Bank credit appraisal criteria for borrowing firms in vietnam

i UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM • VIETNAM- NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS BANK CREDIT APPRAISAL CRITERIA FOR BORROWING FIRMS IN VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of t MASTER OF ARTS IN DEVELOPMENT ECONOMICS By LE DiNH THUY NGAN Academic Supervisor: Asso.Prof.TRUONG QUANG THONG HO CHI MINH CITY, DECEMBER 2010 - ~ CERTIFICATION i • I hereby certify that the substance of this thesis has not been submitted for any degrees and is not being currently submitted for any other degrees I also certify that, to the best of my knowledge, and any help received in preparing the thesis and all sources used have been acknowledged in the thesis ' Signature LeDinh Thuy Ngan Date: December, 2010 · ~ • _- ACKNOWLEDGEMENT • This research 1s impossibly completed without the valuable guidance, encouragement and advice from numerous individuals including VietnamNetherlands program lecturers, friends and my family members I am really indebted and grateful to what they have done for my thesis completion First of all, I would like to send my deepest gratitude to my supervisor, Professor Truang Quang Thong who always gives advice and comments during my completion of the thesis I am grateful for Professor Nguy~n TrQng Hoai and Professor Peter Calkins for their precious advice and comments from the initial ideas of the theme for my thesis • Many especially respectful thanks are sent to my family for encouraging and providing me with an opportunity to pursue my desires in higher learning and for their love, affection and sympathy that have helped me to gain more strength and motive to complete this thesis LIST OFTABLES Table 2.1: Rating symbols long-term and short-term debt Table 2.2: Weighted points of non-financial criteria Table 2.3: Weighted points of financial ratios and non-financial criteria Table 2.4: Weighted points of financial ratios and non-financial criteria Table 2.5: Rating symbols ofVCB Table 2.6: Profit and tax with two different capital structure Table 3.1: Sort credit rating business Table 3.2: Business structure has ability to repay Table 4.1: Following explain the meaning of variables (see appendix 1) Table 4.2: Points of cash flow factor Table 4.3: Points of management quality factor Table 4.4: Points of relations with banks factor (see appendix 3) Table 4.5: Points of business environment factor Table 4.6: Points of other activities factor Table 5.1: Descriptive Statistics Table 5.2: Correlations (see appendix 4) Table 5.3: Model summary (see appendix 5) Table 5.4: Anova Table 5.5: Coefficients of models (see appendix 6) Table 5.6: Distribution graph Table 5.7: Spearman rank correlation Table 5.8: Standardized residual graph ABBREVIATIONS BIDV: Bank for Investment and Development of Vietnam CIC: Credit information center EBIT: Earning before tax and interest rate EU: Europe FDI: Foreign Direct Investment GDP: Gross Domestic Products GSO: General Statistics Office ofVietnam MM: Modiglian Miller SBV: State Bank of Vietnam SMEs: Small Medium Enterprises U.S.: United States VCB (Vietcombank): Bank for Foreign Trade of Vietnam WACC: Weighted average cost of capital ABSTRACT Capital credit is very important in business activities of enterprises The ability to repay loans model in this thesis shows an important role when the bank make a lending decision This study examines and analyses credit rating criteria affecting borrowing firms on bank credit appraisal in Vietnam through applying cross-section data from Credit Information Center which concentrate on forty firms including the medium-sized enterprises that has equity capital more than five billions Vietnam dong or number labor more than two hundred people in leather-footwear industry The regression model is estimated based on the multiple linear regression function The ability to repay loans is dependent variable in the thesis model, and independent variables are current ratio, quick ratio, inventory