Analyzing small and medium enterprise lending activities case study of MSB bank

Analyzing small and medium enterprise lending activities case study of MSB bank Analyzing small and medium enterprise lending activities case study of MSB bank Analyzing small and medium enterprise lending activities case study of MSB bank Analyzing small and medium enterprise lending activities case study of MSB bank Analyzing small and medium enterprise lending activities case study of MSB bank

,, ĐẠI HỌC QUỐC GIA HÀ NỘI KHOA QUẢN TRỊ VÀ KINH DOANH - NGUYỄN THANH HIẾU ANALYZING SMALL AND MEDIUM ENTERPRISE LENDING ACTIVITIES - CASE STUDY OF MSB BANK PHÂN TÍCH HOẠT ĐỘNG CHO VAY DOANH NGHIỆP VỪA VÀ NHỎ TẠI NGÂN HÀNG TMCP HÀNG HẢI VIỆT NAM LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH HÀ NỘI - 2020 ĐẠI HỌC QUỐC GIA HÀ NỘI KHOA QUẢN TRỊ VÀ KINH DOANH - NGUYỄN THANH HIẾU ANALYZING SMALL AND MEDIUM ENTERPRISE LENDING ACTIVITIES - CASE STUDY OF MSB BANK PHÂN TÍCH HOẠT ĐỘNG CHO VAY DOANH NGHIỆP VỪA VÀ NHỎ TẠI NGÂN HÀNG TMCP HÀNG HẢI VIỆT NAM Chuyên ngành: Quản trị kinh doanh Mã số: 60 34 01 02 LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH NGƯỜI HƯỚNG DẪN KHOA HỌC: PGS.TS PHẠM VĂN HỒNG HÀ NỘI - 2020 ACKNOWLEDGEMENT I would like to express my sincere gratitude and appreciation to Assoc Prof Dr Pham Van Hong for her patience, the thesis Last but not least continuing encouragement, endless support and immense knowledge She has generously provided me all the guidance, comment and constructive advices that made this thesis achievable Besides, I would like to thank the rest of my thesis committee for their insightful comment and encouragement but also for the hard question which incented me to widen my research from various perspectives My sincere thank also goes to my colleagues who provided me an opportunity to access to the database as well as their point of view about the business Without their support it would not be possible to conduct this research Thank to my classmates for enlightening me the first glance of research and showing me knowledge and experiences to accomplish, I would like to thank my family for supporting me a throughout writing this thesis and my life in general i CONTENTS ACKNOWLEDGEMENT i ABREVIATION iv LIST OF TABLES v LIST OF FIGURES vi CHAPTER 1: INTRODUCTION 1.1 Rationale of the research 1.2 Research Objectives 1.3 Research questions 1.4 Research scope 1.5 Research methodology 1.6 1.5.1 Data 1.5.2 Research Methodology Research structure CHAPTER 2: THE THEORETICAL FRAMWORK ON SME LENDING ACTIVITIES OF COMMERCIAL BANKS 2.1 2.2 Overview of SMEs 2.1.1 Concepts of SMEs 2.1.2 The characteristics of SMEs 11 The Criteria of Commercial bank’s lending to SMEs 13 2.2.1 Concepts and Importance of lending to SMEs 13 2.2.1.1 Concepts 13 2.2.1.2 Importance of lending to SMEs 14 2.2.2 Criteria for analyzing SME lending 16 2.2.2.1 Quality ratios 17 2.2.2.2 Productivity rotios 18 2.2.2.3 Quality ratios 20 2.2.2.4 Profitability ratios 21 2.3 Impact factors for lending SMEs 23 2.3.1 Internal factors 223 ii 2.3.2 External factors 25 CHAPTER 3: FACT FINDINGS OF SME LENDING AT MSB BANK 29 3.1 3.2 3.3 Overview of MSB Bank 29 3.1.1 General Information 29 3.1.2 History and Milestone 30 3.1.3 Business model and organizational structure 31 3.1.4 Business performance 34 Criteria for analyzing SME lending at MSB Bank 36 3.2.1 Credit Policy and Procedure 36 3.2.1.1 SME Definition 36 3.2.1.2 Credit Procedure 36 3.2.2 Analyzing the SME lending activities at MSB Bank 39 Analyzing impact factors for SME lending at MSB 55 3.3.1 Key achievements 55 3.3.2 Limitations 57 3.3.3 Reasons for limitation 58 3.3.3.1 From MSB Bank 58 3.3.3.2 From External Factors 61 CHAPTER 4: RECOMMENDATIONS 64 4.1 Orientation of SME lending 64 4.2 Recommendations 64 4.2.1 To MSB Bank 64 4.2.2 To SBV and related agencies 68 CONCLUSION 70 REFERENCES 71 APPENDIX: INTERVIEWS 79 iii BREVIATION BOD Board of Directors CIC National Credit Information Center of Vietnam GSO General Statistics Office of Vietnam HO Head Office HR Human resources IFC International Finance Corporation MSME Micro, small and medium enterprise NIM Net Interest margin NPL Nonperforming loan OECD Organization of Economic Co-operation and Development RM Relationship manager SBV State Bank SME Small and medium sized enterprises SMEs Small medium enterprises SSE Supper small sized enterprises MSB Bank Vietnam MSB Commercial Joint Stock Bank iv LIST OF TABLES Table 2.1 Examples of quantitative criteria used in defining SMEs in some counties Table 2.2 SME Definition in Japan 10 Table 3.1 Comparison SME classification between MSB and the Government 36 v LIST OF FIGURES Figure 3.1 Organizational structure of MSB Bank 333 Figure 3.2 Financial indicators 35 Figure 3.3 The growth of SME credit customers in the period of 2015 -2017 39 Figure 3.4 The SME credit line and loan balance of MSB Bank 41 Figure 3.5 The SME loan portfolio by terms of MSB in the period of 2015 -2017 