Factors affecting the loan repayment of sme enterprises at vietinbank hoan kiem branch

BANKING ACADEMY Banking Faculty ------ GRADUATION THESIS FACTORS AFFECTING THE LOAN REPAYMENT OF SME ENTERPRISES AT VIETINBANK – HOAN KIEM BRANCH Student’s name: Vu Ha Ly Clas

BANKING ACADEMY Banking Faculty

- -

GRADUATION THESIS

FACTORS AFFECTING THE LOAN REPAYMENT

OF SME ENTERPRISES AT VIETINBANK

– HOAN KIEM BRANCH

Student’s name: Vu Ha Ly Class: K21CLCA

Intake: 21 Student’s ID: 21A4010879 Supervisor: Assoc Prof Dr Le Van Luyen

Hanoi, May 2022

BANKING ACADEMY Banking Faculty

- -

GRADUATION THESIS

FACTORS AFFECTING THE LOAN REPAYMENT

OF SME ENTERPRISES AT VIETINBANK

– HOAN KIEM BRANCH

Student’s name: Vu Ha Ly Class: K21CLCA

Intake: 21 Student’s ID: 21A4010879 Supervisor: Assoc Prof Dr Le Van Luyen

Hanoi, May 2022

ANNOUNCEMENT

I want to declare that the thesis is my independent research work Statistics used for analysis purposes in this thesis have clear and well-founded origins and were published legitimately following the current applicable Vietnamese regulations Research findings in this thesis are my independent, factual, and objective work that

is in agreement with the situation in Vietnam These findings have not been published

in any other studies before at the time of this thesis’s completion

Hanoi, May 23th, 2022

Student

Vu Ha Ly

ACKNOWLEDGEMENTS

After four years of pursuing the Bachelor of Banking – Finance of Advance Program, Banking Academy, the contents designed for the curriculums and the dedicated instruction of the teachers helped me improve a great amount of knowledge and other soft skills This important knowledge and skills will help me a lot in my future career

First and foremost, I would like to express my sincere gratitude to my supervisor Assoc Prof Dr Le Van Luyen guided me in doing these projects He provided me with invaluable advice and helped me in difficult periods His motivation and help contributed tremendously to the successful completion of the thesis

Besides, I would like to thank all the teachers of the Banking Academy, especially the Banking Faculty, who helped me by giving me advice and broadening my knowledge

Also, I would like to thank all staff of VietinBank – Hoan Kiem brach, every officer of the Corporate Customer Department, for giving me the materials and information necessary for this thesis They had taught me many important skills and supported me in my internship

Last but not least, I would like to thank my family and friends for their support Without that support, I couldn’t have succeeded in completing this thesis

CONTENTS

TABLE OF ABBREVIATIONS vi

LIST OF TABLES vii

LIST OF FIGURES viii

INTRODUCTION 1

1 Rationale of the study 1

2 Previous study 2

3 Significance of study 5

4 Aims of the study 5

4.1 Overall objectives 5

4.2 Detail objectives 5

5 Objects and scope of the study 6

6 Research questions and method 6

6.1 Research questions 6

6.2 Research method 6

7 Organization of the study 7

CHAPTER 1: LITERATURE REVIEW 8

1.1 Credit and credit characteristics for SMEs 8

1.1.1.Definitions of credit for SMEs 8

1.1.2.Credit characteristics for SMEs 9

1.1.3.The role of credit for SMEs 11

1.2 Loan repayment ability of SMEs 13

1.2.1.Definition of repayment 13

1.2.2.Methods evaluating loan repayment 15

1.2.3.The role of assessment and analysis of factors affecting the loan repayment

of SMEs 20

1.3 Factors affecting the loan repayment of SMEs 20

1.3.1.Factors from SME enterprises 20

1.3.2.Factors from the loan side 21

1.3.3.Factors on the bank side 22

1.3.4.Factors on the economy 23

SUMMARY OF CHAPTER 1 25

CHAPTER 2: THE LOAN REPAYMENT OF SMES AT VIETINBANK - HOAN KIEM BRANCH 26

2.1 Introduction of VietinBank - Hoan Kiem branch 26

2.1.1 History of establishment and development of VietinBank Hoan Kiem 26

2.1.2.Organizational structure 26

2.1.3.Business result 28

2.2 Method evaluating loan repayment for SMEs at VietinBank - Hoan Kiem branch 29

2.3 Credit activities of SMEs at VietinBank - Hoan Kiem branch 32

2.3.1.SME loan sales 32

2.3.2.SME loan sales structure 33

2.3.3.Non-performing debt, the overdue debt of SMEs 36

2.3.4.Provision for SMEs lan losses 37

2.4 Reasons for unable to repay loans of SMEs at VietinBank - Hoan Kiem branch 37

2.4.1.Factors from customers 37

2.4.2.Factors from the bank 38

SUMMARY OF CHAPTER 2 40

CHAPTER 3 RESEARCH METHODOLOGY, FINDINGS, AND

DISCUSSION 41

3.1 Theoretical models 41

3.2 Research process and framework 42

3.3 Research hypothesis 43

3.4 Data sources 43

3.5 Research methodology 45

3.5.1.Descriptive statistics 45

3.5.2.Correlation Analysis 47

3.5.3.Logit regression analysis 47

3.6 Summary and interpretation of findings 51

SUMMARY OF CHAPTER 3 52

CHAPTER 4 RECOMMENDATIONS 53

4.1 Implications from research results 53

4.2 Recommendations for VietinBank and Hoan Kiem branch 53

4.2.1.For the process of appraising corporate customers in general and SMEs in particular 54 4.2.2.For credit policy 55

4.2.3.For the staff of VietinBank 55

4.3 Recommendations for SMEs 57

4.4 Recommendations for the State Bank of Vietnam 58

4.5 Limitations 59

SUMMARY OF CHAPTER 4 60

CONCLUSION 61

REFERENCES 62

APPENDIX 69

TABLE OF ABBREVIATIONS

CASA Current Account Savings Account

CIC Credit Information Center

EAD Exposure of Default

EL Expected Loss

FEM Fixed Effects Model

GDP Gross Domestic Product

IFC International Finance Company

IT Information Technology

LGD Loss Given Default

MDA Multiple Discriminant Analysis

NPL Non-performing Loan

OLS Ordinary Least Square

PD Probability of Default

REM Random Effects Model

ROA Return on Assets

ROE Return on Equity

SBV The State Bank of Vietnam

SME Small and Mid-size Enterprise

VCOMS VietinBank Credit Operation Management Support

LIST OF TABLES

Table 1.2 Relationship between loan repayment ability and customer's

Table 2.1 Business result of VietinBank Hoan Kiem from 2019-2021 28 Table 2.2 The customer’s rating classification at VietinBank 31

