Asset based lending at BIDV westlake branch analysis suggestions

Academy of Finance Mid-term Intern Report Asset-based lending at BIDV-Westlake branch: Analysis & Suggestions Instructor: Bui Thi Tuyet Mai M.A Student: Le The Nhan ID: 0954050074 Class: CQ47/51.03 Hanoi, 2013 Table of Contents Introdution CHAPTER 1: SOME BASIC THEORIES ABOUT SECURITY TRANSACTIONS IN LENDING ACTIVITY OF COMMERCIAL BANKS 1.1 Lending activity of commercial bank14 1.1.1 Definition 14 1.1.2 Characteristics 20 1.1.3 Elements of lendings II Assets used to secure loans 22 Definition of security assets 22 Types of security 23 III.General provisions of asset-based lending at Bank for Investment and Development of Vietnam syste Conditions of assets used to secure loans 26 .The assets to pledge, mortgage26 Maximum lending range for each form of security transaction 26 CHAPTER 2: REAL SITUATION OF ASSET-BASED LENDING AT BIDV-WESTLAKE BRANCH IN RECENT YEARS .28 I Overview about BIDV-Westlake branch28 .History and development progress 28 Main mission and functions 29 Organizational structure31 II Banking activities in recent years 36 Capital mobilization situation at BIDV-Westlake branch 37 Lending activity situation at BIDV-Westlake branch 38 Performance of BIDV-Westlake branch 40 III Situation of asset-based lending at BIDV-Westlake branch 41 Necessary procedures of processing asset-based loan at BIDV-Westlake branch41 General situation of secured loans at BIDV-Westlake branch 44 .Situation of asset-based lending at BIDV-Westlake branch 45 Unit: Billion VND 45 Analyze asset-based lending activity according to business sectors at BIDV-Westlake48 Unit: Billion VND Error! Bookmark not defined .Analyze asset-based lending activity according to duration at BIDV-Westlake50 Unit: Billion VND 50 IV Assessment of asset-based lending activities in BIDV-Westlake51 Opportunities and threads 51 Achievements 55 Limits 56 CHAPTER 3: SUGGESTION FOR IMPROVING EFFECTIVENESS OF ASSET-BASED LENDING AT BIDV-Westlake BRANCH 59 I.Orientation to improve performance in asset-based lending at BIDV-Westlake branch in future 59 II Suggestion for improving effectiveness of asset-based lending at BIDV-Westlake branch 60 1.Mobilizing capital to expand size of asset-based lending activity at BIDV-Westlake branch Minimizing threads in asset-based lending activity at BIDV-Westlake branch62 Preventing credit risk 64 Treatment for bad debt and outstanding debt 65 Improving quality of credit officers 66 Applying balance offset loan 68 60 .Applying Information Technology 69 III .Recommendation 69 Recommendations to BIDV headquarter69 Recommendations to local authorities 70 CONCLUSION .76 REFERENCES 77 Introduction Chapter 1: SOME BASIC THEORIES ABOUT SECURITY TRANSACTIONS IN LENDING ACTIVITY OF COMMERCIAL BANKS 1.1 Lending activity of commercial banks 1.1.1 Definition 1.1.2 Characteristics 1.1.3 Elements of lending 1.1.3.1 Parties 1.1.3.2 Cost of lendings 1.1.4 The role of lending activities 1.1.4.1 The role of lending activities with economy 1.1.4.2 The role of lending activities with customers 1.1.4.3 Benefits of banks 1.1.5 Types of lending 1.2 Assets used to secured loans 1.2.1 Definition 1.2.2 Types of security 1.3 General provisions of ABL at BIDV system 1.3.1 Conditions of assets used to secure loans 1.3.2 The assets to pledge, mortage 1.3.3 Maximum lending range for each form of security transaction CHAPTER 2: REAL SITUATION OF ABL AT BIDV-WESTLAKE BRANCH IN RECENT YEARS 2.1 Overview about BIDV-Westlake branch 2.1.1 History and development progress 2.1.2 Main missions and function 2.1.3 Organizational structure 2.2 Banking activities in recent years 2.2.1 Capital mobilization situation at BIDV-Westlake branch 2.2.2 Lending activity situation at BIDV-Westlake branch 2.2.3 Performance of BIDV-Westlake branch 2.3 Situation of ABL at BIDV-Westlake branck 2.3.1 Necessary procedures of processing asset-based loans at BIDV-Westlake branch 2.3.2 General situation of secured loans at BIDV-Westlake branch 2.3.3 Situation of asset-based lending at BIDV-Westlake branch 2.3.4 Analyze ABL activity according to duration at BIDVWestlake branch 2.4 Assessment of ABL activities in BIDV-Westlake branch 2.4.1 Opportunities and threads 2.4.2 Achievements 2.4.3 Limits CHAPTER 3: CHAPTER 3: SUGGESTION FOR IMPROVING EFFECTIVENESS OF ASSET-BASED LENDING AT BIDV-WESTLAKE BRANCH 3.1 Orientation to improve performance in asset-based lending at BIDVWestlake branch in future 3.2 for improving effectiveness of asset-based lending at BIDV-Westlake branch 3.2.1 Mobilizing capital to expand size of asset-based lending activity at BIDVWestlake branch 3.2.2 Minimizing threads in asset-based lending activity at BIDV-Westlake branch 3.2.3 Preventing credit risk 3.2.4 Treatment for bad debt and outstanding debt 3.2.5 Improving quality of credit officers 3.2.6 Applying balance offset loan 3.2.7 Applying Information Technology 3.3 Recommendations 3.3.1 Recommendations to BIDV headquarter 3.3.2 Recommendations to local authorities 3.3.3 Recommendations to the Government 3.3.3.1 