443 Figure 3.6 The SME loan portfolio of MSB by business sector in the period of 2015 2017 44 Figure 3.7 The growth rate of Vietnamese economic by business sector 45 Figure 3.8 The change of SME loan utilization of MSB in the period of 2015 -2017 46 Figure 3.9 Reasons for low SME loan utilization in MSB Bank in 2016 47 Figure 3.10 SME credit productivity per RM in MSB Bank from 2015 to 2017 49 Figure 3.11 SME Sale force situation in MSB Bank from 2015 to 2017 50 Figure 3.12 SME sale force employment termination in MSB Bank in 2017 51 Figure 3.13 Nonperforming loan (NPL) ratio of MSB in SME lending from 2015 to 2017 553 Figure 3.14 Risk cost of MSB in SME lending by sectors from 2016 to 2017 53 Figure 3.15 Profitability of MSB in SME lending from 2015 to 2017 54 Figure 3.16 Loan NIM of MSB in SME lending by sectors from 2015 to 2017 55 vi CHAPTER 1: INTRODUCTION 1.1 Rationale of the research Nowadays, Small and medium enterprises (SMEs) play a huge role in the economic growth process of many countries or regions, including in developed and developing countries Small and medium enterprises operate in all areas of the national economy from industrial production, construction, trade, services to meet the increasingly diverse and rich needs of consumers In economies with different development characteristics, the role of small and medium enterprises is expressed at different levels But the reality shows that the importance of small and medium enterprises is getting bigger as the scope of activities is increasingly expanded through the number of businesses and activities present in many industries, fields and existences as an indispensable part of each country's economy First, SMEs create jobs for workers, contributing to reducing unemployment Second, SMEs play an important role in stabilizing and promoting economic growth Third, SMEs exploit and promote local resources, contributing to economic restructuring Fourth, SMEs promote a dynamic economy In every economy, SMEs are the engine that accelerates economic development through its roles in making income, alleviating poverty, increasing employment, (Altman and Sabato, 2005; Fatoki, 2011, Roman, 2011) According to declaration of OECD in Ministerial Conference in 2018, SMEs are key element of the world economy, employing formally more than half of global labor forces and contributing on average between 50% and 60% of national GDP in OECD Member countries which includes all types of economics from middle and lowincome countries such as Kazakhstan, Latvia, Vietnam to high income countries like USA, the United Kingdom, Japan Moreover, SMEs also take part in generating innovation and potential exporting opportunities, supporting inter-and intra-regional decentralization (Cook, 2001) Therefore, SMEs have been the objectives of research in many fields including financial aspects (Tucker and Lean, 2003; Berger and Udell, 2006), management (Hutchison and Quintas, 2008) Majority researches pointed out that financing play important roles to the existence, expansion of SMEs It is unquestionable that financing is important for the existence and growth of SMEs sector via supporting of new business creation, innovation facilitation, promotion of existing business development According to the research of Ardic, Mylenko and Saltene (2012) there was a strong positive correlation between financing SMEs and overall economic development Therefore, a high-functioning financial sector is very important to meet the needs of SMEs Based on Beck (2008)’s research of 91 banks from 45 countries, in bank perspective, SME lending is potential profitable segment Vietnam is also no exceptional case According to Economic Credit Department (SBV)1, at August 31st, 2017, the total SME loans of Vietnam banking system was 1,292,182 billion VND, accounting for 21,14% total loans of Vietnamese economic Currently 200,000 SMEs are borrowing from banks Many financial institutions are offering actively many promotion and attractive products to SMEs In current Vietnamese banking market, Techcombank and VPBank are the two retail commercial banks which have similar business structure with MSB Bank and consider SMEs strategic customers In recent years, SMEs has been considered as one of main segments of VPBank Beside secured loan products, VPBank also has implemented substantially unsecured loan products in order to give more opportunities to SMEs to access bank loan without collaterals On the other hand, in the annual shareholder meeting 2017, Techcombank announced that SME was continuously target segment in line with the guidance of the government MSB Bank (MSB) also spent a great of time and resources in order to compete with other bank in this market Even though, the whole SME business structure of MSB was completely changed to customer orientation since 2014, the business performance didn’t meet expectation The SME loan size of MSB is quite small in comparison with other banks