Table 2.3 VietinBank Hoan Kiem’s SME loan sales structure 2019 -

Table 2.4 VietinBank Hoan Kiem's SME loan sales structure by

Table 2.5 Non-performing debt, the overdue debt of SMEs at

Table 2.6 Provision for SME loan losses at VietinBank Hoan Kiem

Table 3.2 The loan repayment of the research sample 46 Table 3.3 Correlation of independent and dependent variables 47 Table 3.4 Omnibus Tests of Model Coefficients 47 Table 3.5 The results of testing the prediction level of the model 48

LIST OF FIGURES

Figure 2.1 VietinBank Hoan Kiem’s organization structure 26 Figure 2.2 VietinBank Hoan Kiem loan sales structure 2019 - 2021 32

Figure 2.3 VietinBank Hoan Kiem loan sales structure by terms 2019 -

INTRODUCTION

1 Rationale of the study

The development of the commercial banking system has always been associated with the evolution of the national economy As the main credit intermediaries, Vietnam's commercial banks have actively supported recovering the economy and stabilizing citizens' lives, especially in 2019 - 2021, in the context of the widespread Covid-19 epidemic According to the General Statistics Office, Vietnam welcomed

2021 with a GDP growth of only 2.91% in 2020, the lowest in the past decade However, this result put Vietnam on the list of countries with high growth rates worldwide This positive signal came from implementing credit programs, timely support, and removal of difficulties for businesses across the country, significantly promoting investment and production Credit activities for corporate customers, especially the SME segment, have continuously been prioritized in the loan portfolio

of commercial banks because of their significant number in the Vietnamese market economy Following the direction of the State Bank, VietinBank has implemented selective and effective credit growth promotion, encouraging the expansion of the retail segment and SME enterprise customers According to Vietinbank's internal report, as of December 31, 2021, the proportion of individuals and SME loans reached 57%, a positive gain compared to 54% in 2020

Although credit activities generate a huge profit, they also conceal many potential losses Credit risks would exert many serious consequences by creating a domino effect for a bank and the entire financial system Credit risk in lending activities results from various reasons, but its predecessor is the ability of customers to repay loans The evaluation of the loan repayment of SMEs cannot rely on only the statistics

on the financial statements but also on various factors from the banks or the environment… It is a daunting task for banks to combine financial and non-financial elements, supporting making a loan decision By the end of 2021, the non-performing loan ratio of VietinBank was controlled at 1.3%, in compliance with the planned limit assigned by the State Bank and the General Meeting of Shareholders However, in reality, non-performing loans have always existed and tend to increase, especially for loans of SMEs Therefore, researching the factors affecting the loan repayment of

macro-SMEs is essential for VietinBank to achieve its goal of sustainable and effective credit growth in the near future Due to limited time and conditions, the writer selected the

topic: "Factors affecting the loan repayment of SME enterprises at VietinBank -

Hoan Kiem branch"

2 Previous study

Many previous studies had put a great deal of effort into explaining the factors affecting the loan repayment of customers Paving the way for forecasting financial difficulties, Ohlson (1980) used logistic regression to predict the probability of a firm’s bankruptcy The writer used a data set of 2058 companies listed on Wall Street from 1970 to 1976 He found a negative correlation between the probability of bankruptcy and firm size, profitability, and liquidity; and a positive correlation between the probability of bankruptcy and debt

Ajah et al (2014) researched the creditworthiness of agribusiness in Cross River State, Nigeria, using a sample from agri-households borrowing at the Nigeria Agricultural Support Fund in 2008-2009 The results showed that creditworthiness is influenced by the household head’s education level, farm size, age, income, and experience In addition, the study proved that the banks’ ability to manage loans also affects the customers’ loan repayment decisions

In Vietnam, Truong Dong Loc (2011) investigated the factors affecting the capability of farmers to repay loans on time in Hau Giang province The research applied the Probit model to the statistics collected from the survey of 436 households

in 2009 The outcome exposed that the income after borrowings and the owner experience are positively correlated with the ability to repay on time, while the loan interest rate had a negative correlation Moreover, the author also expected the relationship between the practical purpose of capital use and the timely repayment However, this result had no statistical significance; the use of loans had no relationship with the farmers' loan repayment

In the same year, Hoang Tung (2011) analyzed the corporate credit risk, using the logistic model on data of 463 firms listed on the Vietnamese stock market The sample was divided into two groups: the companies with credit risk (93 companies) and those without credit risk (370 companies) The independent variables were

calculated from the 2009 financial statements of these firms From the result, the author had successfully built a function to forecast credit risk for businesses based on financial indicators with a high accuracy (the correct prediction rate of the whole sample was 98.7%) On the other hand, the model also supported the determination

of the credit ratings of businesses

Vo Van Dut (2012) studied the factor affecting the relationship between commercial banks and enterprises in Can Tho, using the data collected from 12 bank branches and 199 enterprises in Can Tho The final figures showed that the average number of banks having relationships with a firm was 2.34 Merely one-third of firms

in the sample had relationships with one bank only Specifically, there were enterprises that had relationships with more than 5 banks

Le Phuong Dung and Nguyen Thi Nam Thanh (2013) researched factors affecting the short-term bank loan of the food processing businesses listed on the Vietnam stock market The study used the data from the financial statements in the period from

2007 to 2011 of 39 enterprises The writer applied a dynamic panel data model with different methodological approaches: fixed effects model (FEM) and random effects model (REM) The results indicated that the reputation of the business (measured by the operating year of the business and the form of ownership) had an impact on the ability to borrow and repay of business

Phung Mai Lan (2014) studied the impact of factors on corporate performance, using the data set of 1255 manufacturing enterprises across the country in the period

of 12 years from 2000 and the annual macro data of the General Statistics Office To estimate the efficiency of the firm, the author applied the production function model

of Battese and Coellie (1993, 1995); at the same time, with three different models: fixed effects model (FEM), random effects model (REM), and Pooled OLS model The outcome revealed that the lending interest rate had a negative value and high statistical significance It can be seen that a high-interest rate leads to an increasing firm’s cost, reducing the operational performance and investment opportunities of the firm

Tran Ngoc Minh et al (2019) investigated factors affecting the loan repayment of SMEs in Can Tho city The study was conducted through a survey of 125 SMEs,

mainly operating in the commercial field of Can Tho city The method utilized in the research was descriptive statistics and Binary Logistic regression analysis The results showed that the main factors affecting the loan repayment ability of SMEs include: the size of the business, loan value, ROA, and interest rate On that basis, the writers proposed some recommendations to SMEs and banks to improve credit activities for this segment

