From that point of view and the credit status of SMEs at Ngo Quyen branch, I chose the subject: „The quality of bank credit to SME at Joint Stock Commercial Bank for Foreign Trade of Vi
Rationale of the thesis
Small and medium-sized enterprises (SMEs) play a crucial role in the socio-economic development of Vietnam by utilizing local resources, creating job opportunities, and significantly contributing to the nation's GDP Consequently, SMEs have garnered focused attention and supportive policies from the government, ministries, and both national and international organizations.
Many small and medium-sized enterprises (SMEs) face significant challenges in their production processes due to outdated technology and inadequate management practices A primary factor contributing to these issues is their limited access to capital, as SMEs frequently struggle to qualify for bank loans and often misuse available funds This situation severely hampers the growth potential of SMEs in Vietnam.
Despite limited current credit availability, the strong demand from SMEs for capital to expand operations and invest in technological innovation, along with a growing number of start-ups, presents a promising market for commercial banks To capitalize on this opportunity, banks must implement targeted strategies to develop potential SME clients However, investing in this sector poses risks, as many SMEs struggle with management capabilities and face a shortage of skilled labor.
From that point of view and the credit status of SMEs at Ngo Quyen branch, I chose the subject: „The quality of bank credit to SME at Joint Stock Commercial
Bank for Foreign Trade of Vietnam - Ngo Quyen branch’.
Literature review
Allen N Berger and Gregory F Udell (1990) examined the connection between asset security and credit quality, addressing two key questions: whether the lowest-risk or highest-risk borrowers are more likely to pledge collateral, and whether secured loans are inherently safer or riskier compared to unsecured loans.
Collateral is frequently linked to riskier borrowers, loans, and banks, as indicated by empirical evidence This study provides an in-depth analysis of collateral's impact on loan quality and the associated lending risks Understanding the credit quality of banks is crucial for making informed recommendations in the lending process.
Burak Guner Bank (2007) evaluated loan opportunities and credit quality while analyzing credit portfolios, revealing that a diverse range of credit products enhances risk diversification The study highlights the significant relationship between credit standards and external factors affecting potential borrowers These insights into the credit standards of Western banks offer valuable guidance for the advancement of commercial banks in Vietnam.
Effective credit control is crucial for business success, as poor management can lead to significant bad debts, according to Addlestone, Cowan, and Bullivant (2014) Businesses must implement robust systems to minimize credit risk and be prepared with debt recovery procedures for unpaid invoices The study also highlights important legal aspects, including debt recovery legislation and lending guidelines for new customers It offers strategies for maintaining and increasing loan limits for small businesses and outlines conditions that can attract larger clients.
In his 2015 study, Bogdan Florin Filip assessed the quality of bank loans in Romania and the EU during the period from 2000 to 2012, focusing on the concepts of loan quality and non-performing loans (NPLs) He analyzed the inverse relationship between bad debt and economic indicators such as GDP growth, inflation, and unemployment rates, highlighting the critical need for enhancing credit quality to foster economic stability.
Paula Hill (2009) investigated agency variation in credit quality assessment (Standard and Poor‟s vs Moody‟s vs Fitch) employing sovereign ratings data for
Between 1990 and 2006, credit ratings across 129 countries exhibited significant variability among different agencies, highlighting material heterogeneity in their assessments While watch and outlook procedures are strong indicators of potential rating changes, additional variables could enhance the predictive accuracy of these agency ratings This research on credit ratings serves as a vital resource for commercial banks, enabling them to self-assess and elevate their quality in alignment with international standards, ultimately promoting the enhancement of credit quality within the banking sector.
Nguyen Huu Duong (2002) introduced a credit rating method for businesses to be utilized at credit information centers, highlighting the significance of developing a robust credit information system His research proposed detailed methods for assessing a company's financial status, establishing a scoring scale, and categorizing enterprises into nine distinct types While the study underscores the limitations of the chosen indicators for analysis, it primarily concentrates on the financial conditions of firms Although this is a pioneering study in credit rating, it acknowledges that the assessment of businesses lacks objectivity, as it fails to comprehensively evaluate all relevant aspects.
Nguyen Van Hung (2003) presented a foundational argument regarding safety regulations in commercial bank lending, focusing on the current status in Vietnam His research involved an analysis of legal documents governing lending activities at commercial banks, which are evolving amid the challenges of international economic integration This study aims to enhance the quality of lending practices within the banking sector.
Nguyen Huu Huan (2005) examined banking quality from three perspectives: customer satisfaction, commercial bank performance, and socio-economic impact By analyzing actual operations, the author proposed solutions to enhance the business quality of Vietcombank (VCB).
In 2009, Nguyen Trong Hoa systematically analyzed theories and practices of credit rating, drawing insights from prior research and the current state of Vietnam His thesis identified flaws in the credit rating process and their underlying causes Additionally, he developed a credit rating model tailored for Vietnamese enterprises and proposed several solutions to enhance the credit rating methodology.
In their 2009 study, Lam Chi Dung and Phan Dinh Anh employed the KMV-MERTON model to assess credit risk by analyzing key factors such as the ratio of maximum loan to collateral value, the borrowers' intended use of capital, and the frequency of asset usage as collateral This approach is particularly significant in Vietnam, where most loans require collateral, making it a crucial element in evaluating credit quality.
In her 2012 study, Nguyen Thi Thu Dong conducted an in-depth analysis of the credit quality of commercial banks, specifically focusing on Vietcombank (VCB) However, the research primarily relied on secondary data sourced from VCB's reports and did not incorporate customer perspectives.
In summary, this article addresses the varying issues related to credit quality, influenced by distinct banking models and fluctuating economic conditions across countries By leveraging insights from previous research, the author aims to adapt these findings to the current economic landscape and credit policies, ultimately seeking to enhance the credit quality for VCB.
Aims of the study
The thesis focuses on the study of bank credit and how to enhance its quality in a branch of particular bank The aims include:
To provide a theoretical background on the bank credit, SME and their relationship
To analyse and evaluate bank credit quality in Vietcombank - Ngo Quyen branch
To suggest solutions and recommendations to improve the quality of bank credit in Vietcombank - Ngo Quyen branch.
Subject and scope of the study
This research examines bank credit at Vietcombank's Ngo Quyen branch from 2014 to 2017 The selected timeframe provides a robust dataset for thorough analysis, ensuring that the information is current and relevant for formulating recommendations that will aid in the branch's development.