The total outstanding balance of SME segment at year end 2017 of MSB was only around 5,700 billion VND which http://tapchitaichinh.vn/nghien-cuu-trao-doi/dau-tu-tin-dung-doi-voi-doanh-nghiep-nho-va-vua-tangmanh-123724.html  Customer and Informal Finance According to the report of the SMEs Report system, the success rate on the appointment is three-teen, which means that if you meet 10 customers, you will be able to have successful deal After extracting data from the system, the author went with RM to meet customers to determine the cause of the 70% failure rate The results show that In which 40% of customers are borrowing from other credit institutions and they not want to change, the remaining 30% are customers who not need to borrow capital or ineligible for loans (in which 55% can borrow money from their family members with reasons: low lending rates, no collateral is required or there aren’t collateral, 5% of group loans and credit funds, women's union, 40% due to record system is ineligible for loan under the credit policy at MSB) 64 CHAPTER 4: RECOMMENDATIONS 4.1 Orientation of SME lending SME segment is considered as the promising profit market many retail commercial banks is paying attention The growth of fund demand from this market is in line with the growth of the economic In order to able to compete in this market, the bank need both attractive loan products which is based on the main characteristic of SMEs as well as sound credit management The trend of SME market will change dramatically according to the changes in the economic A sound credit management help banks get stable profitability and reduce risk Moreover, HR policy also need be well established and adjusted quickly with the change of banking employment market 4.2 Recommendations 4.2.1 To MSB Bank  Making credit policy and procedure more flexible and optimized Credit policy is the core lending principles of the bank to clarify which customer the bank and how much fund the bank can lend to the customer while credit procedure indicates the process of lending activities and the role of each department in the process Strict or poor credit policy and procedure can either restrain the growth of business or make the business grow too fast and too risky Currently, MSB Bank keeps SME lending risk quite lower than SBV requirement and BOD expectation Therefore, CRO and high-level management of SME risk department should review the credit policy and loosen some conditions to expand the type of potential SME credit customers in some sectors which is growing in Vietnamese economics For example, the percentage of unsecured credit line in total credit line can be raised from 20% (current) to 25% for those customers which is classified into group A (good business and credit status) in low risk and growing sectors Moreover, it is necessary for SME risk policy departments to receive branch response to reduce unnecessary or immaterial requirements in credit assessment 65 and loan disbursement The objective is shortening the target assessment time from days to - days By this way, the loan will be proceeded quickly Deploying in pre - approval for customers refinancing the limit, based on the customer's repayment history of cash flow through banks as well as the average demand cash flow in the customer's account, etc which will help reduce the workload for RM, better focus on finding new customers, while old customers are prioritized to quickly refinancing the limit, it will motivate customers to trade long-term and maintain relationships well with the bank  Develop attractive loan products In order to sell well, the company must have products which is favored by the customer It is the same in the bank industry The reasons for VPBank and Techcombank success are their products which attracts lots of SME customers The advantage loan product of VPBank is unsecured loan with high interest while the advantage loan product of Techcombank is project finance (projects such as: "Techcombank - Vin group" ecosystem chain in which Techcombank finances all customers from input to output of Vingroup And some partnership projects such as financing loans to customers who are distributors of a big brand "customer value chain" thanks to anchors for being introduced as well as getting certain brand preferences.) Currently, MSB Bank has not developed project finance in loan product list In order to take over more SME lending market share and increase loan growth rate, MSB Bank needs to extend loan product list which offer to SME customers, especially project finance In SME Banking Division, Product development department should work together with risk departments to establish project finance policy and procedure which meet credit appetite of MSB Bank Moreover, the lending product division should develop products depending on the persona of customers So first, we need to understand the personality of customers by industry, business sector for each field