Fidow, Abdikadir Noor (2020) concluded that supply flow and loan repayment ability has a significant positive relationship In their study on 50 small businesses in Kenya, it stated that the relationship between supply cost and sales target on loan repayment ability was weak but significant Also, “the association between cash flow and loan repayment was strong and positive, while the one between operating period and loan repayment was significantly positive” Finally, in the summary, two authors emphasized that there was a negative relationship between small business disruptions and their ability to repay the loan on time

Lakuma et al (2020) studied how COVID-19 impacted SME enterprises in Uganda Although Uganda adopted serious measures of containment to curb the spread of the pandemic such as closing schools, restricting the movement of people

in and out of the country, and social distancing, the virus took its toll on the population and affected businesses of different sectors The study showed that three-quarters of businesses surveyed laid-off employees in the last three months due to reduced business activities caused by COVID-19 Agriculture businesses have experienced the largest constraints in accessing markets due to transport restrictions, quarantine, and sanctions of weekly markets More than 51% of the respondents indicated that if the current restriction persists, they would close their businesses within three months, while 34% indicated that they would be able to survive up to six months About 35% of the respondents also stated that the pandemic affected their loan repayment ability

“How has the COVID-19 pandemic impacted Uganda businesses? Results from a business climate survey” (2020) emphasized “Large businesses generally reported no effect of COVID-19 on their ability to repay outstanding loans, but the risk associated with COVID-19 has undermined SMEs’ ability to repay loans” Conducting the

survey, these writers found that 65% of the businesses reported a decline in their ability to repay loans as a result of the risk associated with COVID-19 and the subsequent measures to contain the disease, the decline is largely in micro (69% of the businesses), small (72% of the businesses) and medium (88% of the businesses)

3 Significance of study

Through previous studies, it can be seen that "loan repayment" is a concern of researchers worldwide However, there are still two gaps that I would like to use as a distinction for my research The first is about the research object As mentioned above, Vietnam is a country where the number of SMEs accounts for more than 90% However, Vietnamese authors often choose research subjects as individual customers

or corporate customers of a certain industry when conducting research about this subject Therefore, this will create a favorable condition for my research to be different due to selecting research subjects who are SMEs in general The second is about research time Most of the studies were conducted before the Covid-19 pandemic, such as Truong Dong Loc and Hoang Tung (2011), Vo Van Dut (2012),

or Tran Ngoc Minh (2019) As for this thesis, the research period is from 2019 to

2021, which is also when the epidemic is most complicated, causing many significant impacts on the loan repayment of SME enterprises

4 Aims of the study

4.1 Overall objectives

Based on the theories about evaluating the loan repayment of SME customers, the author analyzed the status of SME loans and factors affecting the loan repayment of SME enterprises at the VietinBank - Hoan Kiem branch From that, the author offered recommendations to improve the loan repayment of SME enterprises at the VietinBank, Hoan Kiem branch

- Based on the research results, suggesting related solutions to improve the loan repayment of SMEs

5 Objects and scope of the study

- The research object is the factors affecting the loan repayment of SME enterprises of commercial banks

- The research scope is credit activities in the VietinBank - Hoan Kiem branch from January 1, 2019, to the end of December 31, 2021

6 Research questions and method

6.1 Research questions

- What factors affect the ability of SME customers to repay loans at VietinBank

- Hoan Kiem branch?

- The level of impact of each factor on the loan repayment of SMEs at VietinBank Hoan Kiem?

- Solutions to improve loan repayment for SMEs at VietinBank - Hoan Kiem branch?

6.2 Research method

Data collection method

- The data is collected from the 2019-2021 SMEs Debt Balance Report and the information extracted from VietinBank’s internal credit system

Sampling method

- Sample size: 150 SME customers, having credit relationships with VietinBank Hoan Kiem on the condition that they provide all 2019-2021 financial statements and have the latest credit rating at VietinBank Hoan Kiem Selected SMEs do not belong to special structure corporations (financial companies, insurance companies…) to ensure the sample's representativeness

Data processing methods

- The collected data is processed by SPSS 20 software to determine the factors related to the loan repayment of SME customers at VietinBank Hoan Kiem;

- Using these quantities to describe the sample statistics (frequency, mean value, maximum value, minimum value);

- Carrying out the inclusion of dependent and expected independent variables

in Logistic regression analysis

7 Organization of the study

In addition to the introduction, conclusion, list of references, appendix, the thesis included 4 chapters:

Chapter 1: Literature review

Chapter 2: The loan repayment of SMEs at VietinBank - Hoan Kiem branch Chapter 3: Research methodology, findings, and discussion

Chapter 4: Recommendations

CHAPTER 1: LITERATURE REVIEW 1.1 Credit and credit characteristics for SMEs

1.1.1 Definitions of credit for SMEs

Nguyen Minh Kieu (2008) interpreted the credit definition according to Kmax as:

“Credit is the temporary process of transferring an amount of value from the owner

to the user, after a certain period of time, the owner will recover a greater value than the original amount” Obilor (2013) noted that “Credit cannot be divorced from the banking sector as banks serve as a conduit for funds to be received in form of deposits from the surplus units of the economy and passed on to the deficit units who need funds for productive purposes”

According to the consolidated document No.07/VBHN-VPQH on date 12/12/2017

on consolidated of credit institutions promulgated by the National Assembly office,

it is defined that “Credit is an agreement for an organization and individual to use a

sum of money or a commitment to allow the use of a sum of money on the principle

of repayment by lending, discounting, financial leasing, factoring, bank guarantee, and other credit extensions”

Two main groups of target customers of credit activities are:

- Credit for businesses: providing credit to the corporate customers for

business purposes, project investment, purchasing fixed asset…

- Credit for individuals: providing credit to individuals for major purposes

such as consumption and supplementing capital for production activities Lending is the most important activity of a commercial bank Lending activities have always accounted for the vast majority of total assets, generating the largest interest income but carrying the highest risk According to the Law on Credit

institutions No.47/2010/QH12: “Lending is a form of credit extension, whereby a

credit institution assigns or commits to provide a sum of money to a customer for a specified purpose within a certain period of time on the principle of repayment of both principal and interest”

In this study, the term “credit” would be focused on lending activities to SMEs for

different maturities and purposes

1.1.2 Credit characteristics for SMEs

According to Decree No.56/2009/ND-CP: “SMEs are businesses establishments that have registered their business in accordance with the law and are divided into three levels: micro, small, medium to the size of total capital (total capital is equivalent to the total asset as determined in the firm’s balance sheet), or the average number of employees per year (total capital is the priority criterion), as shown in Table 1

Table 1.1 Classifying SMEs in Vietnam

Fields

Micro businesses Small businesses Medium businesses

Number of employees

Total capital

Number of employees

Total capital

Number of employees

From above 10 to

200 people

From above VND 20 billion to

100 billion

From above

200 to 300 people

From above 10 to

200 people

From above VND 20 billion to

100 billion

From above

200 to 300 people

From above 10 to

50 people

From above VND 10 billion to

50 billion

From above

50 to 100 people

(Source: Decree No.56/2009/ND-CP)

