to, leading to the low level of credit safety In some cases, the appraisers do not have enough knowledge about the characteristics of each business sector, so they have to do researches in order to comprehend the business conditions and investment opportunities of customers which are the basis of lending decisions However, this process often takes a long time, and it is difficult to fully evaluate all the advantages and disadvantages of the investment projects.
The branch’s staff has high qualifications, experiences and responsibility, but they lack of knowledge on other business areas, leading to bias conclusions when appraising loan projects Moreover, the large number of loan officers is not correspondent with the amount of work; there are cases when loan officers have responsibility for too many tasks.
So far up to now, the process of modernization of the branch remains unstable.Technological equipment is not one of LienVietPostBank Hanoi’s competitive advantages There are still technological errors which are not solved in time, causing time-consuming interruption. b/ Objective causes
- The business environment does not provide the bank favorable conditions to develop credit activities There still no professional agencies who supply information on the financial situation of enterprises The fact that the enterprises do not provide or provide lately or inadequately their financial statements and the situation of using bank capital will lead to incorrect assessments and investment decisions from bank, causing losses to both bank and enterprises This is one of the reasons for uncontrolled loans, which leads to overdue debts.
- The formation and expansion of other banks and credit institutions in Hanoi area leads to high competitive pressure in the credit market, affecting the branch’s business results.
- Other causes affecting the branch’s lending situation include the market fluctuations such as the rapid increase in the prices of gold and oil, and so on.
- Causes from the borrowers: SMEs usually have little capital capability; their working capital depends mostly on bank credit Some SMEs have limited financial management and lack of experiences when building investment They are still passive when conducting businesses and do not focus on recruiting high-qualified labor force. Therefore, SMEs cannot avoid shortcomings when creating the report on the feasibility of their investment projects, limiting their ability to get loans from the bank In addition, a lot of SMEs may even provide information which is not transparent or wrong, such as they do not use the borrowed capital in accordance with the purposes in the lending contracts, or lie about the profitability and feasibility of their investment plans These reasons lead to losses in SMEs’ performance, affecting their ability to pay the bank in full and in timely manner.
RECOMMENDATIONS AND CONCLUSION 51
Orientation to enhance SME credit quality at LienVietPostBank Hanoi 51 1 General orientation
LienVietPostBank Hanoi branch is implementing a comprehensive transforming program in the period of 2011-2014, aiming to the common goal of all branches in LienVietPostBank system which is making LienVietPostBank become “the best bank and leading enterprise" in 2015.
The mission of the branch at this stage is to expand and develop banking activities to become a multifunctional commercial bank branch with economic criteria matching the regulations and general orientations of the whole banking industry Some main specific development orientations for LienVietPostBank branch from now to the end of 2013 is:
Bettering credit performance in both scale and quality of credit services. Concentrating on developing medium, long-term loans, then exploiting profit from short- term loans; at the same time providing other related service packages.
Expanding depositing customers, and restructuring groups of customers, types of deposits that are suitable with each type of customers, with a view of fostering the efficiency of fund mobilizing activity and increasing the relative stability of mobilized funds
Make use of modern technology to provide customers with high quality products, creating differences and reputation of the branch.
Continuing to consolidate and strengthen the branch into a modern, dynamic,highly competitive bank in the area, developing the model of multifunctional banks with highly diversified and high-quality products and services, contributing in hightening the position of Techcombank in the market.
Improving all shortcomings and limitations in activities of the branch, eliminating adverse impacts on banking activities.
To drive business growth, the branch actively seeks new customers and major projects, prioritizing retail products and services By capturing market share swiftly, the branch establishes a solid foundation for expanding short-term credit and developing tailored services This strategic focus not only enhances customer relationships but also ensures sustainable growth in the retail market.
Restructuring customer system, limiting relations with risky customers who are in weak financial situation, focusing on individual customers, non-state enterprises, joint stock companies, limited liability companies, and SMEs.
Improving the efficiency in operation of transaction offices under control of the branch, developing the network of trading offices in the area Expanding the network to potential areas such as highly populated areas, new urban areas.
Upgrading the facilities of all sub-branches to match with common standards and requirements.
Recommendations to LienVietPostBank Hanoi 52 4.3 Other recommendations 58 4.3.1 Recommendations to LienVietPostBank Headquarter
SMEs in eastern Hanoi have significant potential for growth due to favorable geographic, natural, and human resources However, they face challenges in accessing capital, as banks prioritize state-owned enterprises, leaving non-stated SMEs underserved Despite efforts, banks' financial support for SMEs remains insufficient, highlighting the need for solutions to address this issue Through an internship at a local branch, this paper identifies obstacles to SME lending and proposes recommendations to enhance marketing policies, particularly for corporate customers, to promote loan growth and support SME development.
LienVietPostBank Hanoi branch has already had a rather reasonable customer policies; however, there are still some unresolved shortcomings such as problems of interest rates, loan terms etc To complete and improve the credit quality in the near future, the branch needs to focus on building a really flexible customer policies.