Research methodology
In this thesis, the author employs various research methods, including quantitative analysis, comparative studies, and summarization techniques Additionally, a survey is conducted to assess the satisfaction levels of SMEs utilizing bank credit from the Ngo Quyen branch.
Thesis structure
The study includes four main chapters besides introduction:
Introduction: This chapter introduces main characteristics of the thesis including rational, aims, and scope and research methodology
Chapter 1: Theoretical background - This chapter provides a general knowledge about SMEs, bank credit and the credit quality
Chapter 2: Bank credit to SMEs at Ngo Quyen branch - This chapter focuses on analyzing and evaluating bank credit in Vietcombank, which is the key part of the study
Chapter 3: Recommendations - This last chapter comprises several strategies and recommendations to improve the quality of bank credit to SMEs in Vietcombank, Ngo Quyen branch
THEORETICAL BACKGROUND ON THE QUALITY OF BANK
Theoretical background on SMEs
1.1.1 Definition and classification criteria of SMEs
Small and Medium Enterprises (SMEs) lack a universally accepted definition, as various countries establish their own criteria based on socio-economic factors, developmental levels, and national objectives Furthermore, within a single country, the classification of a "small and medium" enterprise may vary by industry and evolve over time.
The classification of companies primarily hinges on their size, specifically the number of employees and revenue generated Small to medium-sized enterprises (SMEs) are defined as legal business entities that must adhere to specific regulations regarding capital, labor, and revenue, which can differ by country and are influenced by the economic development of the region.
In Vietnam, one of the first concepts about SMEs was mentioned in Documentary
On June 20, 1998, the Government issued Document No 681/CP-KTN, which established the initial framework for small and medium-sized enterprises (SMEs) This framework was refined on November 23, 2001, with Government Decree 90/2001/NĐ-CP, which focused on promoting SME development While the criteria from Document 681/CP-KTN were retained, the new decree imposed fewer restrictions, aiming to broaden financial support for enterprises within the economy.
Decree No 56/2009/NĐ-CP, issued by the Government on June 30, 2009, provides a detailed definition of small and medium-sized enterprises (SMEs), categorizing them into three distinct types: micro, small, and medium enterprises.
Table 1: The classification of SMEs according to Decree No.56/2009/NĐ-CP
Micro enterprise Small enterprise Medium enterprise
According to Law No 04/2017/QH14 on Support for SMEs, enacted on December 6, 2017, small and medium-sized enterprises (SMEs) are defined as businesses with an average of 200 or fewer employees annually To qualify as an SME, a company must also meet at least one of the following criteria: it must have total capital not exceeding 100 billion VND or total revenue from the previous year not exceeding 300 billion VND.
Current regulations for SMEs primarily utilize quantitative measures for classification By evaluating total capital or revenue, these regulations ensure a thorough assessment of businesses across various sectors, including trade, industry, and services This approach aids in the development of targeted supportive policies.
On January 22, 2018, Vietcombank introduced a new regulation defining small and medium-sized enterprises (SMEs) as businesses established and operated under the Law of Enterprises, with an average number of employees eligible for social insurance not exceeding 200 and total capital not exceeding a specified limit.
The main characteristics of SMEs are as follows:
Small and medium-sized enterprises (SMEs) play a vital role in various economic sectors, encompassing trade, services, industry, construction, and agriculture They can take on multiple forms, including state-owned enterprises, private firms, joint stock companies, foreign corporations, and individual establishments, allowing them to thrive and adapt in diverse business environments.
Small and medium-sized enterprises (SMEs) are characterized by their flexibility and dynamism, driven by private ownership and an entrepreneurial spirit This adaptability enables them to respond effectively to challenges and changing market conditions Operating across various economic sectors, SMEs offer a diverse range of products, albeit on a smaller scale Consequently, when faced with market demand fluctuations, SMEs can more easily pivot and explore new directions compared to larger corporations.
Small and medium-sized enterprises (SMEs) typically operate with a shorter production cycle due to their limited initial capital This strategy allows them to invest in their business with a quicker turnaround, enabling rapid capital recovery and ensuring optimal operational conditions for effective company performance.
Small and medium-sized enterprises (SMEs) face significant challenges due to limited capital and restricted access to financial resources, which hinders their growth potential They often operate with inadequate infrastructure and outdated technology, diminishing their competitiveness in the market Additionally, SMEs struggle with market targeting and product distribution due to insufficient information and ineffective marketing strategies Their constrained budgets further impede their ability to expand markets, undertake large projects, and invest in new products Moreover, a shortage of skilled labor and inadequate management capacity poses further obstacles, as SMEs find it difficult to attract qualified workers and managers Consequently, employees are frequently undertrained and inexperienced, and SMEs show little interest in investing in training programs essential for enhancing workforce quality.
17 existence and development of enterprises Besides, there are a scare of business leaders with high professional qualifications and management capacity
The Account Payable/Equity ratio, reputation, and risk tolerance of SMEs are generally less significant than those of large enterprises, resulting in shorter credit terms and smaller loan amounts for SMEs Consequently, commercial banks typically assess SMEs based on these characteristics.
Investing in SMEs offers several key advantages Firstly, commercial banks can enforce stricter controls and charge higher interest rates and fees compared to larger corporations, as SMEs often face significant challenges in accessing capital This reliance on bank funding makes SMEs less sensitive to price fluctuations Secondly, the diverse range of clients across various industries allows banks to effectively diversify their risk Lastly, SMEs typically provide high collateral rates with fewer legal complexities, facilitating easier management of at-risk assets.
Granting credit to SMEs presents three significant challenges Firstly, ineffective internal controls and risk management necessitate direct intervention from commercial banks to assess potential risks accurately Secondly, the limited management capacity within SMEs often results in financial information that fails to accurately represent their true financial health Lastly, the minimal range of services utilized by these customers, primarily limited to basic credit offerings, diminishes overall profitability for lenders.
1.1.2 The role of SMEs in the economy
Small and medium-sized enterprises (SMEs) are essential to the contemporary economy, serving as a key driver of business growth, innovation, and competitiveness Additionally, they play a significant role as major employers, underscoring their critical importance in today's economic landscape.