SMEs are enterprises with small capital scales and simple organizational structures SMEs have certain characteristics in the process of formation and development According to the Times of Development and Integration, article 3 (March-April 2012), it can be seen that SMEs have the following basic characteristics:

 SMEs are dynamic, flexible, and easily adapt to market changes

 SMEs have small capital, so their competitiveness is relatively low

 Most SMEs do not have updated technology and management skills

 Most teams of workers and employees are not qualified or highly specialized Therefore, Ata A et al (2013) agreed that there are four main problems that SMEs have to face: (1) Working Capital Constraints; (2) Fixed Capital Constraints; (3) Inability to qualify for loans; (4) Lack of motivation, interest and education

SME enterprises have a considerable need for capital in the economy, but compared to the size of each firm, the loan value is not really high with banks In fact, banks can easily fulfill the need for credit of SME customers anytime time, without meeting any problems of liquidity However, during the loan procedures, banks might still face credit risk because these firms do not meet the requirements of banks From these aspects, Tran Long Hai (2019) indicated that the credit activities for SME customers have some comments including:

● Loan maturity: Depending on the purpose and the lending types, the credits

for SME customers can be short, medium, or long term But suppose that the credit extension is smaller than the customer’s capital turnover cycle In this case, when the repayment period comes, the customer does not have the source

to repay the loan, causing difficulties for the customers and the timely loan collection for the bank, and vice versa

● Loan amount: The scale of production and business activities of SME

enterprises are also small so the loan value is usually low Many businesses have to accept loans that have shorter terms and lower value than the real need

of the business project The mismatching in maturity also causes many difficulties for firms in controlling the cash flows and financial management These problems might affect directly the efficiency of the production plan, the repayment ability, and profitability of SME enterprises Although the loan value is low, the number of SME customers is significant As a result, in the loan portfolio of banks, outstanding loans of SME customers usually accounted for a considerable proportion

● Loan interest rate: For SME customers, banks often apply a higher interest

rate, compared to large enterprises, but lower than individual customers The high-interest cost is also considered as one of the difficulties for SMEs to

access credits from banks and other financial institutions However, recently, interest rate of commercial banks have been gradually adjusted, reducing the interest cost and supporting SMEs But how to maintain the stability in interest rate and adjust the rate to even lower are still problems that have not been solved

● Loan procedures: The complicated loan procedures and collateral

requirements are the basic barriers that prevent SMEs from getting loans The loan application needs many documents and time-consuming approval that is out of the business’s ability and capacity

● Collateral: The collateral from loans is prioritized to be high liquidity assets,

one of which is real estate However, the real estate value of SME enterprises

is often very low and does not meet the banks’ requirements There are cases where firms are allocated land to use but have not been issued ownership documents, leading to unsatisfied collateral for loans Other enterprises have already used their entire assets for existing loans and do not have the collateral for new loans

● The stability of loans: The capital needs of SMEs are often small value loans

with short maturities However, not in every case, enterprises can access loans, which push them into passive positions in financial plans During the loan process, banks can unilaterally terminate the credit contract for some reasons, leading to a shortage of capital and disrupting business activities

1.1.3 The role of credit for SMEs

In developed and developing countries, SMEs have a significant impact on employment, economic growth (Gunjati & Adake, 2020), and social progress (IMF, 2019)

● For commercial banks

Banks have always considered the SME sector as hazardous, expensive, and difficult to serve However, accumulating evidence showed that banks are finding efficient solutions to problems such as evaluating credit risk, cutting operational costs and they are profitably servicing the SMEs SMEs' demand for financial services has

become an indicator of the potential for these banks to improve their market share and profit

In “The SME Banking Knowledge Guide” of International Finance Corporation, a Retail banking head at an African Bank claimed that “SMEs are fulcrum of the economies we work in, and the fulcrum of our banking strategy Banking SMEs may

be riskier than banking corporations but we price for the risk, and banking SMEs are more profitable… There is a lot of capacity in the SME market”

As a result, survey data from several studies suggested that banks have begun to pursue SMEs as a profitable area Particularly, even in Latin America, where there has been some concern about the future of SMEs, a bank poll revealed that almost 75% of big and midsize banks, and 50% of small banks, saw SMEs as a crucial element for their business (IIC/MIF, IDB and FELEBAN with D’Alessio IROL, 2008)

In Vietnam, SMEs have limited size and accumulated capital; therefore, they desperately need capital to develop their business The government has implemented many policies to enhance credit access of SMEs, and gradually built and completed the legal policy framework on credit and credit support to create favorable conditions for SMEs, but there are still limitations (CIEM, 2018)

● For SMEs

Firstly, bank credit contributes to promoting the reproduction process The most

important role of bank credit is to provide capital promptly for the production and business needs of SMEs In these processes, a business maintaining continuous operations requires the enterprise's capital to be simultaneously in all three stages: reserve, production, and circulation The phenomenon of temporary excess or lack of capital always occurs in enterprises, and credit supports regulating capital sources to facilitate enterprises' processes without interruption As a result, businesses can speed

up production and product consumption

Secondly, bank credit helps SMEs improve capital efficiency In order to access

bank credit, SMEs must develop a viable production and business plan At the same time, they have to improve operational efficiency and bring profits to fulfill their terms and conditions in the credit contract, ensuring the repayment of principal and

interest on time Therefore, bank credit encourages businesses to find ways to use capital effectively, securing that the profit rate must be higher than the bank interest rate to pay off debt and do a profitable business Banks exercise control before, during, and after disbursement in the lending process, forcing businesses to use the capital for the right purposes and effectiveness

Thirdly, bank credit helps to form the optimal capital structure for SMEs

Borrowed funds are a leverage tool for businesses to optimize the efficiency of capital use Due to limited capital, it is difficult for SMEs to use their capital for production

If only this capital is used, the cost of capital will be prohibitive and difficult to invest

in expanding Therefore, to have an effective capital structure, a reasonable structure

is charter capital and borrowed capital to maximize profits at the cheapest average cost

