Credit expansions to SMEs at techcombank trung yen branch

ACKNOWLEDGEMENT Firstly, I – the author of this graduation thesis wish to express my gratitude to my instructor, Nguyen Thu Thuy, MSc who have been abundantly helpful and offered invaluable assistance, support and guidance to finish this graduation thesis Secondly, I am grateful to all lecturers of Finance and Banking Faculty of Foreign Trade University for their untiring efforts in my professional growth throughout years I studied at the university Thirdly, I also would like to send special thanks to the officers of Techcombank – Trung Yen branch, who had kind concerns and considerations in regard to academic requirements and valuable reference documents Last but not least, I wish to express my sincere thanks to my beloved family and friends for their understanding and encouragement through the duration of my studies Sincerely, Hanoi, June 2013 Student Do Nhu Trang TABLE OF CONTENT INTRODUCTION CHAPTER OVERVIEW OF EXTENDING CREDIT TO SMES IN COMMERCIAL BANKS 1.1 Overview of commercial banks .3 1.1.1 Concepts of bank and commercial bank 1.1.2 Functions and roles of commercial banks .3 1.2 Overview of small and medium enterprises .5 1.2.1 Concepts of SMEs .5 1.2.2 The role of SMEs in the economy 1.2.3 Major types and sources of SMEs’ capital funds 1.3 Credit activities of commercial banks to SMEs .10 1.3.1 The essentials of commercial banks’ credit to SMEs 10 1.3.2 Types of loans for SMEs in commercial banks .11 1.3.3 Roles of commercial banks’ activities to SMEs 13 1.4 Extending credit to SMEs in commercial banks 14 1.4.1 Views on expanding credit to SMEs from commercial banks .14 1.4.2 The necessary of extending credit to SMEs 14 1.4.3 Factors that impact on the expansion of credit to SMEs 15 1.4.4 Indicators that impact on the ability to the expansion of credit to SMEs in commercial banks .16 CHAPTER 2.SITUATION OF CREDIT EXPANSION FOR SMALL AND MEDIUM ENTERPRISES (SMEs) AT TECHCOMBANK - TRUNG YEN BRANCH 19 2.1 Introduction to Techcombank – Trung Yen branch 19 2.1.1 General information .19 2.1.2 Business operation of Techcombank from 2010 to 2012 21 2.2 Current situation of credit activities to SMEs at Techcombank - Trung Yen .28 2.2.1 The general provisions on lending to SMEs 28 2.2.2 Current situation of credit activities to SMEs at Techcombank - Trung Yen branch 31 2.3 Assessing credit activities to SMEs at Techcombank – Trung Yen branch 33 2.3.1 Achievements 33 2.3.2 The limitations of credit expansions to SMEs of the banks and the causes .34 CHAPTER 3: SOLUTIONS TO EXPANDING LENDING TO SMES AT TECHCOMBANK - TRUNG YEN BRANCH 38 3.1 The essentials of extending credit to SMEs at Techcombank – Trung Yen branch 38 3.1.1 Small and medium enterprises development orientation in Vietnam .38 3.1.2 General development orientation of Techcombank – Trung Yen branch 40 3.1.3 Orientation of credit expansion to SMES at Techcombank – Trung Yen branch .41 3.2 Solutions to credit extension to SMEs at Techcombank – Trung Yen branch 43 3.2.1 Develop flexible policies for customers 43 3.2.2 Developing an appropriate supportive credit policies for SMEs 45 3.2.3 Awareness of clientele, change in marketing to clients: 48 3.2.4 Strengthen advisory role, creating close relationships between SMEs and the bank, forming specialized lending division for SMEs .49 3.2.5 Simplification of loan applying procedures: 50 3.2.6 Diversification of credit activities for SMEs 50 3.2.7 Developing a marketing strategy with the goal of attracting SMEs 52 3.2.8 Improving the quality of credit appraisal for SMEs 52 3.2.9 Good organization in term of raising capital in order to ensure meeting the borrowing needs of customers 56 3.2.10 Enhance the work of staff 57 3.2.11 Strengthening consultancy for SMEs 59 3.3 Recommendations .59 3.3.1 Recommendations for the Government and Ministries .59 3.3.2 Recommendation for Techcombank .60 3.3.3 Recommendations for SMEs 61 CONCLUSION 64 REFERENCES 65 LIST OF ABBREVIATIONS No Abbreviation Original SME Small and medium enterprises Techcombank Vietnam Technological and Commercial Joint- stock Bank CAR Capital adequacy ratio NIM Net interest margin NPL Net profit loss VND Vietnamese Dong USD United Stated Dollar ROA Return on assets ROE Return on equity 10 WTO World Trade Organization 11 MSE Micro and small enterprise 12 VCCI Vietnam Chamber of Commerce and Industry 13 GDP Gross Domestic Product LIST OF FIGURES AND TABLES List of figures Name of figures Page Figure 2.1 Income structure of Techcombank in 2010 – 2012 23 Figure 2.2 Capital mobilizing situation of Techcombank in 2010 – 2012 25 Figure 2.3 The deposit mobilization structure over the years 26 Figure 2.4 The loans allocation by industry segment of Techcombank 28 List of tables Name of tables Table 2.1 Table 2.2 The number of SMEs, loans and loan ratio of SMEs Delinquency and delinquency rate of loans to SMEs through the years Page 32 33 Page INTRODUCTION The necessity of the research In recent years, following the general trend of the world, SMEs have been increasingly playing an important role in the growth of economic In fact, SMEs model, which is appropriate for the multi-commodity economy, allowing exploitation and efficient use of all potentials and resources of the country: capital, labor, technology, resources, etc., should be encouraged to develop in the current