Firstly, they reduce the number of unemployed and contribute to social stabilization It can be said that lowering the unemployment rate is a top priority of
Theoretical background on bank credit to SME
1.2.1 Definition and types of credit to SMEs
1.2.1.1 Definition of credit to SMEs
The term "credit" originates from the Latin word "credo," meaning "trust and confidence." It signifies the trust that a borrower will repay the money lent by a lender, typically with interest, by a specified date According to the Law on Credit Institutions, enacted on January 1, 2011, bank credit is defined as an agreement or commitment allowing an organization or individual to utilize a sum of money through various means such as lending, discounting, financial leasing, factoring, and bank guarantees, all based on the principle of repayment.
Bank credit to SMEs represents a financial agreement where banks extend loans, credit cards, or other forms of credit to small and medium-sized enterprises, based on the expectation that these businesses will repay the borrowed amount along with interest at a future date.
There are numerous methods to grant credit for SMEs, some of which have been defined in the Law on Credit Institution as follows:
Lending refers to the process where a creditor provides a client with a specified amount of money for a particular purpose, to be repaid over a designated period, including both principal and interest.
Discount: Discount is the purchase within a specific time or the buying negotiable instruments with recourse and other valuable papers of the beneficiary prior to maturity
Re-discount: Re-discount is the discount on negotiable instruments and other valuable papers have been discounted prior to maturity
Factoring is a financial service that allows sellers and buyers to obtain credit by selling their receivables or payables, which arise from the sale of goods and services under contractual agreements.
A bank guarantee is a financial commitment where credit institutions assume the responsibility of fulfilling a customer's financial obligations if the customer defaults The customer is required to recognize the debt and repay the credit institution as per the agreement.
1.2.1.2 Types of credit a Based on the term:
Short-term credit is a revolving line of credit provided to businesses for a duration of up to 12 months, designed to meet immediate working capital requirements This financial tool helps enterprises manage their short-term funding needs effectively.
Medium-term credit is credit scheduled to be repaid from more than one to under five years
Long-term credit refers to loans that are set to be repaid over a period exceeding five years These corporate loans can be categorized based on their intended purposes, which helps in understanding the specific financial needs they address.
Credit to expand working capital: This credit granting activities finance the demands of working capital to offset the differences among terms, value of assets
21 and enterprises‟ capital This is usually a short-term credit, depending on the working capital turnover Sale of products is the main source of debt repayment
Credit for acquiring fixed assets and projects facilitates the purchase and expansion of manufacturing and business operations This type of financing typically involves medium to long-term loans, determined by the assessment of both enterprises and banks regarding the repayment timeline The primary sources for repaying these debts are the depreciation of fixed assets and generated profits, which are influenced by the creditworthiness of customers.
Secured loans: Credit is granted with additional security measures such as collateral and a guarantee from a third party
Unsecured loans: This form of credit is not secured by any measures other than the reputation of customers
1.2.2 Roles of bank credit to SMEs
Commercial banks play a crucial role in providing capital for the development of SMEs by mobilizing idle funds from various economic sectors This enables businesses facing capital deficits to maintain operations and expand their markets Although SMEs often struggle to secure loans due to insufficient net worth, poor access to finance remains a significant barrier to their growth Therefore, it is essential for commercial banks to explore innovative solutions that unlock capital sources, thereby facilitating business growth and development for SMEs.
Bank credit for SMEs enhances capital efficiency by ensuring that commercial banks monitor business activities throughout the lending process This oversight compels companies to utilize funds effectively and adopt profitable strategies, ultimately enabling them to repay both principal and interest to the banks punctually.
Thirdly, bank financing is considered a financial leverage for SMEs to optimize their capital structure, achieve the lowest cost of capital, and reduce expenses
Small and medium enterprises (SMEs) with limited capital can significantly enhance their profitability by effectively leveraging their own funds alongside additional loans in a balanced manner, ultimately achieving the lowest average cost.
Theoretical background on the quality of credit to SMEs
1.3.1 Definition of the quality of credit to SMEs
Quality in products and services, including banking, is defined in various ways Philip B Crosby (1979) described quality as "conformance to requirements - nothing more, nothing less." In contrast, the International Organization for Standardization (ISO) in ISO 9000:2015 states that the quality of an object is determined by comparing its inherent characteristics to a set of requirements High or excellent quality is achieved when these characteristics meet all requirements, while a failure to meet them results in low or poor quality Thus, the quality of an object is contingent upon its characteristics and the requirements it must fulfill.
From the customers' perspective, credit quality in commercial banks is defined by their ability to meet customer needs effectively, which includes providing adequate capital, reasonable interest rates, and flexible repayment options Additionally, from a social standpoint, credit quality should support socio-economic growth and contribute to the development of the monetary market by efficiently managing cash flow.
This paper aims to enhance the credit quality for SMEs at the Ngo Quyen branch, focusing on the bank's perspective The concept of credit quality is explored through two primary dimensions.
23 aspects: (i) The quality of SMEs‟ credit operations and (ii) The risk management activities during the credit granting process to SMEs
1.3.2 Measures of the quality of bank credit to SMEs
Quantitative indicators play a crucial role in assessing credit quality, enabling banks to evaluate the creditworthiness of SMEs effectively Accurate and comprehensive figures are essential for this analysis One key measure used in this assessment is the loan growth rate of SMEs.
Outstanding loans to SMEs represent the total funds that banks lend to small and medium-sized enterprises at a specific point in time, as reflected by the closing balance on the bank's balance sheet.
The rising percentage of outstanding loans to SMEs indicates a growing trend, but a negative index suggests a slow development pace that may lead to market loss and decreased efficiency in capital utilization Conversely, a high percentage of outstanding loans can pose systemic risks Additionally, monitoring the overdue debt ratio of SMEs is crucial for assessing financial health and stability.
Overdue debts refer to payments that customers fail to settle by their due date, serving as a critical indicator of a bank's potential capital loss A higher ratio of overdue debts signifies an increased risk of capital loss and indicates a decline in credit quality.