Complete mechanisms for loan security 3.3.3.2 Provide solutions to the valuation of collateral, pledged for the bank and the customer 3.3.3.3 Adjust the statute of limitations for breach of contract 3.3.3.4 Solving problems in the handling of collateral assets of land use rights CONCLUSION REFERENCES LIST OF AVBBRIATIONS BIDV: Bank for Investment and Development of Vietnam ABL: Asset-based lending LIST OF TABLES Figure 1: Organizational structure Table 1: Statistics of indicators over recent years Table 2: Statistics of performance in 2011-2012 Table 3: Statistics of secured loans 2011-2012 Table 4: Statistics of ABL activities in 2011-2012 Table 5: ABL activities according to business sectors Table 6: ABL activities according to duration Chart 1: Capital structure by 31/12/2012 Chart 2: Outstanding balance structure by 31/12/2012 DECLARATION I hereby declare that this thesis is my own work and effort and that it has not been submitted anywhere for any award Where other sources of information have been used, they have been acknowledged Signature: Le The Nhan Date: ACKNOWLEDGEMENT This thesis would not have been possible without the support of many people Firstly, I would like to express my profound gratitude to my honorable teacher and supervisor, Ms Bui Thi Tuyet Mai, a lecturer of Faculty of Foreign Languages, Academy of Finance She helped me a lot by proper guidance, effective comments and with a good support She had always paved me the right way to conduct my internship program She has passed a lot of time in this respect She was cordial to solve my problem Secondly, although it is very much tough to collect necessary information within shortest possible time, I got much support from all officers and associates of BIDV Bank, Westlake Branch, Branch Manager, staffs of Risk Management Department Therefore, I would like to express my great acknowledgement to them At last, I am grateful to my respected teachers, Faculty of Foreign Languages, Academy of Finance, my family, and associates for their help and co-operation during my Internship program 63 equipment as mortgage, to bind legal and economic liability for inspection in the assessment of assets and avoid appraisal to higher valuation of assets Credit officers should monitor the contract period of the guarantee, address, and office location to update those information Upon receiving the contract of guarantee there should be commitment: the guarantor's obligations for branch was determined by a specific amount then credit officers should monitor loans and only lend such an amount that the principal and debt incurred to maturity are not greater than and monthly interest arise must be collect For reputable customers of regular contacts with banks, good performance obligations for previous loans, and especially with large account balances, the branch should have more incentives For example, the mortgage contract is not necessarily be notarized but can be negotiated between two parties to create favorable conditions for customers to access funds quickly to meet capital needs of customers To create advantage in the lending process, for each type of security assets, credit officers can design a framework based on their set of experience through each valuation In each frame rate, basic requirements for each security asset valuation should be listed so that when lending, credit officers can only based on that model to evaluate In case security assets have some other features, credit officers just need further assessment and add on later This approach is very convenient for the branch when the security assets is the production line, because if the price bracket is available, credit officers can appraise by themselves without having to hire the appraisal agencies, thereby reducing cost as well as providing safety for branch, avoiding appraisal officers and business connect with each other to increase asset value 64 3.2.3 Preventing credit risk Branch should improve the quality and capacity of management in dealing with problems-to-be quickly before it causes a negative effect on the branch Or, branch may change the ratio of investment for the portfolio structure of security assets: capital of the branch should not be too focused on loan with security assets which are real estate, because this is the type of asset whose current market price is in downward trend and is very hard to sell to recover the debt Branch should increase the proportion of pledge of valuable paper, especially saving books with large balances since this form has many advantages (as explained above) To this, branch need to promote people know about this form, for example when customers deposit money, the branch staff can recommend that if customers need to borrow capital, they can pledge their saving books Branch should strengthen coordination with insurance agencies in minimize credit risk, such as personal loans can be secured by life insurance contract Contracts of life risk protection are not only to protect customers from risks but also a form of savings, which