- Studying customers’ demand: understanding customers’s psychology and satisfying their needs The bank has to answer accurately and satisfactorily these questions: how much capital customers need for carrying businesses and investing, which type of loan is the most suitable with each customer, what benefits customers can earn when using the bank’s capital, etc However, in reality sometimes there are conflicts between customers and the bank’s benefits In that circumstance, the bank have to settle conflicts in a reasonable way which can ensure the profits of both parties Satisfying customers’ needs is an important step in building a flexible customer strategy in order to attract a large number of good borrowers
- Creating good methods to attracting new potential customers as well as maintaining sustainable relationships with reputable customers who has done a lot of transactions with the bank Creating attractive product and service packages, at the same time actively looking for effective customers are very important activities to ensure a safe, rapid and sustainable credit growth Especially, while SMEs with small scale and financial limitations cannot mobilize funds from the securities market, the bank should actively make contacts with SMEs who can utilize their capital efficiently, because SMEs are the formation of large enterprises and corporations in the future.
- Diversifying customers: lending more to non-stated enterprises, including mostly SMEs This is suitable and necessary with Vietnam’s economic conditions when state- owned enterprises show limitation in business results, in contrast developing SMEs can operate efficiently
- Building an attractive product system: In the increasingly competitive market, bank services are mostly identical and easy to be duplicated; therefore, if the bank wants to attract customers, it must have strategies to distinguish itself from others Along with enhancing credit quality, the bank must continuously renew its products and services, have apealing product strategies to show customers the benefits they would get when using the bank’s new services b/ Improving the implementation of credit policies for SMEs
SMEs is the type of enterprises which is being encourage to develop in the economy In fact, they SMEs account for the largest proportion in GDP and labor force.
As a result, applying preferential credit policies with appropriate interest rate is a necessary solution The bank can create various interest rates and duration for the same loan amount, depending on different customers; subsidy interest rate for loyal customers who have a good reputation with the banks in loan repayment SMEs have a very high demand of capital with many different loan terms; the bank can base on this to offer different interest rate levels which are suitable with customers’ wishes and their financial capability, simultaneously ensuring profits for the bank. c/ Offering various types of credit products
There is a large number of SMEs and they belong to many different business sectors and have different scales and resources leading to their different demands for the amount of capital, loan terms, repayment schedules As a result, the bank have to offer various types of bank credit so as to satify a wide range of customers, increasing the number of customers as well as the credit amount.
To enhance the competitiveness of SMEs, the bank should facilitate access to medium- and long-term loans for investments in fixed assets and modern technology The bank can also provide flexible repayment schedules tailored to the financial capabilities of each SME to support their business growth and long-term success.
In order to improve the branch’s credit quality, a necessary task is to improve the branch’s evaluation system To do so, LPB Hanoi needs to create a standard manual for bank’ collateral evaluations, strengthening their own expertise to ensure the objectivity and fairness of collateral evaluations Except for cases in which the branch cannot make reliable evaluations with reliable market data such as the market prices of assets, it will be encouraged to ask outside appraisers to conduct the evaluation.
Credit appraisal is the essential part of determinning the eligibility of loans, an vital element affecting lending decisions and the effeciency of capital utilization If the process of credit appraisal does not receive enough attention, the possibility of credit risks will definitely be higher Credit appraisals are very complexed and difficult because they often depends on more than just numbers They depend on the appraiser’s understanding and beliefs about the risk to the bank and ability of the borrowing organization to pay back the loan Good lenders understand the challenges of making accurate credit appraisals and embrace the knowledge, skills and motivation that they need to make good credit decisions 28 e/ Enhancing fund mobilization activity
Located in a thriving economic hub, LienVietPostBank Hanoi branch faces high demand for capital from businesses due to its large population and substantial idle funds Despite the bank's limited financial capacity, it recognizes the strategic importance of fund mobilization to support small and medium-sized enterprises (SMEs), particularly long-term funding While the branch has implemented measures to enhance capital mobilization, it seeks additional innovative approaches to meet the growing demand.
Diversifying types of deposits, improving depodit and withdraw procedures and sent, training the branch’s staff to have proper, polite and enthusiastic serving manners to customers
28 Credit appraisal determines your loan eligibility, http://articles.economictimes.indiatimes.com/2010-11-07/news/27573337_1_loan-eligibility-credit-appraisal- borrower (2010)
Expanding the network of capital mobilization throughout the city in order to easily access to a large amount of customers
Implementing multiple forms of capital mobilization, focusing forms with stable interest rates, such as certificates of deposit, promissory notes, bonds; offering various ways of withdrawal which is the most convenient to different customers.
Having competitive flexible interest rates, actively catching upp with changes in the interest rate market in order to offer customers with an appropriate interest rate, and give advice to customers, setting up closer relationships with customers.
Expanding the banking network, establishing some new sub-branches and upgrading transaction offices What needs to be done is collecting information about the branch’s market segment, potential customers and their income, demand, the advantages of competitors and so on Based on that, the branch will be able to reasonably distribute its transaction across the area, allowing customers to use the branch’s services in much more easy and convenient ways.
Applying attractive promotion policy for customers who have deposited a large amount of money in the bank, encouraging them to make long-term deposits by offering attractive interst rates.
Apart applying propaganda campaigns to promote new services, the bank can allow transactions which take place outside the office hours or in weekends to attract more deposits from customers.