According to Circular 09/2014/TT-NHTM, debts are classified into 5 categories as follow:
Group 1: Current debt: are debts could be fully recovered, both principle and interest at maturity or debts which are overdue for less than 10 days Both overdue principle and interest must be recovered within the repayment rescheduled term
Group 2: Noted debt: overdue for less than 90 days
Group 3: Substandard debt: overdue from 90 to 180 days
Group 4: Doubtful debt: overdue from 181 to 360 days
Group 5: Unrecovered debts: overdue for over 360 days c Non-performing loan of SMEs
According to the "Regulations on Debt Classifications and Provisions for Handling Credit Risks" issued on June 4, 2014, non-performing loans (NPLs) are categorized into substandard debts (group 3), doubtful debts (group 4), and unrecoverable debts (group 5) An increase in NPLs leads to higher provisions for credit losses, negatively impacting banks' profitability High levels of NPLs indicate low credit quality and poor financial management and operational capacity within banks, necessitating a reevaluation of their credit activities.
The ratio evaluates the proportion of non-performing loans (NPLs) from small and medium-sized enterprises (SMEs) relative to the total lending activities of the unit, allowing for an assessment of their impact and informing strategic decisions to address the issue.
The index indicates the percentage of small and medium-sized enterprises (SMEs) with non-performing loans (NPLs) relative to the total number of SMEs, offering insights into the sector's overall health These metrics are influenced by the risk appetite and risk management strategies of commercial banks Additionally, the unrecovered debt ratio plays a crucial role in assessing financial stability within this context.
This data demonstrate debts have the highest possibility of being completely not collectible This indicates the debts that are placed into group 5 as Circular 09/2014/TT-NHTM
Overdue debt, non-performing loans (NPLs), and the unrecovered debt ratio are interconnected indicators of varying credit risk levels For commercial banks, customers failing to meet payment deadlines can result in liquidity risk, with non-performing loans serving as a critical warning signal It is essential to assess loan maturities and consider rescheduling overdue debts based on the repayment capacity of customers Additionally, the collateral coverage ratio of small and medium-sized enterprises (SMEs) plays a significant role in managing credit risk effectively.
Collateral coverage ratio is calculated as follow:
Securitized loans play a crucial role in minimizing banks' losses during credit defaults, prompting commercial banks, particularly state-owned ones, to increase their collateral-backed outstanding loans as a key source for debt recovery This collateral fosters a mutually beneficial relationship between clients and banks, serving as an indicator of credit quality However, while the proportion of secured loans to total loans provides insight into a bank's potential recovery after financial risks, it does not guarantee the recovery of non-performing loans (NPLs) To accurately assess credit quality, banks must evaluate the actual unrecovered capital at the end of credit contracts, alongside the credit concentration ratio for small and medium-sized enterprises (SMEs).
This indicator reflects the proportion of credit allocated to SMEs within the total outstanding loans of the bank, highlighting the institution's engagement in SME financing However, a high ratio may also indicate issues related to unpaid debt collection Therefore, a thorough analysis is essential before making any definitive conclusions about the bank's credit activities towards SMEs.
Every financial institution operates under specific lending standards, with commercial banks playing a crucial role in shaping the national economy and social landscape Due to their significant impact, these banks must adhere to strict operating principles Furthermore, each commercial bank sets its own criteria tailored to various financial services and products.
27 qualitative indicators after taking the bank‟s situation in relation to the banking system of each country under consideration
The credit must follow the principles and conditions for borrowing capital including the appraisal process and comply with the current law, documents and regimes of the credit operation
BANK CREDIT TO SMES AT NGO QUYEN BRANCH
The overview of Joint Stock Commercial Bank for Foreign Trade of Vietnam - Ngo Quyen branch
2.1.1 The development history of VCB - Ngo Quyen branch
Ngo Quyen branch was established on April 1st, 1991 It operates directly under Headquarter of Vietcombank
The evolution of the banking system has led to the necessity for VCB's Headquarter to separate its management and business operations With the expansion of VCB's network, there has been a significant increase in both mobilized capital and loans To enhance focus on business activities, VCB established the Ngo Quyen branch as an independent Level I branch on January 1, 2006.
Full name: Joint Stock Commercial Bank for Foreign Trade of Vietnam - Ngo Quyen branch
Name of international transaction: Vietcombanks‟ Operational Center
Head office: 31-33 Ngo Quyen, Hoan Kiem, Hanoi
The Ngo Quyen branch stands out as one of the largest and most effective branches in Vietnam's banking system With the country's economic growth, the branch has successfully expanded its market reach, embraced advanced technology, diversified its range of products and services, and enhanced overall service quality Committed to becoming a modern, multi-functional bank, the Ngo Quyen branch aims to serve all sectors of the economy.
The Ngo Quyen branch is managed by a board of directors that includes one director, five deputy directors, and nearly 800 employees It operates 19 transaction offices throughout Hanoi, with various departments organized to enhance its services.
Individual Customer Department: The target customers are individuals Bankers carry out home mortgages, instalment loans and loans for business households
Credit Department of SMEs: The target customers are SMEs The department provides services such as lending, guarantee, discount and L/C
Customer Department: The target customers are large enterprises, corporations and state corporations The department provides services such as lending, guarantee, discount and L/C
Guarantee Department: This is a division that delivers services such as contract performance guarantee, advance guarantee and payment guarantee
Project Investment Division: This department mainly meets the medium and long-term needs of customers, consult customers and analyse loan applications with a term of over one year
The Department of Debt Management is responsible for overseeing loan disbursement, managing credit control, and ensuring compliance with legal documentation Officers within the department compile credit reports and monitor the implementation of disbursement, debt collection, and interest processes, subsequently updating this information in the system.
International Offices: The department offers customers with international payment transactions such as letters of credit, collection documents and guides customers with international payment operations
Financial Accounting Department: The department is responsible for implementing the financial accounting regime, monitoring and managing financial expenditures, asset procurement, controlling all kinds of internal funds
The branch encompasses several key departments, including IT, Administration, Capital and Foreign Currency, Compliance and Supervision, Transaction, and Business Service Each department is dedicated to providing specialized services tailored to meet the needs of diverse target customers.
2.1.3 Business performance of Ngo Quyen branch
The primary function of a bank is capital mobilization, which constitutes the largest portion of its overall activities This process is significantly impacted by the bank's scale and market engagement Notably, the Ngo Quyen branch has demonstrated a proactive approach in effectively mobilizing available capital.
The branch mobilizes capital from individuals, enterprises and financial institutions
To promote money deposits, the branch offers a range of services such as investment accumulation, online deposits, prepaid interest payments, and VCB-iB@nking along with Mobile B@nking Additionally, it tailors deposit accounts to meet the specific needs of businesses and financial institutions.
Over a four-year period, there has been a notable rise in mobilized capital, primarily driven by the wholesale sector, which focuses on purchasing from wholesale customers and selling to the retail market Both the wholesale and retail sectors have seen growth in capital, with individual contributions steadily increasing, while other deposit types experienced minor fluctuations.
Table 2: Capital mobilization of Ngo Quyen branch
Source: Business report of Ngo Quyen branch
Despite facing challenges in retaining customers due to lower interest rates on VND compared to other financial institutions, Ngo Quyen branch has built a strong reputation through dedicated efforts by its staff to manage cash flow and expand its market presence, resulting in a gradual increase in growth rate.
In 2015, key clients withdrew their accounts seeking higher interest rates, prompting the headquarters to accept the interest rate ceiling However, this decision did not alleviate the challenges posed by funds transfer pricing To retain deposits and preserve customer relationships, the Ngo Quyen branch faced losses in specific instances, impacting its market share Consequently, capital mobilization from the economy remained a critical focus.
2015 reached 57,124.44 billion VND completed 93.75% of the plan to mobilize capital
Figure 1: The mobilized capital in Ngo Quyen branch (2016)
Source: Business report of Ngo Quyen branch
In 2016, the foreign currency interest rate was set at 0%, leading to a significant withdrawal of 70 million USD by individuals However, by the end of the year, the foreign currency reserves rose due to a strategic shift towards enterprise focus The Ngo Quyen branch effectively tapped into inexpensive non-term capital from deposit insurance, social insurance revenues, and centralized capital management services, enhancing the efficiency of funds allocated to borrowers' projects Consequently, the branch experienced a remarkable increase in cash flow, with non-term deposits reaching 13,328 billion VND, which represented 27% of the total mobilized capital.
In 2017, the total capital in Vietnam reached 68,385.5 billion VND, marking a 13.5% increase of 863.71 billion VND from the previous year The wholesale and retail sector contributed significantly, with figures at 35,489.5 billion VND and 33,196 billion VND, respectively Additionally, small and medium-sized enterprises (SMEs) and individual businesses saw growth rates of 6% and 3%.
Over a four-year period, mobilized capital primarily derived from term deposits, consistently representing over 75% of the total capital This stability in capital sources highlights the branch's ability to maintain a robust credit supply.
The stability in mobilization has provided a strong foundation for the branch's credit activities Vietnam's economy has seen rapid growth in enterprise numbers, import and export activities, and foreign investment in recent years However, this growth has led to challenges regarding interest rates and foreign currencies In response, the branch, guided by the Government and VCB Headquarters, has implemented crucial measures to manage credit growth effectively while ensuring capital mobilization for maintaining liquidity and a balanced growth structure.
Figure 2: Total outstanding loans of Ngo Quyen branch
Source: Business report of Ngo Quyen branch
From 2014 to 2017, total outstanding loans showed a consistent upward trend This analysis will explore various indicators to provide insights into the current lending activities at the Ngo Quyen branch, focusing on the types of loans categorized by economic sectors.
Table 3: The outstanding loans classified by sectors
Value Growth rate Value Growth rate Value Growth rate
Source: Business report of Ngo Quyen branch
Bank credit activities in Joint stock Commercial Bank for Foreign Trade of
of Vietnam - Ngo Quyen branch
2.2.1 Bank credit to SMEs process at Vietcombank
There are five steps in credit granting process in Viecombank including credit application, credit appraisal, approval processes, loan supervision and loan collection
Figure 5: The credit granting process in Viecombank
Source: Credit Department of Ngo Quyen branch
Credit officers proactively engage with potential businesses, including start-ups, companies looking to expand, and those with existing credit relationships with other institutions They must comprehend customer needs, offer suitable loan options, and assist clients in completing credit applications Essential documents are required for this process.
Legal dossiers are business registration, establishment decision, company rules and appointment decision of chairman and chief accountant
CREDIT APPLICATION CREDIT APPRAISAL APPROVAL PROCESS LOAN SUPERVISION LOAN COLLECTION
Financial documents include balance sheet, income statement, cash flow and business report
Loan dossiers contain business plan, repayment plan and other related documents
Mortgaged dossiers are lists of collateral and legal documents of those assets Credit officers have to examine the value of collateral (if any)
Creditors evaluate customers' creditworthiness by analyzing financial reports and various information sources, focusing on their repayment capacity and competitive standing This appraisal includes assessing credit scores and borrower ratings, which inform the bank's decision to establish a credit limit for each customer The findings are then reported to the Deputy Manager of the Credit department for final decision-making.
Branch managers can authorize loans up to 60 billion VND, while loans ranging from 60 to 100 billion VND require approval from the Headquarters manager For loans exceeding 100 billion VND, the Central Credit Union holds the decision-making authority.
The approval procedures cost 5 days for individuals, 10 days for fewer than 20 billion VND loans and 21 days for above 20 billion VND loans
The credit department reports to the Board of Directors and requests the accounting department to disburse grants to customers after signing the contract
Loan officers oversee the proper utilization of loans by businesses, ensuring funds are used for their intended purposes They carefully analyze any suspicious activities and take necessary actions to address potential issues.
Upon reaching maturity, banks notify customers of the repayment terms and the total debt amount If customers are unable to repay due to valid reasons, they must submit written requests for loan term adjustments or debt rescheduling Once the credit contract is concluded, the bank officer documents the customer's information and loan details.
2.2.2 The features of SMEs at Ngo Quyen branch
The Ngo Quyen branch primarily serves customers in the trade and service sectors, particularly within distribution, where low capital requirements facilitate easy establishment and operation This has led to a significant presence of small and medium-sized enterprises (SMEs) in the industry The branch focuses on investing in these target customers due to their frequent small capital needs and rapid turnover.
Figure 6: The working fields of SMEs at Ngo Quyen branch
Source: Business report of Ngo Quyen branch
Secondly, most of SMEs applied for short-term credit because the characteristics of
Small and medium-sized enterprises (SMEs) typically engage in small-scale production with rapid turnover, leading to a frequent need for additional capital to address working capital shortages during the production process Additionally, SMEs face stringent requirements when seeking long-term loans, as the absence of sufficient secured assets limits their borrowing capacity to only short- to medium-term financing options.