period of economic innovation Currently, SMEs are facing many difficulties, especially in term of capital Businesses cannot rely only on their own equity, they need to have external funds to expand production and increase business competitiveness Therefore, in order to help SMEs, the banks need to be the one who help them meet the needs of capital quickly and promptly However, in recent years, activities of small and medium enterprise lending in Techcombank - Trung Yen branch have been still under development This not only affects the profit of the bank for not exploiting a huge market of small and mediumsized enterprises, but also limits the SMEs’ access to the bank credits Therefore the research of: "Credit expansions to SMEs at Techcombank - Trung Yen branch" is needed in order to support for the development of the economy of Vietnam Purpose of the research Based on the reality of credit activities at Techcombank, this thesis analyzes the result and points out the achievements and existed limitations and from those suggested some development solutions To obtain the above target, the thesis solves the following basic tasks: • Generalize basic theory about credit activities of commercial banks • Present an overview of real situations of credit activities at Techcombank • Suggest some solutions to improve the efficiency of credit activites at Techcombank Page Research objectives and scopes • Lending activities in commercial banks • Analyze and assess the credit extension to SMEs Techcombank - Trung Yen branch • Extending credits to SMEs at Techcombank - Trung Yen branch Research methodology Research taken in Techcombank - Trung Yen from 2010 to 2012 The project has been using a number of methods: methods of analysis, synthesis, comparison and the accompanying tables illustrate system Research structure In addition to the introduction, conclusion, references, the project is divided into three chapters: Chapter 1: Overview of extending credit to SMEs of commercial banks Chapter 2: Situation of credit expansion for SMEs at Techcombank – Trung Yen branch Chapter 3: Solutions to extending credit to SMEs at Techcombank – Trung Yen branch Page CHAPTER OVERVIEW OF EXTENDING CREDIT TO SMES IN COMMERCIAL BANKS 1.1 Overview of commercial banks 1.1.1 Concepts of bank and commercial bank A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets A bank connects customers that have capital deficits to customers with capital surpluses Due to their influence within a financial system and an economy, banks are generally highly regulated in most countries Most banks operate under a system known as fractional reserve banking where they hold only a small reserve of the funds deposited and lend out the rest for profit They are generally subject to minimum capital requirements, which are based on an international set of capital standards, known as the Basel Accords A commercial bank (or business bank) is an institution which accepts deposits, makes business loans and offers related services Commercial banks also allow for a variety of deposits accounts, such as checking, savings and time deposits These institutions are run to make a profit According to Article 4, Section and 4, Law on Credit Institution of Vietnam, “Bank means a type of credit institution which may conduct all banking operations under this Law Based on their characteristics and operation objectives, banks include commercial banks, policy banks and cooperative banks.” and “Commercial bank means a type of bank which may conduct all banking operations and other business activities under this Law for profit.” 1.1.2 Functions and roles of commercial banks  Functions of Commercial Banks Commercial bank being the financial institution performs diverse types of functions It satisfies the financial needs of the sectors such as agriculture, industry, trade, communication, etc That means they play very significant role in a process of Page economic social needs The functions performed by banks are changing according to change in time and recently they are becoming customer centric and widening their functions Generally the functions of commercial banks are divided into two categories viz primary functions and the secondary functions The following chart simplifies the functions of banks  Primary Functions of Commercial Banks Commercial Banks performs various primary functions some of them are given below: Accepting Deposits: Commercial bank accepts various types of deposits from public especially from its clients It includes saving account deposits, recurring account deposits, fixed deposits, etc These deposits are payable after a certain time period Making Advances : The commercial banks provide loans and advances of various forms It includes an overdraft facility, cash credit, bill discounting, etc They also give demand and demand and term loans to all types of clients against proper security Credit Creation: It is most significant function of the commercial banks While sanctioning a loan to a customer, a bank does not provide cash to the borrower Instead it opens a deposit account from where the borrower can withdraw In other words while sanctioning a loan a bank automatically creates deposits This is known as a credit creation from commercial bank  Secondary Functions of Commercial Banks Along with the primary functions each commercial bank has to perform