Finally, bank credit contributes to the concentration of production capital,

improving the competitiveness of SMEs Competition is a necessary rule of the market To survive and stand still, businesses must succeed in the competition Especially for SMEs, it is difficult to gain a competitive advantage over large domestic and foreign enterprises due to certain limitations The current trend of these enterprises is to strengthen joint ventures and associations, concentrate investment capital, expand production, and equip them with modern techniques to increase their competitiveness However, to have sufficient capital to invest in development while owner equity is limited, the ability to accumulate takes many years to achieve Thus,

to be able to respond promptly, finding a bank credit source is the right thing

1.2 Loan repayment ability of SMEs

1.2.1 Definition of repayment

From a business perspective, the solvency refers to the long-term financial ability and the ability to pay debt obligations in the long term All of a company's business activities, such as financing, investing, and operating, affecting the business's ability

to repay debts

From a banking perspective, the credit analysis to determine the customer's ability

to repay loans is the assessment of the business's creditworthiness Creditability is the ability of a business to secure its loan repayment obligations In other words, it is the

ability of the business to pay its due debts Therefore, the main content of the analysis

is based on risk, not on profitability (Nguyen Thi Ngoc Trang and Nguyen Thi Lien Hoa, 2008)

The Basel Committee on Banking Supervision defined the customer as not having the ability to repay as “default” And in the International Convergence of Capital Measurement and Capital Standards (2006), Article 452, “A default is considered to have occurred with regard to a particular obligor when either or both of the two following events have taken place

● The bank considers that the obligor is unlikely to pay its credit obligations to the banking group in full, without recourse by the bank to actions such as realizing security (if held)

● The obligor is past due more than 90 days on any material credit obligation to the banking group Overdrafts will be considered as being past due once the customer has breached an advised limit or been advised of a limit smaller than current outstandings

According to Circular 02/2013/TT-NHNN issued by the State Bank of Vietnam on January 21, 2013, overdue debt is defined as "a debt for which part or all of the principal and/or interest is overdue.", “bad debt (non-performing loan is debt in groups 3,4 and 5.”

Table 1.2 Relationship between loan repayment ability and customer's debt

1 Customer is able to

repay the debt

Group1 - qualified debt Group 2 - debt needs attention

Overdue by 90 days or more; Debt extension

(Source: Design based on documents of Basel, AEG, and Circular 02/TT-NHNN)

In this thesis, the author assesses the loan repayment of corporate customers based

on the expression "customers whose loans are overdue for principal/interest by more than 90 days"

1.2.2 Methods evaluating loan repayment

1.2.2.1 Evaluation through financial ratio analysis

Financial and business activities have a direct correlation All production and business activities influence the finances of the business Particularly, a good or bad financial situation would promote or delay the business process Therefore, analyzing the financial situation has important implications for both business owners and external parties For lenders, their biggest concern is the business's ability to repay

By analyzing the business's financial position, lenders can compare and understand the solvency situation of the business through the amount of cash and high-liquidity assets At the same time, they also pay attention to the business's profitability because that is the basic source for the repayment

The analysis of the enterprise's financial situation has a fairly complete theoretical framework There are many foreign textbooks written on this topic, including specialized textbooks such as Financial statement analysis by John J Wild (2009); Techniques of Financial Analysis: A Practical Guide to Measuring Business Performance by Erich A Helfert (1997); Analysis for Financial Management by Robert C Higgins (2009)

In general, the textbooks mentioned above have detailed programs on assessing the repayment ability of enterprises through the analysis of groups of financial indicators such as liquidity ratios, solvency ratios, profitability ratios, and efficiency ratios… In Vietnam, the academic writings on corporate financial analysis are very various, specifically: Guidance on analysis, forecasting, and stock valuation through corporate financial statements of Pham Thi Thuy and Nguyen Thi Lan Anh (2013); Manual on how to prepare, read and analyze financial statements and management accounting reports by Vo Van Nhi (2011); Analyzing corporate financial statements

by Nguyen Minh Kieu (2008)

1.2.2.2 Evaluation through the 5P model

The 5P model studies five groups of borrowers' criteria: purpose, payment, protection, policy, and pricing

● Purpose: When businesses need to borrow capital from a bank, they must

prove that they use the loan for the specific plan The credit officer will check the legitimacy and suitability of the loan to decide to finance the business The loan purpose must be clearly stated in the loan application, credit contract, documents, and invoices

● Payment: Enterprises must confirm to the bank that they can pay the due debts

following the credit contract provisions The business's solvency depends on the source of income from the loan plan Based on the indicators in the financial statements, the bank will calculate the liquidity ratios such as the current ratio, the quick ratio If the enterprise has the ratios in the standard, the bank will initially assess the business’s ability to pay on time and make a loan decision easier On the contrary, the bank can ask the business to add more information or refuse to lend

● Protection: A loan secured by the asset, the customer's or a third party's, is

more closely associated with obligation than unsecured loans In the worst case, when the customer can no longer repay the loan, the bank can use collateral as a last source of income Depending on the size of the business, the loan agreement, and the current financial situation, the bank will lay down different asset requirements and collateral ratios However, collateral does not show the effectiveness of the loan but only ensures safety for the bank The banks might accept risk with the desire to earn profit from high-interest rates from loans and can still approve lending with a low ratio of collateral or even

no collateral The protection of loans relies on the corporate customer and the bank's risk appetite

● Policy: The policy of an enterprise has a decisive meaning to the existence and

development of the enterprise in the future The introduction of even term or long-term policies will show professionalism and stability in the operating activities An enterprise, which has a good orientation, a clear

short-vision, and specific development policies, will have the power to survive and develop stably and solidly Moreover, a business with a long-term vision aiming for sustainable growth would easily access the bank's fund

● Pricing: For each bank, there will be different criteria to evaluate customers

through the internal credit rating system Several banks create their own internal credit rating system based on Alman's Z-score model for loan evaluation and decision making This model is used to measure the probability

of customer default through the basic characteristics of the customer The quantity Z is a composite measure to classify the risk to the borrower and depends on the borrower's financial indicators From this model, the borrower's probability of default is calculated based on past data

1.2.2.3 Evaluation through the credit rating system

Credit rating was a term coined by John Moody in 1909 in the publication announcing the results of the railway bond ratings (Lawrence, 2010; Moody's, 2013) The rating system presented in this report was denoted by the 3-letter ABC, which is ranked from AAA (most reliable) to C (highest risk), respectively Since then, these rating instruments have played an important role in the financial markets by providing ratings to assess the quality of products in the financial markets

Moody's (2013) stated that credit ratings are intended to estimate the credit risks associated with an organization's financial obligations in the future The long-term credit rating evaluates the credit risk with a maturity above one year, reflecting the ability to fulfill the loan repayment commitments and the risk of declining financial status in the future Meanwhile, the short-term rating is only for credits under 13 months and only assesses the repayment risk (Moody's, 2007)

According to Standard and Poor's (2012), credit rating was an estimate of the creditworthiness of the party that is required to fulfill financial obligations in the future, based on current factors and the evaluator's point of view In other words, credit rating is considered as an indicator of safeness when investing in valuable papers, such as bonds, stocks, or other similar debentures

In Fitch's view, a credit rating assesses an organization's ability to meet its debt obligations such as interest, preferred dividends, insurance, or other liabilities Fitch's credit rating method combined both financial and non-financial factors