Agriculture and forestryIndustry and constructionTrade and services
48 agreements Hence, the amount of medium-term loans increased gradually as an open strategy of VCB to invest in SMEs
Figure 7: SMEs’ loans in different terms at Ngo Quyen branch
Source: Business report of Ngo Quyen branch
Thirdly, SMEs usually borrow in VND as their business activities are mainly to serve the domestic market
Figure 8: SMEs’ loans in USD and VND at Ngo Quyen branch
Source: Business report of Ngo Quyen branch
Loan in VNDLoan in USD
2.2.3 Current quality of bank credit to SMEs in Ngo Quyen branch
2.2.3.1 The quality of bank credit to SMEs through quantitative measures a Loan growth rate of SMEs
Figure 9: Loan growth rate of SMEs in Ngo Quyen branch
Source: Business report of Ngo Quyen branch
The growth rate of outstanding loans to SMEs has shown a positive trend, increasing by 3% in 2014, 4.55% in 2016, and 8.01% in 2017 Despite this growth, the figures do not fully represent the branch's potential, given its strong reputation and strategically located transaction offices Moving forward, the branch aims to prioritize credit for SMEs, recognizing their significant growth as a promising opportunity However, this focus may also lead to challenges regarding the quality of credit extended to SMEs, which the branch must carefully address.
Growth rate of loan to SMEs
50 b Overdue debt ratio of SMEs
Figure 10: Overdue debt ratio of SMEs in Ngo Quyen branch
Source: Business report of Ngo Quyen branch
In 2015, the Ngo Quyen branch effectively managed risk by significantly reducing its overdue debt ratio, which dropped from 29.37% in 2014 to 7.66% in 2015, and further to 6.3% in 2016, by selling a large volume of debt to VAMC and utilizing provisions Despite the broader economic instability that left many commercial banks grappling with high overdue debt ratios, the branch proactively implemented measures to enhance credit quality and address overdue debts.
In contrast, 2017 experienced an increase trend in the amount of overdue debt, the figure rose 7.19% It is essential for the branch to implement tactic strategies to solve the problem
Overdue debt ratio of SMEs
51 c Non-performing loans of SMEs
VCB leads the way among commercial banks in the transparent classification of non-performing loans, ensuring an honest portrayal of credit quality The bank employs an internal credit rating system and customized indicators for each client, enhancing the accuracy of credit assessments Effective debt management not only reduces monitoring and recovery costs but also positively influences the bank's liquidity.
Figure 11: NPLs ratio of SMEs in Ngo Quyen branch
Source: Business report of Ngo Quyen branch
In 2014, the non-performing loan (NPL) rate for small and medium-sized enterprises (SMEs) was 15.59%, but it plummeted to 0.63% in 2015 However, this trend reversed in 2016 and 2017, with NPL rates rising to 0.94% and 1.4%, respectively Despite the Ngo Quyen branch's efforts to address this issue through active debt collection, provisions usage, and sales to the Vietnam Asset Management Company (VAMC), the NPL levels among SMEs remain a significant concern when compared to individuals and large corporations.
Figure 12 : SMEs’ NPL to total NPL ratio in Ngo Quyen branch
Source: Business report of Ngo Quyen branch
The chart illustrates a significant decline in the percentage of non-performing loans (NPLs) attributed to credit activities, dropping from 33% in 2014 to just 6% in 2015 However, this trend reversed in the following two years, with NPLs from credit activities rising to 15% by 2017.
Table 6: The ratio of SMEs having NPLs
Ratio of SMEs having NPLs 8.70% 11.83% 14.78%
Source: Business report of Ngo Quyen branch
In 2016, non-performing loans (NPLs) primarily originated from less than 15% of all small and medium-sized enterprises (SMEs), with the NPL ratio rising to 14.78%, reflecting an increase of 3.13% from 2015 Despite this rise, it is evident that only a small fraction of SMEs struggled to repay loans that were overdue for more than 90 days.
SMEs' NPL to total NPL ratio
53 d Unrecovered debt ratio of SMEs
Table 7: Unrecovered debt of SMEs ratio at Ngo Quyen branch
Unrecovered debt of SMEs ratio 13.74% 0.23% 0.45% 0.82%
Source: Business report of Ngo Quyen branch
In 2014, the unrecovered debt ratio for SMEs was 13.74% Following the sale of a significant portion of loans to VAMC and the use of provisions, this ratio dramatically decreased to 0.23% in 2015 However, due to ongoing economic instability and inadequate credit quality control measures, the unrecovered debt ratio for SMEs rose to 0.82%.
2017, an increase of 0.59% compared to 2016 e Collateral coverage ratio of SMEs
Figure 13: Collateral coverage ratio of SMEs in Ngo Quyen branch
Source: Business report of Ngo Quyen branch
The proportion of secured loans to SMEs has consistently exceeded 73%, rising by 5% in 2015 and reaching a peak of 85% in 2017, with an increase of 233 billion VND from the previous year In an unstable economic climate and lacking legal frameworks, young businesses struggle to enter the market, making secured loans a crucial strategy for banks to mitigate capital loss However, this reliance on collateral poses significant challenges for SME credit development at the Ngo Quyen branch, as many SMEs lack sufficient security assets, preventing them from obtaining loans despite having viable business plans Additionally, the process of assessing collateral is time-consuming and costly.
RECOMMENDATION
The orientation of Ngo Quyen branch to develop SMEs‟ bank credit
VCB's guiding principles are centered around 'Transformation - Efficiency - Sustainability,' while its management philosophy emphasizes 'Innovation - Discipline - Responsibility.' In 2018, the bank is prioritizing retail markets and service activities, aiming to mobilize capital from wholesale customers and extend credit to the retail sector, particularly targeting small and medium-sized enterprises (SMEs).
In alignment with the overarching development goals of the banking sector and directives from VCB Headquarters, the Ngo Quyen branch has established a strategic focus on enhancing credit development for small and medium-sized enterprises (SMEs) in the upcoming year.
The branch aims to achieve a 10% increase in capital mobilization for small and medium-sized enterprises (SMEs) If needed, it can recommend to the board of directors the establishment of suitable sales mechanisms The growth of credit for SMEs will focus on ensuring profitability and sustainability.
The Ngo Quyen branch aims to boost bank credit to SMEs by at least 15% compared to previous years To achieve this, the branch will establish a multi-channel distribution network and deliver high-quality services Additionally, it seeks to attract new SMEs to enhance the bank's revenue and profitability.