will have different personalities and different financial needs, which will give the positioning value of customers for MSB, is another way to attract SME customers from targeted businesses sectors 66 Credit products, currently MSB Bank is still developing in the traditional way, selling what the Bank has need to change the method when creating a new product, need to stick to the actual needs of the Customer, Customer Development, build the product for the customer file in sequence, other products sold together, From anchor customers researching needs, selling methods of anchors to offer suitable products for input and output customers, creating cohesion, increasing the connection of the value chain, getting the support of anchors, increasing customers quickly, will reduce the risk of losing customers more than the approach of single customers,  Improve HR policy HR policy presents rules and procedures related to employee right and obligation HR policy can help the organization improve employee quality and quantity, thereby booting the business performance MSB Bank is facing some serious problem related to HR policy Salary & allowance is not as attractive as other bank so that turnover rate increases and affected negatively credit productivity Therefore, the Human Resources Department of SME should provide programs and policies to retain qualified employee, develop remuneration mechanisms and policies for employees to innovate and inspire work outside the salary ( For example, giving employees years or more every month benefits such as swimming, eating at 5-star restaurants, yoga tickets .) motivates and attracts new capacity employees and also a method to retain personnel in addition to salary and bonus according to labor productivity At the same time, the HR Division needs to understand the wishes, aspirations and feedbacks of personnel at the HO or branch to consider and adjust accordingly at least to maintain current high-quality employees For example, HR should establish formal career path and salary growth rate policy for each level of KPI result The 13st salary policy should be implemented Moreover, training programs for new employee need to be redesigned to be more practical and less theory so that new employee can adapt quickly with MSB Bank policy and loan products The content of training should be consulted by 67 experienced employees and has more case study based on some common situations happened in the past Besides, to make up quickly the number of employees left banks, SME HR division can arrange sale force recruitment program for undergraduates In this program, undergraduates can be trained and practice to get credit customers as same as new employee If these undergraduates are good, they can become official RM of MSB Bank This is optional resource for sale force On the other hand, HR Division and Head of SME risk departments should coordinate so that criteria related to business performance need to be added in KPI of the risk and credit operation department in order to increase the coordination among departments for general purpose  Applying the optimized model in loan portfolio management Loan portfolio describes all type of loans of the banks in many aspects such as types of products, business sectors, currencies, term, etc loan portfolio management is the process of controlling and managing credit risk and still maximizing profitability In MSB Bank, there is inconsistence in loan portfolio management Risk departments mainly pay attention in keeping low risk while business development departments’ objective is maximizing profit The cooperation between them has not been fully used in business planning In many researching reports, Liner optimization is described as the useful tool for optimizing business opportunities under the certain conditions about limited resource and fixed risk level SME risk policy department and business development department should work together and set up a general database of SME customers which consists of risk cost and profitability each customer and information about sectors which SME customers operate Based on risk cost and profitability of each business sector, risk policy department and business development department can use this tool to identify optimized structure of loan portfolio under the limitation of resources such as the amount of deposit, sale force size and determine the proportion target of each business sectors in SME loan portfolio  Improve technology capacity 68 Investing in the sales management technology system, in order to improve efficiency, RM can manage their business result as well as help director board is easier for management to manage customer and business figures Understand RM's KPI completion rates as well as business units by month / quarter / year Changing and upgrading core banking software which can cover the entire customer system, business data and reporting system to ensure that the report data is