Strategies for enhancing quality of medium and long term credit at vietcombank,graduation thesis

STATEBANK OF VIETNAM BANKING ACADEMY Faculty of Foreign Language ------ GRADUATION THESIS STRATEGIES FOR ENHANCING QUALITY OF MEDIUM AND LONG-TERM CREDIT AT VIETCOMBANK... STA

STATEBANK OF VIETNAM

BANKING ACADEMY Faculty of Foreign Language

- -

GRADUATION THESIS STRATEGIES FOR ENHANCING QUALITY OF MEDIUM AND

LONG-TERM CREDIT AT VIETCOMBANK

STATEBANK OF VIETNAM

BANKING ACADEMY Faculty of Foreign Language

- -

GRADUATION THESIS STRATEGIES FOR ENHANCING QUALITY OF MEDIUM AND

LONG-TERM CREDIT AT VIETCOMBANK

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ACKNOWLEGDEMENT

First of all, from the bottom of my heart, I would like to send my most sincere thanks

to Ms Nguyen Thi Thuy, Faculty of Foreign Languages – Banking Academy for having supported me during my thesis writing process Without her whole – hearted instruction, I could not have accomplished this thesis

Secondly, I would also like to express my great attitude toward Mr Nguyen Thanh Tung, the director of Vietcombank – Tay Ho branch and all staff in Credit Department, who enthusiastically offered me with the very first ideas on research methods, precious comments and encouragement during my internship process I have learned a lot from his precious knowledge about credits as well as his industriousness and big dedication in work Thanks to his great assistance, I have finished this thesis Additionally, I also want to show my deep gratitude toward all teachers of the Faculty

of Foreign Languages, Banking Academy for helping me to cultivate background knowledge of subjects related to my research

Finally, I do want to give the last grateful sentence to my family and friends who always stand by me and continuously encourage me during four years at Banking Academy They are really the greatest spiritual motivation for me to make my best efforts to perfect myself and overcome the most difficult time as a student

Because of limited experience and lack of time, the thesis might have many shortcomings I am looking forward to receiving any comments to make it better

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DECLARATION

I hereby declare that this submission is my own work towards the Bachelor in English

at Banking Academy and that to the best of my knowledge, it contains no material previously published by another person, nor material which has been accepted for the award of any other degree of the Academy except where due acknowledgement bas been made in the text

Signature

Pham Hanh Trang

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LIST OF ABBREVIATIONS

Vietcombank Joint Stock Commercial Bank for Foreign

Trade of Vietnam SMEs Small and Medium Enterprises

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LIST OF CHARTS

Chart 3.1 Organizational structure of Vietcombank 21

Chart 3.2 Business performances of Vietnam Commercial Banks in 2016 23

Chart 3.3 Loan-to-deposit ratio of Vietcombank 25

Chart 3.4 Medium and long-term granting procedures of Vietcombank 27

Chart 3.5 Loan structure of Vietcombank by term during 2014-2016 period 29

Chart 3.6 Structure of medium and long-term credit by types of customers 30

LIST OF TABLES Table 3.1 Business volume of Vietcombank between 2014 and 2016 22

Table 3.2 Mobilized capital of Vietcombank in the 2014-2016 period 24

Table 3.3 Capital utilization at Vietcombank in the 2014-2016 period 25

Table 3.4 Loans to customers of Vietcombank during 2014-2016 period 28

Table 3.5 Loan portfolio based on types of industry sectors during 2014-2016 period 31 Table 3.6 Medium and long-term credit quality assessment through statistics of revenue generated from lending medium and long-term loans 32 Table 3.7 Ratio of bad debts, overdue debts at Vietcombank during 2014-2016 period33