Thirdly, the branch has to reduce and maintain the ratio of NPLs less than 1%
To enhance the quality of credit in line with international standards, the branch prioritizes credit risk prevention as a crucial strategy for developing credit for SMEs This approach aims to comprehensively address and minimize credit risk, ensuring a more secure lending environment.
Fourthly, the branch has to develop and foster staff to be competitive and adapt quickly in the integration process of Vietnam Besides, Ngo Quyen branch also
68 make sure the sufficiency of income fund to pay salaries and incentives to encourage staff
The Ngo Quyen branch is set to enhance its reporting system, recognizing that the accuracy and volume of reported information are crucial for credit procedures To address the current issues of missing and inaccurate reports, the branch will implement more proactive measures aimed at significantly improving the reporting process.
Solutions to enhance the quality of bank credit to SMEs at Ngo Quyen branch
3.2.1 Improve the quality of appraisal and conduct inspection strictly after credit granting
Appraisal is crucial in credit operations as it assesses the acceptability of loan applications To reduce non-performing loans (NPLs) and enhance decision-making, banks must focus on improving appraisal quality Successful assessment processes rely on strong collaboration between creditors and customers.
Before approving loans, creditors must have a comprehensive understanding of borrowers, particularly for SMEs This includes assessing the business's financial capacity, legal standing, repayment capabilities, and past loan credibility Additionally, creditors should evaluate the business's strengths, current challenges, and overall situation in relation to customer records to make informed lending decisions.
Credit officers must be able to anticipate any circumstances that may arise, present risk management ideas, corrective measures for the business, and plan debt settlements (if necessary)
After disbursement, bankers have to control investment objectives of clients to ensure the return of principle and interest They prevent any possible cases that
69 customers use funds for earning profits from prohibited items, which leads to the high risk of losing capital
Credit officers must regularly evaluate loans by monitoring cash flow and assessing the usage and management of funds, as this is crucial for maintaining credit quality Additionally, the Ngo Quyen branch should be vigilant in identifying any business challenges to provide timely financial advice and address potential violations or problematic loans effectively.
3.2.2 Develop a rational credit policy for SMEs
Creating a flexible lending interest rate tailored to various corporate needs is essential, particularly for SMEs, as high interest rates significantly increase production costs and hinder their market competitiveness This challenge can lead to operational difficulties and difficulties in repaying debts To address this, VCB and its branches must continuously monitor market dynamics, including capital supply and demand, to establish effective interest rate policies Each SME requires a customized approach that fosters growth and profitability, necessitating the bank to offer diverse interest rates based on the type, purpose, and size of loans, thereby providing customers with more options to find suitable financing solutions.
Ngo Quyen branch should focus on diversifying its credit offerings to meet the diverse needs of customers, including preferential loan products for new clients to enhance market share Currently, the bank primarily provides standalone credit products such as loans, guarantees, discounted bills, and import/export payments However, businesses often require a range of fast and convenient services to support their operations Therefore, VCB should implement "package" services tailored to customer demands, which would not only enhance customer satisfaction but also increase profitability By promoting the use of more products, the bank can effectively reduce service fees.
To attract and satisfy a broader range of clients, the bank offers various services that provide creditors with a comprehensive view of the business This insight enables the bank to better understand its customers, effectively manage risk, and take appropriate actions when necessary.
VCB should adopt a flexible approach in its lending policies by assessing the viability of business production plans and the competitiveness of products, rather than solely concentrating on debt collection through asset liquidation This strategy will more effectively improve credit quality and foster healthier lending practices.
Ngo Quyen branch needs to streamline loan procedures by reducing unnecessary documentation, as SMEs urgently require substantial capital Currently, SMEs encounter cumbersome processes filled with excessive paperwork to secure credit The complexity of internal procedures requires credit officers to navigate multiple steps before submitting documents to the Debt Management department for verification, leading to prolonged overlapping checks that do not enhance credit quality Therefore, establishing clear guidelines for declines is essential to expedite credit procedures and ensure timely budget allocation for customers.
3.2.3 Improve the quality of SMEs’ credit information
Information for assessing the financial capacity of SMEs is gathered from three key sources: in-depth interviews, intermediaries, and direct interactions with borrowers Commercial banks utilize this data to evaluate project profitability and identify potential risks associated with customer defaults.
To enhance credit quality for SMEs, commercial banks must develop comprehensive customer information systems that encompass both existing and prospective clients It is essential to categorize this information promptly upon collection, focusing on targeted customer segments Additionally, fostering close relationships with these SMEs is crucial for effective credit management.
Banks must maintain strong relationships with the Credit Information Center of the State Bank of Vietnam (CIC) and other financial institutions It is crucial for banks to regularly update their information regarding small and medium-sized enterprises (SMEs), as well as market trends, policies, regulations, and competitors Once this information is gathered, effective processing and classification are necessary for optimal utilization.
3.2.4 Recruit talented staff and run regular training programs
To ensure a competent workforce, the branch must implement a standardized recruitment process that includes strict criteria for candidate selection This involves conducting examinations in a serious and fair manner to identify potential applicants effectively Additionally, evaluating candidates during their internship is essential for eliminating those who do not meet the required standards.
Regular training for staff is essential to enhance their skills and expertise, aiming for excellence in their roles Training programs should emphasize both professional development and the cultivation of soft skills Given the often limited structure of SMEs, they may struggle to create feasible projects and viable business plans Consequently, it is crucial for bankers to acquire in-depth knowledge of the industry, relevant laws, and market prices to provide accurate and effective consulting.
3.2.5 Apply key performance indicators system
Key Performance Indicators (KPIs) are essential quantifiable measures used to assess staff performance in the banking sector Each employee should have tailored indicators based on their skills, experience, and seniority Regular evaluations provide managers with an objective perspective on each banker’s capabilities, enabling them to assign suitable tasks effectively Additionally, the Ngo Quyen branch should implement regular position rotations to enhance staff engagement and reduce risks related to personal interests.
The branch also need reasonable remuneration packages, such as salary in line with personal performance, promotion opportunities, health checkup and other bonus for
72 employees who accomplish outstanding tasks On the other hand, the branch should have specific penalties for under-performing staff
Creditors play a crucial role in acquiring new customers and nurturing existing relationships, while VCB should delineate responsibilities between the sales and document processing departments By allowing creditors to focus on customer engagement, other departments can handle the assessment, disbursement, and post-lending scrutiny of credit This specialization enhances staff efficiency, ultimately leading to increased credit availability and improved credit quality for SMEs.