give beneficiaries a budget in the future When they lose the ability to pay, debts will be paid by their insurance Also, branch should strengthen internal controls to detect errors in time Branch can use two methods which are direct and indirect supervision When using the direct method of testing, there must be consistent manner through independent auditing expertise Based on these results which comply with the auditing standards, analysis and evaluation should be conducted, from which creating effective channel of supervision 65 Due to the fact that branch focuses too much on credit growth target over the years without adequate attention to potential credit risk, growth of credit is unsustainable As a result, bad debts are about to rise again So branch should control credit growth in relation to the resources and ability to control credit risk Improving the quality of management system and report customers’ information is also a factor contributing to improving the quality of appraisal and credit approval 3.2.4 Treatment for bad debt and outstanding debt Branch establishes outstanding debts handling committees with the Director as its Chairman to prepare a general plan on handling bad debts of the branch beside Decision 493-SBV The plan should be divided into overdue debt and bad debt Overdue debt is divided into 12 groups so that branch can specifically monitor the status of each debt, in which each group is carefully analyzed to find the causes to overdue situation, the financial situation of the customer in order to propose appropriate measures For those customers with overdue debt but resilient business for debt repayment, if branch applies debt recovery measures without extra loan, the customer may sneak to open accounts at other banks and loans of the branch are outside the control cycle So branch can choose either following option The first option is to continue lending for capital circulation after careful analysis of business plans, business prospects, bank debt and detailed commitments with regard to overdue debts repayment schedule 66 If customer does not have promising business prospect, branch should analyze and negotiate with customer to deposit on debt collection account with agreed rate and the rest can be withdraw for business purpose In addition, branch has to improve strength of inter-bank system in handling overdue debts and bad debt Branch should contact other branch to find customers wishing to purchase assets or reputable customers who can corporate with branch’s customer who are in difficulty in finding output buyer 3.2.5 Improving quality of credit officers The work of credit officers plays an important role in the operation of branch, as they not only serve the needs of customers in an enthusiastic way to ensure fairness, but also ensure loans are effectively facilitate for the branch on the basis of capital adequacy Currently, due to overload at work, credit officers sometimes make mistakes in the process of lending and thus risks occur in assetbased lending To limit the risks mentioned above, first, credit officers must obey a strict lending process, from proper documentation (especially credit contracts, mortgage contract, guaranty contract) to strict control of the use of loans of customer, periodic reassessment of the value of the security assets compared to market prices For the security assets that customer hold, regular check for status of assets is a must, to avoid customer arbitrarily changing some parts without informing the branch Besides, credit officers themselves can improve their professional skills through continuous learning and accumulated experience to enrich the knowledge of business practices, understand customer’s psychology to be able to negotiate 67 with customers, to give the correct lending decisions promptly and to predict the possible risk for the loan Branch should regularly develop training programs which are truly specialized and highly useful for credit officers Because of the branch credit officers not having much time participating in the program, the branch may prepare reference material for credit officers in advance and workshops to practice later The training program should focus on the concept of credit management and the principles in policy decisions The program needs to study all aspects of profitability, risk and financial statement analysis, credit records, management of assets and liabilities, business development, problematic loans, credit policy Besides, credit officers should also be equipped with the intensive knowledge of the nature of asset-based lending such as researching and sampling to analyze assets, income, profitability, legal aspects of the mortgage lending process, the possibility of asset sales, asset evaluation capabilities In addition, branch can apply the behavior management theory, particularly the theory of motivating employees in risk management Branch should promote the application Maslow’s “satisfaction of needs theory”: according to this theory, to promote the employees, it is necessary to standardize various level of demand according to different levels of achievement in controlling credit risk by different employees The first is motivating by physical needs: the motivation requires specific identification of the different bonus levels corresponding to different performance levels of employees in risk control To achieve a certain level of compensation, employees themselves must feel they should put corresponding effort in the credit risk control 68 The second motivation is by safety needs: safety needs are safety on the job, on legal aspects It should be noted that the safety levels of employment and other liabilities is corresponding to the level of risk control and seriousness of violations, so that the staff put effort to satisfy safety requirements Besides, it is motivation by the integration needs: this kind of need depends very much on the personality of each person It is essential to create conditions for employees to work in teams to discuss, learn and help each other Branch should also try motivating by recognition and respect need: building different badges equal to various achievements to satisfy employees’ pride Finally, employees may be motivated by show-off needs: building levels of authority and supervision for different levels of freedom to create experiment and act depending on different achievement levels of staff According to this theory, employees often compare the ratio between their reward and their dedication to this ratio of others in same department, different departments or different units If they feel unfair, they will response or reestablish justice spontaneously: lower their contribution, fraud, indifferent to the job, or, in some rare cases, enhance the contribution Therefore, measuring the results of work of each credit officers must be accurate, reflect the contribution of each one in the final result of the unit, and on that basis, remuneration must be rewarded correspondingly Otherwise, the negative impact of unfairness would harm branch, 3.2.6 Applying balance offset loan To limit moral hazard from the borrower, the branch can deploy forms of balance offset loan, which is a separate form of compulsory security assets When borrowing, the borrower shall open an account there and keep the 69 minimum amount required by the branch For households and individuals, a certain balance is required in the saving account Time for saving must be equal borrowing time in credit contracts, interest rate must be equal mobilized interest rates periodically throughout that period of branch The balance offset loan contributes to diversification of the forms of mobilization of the branch, enables branch monitor customers’ borrowing through their accounts and provide information on financial conditions of borrowers Especially, when the customer fails to pay debts, branch can collect debts from this balance to offset this loss of the loan But for this measure being effective, first of all, branch should only apply this form of lending for customers with large amount of borrowing, and repayment source is not guaranteed 3.2.7 Applying Information Technology To maximize the efficiency of modern technology and constantly improve the technological capacity, first, branch should develop a strategy for long-term technology-based business strategy Depending on business strategy, the operational scale and the existing capital resources, human resources and technology, branch can choose the overall solution of different technologies 3.3 Recommendations Starting from the situation above, to further improve performance for asset-based lending activities at BIDV-Westlake branch, may I suggest some recommendations 3.3.1 Recommendations to BIDV headquarter Currently, the number of credit officers is modest, leading to overload work, so credit officers at BIDV-Westlake branch may not be fully aware of rules, 70 regulations, circulars and decrees of the government regulated on asset-based lending So there were mistakes in the lending process causing losses to branch BIDV Headquarter should issue guidelines in more detail of these regulations, and conduct more regular short training classes for credit officers to apply the regulations into practice of lending activities BIDV Headquarter should coordinate with the central bank regular for periodic inspection of the credit quality of the branch Thereby if there are errors, the branch will correct according to report of the inspection team to avoid potential damage to the branch In the future, banks should enable execution of online mortgage and guaranty registration In order to minimize the time of mortgage (or guaranty) registration using the land use right and assets attached to land, branch can corporate with land use right registration office to develop registration via the Internet If this plan succeeds, customers can perform online registration at any time of day Thus, the mortgage registration period can be shortened from days to just days Since then, the branch can implement this operation for all level branches in the city, and is implemented through an internal network 3.3.2 Recommendations to local authorities Local authorities should create favorable conditions for bank loans by speeding up and improving the licensing for land use right, agricultural land use rights for farmers in the area, thereby, executing governmental decree 60/CP of licensing ownership and land use rights to farmers to help them meet their legal requirements for bank loans 71 Local authorities should have a detailed notice of the planning period This is also the concern of the borrower and the bank, because when the planning area and planning time are unclear, the borrowing situation of customers having real estate in the planning area Local authorities need to adjust the land price brackets to suit the market price and published widely on mass media, creating favorable conditions for banks when determining value of security assets Law enforcement agencies, courts should empower bank to seize collateral in order to solve the case quickly to recover capital for banks Local authorities should quickly establish an independent audit organization to facilitate the bank in choosing customer without security assets The independent auditor will prevent wrong settlement and reporting of business Besides the above recommendations, the provincial state banks should strengthen the role of credit management for commercial banks in the area Relevant officials should issue guidance for specific documents, processes, procedures and fees for registration of security transactions so that credit institutions can implement the registration of security transactions by themselves 3.3.3 Recommendations to the Government 3.3.3.1 Complete mechanisms for loan security It is necessary for a loan guarantee mechanism that does not regulate that mortgage, pledge or guarantee are the loan conditions that borrowers are required to perform or be exempt from performing as a privilege, but produce a clear legal framework separating commercial credit and credit under trade policy For the commercial credit, there should be various measures for loan guarantees, based on which the credit institution will select customers, select the 72 project to lend under its self-determination of lending with or without guarantee secured by assets The implementation was carried out for customers of all economic sectors without discrimination For those under credit policy preferences of the State for a number of customers and projects, it should be the Government who provides loans and there is no need for security assets When losses occur due to the objective reasons for the loan, the government will handle Such mechanisms for loan security will fix some problems First, it will improve autonomy, self-responsibility of the bank and the customer in determining loan and debt obligations The State does not interfere too deeply in the decision process for lending and borrowing of banks and customers Besides, bank will choose reputable, efficient customers with capacity to repay loans and select suitable measures to ensure the loan, thus reducing the dependence of the loan control on the bank, reducing the ease of receiving any mortgage, pledge to lend so much to cut down on handling the property 3.3.3.2 Provide solutions to the valuation of collateral, pledged for the bank and the customer The government should make a price bracket, creating the conditions for credit institutions to be more flexible in valuing assets which does not go too far from price regulated by the State, but also not get fixed into this mold, avoid the possibility that price bracket of the state is much lower than the market price, especially for the real estate market Government should also issue strict regulations on the accounting for the business to avoid improper asset valuation 73 in bookkeeping with the figures being different from reality Then it should step by step establish a professional organization of collateral valuation, mortgage 3.3.3.3 Adjust the statute of limitations for breach of contract According to Article 31, Clause of the Ordinance on Economic Contracts, the statute lawsuits economy must be in months from the date the dispute arises In the credit relationship, when the loan has expired but the customer cannot repay the bank debt, bank usually does not prepare litigation immediately but find every possible ways to collect that debt, until there is sufficient evidence to determine the customer does not have the ability to repay, and this period usually lasts for more than months Now that bank brings the case to the economy court but time for suing is up so the case is dismissed Thus, for the credit relationship, time for litigation should be extended to more than 12 months 3.3.3.4 Solving problems in the handling of collateral assets of land use rights According to paragraph 2.1, Section II, Part B of Circular dated 04.23.2001 03/2001/TTLT/NHNN-BTP-BCA-BTC-BCA-TCDC (TTLT), which includes treatment guidelines of collateral Loan underwriting for debt recovery for credit institutions, states: "The credit institution directly sells secured assets (excluding the land use rights and other assets that have to be sold at the auction)” However, current regulations on the disposal of the mortgaged land use rights mentioned in Article 737, Civil Code only states: "When the due performance of obligations secured by mortgages on land use rights mortgage fails to perform or improper performance obligations, the land use rights shall be handled as follows: 74 In case of land use rights of Agriculture and Forestry land for afforestation was mortgaged, the mortgagee may request the State agency to organize the auction of land use rights to recovery of principal and interest In case of land use rights of public was mortgaged with economic institutions and individuals in Vietnam, then the mortgagee may request the State agency to auction of land use rights to recover the principal and interest Thus, on this point, the Civil Law only emphasizes to the rights of the mortgagee in the handling of land use rights The mortgagees may request the competent State institutions to bid to recover principal and interest when due performance of the contract which the mortgagor fails to perform or make obligation According to the Civil Law, it is not required if handling the loan collateral by of land use rights is ratified by auction organization or not This also means that if the mortgagee does not require the auction, they still have the right to selfdetermination of the appropriate measures In order not to create favorable conditions for the credit institutions but also to ensure legitimate interests to the parties concerned, it is considerable that the State should have some action: Firstly, within a period of 60 days from the date of the debt, State should allow credit institutions and the party that has collateral assets of land use rights the right to dispose asset by the agreed measures Secondly, after a period of 60 days from the date of the debt, if collateral assets of land use rights can’t be disposed, then depending on each specific case, the credit institution can solve that by these following ways: 75 i) In case borrowers still will to pay, they and the credit institution can continues to dispose assets to recovery debt ii) In case borrowers deliberately delay or fail to reach agreement with the credit institutions in the process of disposing secured assets, we will send these cases to specialized auction organizations to ensure fairness and the interests of the parties Besides, after performing the steps above, but if after a period of year from the date the debt that has not been processed, the credit institution shall be entitled to directly dispose or sell assets to recover debt, even including getting back the assets from the auction organization for sale In this case, the owner of collateral does not have the rights to claim Finally, the government can allow the credit institutions to receive collateral assets of the land use rights to substitute debt obligations if the credit institutions deems that collateral operating have the ability to recover debts or wishing to use the land to build offices, trading rooms to serve the business activities 76 CONCLUSION In summary, for small-scale operation as present, asset-based lending is a must for operation of BIDV-Westlake to prevent credit risks But in the future, with activities of the branch developing, the size of credit growing, the level of funding for each loan increasing, a combination of asset-based loan and loan based on the solvency of the customer is a the best choice, allowing customers who not have sufficient assets but promising business plan can have access to loans, in order to create easier access in terms of procedures without increasing risks Therefore, asset-based lending can contribute to bring effectiveness of credit activities as well as improve performance of the branch 77 REFERENCES / Credit Handbook of BIDV Vietnam / Le Van Tu 2005 Professional of Commercial bank Finance Publisher 3/ Jonathan Golin 2001 The Bank Credit Analysis Handbook: A Guide for Analysts, Bankers and Investors, 1ed Wiley Finance / BIDV’s guidelines for security loan regulations / BIDV-Westlake’s 2011 reports / BIDV-Westlake’s credit department 2011, Report on credit data in 2010-2011 of BIDV-Westlake 7/ BIDV’s Customer Policies 8/ Rose, Peter S 2001 Commercial bank management.5ed McGraw-Hill, Irwin, pp 532 ... Capital mobilization situation at BIDV- Westlake branch 2.2.2 Lending activity situation at BIDV- Westlake branch 2.2.3 Performance of BIDV- Westlake branch 2.3 Situation of ABL at BIDV- Westlake branck... of processing asset- based loans at BIDV- Westlake branch 2.3.2 General situation of secured loans at BIDV- Westlake branch 2.3.3 Situation of asset- based lending at BIDV- Westlake branch 2.3.4 Analyze... OF ASSET- BASED LENDING AT BIDV- WESTLAKE BRANCH 3.1 Orientation to improve performance in asset- based lending at BIDVWestlake branch in future 3.2 for improving effectiveness of asset- based lending