From the above points of view, it can be seen that credit rating is an action to evaluate the financial status of the assessed objects Credit ratings provide information to investors about the financial situation and risk level of institutions to make appropriate investments The evaluation factors usually include both financial and non-financial factors Financial factors contain important financial ratios, calculated through financial statements Non-financial factors are various and difficult to quantify, such as politics, business sectors, macroeconomic environment (Vo Hong Duc and Nguyen Dinh Thien, 2013)

1.2.2.4 Evaluation through the default probability system

Currently, according to the Basel II International Capital Standards (Nguyen Duc Trung, 2014), banks need to use models based on internal data systems to determine the possibility of credit loss For each specified period, the estimated loss is calculated based on the following formula:

EL = PD x EAD x LGD

In which:

● EL - Expected Loss: the expected credit loss, the average loss that can be

calculated from past data

● PD - Probability of Default: the probability that a customer defaults

● LGD - Loss Given Default: Expected rate of capital loss LGD is the

proportion of capital losses on the total outstanding balance when the customer cannot pay the debt LGD includes loan losses and other losses incurred, which are interest is due but not paid, and other costs such as costs for legal services, handling collateral, and related costs

● EAD - Exposure of Default: Customer's outstanding balance at the time of

unable to pay

The sum of these losses for each customer in the credit portfolio would be the loss

of the credit portfolio

Thus, through the variables - LGD, PD, and EAD, the bank will evaluate EL - estimated loss of loans Suppose the bank can accurately calculate the estimated loan loss, it will bring many benefits to the bank besides determining the minimum capital adequacy ratio in the relationship between equity and credit risk

1.2.2.5 Evaluation through the Market Approach Model

KMV model (short for Stephen Kealhofer, John McQuown, and Oldrich Vasicek – co-founders of KMV company in 1989 on risk management and development of KMV model in the 1990s) was fairly common in the world, in which, in 2004, 40 of the 50 largest financial groups in the world had registered to utilize it

According to economic experts, in theory, the KMV model is an extended

"version" of the Merton model However, the strength of the KMV model lies in the experimental and calculation tools established on a large database The key quantity

in the KMV model is the probability of default (EDF) EDF is the probability (in real terms) that a company will default within 1 year according to KMV's calculation method

Credit risk is the probability that an enterprise will not be able to pay its financial obligations as committed (Klieštik and Cúg, 2015) Meanwhile, bankruptcy is caused

by the enterprise's decision to stop performing its debt obligations and carry out statutory bankruptcy procedures (Crouhy et al., 2007)

Therefore, credit risk can result in bankruptcy risk Alternatively, credit risk is defined as the degree of volatility in the value of debt instruments and derivatives due

to a change in the potential credit quality of a borrower or counterparty (Lopez et al Saidenberg, 2000)

The KMV risk measurement model inherits from the results of Merton's asset pricing model (Valášková and Klieštik, 2014) With the structural model, the volatility of the firm's asset value is used to measure credit risk Meanwhile, the market value of the future enterprise cannot be calculated easily

In Vietnam, the research on credit risk measurement is limited, especially the application of the KMV model One of those studies is the study of Nguyen Thi Canh and Pham Chi Khoa (2014), applying the KMV model in calculating and predicting bankruptcy probabilities of corporate customers at Vietcombank

1.2.3 The role of assessment and analysis of factors affecting the loan

repayment of SMEs

Banks can build a reasonable credit portfolio to limit risks and at the same time evaluate each loan, and each customer to have an appropriate credit policy Therefore, evaluating a customer's repayment ability is important in determining the expected credit loss

Estimating the ability to analyze the factors affecting the customer's loan repayment would support credit officers and banks approving credit for a customer, saving costs and time, and limiting the subjectivity of individual credit officers in loan appraisal Analysis of loan repayment is the means of support for the bank to monitor the loan after lending, prevent credit risks, help the bank identify potential risks, and take measures to limit risks to a low level

These actions also improve the bank's quality and credit risk management system, timely detect errors, and contribute to completing the bank's internal credit rating program for SMEs

1.3 Factors affecting the loan repayment of SMEs

1.3.1 Factors from SME enterprises

The number of operating years of the business: an enterprise that has been

operating for a long time in the industry, experienced many economic periods, has a large customer base, long-term traditional partners, will rarely meet risk, compared with newly established enterprises, just entering the business market (Petrunia, 2007) When they have experience, businesses will have better options to adapt to changes

in the market, business environment, and competition than less experienced ones Coravos' study (2010) using the Logit model to study a sample of 530 loans had shown that the experience variable of the enterprise and the loan repayment of the enterprise had a positive relationship

Financial capacity of the enterprise: expressed mainly through financial ratios

According to Pederzoli and Costanza (2010), financial ratios often have a deep relationship with the ability of enterprises to default These indicators will indicate the health of a business Some indicators of financial capacity are solvency indicators, efficiency indicators, profitability indicators, debt indicators Banks also use these

indicators to assess the financial capacity of enterprises before lending and play a decisive role in the results of internal credit ratings in the banking system

Some of the financial ratios:

Financial leverage of the enterprise (expressed in the debt ratio of the business:

debt/equity) showed how much of the total equity of the enterprise are liabilities; the higher this ratio, the greater the company's financial risk and vice versa According

to Lally's (2003) research, the more debt a business has, the greater the risk of financial distress or inability to meet its debt obligations The higher the ratio, the lower the company's ability to repay debt Bigelli and Vidal (2012) and Gooddacre and Thomson (2006) revealed that corporate customers' financial leverage and solvency have a negative relationship The greater the financial leverage, the lower the loan repayment ability of the firm In addition, the debt/equity ratio represents the capital structure of a company, which is one of the important criteria that VietinBank uses to evaluate customers when lending For some specific industries, VietinBank stipulates that loans are only accepted when the debt indicator is within a specified limit

Business performance: Fitzpatrick's (1931) study used financial ratios to analyze

the bankruptcy of corporations The author had pointed out that one of the best ratios

to predict the bankruptcy of corporate customers based on financial statements was profitability The bank will highly appreciate an effective business enterprise When the profitability is high, the ability to repay the bank's loan will also be guaranteed According to Watson and Wilson (2002); Bessler et al (2011), to minimize costs, business managers would prioritize using internal sources first, with low capital costs, then external funding sources, with higher capital costs Furthermore, the higher the business efficiency, the more it is likely to be approved for bank financing, according

to Amato (2004) When effective projects have been exploited with easy access to loans, businesses tend to expand their investments into less productive projects, so the customer's loan repayment would be decreased (Goyal et al., 2011)