Recommendation
Develop and complete the legal system in an uniform and transparent way
The Party and the government must continually enhance the legal system to foster economic growth While recent years have seen positive changes in the legal environment, inconsistencies within Vietnamese law remain, failing to align with the nation’s development Consequently, numerous legal documents require ongoing amendments and updates to better support the economy.
The banking industry plays a crucial role in the economy by acting as intermediaries between various economic entities By facilitating easy access to capital for companies, banks significantly influence national regulations Therefore, it is essential for banking activities to operate within a stable legal framework that ensures adequate protection for banking operations.
Information about enterprises is currently fragmented across various state-owned management agencies, leading to a lack of standardized data storage Most data is stored on paper rather than digitally, making it challenging and time-consuming to retrieve information, which is also at risk of being lost or damaged Additionally, banks seeking to utilize this information often encounter obstacles due to a lack of cooperation from these agencies.
The implementation of a national information system is crucial for effective government management and plays a vital role in enabling commercial banks to conduct comprehensive assessments of companies prior to making credit decisions.
Improve the quality of the National Registration Agency for Secured Transactions
The National Registration Agency for Secured Transactions offers essential information on secured transactions involving movable assets and real estate for individuals and organizations Registering secured transactions is crucial for protecting banks' rights and ensuring they have priority over asset disposal While the online platform facilitates the search and registration of security interests in movable property, real estate registration requires direct intervention, leading to delays in credit approval for SMEs Additionally, instances of assets being guaranteed to multiple financial institutions highlight the need for the Ministry of Justice to modernize the information system.
3.3.2 Recommendation for the State Bank of Vietnam
The State Bank of Vietnam (SBV) should enhance its inspection and supervision of the commercial banking system by developing a robust inspection team in both size and expertise This initiative aims to promptly identify and prevent violations across all banking sectors, particularly in credit operations While supervisory activities are crucial, they must not adversely affect the functioning of commercial banks Upon discovering any violations, financial institutions should be treated with transparency Additionally, the SBV should conduct training sessions and seminars, along with issuing guiding circulars, to improve financial management and strengthen risk mitigation supervision within commercial banks.
To enhance the effectiveness of the Credit Information Center (CIC), the State Bank of Vietnam (SBV) must focus on improving its operations As a state-owned agency, the CIC is responsible for collecting, analyzing, and forecasting credit information in accordance with SBV and government regulations The SBV should mandate commercial banks to regularly submit data on credit quality and monthly balances, while also developing a comprehensive chart to track credit balances and the quality of outstanding loans Additionally, the SBV needs to compile pertinent information about company directors and associated clients to issue timely warning alerts.
The State Bank of Vietnam (SBV) must enhance the legal framework governing business and credit operations While credit regulations are in place, the complexity and rapid changes in credit activities necessitate continuous research and prompt amendments based on feedback Finalizing banking laws, particularly those related to credit institutions, will facilitate commercial banks in extending credit to small and medium-sized enterprises (SMEs) Additionally, the SBV should establish a dedicated lending mechanism for SMEs that aligns with government policies aimed at fostering their growth.
3.3.3 Recommendations for Vietnam Association of Small and Medium
Established in 2005 in Hanoi, the Vietnam Association of Small and Medium Enterprises (VINASME) serves as a vital support network for SMEs in the country As Vietnam's largest business association, VINASME is dedicated to representing the interests of small and medium businesses by fostering a collaborative environment for members to share experiences and information The association also plays a crucial role in facilitating communication with the government, disseminating important information to its members, and engaging in policy discussions that impact SMEs.
The rapid development of the national operation network has enhanced the recognition and significance of VINASME by key entities such as the Central Party, National Assembly, Government, and the community To maintain its vital role in supporting small and medium-sized enterprises (SMEs), VINASME must continue to evolve and adapt its strategies.
Regularly audit the data and have leading economic expertise to assess and analyse to enact policies that aim to support SMEs working in different areas and raise their competitiveness
Hold up training courses to increase knowledge of SMEs‟ directors and keep them updating with the current market and national policies to make right investment decisions
To advocate and support SMEs‟ business and production by developing a network of providing services for SMEs to develop sustainably
Act as a proactive mediator between SMEs and the government to collect enterprises‟ ideas for the government to formulate laws
The VCB Headquarters must collaborate with its branches to develop effective strategies and policies for credit activities, providing the Ngo Quyen branch with a solid foundation for growth Tailored policies and strategic approaches for small and medium-sized enterprises (SMEs) are crucial for the Ngo Quyen branch, enabling it to establish clear steps to enhance the number of SMEs engaging in credit relationships.
Secondly, VCB should continuously conduct research and develop new credit products which have more attractive and convenient characteristics that adapt a wide variety of customers‟ demand
To improve efficiency, VCB should streamline its credit operations by analyzing the credit procedures and operational models of commercial banks in developed countries Implementing these best practices across its branches will help accelerate the credit process and enhance overall performance.
78 the quality of bank credit as well as avoid potential risk, while accelerating processes It will attract more customers and remain the loyalty of old ones
To enhance the effectiveness of human resources, VCB must implement a remuneration policy that motivates bank officers and rewards productive employees Regular training courses and seminars should be conducted to elevate the skills of bankers Additionally, recruitment processes should be rigorously managed to identify and attract qualified and experienced candidates.
Improving credit quality for SMEs at the Ngo Quyen branch is essential in the current phase The branch must address and develop its credit policies, lending procedures, credit information, and human resources to enhance credit quality Achieving this goal requires collaboration among the government, the State Bank of Vietnam (SBV), and the Vietnam Commercial Bank (VCB) The author outlines specific steps that these three entities must undertake, while also highlighting the important role of the Vietnam Association of Small and Medium Enterprises in the effort to improve credit quality for SMEs.
The credit activities of commercial banks are crucial for economic stability and growth, particularly as the number of SMEs continues to rise, highlighting the need for targeted investment At the Ngo Quyen branch, enhancing credit quality for SMEs has become a top priority This thesis presents key contributions based on research, assessment, and analysis of the credit quality for SMEs at the Ngo Quyen branch, emphasizing the importance of improving financial support for these vital businesses.