turnover, receivable turnover, total asset turnover, debt to equity ratio, debt to total asset ratio, return on asset, return on common equity ratio, net profit margin ratio, delinquency ratio, cash flow, management quality, the relations with banks, business environment, other activities and corporate income tax (new added) As results, corporate income tax factor affecting Vietnam Moreover, the results seem to be appropriate to answer questions of the research, borrowing firms are perceived to be information on the lending decision at banks in TABLE OF CONTENTS LIST OF TABLES ABBREVIATIONS ABSTRACT CHAPTER 1: INTRODUCTION 1.1 Problem statement 1.2 Research objective 1.3 Research questions 1.4 Methodology 1.5 The structure ofthesis CHAPTER 2: LITERATURE REVIEW 2.1 Theory background ; 2.1.1 Credit appraisal 2.1.2 The definition of credit rating 2.1.3 Objective of credit rating 2.1.4 Role of credit rating 2.1.5 Principle credit rating 2.1.6 Credit rating model 2.1 The basic elements of credit rating 2.1 The number ranks of credit rating 2.1 Scale of criteria 2.2 Some model of credit rating 2.2.1 Moody's rating analysis 2.2.2 Z-score model of Altman 2.2.3 Credit rating of credit information center 2.2.4 Credit rating VCB 2.3 Corporate income tax 2.3.1 Assumptions and proposition ofM&M the 2.3.2 MM proposition I (corporate taxes)- The v 2.3.3 Optimal capital structure theory 2.4 Summary CHAPTER 3: OVERVIEW OF LEATHER IN VIETNA Reasons of using data in Vietnam's le 3.2 Overview ofleather- footwear industry 3.3 Credit ratings data ofthe leather-footw 3.4 Summary CHAPTER 4: METHODOLOGY 4.1 The econometric design 4.2 Suggested research model 4.3 The conceptual design 4.3.1 Criteria that banks use to appraise 4.3.1.1 Current ratio- CR 4.3.1.2 Quick ratio- QR ' 4.3.1.3 Inventory turnover- IA 4.3.1.4 Receivable turnover- RT 4.3.1.5 Total asset turnover- TAT 4.3.1.6 Debt to total asset ratio - DA 4.3.1.7 Debt to equity ratio- DE 4.3.1.8 Net Profit margin- NPM 4.3.1.9 Return on assets - ROA 4.3.1.10 Return on Equity- ROE 4.3.1.11 Cash flow- CF 4.3.1.12 Management quality- MQ 4.3.1.13 Relations with banks- RB 4.3.1.14 Business environment- BE 4.3.1.15 Other activities- OA 4.3.1.16 Delinquency ratio- DR 4.3.2 Corporate income tax (new factor 4.4 Data collection method 4.5 Summary CHAPTER 5: DATA PROCESSING AND EMPIRICAL RESULTS Descriptive statistics 5.2 Regression and hypothesis testing 5.2.1 Correlation analysis 5.2.2 Evaluating the reliability of multiple linear regression model 5.2.3 Test the relevance of the overall regression model 5.2.4 Test the significance of partial regression coefficients 5.2.5 Assumption of multiple linear regression model 5.2.5.1 Linearity Assumption 5.2.5.2 Homoscedasticity 5.2.5.3 Distribution standard of residual 5.2.5.4 No-serial correlation 5.2.5.5 Collinearity diagnostic 5.3 Summary CHAPTER 6: CONCLUSION REFERENCE APPENDIX APPENDIX2 APPENDIX3 APPENDIX4 APPENDIX APPENDIX6 CHAPTER 1: INTRODUCTION This chapter starts with introduction to problem statement It then presents research objectives, questions and methodology in sections: 1.2, 1.3 and 1.4, respectively Finally, this chapter show thesis structure in section 1.5 1.1 Problem statement The world economy is currently undergoing a severe crisis The cause of the crisis is following: - Objectively, on the theory, growth and development economic generally follows cycle After a period of extreme development, it will reach the top, followed by a recession cycle With this perspective, the world economy developed rapidly in last years of previous century and peaked during the period 2001-2007 - Subjectively, these are the errors in the management economy of economic times "digital" - "virtual economy", particularly in management of financial system, money and banks, namely approximately six percents of all mortgage loans in United States were in default in 2008 Historically, defaults were less than one-third of that, i.e., from 0.25% to 2% The crisis began with the collapse of Bank Lehman Brother Investment, one ofthe largest banks in the United States, on June 2008 (BBC News, 2008) As year progressed, the United States banking and financial system, followed by the EU and Japan, were all shaken by the crash of multiple banking, corporate finance-insurance institutions In the first three months of 2009, the situation continued to deteriorate, with GDP growth in most of developed countries dropped to around negative 2.2 percent Trade turnover reduced strong (export of Eastern Asia reduced 30%, • APPENDIX2 Ability to Current Quick Inventory repay ratio ratio turnover No loans 92.4 1.4 0.9 10.3 93.2 10.6 10.6 92.6 1.5 10.3 93.8 1.4 5.4 85.4 1.1 0.8 18.4 91.8 1.4 I 90.2 1.1 0.6 6.5 88 1.5 1.4 24.5 91.2 1.5 1.2 11.4 10 80.2 1.1 0.2 6.7 I 1.7 2.4 80 1.6 1.5 19.5 12 82.4 1.3 0.7 5.4 13 84.3 1.2 0.9 14.3 II v - II! 14 81.1 1.2 0.5 5.9 15 83 1.4 0.9 8.1 16 84.6 1.3 1.1 15 17 83.5 0.8 0.5 5.6 18 79.8 0.5 0.4 29.7 19 72.5 I 0.2 5.4 20 76.7 0.8 0.8 143.1 21 70.9 1.5 1.4 40.7 22 75.4 1.1 0.3 1.1 23 73.2 1.2 0.7 4.7 24 69.9 I 0.4 3.2 25 71.9 0.6 0.4 Ill 26 74.8 0.8 0.3 4.5 27 77.0 3.6 3.2 28 69.1 I I 3.6 29 65.8 II 0.6 5.9 VI • 30 67.2 1.2 0.5 5.8 31 64.3 1.3 0.5 0.9 32 62.5 2.1 2.1 6.6 33 68.7 1.2 0.7 8.8 34 62 0.9 0.3 2.4 35 67.8 2.8 0.1 2.2 36 66.9 0.9 0.2 1.4 37 56.9 l.J 0.5 1.7 38 59.8 0.8 0.2 1.3 39 52.8 0.6 0.5 1.5 40 46.5 0.2 0.1 1.9 I Vll • APPENDIX3 Criteria 100 Repayment schedule >36 months The times of the extension None debt Overdue debt in the past None Total commitments Never incapacity payment (letter of credit, guarantee or other commitments) Information is provided Yes, in sufficient according to past 36 requirement of banks month Source: VCB, Ernst & Young (2008) viii • • APPENDIX4 Tabl e 5.2: Cor relat ions Net profit margin Return on asset Return on common equity Current ratio Cash flow Quick ratio Management quality Inventory turnover Relations with bank Receivable turnover Business environment Total asset turnover Other activities Debt to equity ratio Corporate income tax *.Correlation is significant at the 0.05 level (2-tailed) Debt to total asset ratio ** Correlation is significant at the 0.01 level (2-tailed) lX I! APPENDIXS Table 5.3: Model summary Model 0.6 0.7 0.8 0.8 0.9 0.9 a Predictors: (Constant), Corporate income tax b Predictors: (Constant), Corporate income tax, Relations with bank c Predictors: (Constant), Corporate income tax, Relations with bank, Cash flow d Predictors: (Constant), Corporate income tax, Relations with bank, Cash flow, Total asset turnover e Predictors: (Constant), Corporate income tax, Relations with bank, Cash flow, Total asset turnover, Debt to equity ratio f Predictors: (Constant), Corporate income tax, Relations with bank, Cash flow, Total asset turnover, Debt to equity ratio, Other activities R g Dependent Variable: Ability to repay loans X APPENDIX6 Table 5.5: Coefficients of models Coefficients Model (Constant) Corporate income tax (Constant) Corporate income tax Relations with bank (Constant) Corporate income tax Relations with bank Cash flow (Constant) Corporate income tax Relations with bank Cash flow Total asset turnover xi • ) · / J (Constant) Corporate income tax /,/ Relations with bank Cash flow Total asset turnover Debt to equity ratio (Constant) Corporate income tax Relations with bank Cash flow Total asset turnover Debt to equity ratio Other activities Dependent Variable: Ability to repay loans 1':' xu ' '• ... analyses credit rating criteria affecting borrowing firms on bank credit appraisal in Vietnam through applying cross-section data from Credit Information Center which concentrate on forty firms including... What criteria are currently used in banks for credit rating of enterprises in credit appraisal in Vietnam? • Does corporate income tax factor affect lending decision of banks in credit appraisal? ... The definition of credit rating 2.1.3 Objective of credit rating 2.1.4 Role of credit rating 2.1.5 Principle credit rating 2.1.6 Credit rating model 2.1 The basic elements of credit rating 2.1