several secondary functions too It includes many agency functions or general utility functions The secondary functions of commercial banks can be divided into agency functions and utility functions a) Agency Functions: Various agency functions of commercial banks are Page To collect and clear cheque, dividends and interest warrant To make payment of rent, insurance premium, etc To deal in foreign exchange transactions To purchase and sell securities To act as trusty, attorney, correspondent and executor To accept tax proceeds and tax returns b) General Utility Functions: The general utility functions of the commercial banks include To provide safety locker facility to customers To provide money transfer facility To issue traveller's cheque To act as referees To accept various bills for payment i.e: phone bills, gas bills, water bills, etc To provide merchant banking facility To provide various cards such as credit cards, debit cards, Smart cards, etc 1.2 Overview of small and medium enterprises 1.2.1 Concepts of SMEs Small and medium enterprise (SMEs, small and medium-sized businesses, SMBs and variations thereof) are companies whose personnel numbers fall below certain limits The abbreviation "SME" is used in the European Union and by international organizations such as the World Bank, the United Nations and the World Trade Organization (WTO) In most economies, smaller enterprises outnumber large companies by a wide margin SMEs are said to be responsible for driving innovation and competition in many economic sectors Page 55 different sources and also be capable of handling information in an effective manner in order to avoid the risk of lending decisions and give SMEs opportunities to get a loan - Review loan information from interviews, from bank records - Get information through the media, coordinate with the SBV's credit information center (CIC), information from colleagues and friends Techcombank also need to create regular relationship with the Chamber trade and Industry of Vietnam (VCCI) These organizations can provide the most complete information about the business activities of the SMEs - In addition to the information from the financial statements, loan officers need to survey the situation at the base of the business Hence, banks can capture information on the ability to produce goods, mange capacity of the businesses and current or future needs of them in an objective way Analysis and evaluation of customer After collecting enough information, credit officers to analyze this information In general, the analysis should focus on the following key issues: - Customers must have sufficient borrowing conditions under the specific provisions to each type of customer to ensure the on time repay of principal and interest - The loan projects must be effective and feasible - Loan profile procedures must be completed according to the regulations If there is a dispute, the businesses must ensure legal security for the bank - The legal capacity of the clients such as business registration, legal representation - Evaluating the character or reputation of the clients to minimize risk to the lowest level Through the analysis of the client's situation, the credit officers can make a general assessment about the business situation, the reasonableness of the demand for loans, repayment capacity assessment, the feasibility of loan schemes In addition, the Page 56 bank needs to strengthen inspection and control over SMEs’ use of loans in order to provide supports when SMEs have difficulties in the process of using capital 3.2.9 Good organization in term of raising capital in order to ensure meeting the borrowing needs of customers The bank needs to have plans of attracting medium and long - term basis capital, which is the condition for the expansion of long-term loans to SMEs To this, banks need to implement the marketing activity with the following measures: First: Measures related to interest rate In order to enhance the mobilization of capital, the bank needs to develop a reasonable interest rate policy Specifically, the interest rate must be consistent with the duration of the amount mobilized; must have specific objectives such as customers with higher incomes who will have preferential terms, or based on the overall customer’s relationships with the bank For example, for the customers who use more bank’s products and services, have long-term relationship and reputation with the bank, the bank will have preferential deposit interest rates for them The determination of a reasonable interest rate will help the bank in maximizing profits Depends on the period of time, the bank must have specific interest rate policy Second: Product Policy The banks need to increase the supply of banking services to customers, diversify the types of products and services to meet customer needs, such as: Strengthening services, asset preservation consultancy , diversifying the mobilization term or method Third: Distribution Policy In fact, Techcombank Trung Yen has a minor network of distribution channels The bank needs to have the survey about the number of population, income and demand for such products and services of the people, competitors in the area in order to enable the customers to have easier access to the services of the bank Page 57 There are modern distribution channels which are popular and