1.3.2 Factors from the loan side

Collateral: Jimenez and Saurina (2003) argued that with the large loan collateral,

the probability of the customer defaulting would be lower than the loan with low

collateral In lending activities, if the customer does not pay the loan, the bank will use the measure of handling collateral to recover the debt For each bank's credit rating for businesses, the level of risk of each loan, each customer will have a certain percentage of collateral Collateral can be the property of the business or a third party Most banks are more likely to accept high-liquidity collateral, easily marketable, and not prohibited by law Collateral is not only the last measure to recover the bank's loan but also contributes to increasing the sense of loan repayment responsibility of the customer

Loan maturity date: Loans with longer maturity are often assessed by banks as

having a higher risk than short-term loans According to Coravos (2010), loan duration and repayment ability of customers had a negative relationship To ensure that customers use the loan for the right purpose and evaluate the loan maturity, the bank usually based on the cash flow and working capital turnover of the business According to Flannery’s theory (1986), the author believed that good corporate customers tend to increase short-term loans Research by Jimenez and Saurina (2003) stated that loans with short maturities may be riskier than those with longer maturities Because short-term borrowing costs are often lower than long-term ones, in some cases, businesses would use short-term loans for long-term investment purposes, which may affect the financial balance and reduce the ability of the business to pay debts

Loan amount (Loan value): Jimenez and Saurina (2003) showed that the loan

amount and the loan repayment of enterprises had an inverse relationship Sometimes, the loan amount will directly reflect the size of the business; the larger the loan size, the more rigorous and time-consuming the appraisal process will be Meeting the tougher conditions and supervision, the loan repayment of enterprises would more likely be guaranteed

1.3.3 Factors on the bank side

Each bank builds up a special policy and tailored process for granting credit If the policies and regulations are harsh, detailed, and reasonable, they can help the bank filter customers with good loan repayment and limit credit risks In addition, if the bank has effective credit risk management, it will be easier for the bank to detect signs

of declining solvency of the customer Thus, they can take timely handling measures

to minimize the risk for the bank For credit policies and processes to be promoted effectively, it is required that credit officers have the competence and professional ethics to understand the processes clearly, collect and process information accurately, assess risks, sort corporate customers, and limit errors in the loan appraisal process The competitiveness among commercial banks is getting fierce because of the same targets of loan balance growth, customer base development, the increase in profit Some banking units are willing to accept higher risk and possible mistakes, and loosen processes when granting credit to corporate customers with poor creditworthiness

1.3.4 Factors on the economy

Macro-environmental factors such as inflation, unemployment rate, monetary and fiscal policies, or the economic cycle can affect the production and business activities

of enterprises, especially the company's loan repayment If the economy is in recession and there are bad fluctuations, it will reduce revenue, profit, and the ability

of enterprises to pay debts, and vice versa Especially for SMEs, the impact of the mechanical economy greatly affects the targets of income and loan repayment With

a simple organizational structure and an unstable financial foundation, even a small change in the economy could become a big threat to SMEs

For example, the Covid-19 coronavirus spread has regrettably borne out downside scenarios to the global economy and people’s activities China is the first country to record the spread of the virus with more than 80,000 people infected and World Health Organization (WHO) declared Covid-19 as a pandemic on March 11, 2020 (Congressional Research Service, 2020) The virus outbreak has spread fast and is expected to continue spreading to all parts of the world Currently, more than 140 countries have reported about 735,000 sickened cases (Congressional Research Service, 2020; Craven et al., 2020) and the cases are increasing exponentially in the United States of America, Italy, Germany, France, Iran, and other countries (Segal & Gerstel, 2020) Nevertheless, the governments, businesses, and individuals still have substantial ability to control the disease’s progressions through some specific actions (Craven et al., 2020; Smith-Bingham & Hariharan, 2020)

Covid-19 is jeopardizing the economic well-being of people and institutions (Sneader & Singhal, 2020) The pandemic does not only affect the global health condition but also impending the structure of the global economic order Consequently, many economies are in the dawn of recession (OECD, 2020) Congressional Research Service (2020) in their latest global economics analysis reported the crisis had trimmed the global economic growth by 0.5% to 1.5% as of March 2020 Ernst and Young (2020) in their Global Capital Confidence Barometer survey revealed that 73% of respondents have perceived a severe impact on the world economy, while the other 27% perceived a minor impact The extensive local and crossborder movement control involving the shutting down of local, national, and international business entities also affected the world economy (Smith-Bingham & Hariharan, 2020) As a result, millions of workers are resting under confinement and businesses are in short supply and struggling to get back to the normal track (Smith-Bingham & Hariharan, 2020; Sneader & Singhal, 2020) Aviation, tourism, travel-related industries, hotels, restaurants are among the highest disrupted sectors during the movement control order, while the staple goods producer, groceries, healthcare, pharmaceutical, and agriculture companies are comparatively less vulnerable (OECD, 2020; Segal & Gerstel, 2020)

The impact of COVID-19 can be noticeable in business areas whereas the interaction and face-to-face negotiations have yet to be allowable (Farmaki et al., 2020) As predictions indicated, it is not until the year 2025 may the global economy recover to the ideal situation as it was in 2019 Therefore, although the negative effects of the deadly pandemic are still presented currently, the commercial recovery phase must be projected to start due to the fact that economic development has plummeted to the historic bottom (Gourinchas et al., 2020) Particularly, the SMEs category is among the mostly-affected enterprises because the category includes weakly and averagely potential power (Syriopoulos, 2020) Therefore, the recovery phase of SMEs has to be the initial stage sooner than ever

In Vietnam, many enterprises not only the SME segment but also large enterprises were facing the risk of bankruptcy because of COVID-19 According to the survey

of the Private Economic Development Research Board, it pointed out that if the

pandemic continued for 6 months, 74% of enterprises would go bankrupt The results are given when conducting the survey with more than 1200 businesses affected by COVID-19 (Anh Minh, 2020) Large businesses generally reported no effect of COVID-19 on their ability to repay outstanding loans, but the risk associated with COVID-19 has undermined SMEs’ ability to repay loans (Lakuma et al., 2020) Due to the limitation of time and data sources, in this thesis, the author only studied the factors affecting the loan repayment of SMEs in terms of those from corporate customers and loans

SUMMARY OF CHAPTER 1

In the first chapter, the author has reviewed the concepts of credit, SME loan repayments, factors affecting SME customers' loan repayment, and related studies to create a basic foundation From that, the writer conducted data collection, research design, and problem analysis in the next chapters

CHAPTER 2: THE LOAN REPAYMENT OF SMES AT

VIETINBANK - HOAN KIEM BRANCH 2.1 Introduction of VietinBank - Hoan Kiem branch

2.1.1 History of establishment and development of VietinBank Hoan Kiem

VietinBank Hoan Kiem is located on the 1st, 2nd, and 4th floors, 25 Ly Thuong Kiet building, Hanoi Hoan Kiem branch is one of the branches with a prime location