available at the beginning of the month The system needs to meet the needs of the technology era 4.0, saving manpower and time, improving business efficiency and improving efficiency MSB bank needs to invest in Digital banking system to help change flexible operating mechanism by supporting customers who can use banking services online without having to go to the bank, for example disbursement and guarantee activities if collateral is valuable papers (Saving account, government bonds ), for normal disbursement, customers can go to any branch / transaction office which is the nearest their workplace to use the service That will help customers and banks save moving time, flexible transactions without waiting  Process improvement Not only the bank, but with all other products on the market, there is no product that achieves all the factors that the customer wants (cheap price, good product, good service… delicious - tonic – cheap) For MSB, the price is not the cheapest, so MSB needs to provide competitive factors to attract customers such as: superior products, credit limit process, disbursement, quick issuance of guarantee MSB needs to carry out a super-speed process so that when customers need to use financial services of the Bank, when it comes to disbursement within hour, when it comes to quickly all customers will think of MSB, Process improvements include: Level approval process, Disbursement process, Guarantee issuance process In order to improve the process, it is necessary to study the shortening of SLA at each implementation step Shorten the steps in the process while ensuring risk management 69 4.2.2 To SBV and related agencies As mentioned before, information infrastructure of the economics is the fundamental factors to lending decisions of bank Through statistic or information companies or bureaus, banks can have alternative data for expanding customer base and customizing loan product In Vietnam, there are only GSO and CIC, 02 bureaus which has function to serve this purpose The main role of CIC is to provide history of borrowing money, loan group, used collateral, which is useful for banks to shape overall credit risk of customer in the past The data provided by GSO is in many other aspects like employees, basic financial information However, GSO is unable provide adequate and updated information continuously about corporates because it only conducts survey under the government direction In addition, the gap time between data in GSO and the current date is 02 year In order to improve SME lending activities in bank industry, the cooperation of SBV, tax authorities and the ministry of finance should establish a bureau which is in charge of stores basic financial information of the corporates in the whole countries from tax reports or financial statement audited from accounting or auditing firms The accounting standards need to be reviewed and updated to the international standards increase the accurate of financial statement reflecting the business performance of SMEs 70 CONCLUSION The thesis has systematized the theoretical issues of SME lending activities of commercial bank Based on the above theoretical framework, the thesis has conducted to research reports in same area and common analyzing ratio in order to assess the SME lending performance of MSB Bank and identify main factors affecting the SME lending activities in MSB Bank For the purpose of study, necessary SME lending information of MSB Bank in the period of 2015 – 2017 in financial, HR aspects has been gathered from business management reports, HR reports, KPI reports There are 02 interviews with high level management of SME Banking Based on the analyzing quantitative and qualitative factors and ratios as well as the interview result, the study showed SME lending activities of MSB Bank was ineffective in comparison with other banks Moreover, the strong points and weaknesses of MSB Bank in lending SMEs was identified Then based on theories and interviews, author made some suggestions to improve the business performance of MSB in lending SME Due to limitation of gathered information and restricted time for research, the result cannot be generalized for all Vietnamese banks 71 Comment [U2]: ade REFERENCES Beck, Thorsten; Demirgỹỗ-Kunt, Asli; Martớnez Perớa, María Soledad (2008), Bank Financing for 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Overall, the SME lending activities of MSB Bank has positive changes in both loan volume and revenue aspects However, the business size is still small and has slower growth rate than 02 other banks mentioned above On the other hand, the objective SME customers of those two banks is slightly different from MSB Bank The type of SME customer of Tecombank focused on the corporate with annual revenue over 200 billion VND and under 600 billion VND which is considered as the large corporate of MSB Bank Another thing is the difference in type of main loan product The main loan product of VPBank is unsecured loans By eliminating collateral barrier, more and more SMEs is easy to access to the loan despite of high interest rate Meanwhile, Techcombank pay their attention in project finance More and more SMEs need funds to expand business or implement new projects These two loan products contributed in the significant growth and loan portfolio of these banks Meanwhile, SME banking Division of MSB Bank followed different business model To avoid the intense competition, MSB Bank chose the lower segment of SME customer and focused on loans for working capital or machine purchasing Question 2: In your opinion, what is MSB Bank achievement and concern about SME lending activities? One of strong point of MSB Bank is easy to be realized is the risk management The credit policy and procedure are the proofs The credit assessment and loan disbursement are centralized, thereby, preventing the operation risk related to the cases in which RMs together with the customer deceive the bank about real current business situation of the customer to get a loan The size of nonperforming loan is kept at bank expectation and meeting the SBV 76 requirement On the other hand, there are some urgent concerns about SME lending of MSB Bank Firstly, MSB Bank is lacking the project finance product which other banks is pushing Secondly, SME business model has changed so many times, which affected to the employee’s spirit so that there was a lot of experienced employees left the bank in the transformation process The centralized credit model kept the lower risk but also less flexible, which costs more time of credit approve process In some case, the credit profile is sent back to branches many times to correct some insignificant errors such as inconsistent company address or contact This leads to ineffective productivity Thirdly, the collateral evaluation department is also the weak point of the process The lack of labor in quantity and quality in this department make it difficult to meet the business requirements  Interviewee: Mr Chu An Trung Position: Director of Product Development Center (former SME hub head of Nam Dinh Branch) Email: trungca@msb.com.vn Question 1: What you think about the SME lending activities of MSB Bank in comparison with other banks such as Techcombank and VPBank? Generally, the lending perform of MSB Bank is not as good as those 02 banks Techcombank appears to step ahead of the competition with the project finance product The stable business management and advance system are really supporting its operation while MSB Bank has too many business structure changes Moreover, one of successful factors Techcombank is supply chain By having strong bonds with large corporations, Techcombank requires the suppliers/ distributors of these corporation to make transactions via Techcombank It is easy for Techcombank to obtain necessary information about business operation so that Techcombank can acquire potential SME lending customer with low risk For VPBank, the advantage is unsecured loans Many companies not have or want to use their assets as collaterals for loans Question 2: In your opinion, what is MSB Bank achievement and concern about SME lending activities? 77 MSB Bank also have our own advantage points Firstly, in term of lending interest rate, except for big banks like Vietcombank Agribank or ACB; the overall ending interest rate of MSB Bank is lower than Sacombank, Tienphongbank, Techcombank or VPBank On the other hand, there are some serious issues in MSB Bank Firstly, although GSO reports are used as alternative sources for customer assessment, the data we acquire are unable to show the current SME market For example, we only obtained 2015 data and used them for lending activities of 2017 Secondly, HR policy of MSB Bank is unattractive, especially in salary and compensation conditions, thereby many experienced RM left to other big banks likes VPBank or Techcombank Meanwhile, it is ineffective in recruitment of HR division Many hub head had to use their own connection to get new RMs and didn’t get proper help from HR division It affects negatively the business productivity Thirdly, the co-operation between specialized business banking in MSB Bank is still weak such as between SME Banking and Large Corporation Banking so that there is no visible supply chain in MSB Bank 78 ... Banking of MSB Bank is struggling to resolve the problems of slow growth and meet the expectation of MSB Bank BOD and investors For these reasons, the topic ? ?Analyzing small and medium enterprise lending. .. 3: FACT FINDINGS OF SME LENDING AT MSB BANK 3.1 Overview of MSB Bank 3.1.1 General Information Name Vietnam MSB Commercial Joint Stock Bank Transaction/Shortened MSB Bank – MSB Bank name Business... the role of small and medium enterprises is expressed at different levels But the reality shows that the importance of small and medium enterprises is getting bigger as the scope of activities