highly effective such as electronic banking channels, home banking services, ATM services The bank should apply these modern channels in order to attract more customers Forth: The bank should constantly improve technology and the transaction process, simplify the procedures in order to enhance the quality of services provided to customers Along with the application of modern technology, the bank must also improve the ability of bank officers to avoid wasted investment, especially the one in term of information technology Fifth: The psychological measures In general, the customers tend to have more confidence in the state-owned commercial banks than in joint-stock commercial banks So Techcombank needs to establish and strengthen credibility with customers: - Increased the ability to pay payments - Good recruitment - The bank must have reasonable business policies, which include objectives: profitability, safety and healthy business If the bank focuses too much on profits then it might lead to unsafe or unhealthy business, which will reduce the bank's reputation 3.2.10 Enhance the work of staff 3.2.10.1 Recruitment and training The recruitment of additional staff for the branch business unit is conducted according to the standards of Techcombank and the development of the branch To be able to meet the needs of the job quickly, the branch should prioritize the recruitment of the employees who have previously worked at other banks Once recruited, new staff will be trained by branch officers who are experienced Also, new staff will have to participate in short-term courses in professional job training Along with fostering the professional qualifications for new staff, another important factor is about the staff’s professional ethics, attitudes as well as communication with customers In fact, the branch as well as other commercial banks, Page 58 offers banking products and services – which are different from the products of the manufacturing enterprises The quality of banking products can only be evaluated by the banks or customers only after being used Therefore, the behavior and attitude of the staff is also a form of promotion for the bank’s products In addition to advertising on mass media, there is another method which costs less but has long-term effects: advertising via good customer services This activity requires the bank officers to have higher responsibility in the provision of products and services Bank staff not only need to well complete the assigned workload but also must be able to guarantee the quality, timely response to requests and create customer satisfaction after using the bank's products and services As for lending to SMEs, branch needs to pay much more attention because this is the most profitable activities Therefore, when providing this business, besides compliance with the proposed regulations, the staff of the branch must be responsible for their work as well as have enthusiasm with customers 3.2.10.2 Remuneration - The branch leader must have specific motivation policies, which include incentives, rewards and punishments to each staff in the unit according to their performance To so, the leader needs to regularly review staff through their work performance, listen to feedback from customers This will motivate the staff to work better since their benefit associated with the quantity and quality of their work - The branch should be clearly demarcated powers and specific responsibilities for each level of staff This will create higher sense of responsibility for each position in the credit business - For customers with good credit relationship, loan officers can be flexible in granting credit and self-responsibility Currently, the branch has not yet applied the credit policies for specific industries and types of businesses This reduces the flexibility in the lending decision for customers Page 59 3.2.11 Strengthening consultancy for SMEs Techcombank should create an information network to help businesses Many SMEs, due to lack of information or incorrect information, sign the contract, which has disadvantages Bank, having the relationship with many customers with all kinds of professions in different areas, can collect and analyze information, which is needed for enterprises to reduce costs, avoid inaccurate information and increase business efficiency 3.3 Recommendations 3.3.1 Recommendations for the Government and Ministries Activity of commercial bank credit as well as SMEs or any economic activities are all subjected to the impact of state policies Through the above analysis and evaluation, in order to facilitate SMEs development as well as to facilitate the access to loans from State Bank, State and relevant ministries should have specific and more practical policies, especially credit policies Here are some recommendations to the State and the relevant ministries: - From the difficulties in accessing credit funding by SMEs to meet the needs of changing equipments and technology, modernizing, and expanding production scale, the Government should have specific policies to support enterprises such as: Establish credit guarantee fund for SMEs, appropriate policy to support in terms of capital, interest rates, loan terms, etc - The Government should concretize SMEs’ development program with specific policies to support financially, bank, tax, labor with the