It enjoys many advantages because of its position in the capital's center, where culture, politics, and economy intersect

In 1988, the Vietnamese banking system underwent a major change in operating mechanism, transforming from a one-tier bank to a two-tier bank Therefore, VietinBank Hoan Kiem, based on the State Bank to balance capital for businesses and collectives in the district, was a level I branch of VietinBank Vietnam

In 2008, according to the equity investment project of VietinBank Vietnam, VietinBank Hoan Kiem was changed into a commercial bank VietinBank Hoan Kiem is an accounting unit under VietinBank Vietnam Therefore, in addition to performing branch functions, VietinBank Hoan Kiem also performs currency business activities and services similar to commercial banks

Taking advantage of available strength and persistent efforts, during its operation from 1988 until now, VietinBank Hoan Kiem has continuously grown and developed, becoming one of the leading branches of VietinBank Vietnam, contributing to the growth of the banking system and the overall development of the country

2.1.2 Organizational structure

After many years of operation since its establishment, VietinBank Hoan Kiem has more than 200 officers and employees, with the following organizational structure:

Figure 2.1 VietinBank Hoan Kiem’s organization structure

(Source: Human Resources Department of VietinBank Hoan Kiem)

● Board of Directors: Including the Director and 06 Deputy Directors

● Corporate Customer Department: Developing corporate customer policies;

Evaluating and directly participating in the implementation of customer policies, marketing activities; Introducing to customers about products and services of Vietinbank; Appraisaling and valuating collateral assets of customers; Loan disbursement and management; Debt collection and handling problem debt

● Accounting Department:

○ Organize the accounting of economic events at the branch following the Law on Accounting, the guiding documents of the Ministry of Finance, the State Bank, and VietinBank Vietnam

○ Monitor, manage and account for internal expenditures, taxes, fixed assets, and labor tools; Coordinating with other departments to strictly implement the mode of fund transfer, refund, cash fund management…

● Organization and Administration Department:

○ Personnel organization: Advising and assisting the Board of Directors

in arranging, transferring, appointing and dismissing, rewarding, disciplining, receiving, and recruiting employees; Developing annual staff training plan, monitoring and implementing the plan…

○ Administration and management: Advising the Board of Directors on general issues of administration, management, capital construction, procurement of assets, materials, electricity, and water ; Document management and storage

● General Department: Develop, prepare, and distribute comprehensive plans

and reports in the branch; Manage credit risk in the branch

● Credit Support Department:

○ Customer Information Department: Receive and manage account requests; Receive, open accounts and manage customer records, requests for changes in customer information…

○ Customer Service Department: Handle all transactions related to customer's deposit and loan accounts; Cash advance for credit card

holders, purchase and sale or convert foreign currency, personal traveler's cheque…

○ Card Department: Issuing and paying for cards according to current regulations of VietinBank Vietnam; Manage records of deposit, mortgage, pledge…

● Retail Department: Developing individual customer policies; Evaluating and

directly participating in the implementation of customer policies, marketing activities; Introducing to customers about products and services of Vietinbank; Appraisaling and valuating collateral assets of customers; Loan disbursement and management; Debt collection and handling problem debt

● 10 Transaction Offices: The point-of-sale system of the Branch in Hoan

Kiem district with the general function of the Customer and Credit Support department

2.1.3 Business result

Table 2.1 Business result of VietinBank Hoan Kiem from 2019-2021

Mobilized capital 9937 13064 15539 Credit balance at the end of the period 6469 6781 7143 Profit before tax 319.88 360.99 398.24 NPL ratio (%) 1.10% 1.30% 0.98%

(Source: VietinBank Hoan Kiem’s internal reports)

It can be said that the period of 2019 - 2021 is a period when many fluctuations are recorded in the operation of both the Vietnamese economy in general and the banking industry in particular due to the negative impact of the Covid-19 epidemic The operation stagnated, many enterprises went bankrupt; deposit interest rates fluctuated continuously, sometimes reaching above 14%/year but then falling below 4%/year; bad debt in the banking system increased sharply; many commercial banks operated inefficiently or loss These difficulties had had a great impact on the business activities of the entire banking system and VietinBank Hoan Kiem

From the above data, we can see that from 2019 to 2021, VietinBank Hoan Kiem had achieved certain successes in expanding the scale of operations, increasing revenue, and minimizing costs to achieve maximum profit The branch's mobilized capital increased steadily, from nearly VND 9937 billion in 2019 to VND 15539 billion in 2021, 1.6 times more in just 3 years Especially in the context of the complicated Covid-19, revenue from business activities of the branch still recorded growth The credit balance at the end of the period increased steadily (5%) over the years However, the non-performing ratio tended to fluctuate but remained at low levels (1.1%, 1.3%, and 0.98% in 2019, 2020, and 2021) These indicators showed that the branch had successfully controlled its credits well and had a reasonable lending policy

The branch's profit after tax was guaranteed to grow by 13% in 2020 compared to

2019, and in 2021, by 10% compared to 2020 This result was achieved thanks to the policy of encouragement and continuous expansion of the branch's business activities and strengthened relationships with customers with various preferential policies corresponding to each type of customer The strong financial capacity and increasing prestige of the entire VietinBank Vietnam system and the Hoan Kiem branch have enhanced customers' trust In addition, between 2019 and 2021, the State Bank implemented policies to restore and revive the economy when the second Covid-19 waves occur; stabilize social security, support citizens, strengthen non-cash payments and promote digital transformation The demand for the bank's products and services

is constantly increasing, and the increase in the total revenue of the branch is inevitable

2.2 Method evaluating loan repayment for SMEs at VietinBank - Hoan

Kiem branch

With the support and advice of foreign partners, VietinBank has successfully built

an internal credit system and applied it officially in 2011 The internal credit system

is the ultimate risk management tool for evaluating customers before making a loan decision, the basis for VietinBank's application of interest rates and provision for credit risks Credit officers conduct internal credit relations for new and old customers according to the manual's provisions issued by VietinBank

VietinBank's internal credit rating system for businesses classifies debt by qualitative and quantitative methods: financial and non-financial

The groups of financial indicators to be considered include:

The non-financial component includes the following evaluation criteria:

● Loan repayment of the enterprise;

● Credit balance of the board directors;

● Management qualifications and internal environment;

● Relationship with banks;

● Factors affecting the industry;

● Factors affecting business performance

The number of points for each indicator is evaluated from 20 to 100 points, and the proportion for each indicator varies depending on the industry and size of the client's business

The financial score accounts for 30-35% of the total ranking score (30% for unaudited financial statements and 35% for audited financial statements) The non-financial sector accounts for 70% of the total rating score The combined score of qualitative and quantitative factors will help determine the customer's classification level; the details of the rating classification are as follows: