Determinants of consumer loan repayment performance of customers in vietnam prosperity banks huynh tan phat branch

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING UNIVERSITY HO CHI MINH CITY NGUYEN THI THU UYEN DETERMINANTS OF CONSUMER LOAN REPAYMENT PERFORMANCE OF CUSTOMERS IN VIETNAM PROSPERITY BANK HUYNH TAN PHAT BRANCH MAJOR: FINANCING AND BANKING MAJOR NUMBER: 7340201 GRADUATION THESIS HO CHI MINH - 2018 MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING UNIVERSITY HO CHI MINH CITY NGUYEN THI THU UYEN DETERMINANTS OF CONSUMER LOAN REPAYMENT PERFORMANCE OF CUSTOMERS IN VIETNAM PROSPERITY BANK HUYNH TAN PHAT BRANCH MAJOR: FINANCING AND BANKING MAJOR NUMBER: 7340201 GRADUATION THESIS SUPERVISOR: Assoc Prof PhD HA THI THIEU DAO HO CHI MINH - 2018 i DECLARATION OF AUTHENCITY Full name: Nguyen Thi Thu Uyen Student class: HQ02-GE01, faculty of Banking and Finance, Banking University of Ho Chi Minh city Student code: 030630140790 I declare that this thesis has been composed solely by myself and that it has not been submitted, in whole or in part, in any previous application for a degree Except where states otherwise by reference or acknowledgment, the work presented is entirely my own Ho Chi Minh City, May 29th 2018 Author Nguyen Thi Thu Uyen ii ACKNOWLEDGEMENTS First of all, I would like to thank all lecturers at Banking University of HCMC Your enthusiastic and devoted instruction helped me to improve my logical thinking ability and knowledge In addition, I would like to thank Ms.Ha Thi Thieu Dao who enthusiastically instructed and encouraged me to complete this graduation thesis However, due to limited knowledge and practical experience and limited research time, the study cannot avoid certain shortcomings The author wishes to receive the comments of members in the committee to complete the thesis Ho Chi Minh City, May 29th 2018 Author Nguyen Thi Thu Uyen iii ABSTRACT Author UYEN, Thu Thi NGUYEN Title Determinants of consumer loan repayment performance in VPBank Huynh Tan Phat Branch Language English Instructor DAO, Thieu Thi HA Banking credit plays a very important role in the economy of every country in the world and is especially important for countries with underdeveloped financial markets like Vietnam because it is a main source of funding for not only businesses but also personal customers In the process of international integration, competition among commercial banks will make the banking system more efficient and effective However, this also makes banks tend to loosen their credit policies, lowering lending conditions, resulting in evaluating incorrectly customers‟ repayment probability, particularly in the consumer loan segment Minimizing customers to incur an overdue debt or even loss of solvency is always a challenge which requires commercial banks need to pay attention and also find solutions to apply to the management This thesis examines determinants of consumer loan repayment performance of customers in Vietnam Prosperity Bank Huynh Tan Phat Branch Quantitative approaches are applied, in which Logit model is employed to investigate probability of consumer loan be repaid The results express that the factors including career characteristics, income, ratio of collateral on loan size, the number of dependent people, credit history as well as purpose of taking loan will affect the probability of consumer customers‟ loan repayment in the bank A number of recommendations are introduced to promote the repayment performance of these borrowers Key words: Consumer loans, Consumer customers, Logistics model, Probability of repayment, VPBank Huynh Tan Phat iv TABLE OF CONTENTS LIST OF TABLE AND FIGURES vii LIST OF ACRONYMS viii CHAPTER 1: INTRODUCTION 1.1 Research background 1.2 The necessity of the topic 1.3 Research objectives 1.4 Research question 1.5 Subject and Scope of research 1.5.1 Subject of study 1.5.2 Scope of study 1.6 Analytical methods 1.7 Contributions of research 1.8 Thesis structure CHAPTER 2: LITERATURE REVIEW AND FACTORS AFFECTING THE REPAYMENT OF CONSUMER BORROWERS IN COMMERCIAL BANKS 2.1 Literature review on consumer loans 2.1.1 Consumer loan definition 2.1.2 Consumer loan features 2.2 Factors affecting the repayment of consumer borrowers 2.2.1 Definition of consumer loan repayment 11 2.2.2 Previous experimental studies on determinants of loan repayment performance 11 v 2.3 Aggregation of factors affecting customers‟ consumer loan repayment 15 CHAPTER 3: DATA AND METHODOLOGY 20 3.1 Models researching consumer loan repayment performance 20 3.1.1 Model 5C 20 3.1.2 Binary Logistics Regression model 22 3.1.2.1 Multicollinearity testing 25 3.1.2.2 Testing the fiting of model 25 3.1.2.3 Testing the statistical significance of the coefficients 26 3.2 Research model at VPBank Huynh Tan Phat 27 3.2.1 Data collection 27 3.2.2 Logit regression model 28 CHAPTER 4: RESEARCH RESULT 32 4.1 Consumer loan in Vietnam Prosperity Bank Huynh Tan Phat Branch 32 4.2 Descriptive statistic results 35 4.3 Research results 39 CHAPTER 5: CONCLUSION, RECOMMENDATIONS AND LIMITATIONS 48 5.1 Conclusion and Recommendations 48 5.1.1 Group of positive effects 48 5.1.2 Group of negative effects 49 5.1.3 Other recommendations 50 5.2 Limitations and suggestions for further researches 52 REFERENCES 54 vi APPENDIX 57 vii LIST OF TABLES AND FIGURES Name Page Table 2.1: Research models relating to the subject 14 Table 2.2: Main determinants of consumer loan repayment performance 18 Table 3.1: Analyze sample data according to consumer repayment 27 Table 3.2: Variables in the research model 30 Table 4.1: Consumer loans classified by purpose of borrowing 35 Table 4.2: Classification of consumer loan groups 36 Table 4.3: Descriptive Statistics 37 Table 4.4: Correlation matrix of variables in model 42 Table 4.5: Collinearity Statistics 43 Table 4.6: Model Logistic with variables 43 Table 4.7: Model Logistic with variables 44 Table 4.8: Omnibus Tests of model coefficients 44 Table 4.9: Testing the fiting of model 45 Table 4.10: Testing accuracy level of model 45 Table 4.11: Logistic regression result 46 Table 4.12: Simulation of customer repayment probability 46 Figure 4.1: Average income of customers 40 viii LIST OF ACRONYMS Abbreviations Full meaning CIs Credit Institutions CIC Credit Information Center KPI Key Performance Indicator IMF International Monetary Fund NPL Non-performing loan SPSS Statistical package for Social Sciences VND Vietnam Dong VPBank Vietnam Prosperity Bank VIF Variance Inflation Factor 45 Table 4.12: Simulation of customer repayment probability Dependent variable: Able to repay consumer loan (Y=1) The probability of debt Regression coefficient EXP(B) repayment when an independent variable changes one unit and the probability of the initial Independent variable 10% 20% 30% 40% Collateral/Loan scale 1.242 3.462 27.78 46.40 59.74 69.77 Dependent people -1.72 0.179 1.95 4.28 7.12 10.66 Income 0.058 1.06 10.54 20.95 31.24 41.41 Credit history -0.609 0.543 5.69 11.95 18.88 26.58 Career -0.269 0.764 7.82 16.04 24.67 33.75 Purpose 1.103 3.012 25.07 42.95 56.35 66.76 Source: Estimation of author based on data collection Combined regression results in Table 4.11 as well as Table 4.12 describe the independent effect of each factor on the consumer loan repayment probability at VPBank Huynh Tan Phat as follows: Assume that the probability of debt repayment of consumer customers at the research branch is 40% Under the condition that other factors remain the same, the higher the probability of a collateral value compared to the size of a loan, the higher the probability of debt repayment When debt repayment probability of consumers in the research branch is 40% and the coefficient of variance in e-1.72 is approximately equal to 0.179, if the family has one more member who does not generate income and is dependent on the borrower, the probability of debt repayment of the borrower is reduced to 10.66% Similarly, if the average income of a customer increases by million VND, the customer‟s repayment also increases to 41.41% 46 In addition, the assessment of the situation is consistent with the results obtained from the empirical model that if two customers have all the same conditions, one of them is a blue-collar worker At that time, the coefficient of variation in loan repayment is estimated to be e -0.269 by approximately 0.764 For example, a client who is an officer has initial repayment probability of 0.4 (40%) Another person who are blue-collar worker with similar conditions, the worker will have a coefficient of repayment probability as 0.764*(0.4/0.6) = 0.5093 Therefore, the probability of the customer repaying debt would be (0.5093/1.5093)*100 = 33.75% Thus, the debt repayment probabilities of customers whose occupations are workers are 6.25% lower than that of clients with more stable occupations This result is also very relevant to the reality of operation at VPBank Huynh Tan Phat Explaining the reason for this phenomenon is because the customers being workers in the export processing zone have to work under extremely harsh environmant, leading to the number of workers strikes more and more As a result, the customer‟s ability to pay debts decreases, causing risks to the bank‟s operation For example, during the research period, on the 8th of the Lunar New Year (February 17, 2016) nearly 3,000 workers of Nissey Vietnam Co., Ltd (100% Japanese capital, located in Tan Thuan Export Processing Zone, Ho Chi Minh City) opposed to the company‟s 2016 basic salary increase policy One of the important reasons for the repayment of consumer loans at VPBank Huynh Tan Phat is the purpose of using loan There are two customers having all the same conditions but different purposes of capital use, a person takes a loan to purchase car or real estate and the rest borrows to buy household Then the difference in consumer loan repayment variance is estimated to be e1.103 equal to approximately 3.012 For example, a borrower who purchases household has an initial repayment probability of 0.4 (40%) Someone with similar conditions, but the purpose of loan to buy apartments will have a coefficient of repayment capacity as 3.012*(0.4/0.6) = 2.008 The repayment probability of that customer will be (2.008/3.008)*100 = 47 66.76%.This result is similar to the original assumption These loans are relatively easy to be confirmed accuracy level of the information as they relate to the third party (investors of apartments, car stores) SUMMARY OF CHAPTER Chapter gives a more detailed view on the current situation of consumer lending at VPBank Huynh Tan Phat By using the Binary Logistic model, the author has verified and identified the factors affecting the ability to repay loans of consumer loans at VPBank Huynh Tan Phat There are six determinants affecting repayment performance of these customers including career characteristics, ratio of collateral value on loan amount, the number of dependents, income, credit history and purpose of borrowing From the reality and the result of the model as well, Chapter will offer solutions to enhance the ability to pay debts of consumer customers 48 CHAPTER 5: CONCLUSION, RECOMMENDATIONS AND LIMITATIONS 5.1 Conclusion and Recommendations From the results of running the Logit model about the factors affecting the consumer‟s probability to repay consumer loans, the model has introduced six factors In particular, the age group, the ratio of collateral on the loan size, customers‟ income and the purpose of borrowing affect positively on the probability of repayment of respondents In contract, the remaining variables such as occupational characteristics, dependent people and credit history influence negatively The author suggests the following solutions: 5.1.1 Group of positive effects The ratio of collateral assets on the loan size: when the true value of collateral is higher than loan value, consumer borrowers will have more motivations to repay loan for the bank to avoid the property being handled On the other hand, if the collateral is formed by the borrowing scheme itself, the loan-to-asset ratio is also the value of the financing on the plan For example, customer A takes a loan for buying an apartment B and also use B as the main mortgage, in which case the ratio of equity to bank loans of customers not only represents the ratio of collateral on loan amount but also represents the funding rate on lending plan In addition to evaluating the source of income for debt repayment, the valuation of collateral should be considered carefully as it is a secondary source of repayment in the event customers lose their finance ability to repay debt Solution on Income of customers: the study found that the longer the repayment period, the higher the repayment probability of consumer customers It is therefore important to improve the quality of analytical review of the debt to match the borrower‟s income At the same time, it should be combined with the characteristics of the client‟s work and the stability of their income to predict the repayment probability 49 of customers in the coming time Credit officers need to restructure properly when they find out that borrowers‟ income is falling or that the repayment schedule for customers is not appropriate for their income and cash flow The basic grounds for the bank to determine the loan term in a reasonable way: - The characteristics and the life cycle of the loan are influenced by the customers‟ cash flow in term of both quantity and time Accordingly it affects the ability to balance capital to repay bank loans of consumer borrowers The repayment schedule is consistent with the borrower‟s average cash flow, for example applying monthly interest payment period for white-collar workers receiving salary monthly or annually interest payment method for farmers harvesting drops once a year - Purposing of taking the loan: loans for real estate purchasing normally have longer tenor than that of home repairing or household items shopping - The ability to balance capital of the bank 5.1.2 Group of negative effects Solution on the number of dependent members in the family Research results indicate that customers have a large number of dependent members in their families, their repayment capacity will be lower The solution is that credit officers at VPBank Huynh Tan Phat need to carefully consider the source of income and living expenses in the family to accurately determine the source of disposable income to repay the loan Based on that, they make decision whether to lend or not, the loan limit depending on the case where the number of dependent members increase or decrease under the loan agreement VPBank needs to restructure its credit portfolio to limit credit to consumer borrowers with a large number of dependents Solution on the career characteristic of the borrower Customers being office workers or having intellectual works are more likely to pay debts compared to other subjects, specifically for the case of VPBank Huynh Tan 50 Phat which over 30% of customers is blue-collar workers This is due to the fact that the number of customers with stable incomes is less risky when compared to the number of clients who are laborers However, when considering this factor, credit officers should pay attention many other aspects because otherwise they will be able to leave potential customers even if they are workers With clients who have stable office jobs and those who have been contracted indefinitely, the ability to pay debts and a sense of responsibility will increase, so it is essential to target consumer products that meet their needs Solution on the credit history of customers This is an important source of additional information in assessing the creditworthiness and repayment capacity of consumer borrowers In fact, there are many cases where consumers have overdue debts in the past that affect their ability to repay their loans As a result, credit officers need to intensify the collection and processing of customer information about the history of credit relations with other banks Currently the main information channel for assessing customer‟s credit rating is the National Credit Information (CIC) However, updated data from CIC is provided from CIs customers have been borrowing, so the accuracy of the information depends on the honesty of the CIs In addition to CIC, VPBank can also assess the willingness of customers to repay their debt through the statement of repayment accounts at CIs that each customer has a credit relationship For consumer loans in the process of paying principal and interest periodically, if there are signs of late or late payment of more than two times, credit officers should support with debt reminder department to remind customers If the situation still happens, the relevant officials must re-evaluate the situation of the customer‟s loan, detect and timely handle the risk signs 5.1.3 Other recommendations Human resources: Human resources‟ quality is seen as the priority elements to 51 credit activities of every single bank and VPBank Huynh Tan Phat as well In progress of issuing a credit debt, general credit and credit appraisal staffs are not the one who can direct issue debt but they take a very important role in giving or rejecting customers They are people having direct face to face discussion with customers As a result, increasing capacity of general credit and credit appraisal staffs is the utmost significant thing to raise overall performance of the bank VPBank’s credit policy: VPBank needs to develop a specialized policy, gathering a number of experts with experience in the banking sector to provide guidance, avoiding the overlap among existing regulations Regularly reviewing, following and updating the documents to ensure that VPBank‟s credit policies still remain the guiding role for credit activities of the whole system Credit policy development must be based on the reality situation, associated with the actual situation of the loan, characteristic and specific ability of every customer For example, for customers with long-term credit relationship, regardless of the size of the loan, with good credit, VPBank needs to set up a separate lending mechanism such as preferential terms in terms of loan duration, interest rate for maximum support to customers along with develop a clear and complete credit appraisal system VPBank should create a system of guiding documents for appraisal in each specific industry (related risks, profitability ratio) and promulgate regulation about the calculation of expenses related to customers reasonably in order to serve as a basis for calculating the income of customers in service of the credit decision The State Bank: It should improve the quality of management as well as the legal framework and indicators for banking supervision, enhance the quality and the number of staff, conduct inspection and supervision activities, strengthen the inspection and supervision of the classification of debts and make provisions for credit risk Moreover, the customer credit rating system of the banking sector need to be built to create a basis for effective information collection and evaluate customers‟ ability for 52 repaying loans more accurately The State Bank ought to upgrade the effectiveness of CIC as a focal point for providing information to CIs in evaluating customers CIC is currently providing important information on the customer‟s credit status, but the information is not updated regularly and continuously In order to improve the quality of CIC, the Nation Bank must have strict regulations requiring all banks to fully integrate the credit relationship of each ccustomers The Government: should maintain the stabilization of macro-economic activities and the better control of inflation as well, promote economic growth and create a favorable environment for individuals in society to have the opportunity to develop and raise not only their incomes but also their living standards In addition, they have to facilitate the legal environment for the establishment and development of credit rating agencies and credit rating of borrowers, create additional sources of information for comparative purposes to assess the financial capacity and ability to repay consumer loans Especially, in recent days, stabilizing the real estate market in the District 7, District 8, Nha Be and Hoc Mon along with applying timely intervention and regulation when the economy appears negative impacts threatening the stability of Vietnam economy are considered ones of the most urgent requirements 5.2 Limitations and suggestions for further researches Regression results have identified variables that affect consumer loan repayment performance of customers including: X2 (career characteristics), X4 (ratio of collateral value on loan amount), X5 (the number of dependents), X6 (income), X7 (credit history) and X8 (purpose of borrowing) The model results, however, have also eliminated the X3 variable (loan term) even though this is one of the important factors influencing directly loan repayment probability of customers in general In addition, the results of the model have not fully reflected the variables affecting the repayment capacity of consumer borrowers for some reasons: 53 - The number of observations is low, and the size of the sample should be increased - Input data is lack of information as well as accuracy level is low Accuracy of input information depends on many subjective and objective factors In fact, due to time constraints and personnel such as KPI pressure, appraisal credits during the prelending evaluation process rely heavily on information provided by credit officers The accuracy of this information depends on experiences as well as ethics of credit officers - The study excludes a number of factors that may affect the repayment probability of consumer borrowers, including objective and subjective factors (eg, economic crisis, client working experience, loan size, loan interest, etc.) In conclusion, the model results have regressed to important determinants that affect the repayment performance of consumer borrowers Since then, it has contributed to increasing the accuracy of the client appraisal process The model identifies age factors, occupational characteristics, ratio of collateral on loan size, number of dependents, income, credit history and loan purpose There are still few factors are not yet integrated or focused to assess customers‟ ability to repay by VPBank‟s current consumer credit rating system such as ratio of collateral value on customers‟ income or credit score SUMMARY OF CHAPTER Based on the analysis of the current status of consumer lending at VPBank Huynh Tan Phat and the results of the model study from Chapter 4, the author proposes a number of measures to improve the ability to recognize the repayment probability of consumer customers including banking solutions, as well as recommendations to the 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Identify determinants of the repayment of consumer borrowers in VPBank Huynh Tan Phat Branch Investigate influence level of these determinants on the repayment of consumer borrowers in VPBank Huynh Tan. .. repayment of customers in VPBank Huynh Tan Phat Branch? 1.5 Subject and Scope of research 1.5.1 Subject of study Determinants of consumer loan repayment performance of customers in VPBank Huynh Tan Phat