uniformly, specifically, and timely guideline documents Expeditiously complete SMEs’ organizational structure and let it operational locally - The Government should establish and improve the regulatory environment fully for banking activities Implement good procedures to register secure transactions, update, and provide timely information about the secure-transaction conveniently The Government should direct the authorities to help facilitate banks in improving Page 60 procedures for collateral, bank loan and mortgage processing when customers fail to pay bank debt - All ranks, ministries need to quickly complete planning document, land rights certificates and housing ownership rights for individuals and organizations to create favorable conditions for banks’ mortgage - In addition to help SMEs, the Government should also strengthen the management of this business Government should have the appropriate policies both to support and to manage SMEs activities in accordance with the provisions of the current law Need to research to provide appropriate accounting regime in accordance to the real SMEs situations and in accordance with current accounting law Taxation Department need to have more assertive and effective measures in financial management, billing, and compliance of tax laws of SMEs 3.3.2 Recommendation for Techcombank All activities of Techcombank – Trung Yen branch are under the direction of Techcombank Vietnam, so it can expand the lending to SMEs locally, indispensable to the practical support of Techcombank Vietnam Although today Techcombank has clear goals in the expansion of lending to SMEs, however in reality, there are limits and inadequacies This topic will address some petitions as follow: - Techcombank should have specific policies for SMEs and specify advantages for this type of enterprise - To extend the loan SMEs effectively, safely, Techcombank should quickly issue "Loan procedures for SMEs" - The loan procedures for SMEs require large manpower, so Techcombank should prepare a suitable mode with good branches and has goals to develop these procedures - To create the best conditions for banks and SMEs approach each other, we recommend Techcombank allows the branches to expand network activities in a number of key economic important points in Hanoi Page 61 - Techcombank should rapidly consolidate internal inspection at the subsidiary branches, construct inspection programs, and check at a regular interval of each branch and on the whole system In each specific operational mechanism, Techcombank needs to perform testing, monitoring and timely reporting mistakes to prevent potential risks to deliver superior results for the bank 3.3.3 Recommendations for SMEs Through analysis, we have seen clearly the limited access to bank loans of SMEs is mainly caused by themselves For banks to extend loans, SMEs also must try and have some fundamental changes Loans from commercial banks capital is very important for the SMEs, since this funding is stable and relatively low interest rates, many incentives for the SMEs, therefore SMEs should improve business capacity, create effective business plans to enhance prestige banks Here are some of the petitions for SMEs: Strengthening the inner force and management skills: In the increasingly competitive environment, the ability to well manage the business of the owner is always a great advantage for every business In order to meet the development of the business as well as enhance the reputation of the banks, business owner are required to continually add and equip themselves with the necessary business knowledge Combined with the support of the Government, local authorities and business owners need to actively participate in the training cources, association, and clubs to complement the knowledge base, improve governance economic, market experience, manufacturing business In the management of enterprises, one thing that is indispensable and also very weak is accounting work To help businesses grow, the business owner must fully grasp exactly his business and generate trust from bank and SMEs need to complete the accounting of their work Accounting work needs to be specialization, to be done by qualify professional, and to ensure the accuracy and truthfulness Also, to ensure the accuracy and reliability of financial reporting, SMEs can apply regular audit of financial statements Page 62 To facilitate and ensure the production business of businesses is proactive, stable, efficient, and not be surprised by changes of the market and is also an indispensable condition if Businesses want to access bank loans In this current business conditions, businesses need to focus on planning, goals to suit the capabilities and market realities Besides enlisting the support of external factors, an indispensable factors and also a factor to increase the possibility of external support for SMEs is improving themselves The weakness of this is the capital of business is small and often not enough as business registered Therefore SMEs need effective measures to improve the financial capability by issuing shares, calling for investment partners, attract concessional resources, especially foreign investment Doesn’t matter how open banks are, before you have a minimum credit, SMEs must also have at least one mortgaged property In this case, the mortgage is the basis of your business plan, the most convenient and effective for SMEs To make it convenient, SMEs should complete soon the paperwork about the rights to own property Improved market access, expanding the relationship: To facilitate the development of enterprises, one very important issue for SMEs is to not stop further improvement access to their markets, especially in the current integrated developing trend Besides, in order to create a stable position and safe for business, SMEs need strategies and transform their approach to become an indispensable satellites of the large scale enterprises If they this, not only it will provide stability for businesses, but it is also a pretty good basis for banks to consider investment in the business plan Take full advantage of government support, and the local authorities: In recent years, the Government has a fairly clear orientation to encourage development of SMEs, the Government has proposed writing many important policies and support measures, incentives for SMEs’ development This is a good opportunity for the SMEs to grasp and take advantage of the incentives for their development Page 63 SMEs need to proactively approach the incentives as well as utilize the support of the Government, ministries and local governments Specially, they need to participate and take interest in associations, government funds established to support SMEs Proactive approach and learn about Bank: One of the difficulties of SMEs have always been a concern when approaching the bank, worried about the procedure as well as the requirements that banks put out All these worries are due to the lack of understanding about bank of SMEs, especially the knowledge about self-implementation of business processes and procedures required when bank loans To overcome this limitation, to help businesses understand the loan procedure, provide all the information needed for bank, timely creating projects, feasible business plans, thereby shortening the time of loan procedures and save cost for businesses, SMEs should: Learn about the bank, now most banks are open about their products and services as well as the procedures required when Businesses come to work with banks By understanding this process, in addition to grasp the products and services as well as the procedural requirements of bank, SMEs have more information to make effective choices of which banks can serve and provide the most utility for businesses One very important point to any business, but not every businesses know , is that the banks are the trustworthy partners and should not conceal anything, even when businesses are having difficulty in business production Actually, many lessons have taught us that, if businesses are reluctant and hide facts from banks, it will lead to the confidence of banks lower with the businesses, banks will not grasp the situation promptly to give practical and effective advice, and especially when business faces difficulty in business, banks not know and could not dare to solve the problem with enterprises, sometimes this will accidentally push the enterprises into the dead-end wall Of course this case will not be completely true with some enterprises that come to lend money from bank have already hide a lot of issue from the bank just to achieve their sole objective of borrowing money from banks Page 64 CONCLUSION Currently, SMEs is the type of businesses that plays an important and dominant role in the economy of Vietnam Development of credit for businesses is the general strategy of commercial banks in Vietnam and Techcombank Bank Trung Yen in particular However, in reality, the relationship between Techcombank Trung Yen and many SMEs has not really developed, in both quantity and quality, which also still exist many difficulties Therefore, finding solutions to expanding credit loans to SMEs of Techcombank Trung Yen is a big matter, which needs to be solved quickly With the desire to offer a number of solutions to solve problems, this project has provided analysis about: SMEs, credit extension to SMEs, the activities of Techcombank Trung Yen in recent years From the results of the analysis about the situation as well as the development of SMEs, the State, Techcombank, the third chapter of this project came up with some solutions to help extend credit to SMEs On the other hand, the project also gives a number of recommendations in order to create favorable conditions for SMEs to have easier access to bank credit funds Page 65 REFERENCES Books, Rules and Reports [1] Frederic S.Mishkin, [2009], The Economics of Money, Banking and Financial Markets, Prentice Hall [2] Jeff Madura, [2011], Financial Markets and Institutions 10th Edition, Cengage South-Western [3] Matthias Fink, [2009], The Management of Small and Medium Enterprises, Routledge Publisher [4] Peter S Rose, [2001], Commercial Bank Management, McGraw-Hill College [5] PGS TS Phan Thị Cúc, [2008], 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taken in Techcombank - Trung Yen from... - Trung Yen branch 31 2.3 Assessing credit activities to SMEs at Techcombank – Trung Yen branch 33 2.3.1 Achievements 33 2.3.2 The limitations of credit expansions to SMEs. .. CHAPTER 3: SOLUTIONS TO EXPANDING LENDING TO SMES AT TECHCOMBANK - TRUNG YEN BRANCH 38 3.1 The essentials of extending credit to SMEs at Techcombank – Trung Yen branch 38 3.1.1 Small