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Table of Contents

ACKNOWLEGDEMENT i

DECLARATION ii

LIST OF ABBREVIATIONS iii

LIST OF CHARTS iv

LIST OF TABLES iv

CHAPTER 1: INTRODUCTION 1

1.1 Rationale of the study 1

1.2 Objectives of the study 1

1.3 Research question 1

1.4 Subject and scope of the study 2

1.5 Methodology of the study 2

1.6 Practical implication of the study 2

1.7 Organization of the study 2

CHAPTER 2: OVERVIEW OF MEDIUM AND LONG-TERM CREDIT QUALITY OF COMMERCIAL BANKS 4

2.1 Overview of Commercial Banks 4

2.1.1 Definition and function of Commercial Banks 4

2.1.1.1 Definition of Commercial Banks 4

2.1.2 Core activities of Commercial Bank 5

2.1.2.1 Capital Mobilization 5

2.1.2.2 Capital Utilization 5

2.1.2.3 Intermediary Operations: 6

2.1.3 Classification of Bank Credit 7

2.1.3.1 Based on terms 7

2.1.3.2 Based on collateral 7

2.1.3.3 Based on lending types 7

2.1.3.4 Based on risk assessment 8

2.2 Overview of medium and long-term credit of commercial banks 8

2.2.1 Definition of medium and long-term credit 8

2.2.2 Features of medium and long-term credit 9

2.2.2.1 High risk 9

2.2.2.2 High interest rate 9

2.2.3 Purposes of medium and long-term credit 9

2.2.4 Role of medium and long-term credit 9

2.2.4.1 To the enterprises 9

2.2.4.2 To the banking operation 10

2.2.4.3 To the economy 10

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2.3 Medium and long-term credit quality 11

2.3.1 Criteria in measuring medium and long-term credit quality 11

2.3.1.1 Qualitative criteria 11

2.3.1.2 Quantitative criteria 13

2.3.2 Factors affecting medium and long-term credit quality 15

2.3.2.1 Objective factors 15

2.3.2.2 Subjective factors 16

CHAPTER 3: CURRENT STATUS OF MEDIUM AND LONG-TERM CREDIT QUALITY AT VIETCOMBANK 19

3.1 Overview of Joint Stock Commercial Bank for Foreign Trade of Vietnam 19

3.1.1 Brief history of establishment and development 19

3.1.1.1 Establishment and development history 19

3.1.1.2 Development in 2015-2016 20

3.1.2 Operation fields 20

3.1.3 Mission and vision 21

3.1.4 Organizational structure 21

3.2 Business performance of Vietcombank between 2014 and 2016 22

3.2.1 Business results of Vietcombank during period between 2014 and 2016 22 3.2.2 Capital Mobilization 23

3.2.3 Capital Utilization 25

3.3 Current status of medium and long-term credit at Vietcombank 27

3.3.1 Medium and long-term credit granting procedures 27

3.3.2 Key indicators measuring medium and long-term credit quality 28

3.3.2.1 Loan structure by term 28

3.3.2.2 Loan structure by types of customers 30

3.3.2.3 Loan structure by types of industry sectors 31

3.3.2.4 Income interest from lending activities 32

3.3.2.5 Medium and long-term credit quality assessment through debt categorization 33

3.4 General assessment of medium and long-term credit quality at Vietcombank 34 3.4.1 Achievements 34

3.4.2 Limitations 35

3.4.3 Causes 36

3.4.3.1 Bank 36

3.4.3.2 Customers 37

3.4.3.3 Other objective causes 37

CHAPTER 4: STRATEGIES FOR ENHANCING MEDIUM AND LONG-TERM CREDIT QUALITY AT VIETCOMBANK 39

4.1 Development orientations of Vietcombank 39

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4.2.2 General development orientations of Vietcombank 39

4.2.3 Development orientations for medium and long-term credit of Vietcombank 40

4.2 Strategies for enhancing medium and long-term credit quality of Vietcombank 40 4.2.1 Solutions for expanding medium and long-term credit 40

4.2.1.1 Diversifying types of capital mobilization 40

4.2.1.2 Improving the quality and diversifying the types of medium and long-term loans 42

4.2.1.3 Investment expansion 42

4.2.2 Solutions for enhancing medium and long-term credit quality 44

4.2.2.1 Reshaping medium and long-term credit policy 44

4.2.2.2 Improving quality of investment projects’ appraisal 44

4.2.2.3 Focusing on credit risk management 45

4.2.2.4 Preventing, restricting and handling overdue debt 46

4.2.3 Solutions for organizational structure and workforce 47

4.2.4 Intensifying supervision and inspection 48

4.3 Recommendations 48

4.3.1 To the State Bank of Vietnam 48

4.3.2 To the Government and other relevant organizations 49

CONCLUSION 51

REFERENCES 53

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CHAPTER 1: INTRODUCTION

1.1 Rationale of the study

In the market economy, bank credit has always been known for being a lavish operation field The fact that it is one of the most effective capital distribution and utilization channel is absolutely undeniable due to its huge contribution to the capital turnover and prompt response to the growing demand of individuals, organizations and enterprises

As a vital area of the banking sector, medium and long-term credit plays an integral part in the economic recovery and development process Hence, ensuring the efficiency of medium and long-term credit operation is the overriding concern of not only banks but also the government

As one of the biggest commercial banks in Vietnam, Vietcombank (Joint Stock Commercial Bank for Foreign Trade of Vietnam) has over 14,000 employees, more than 460 domestic and foreign branches Its effective management as well as operation

of medium and long-term credit has had a profound influence on the banking business volume as well as the development prosperity of the country However, the significant growth of commercial banks has urged Vietcombank to expand its operation in order

to take advantage of the economic scale Therefore, only by expanding credit investment and improving credit quality can the bank promote its business Stemming

from this fact, I decided to write a thesis with the theme: “Strategies for enhancing medium and long-term credit quality at Vietcombank” to evaluate the current situation

of medium and long-term credit quality at Vietcombank as well as figure out the causes of its shortcomings and take those as a basis to offer solutions to enhance medium and long-term credit quality at Vietcombank

1.2 Objectives of the study

- Investing in theoretical knowledge related to commercial bank credit and medium and long-term credit quality

- Analyzing current situation of medium and long-term credit activities at Vietcombank

- Giving solutions to improve medium and long-term credit quality at Vietcombank

1.3 Research question

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This report was designed to analyze the real situation of the medium and long-term credit service in Vietcombank To be more specific, the study seeks answers to these following questions:

a Which criteria should be chosen to assess the quality of the medium and long-term credit activity?

b Which factors have influence on the quality of the medium and long-term credit activity?

c How effectively did Vietcombank perform its medium and long-term credit activities during the period between 2014 and 2016? And what are the reasons behind some existing shortcomings?

d What can be the recommendations for Vietcombank to perfect its credit service?

1.4 Subject and scope of the study

- Subject of the study: Medium and long-term credit activities at Vietcombank

- Scope of the study: Status of medium and long-term credit activities at Vietcombank between 2014 and 2016

1.5 Methodology of the study

Based on data collected from reports, documents of Vietcombank, the author used statistical and comparison methods to assess the current situation of medium and long-term credit activities at Vietcombank

1.6 Practical implication of the study

This thesis contributes to make a sober assessment of the current situation of medium and long-term credit activities and suggest solutions for enhancing credit quality at Vietcombank

1.7 Organization of the study

Beside the introduction, conclusion and a list of references, the thesis is divided into three chapters, including:

Chapter 1: Overview of medium and long-term credit quality of commercial banks

Chapter 2: Current status of medium and long-term credit quality at Vietcombank

Chapter 3: Strategies for enhancing medium and long-term credit quality at

Vietcombank

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CHAPTER 2: OVERVIEW OF MEDIUM AND LONG-TERM CREDIT

QUALITY OF COMMERCIAL BANKS

2.1 Overview of Commercial Banks

2.1.1 Definition and function of Commercial Banks

2.1.1.1 Definition of Commercial Banks

The process of establishment and consummation of the Banking system has created the commercial banks, which are known for conducting monetary business operations Commercial bank is a financial institution that offers a list of diversified financial services including credit, savings and payment services, and also being in charge of most financial functions comparing to other business enterprises in the economy There are many definitions of commercial banks so far:

In the US, commercial banks are enterprises that conduct monetary business operations, specializing in providing financial services, operating in financial service industry

The Reserve Bank of India (Amendment) Act, 1959 stated that “Commercial banks are places to receive deposits for lending, sponsoring, or investing”

In Vietnam, commercial banks are financial institutions whose main and regular business are receiving deposits from customers with a repayment commitment to make loans, use as negotiable instruments, etc

According to Law on Banking, 1997: “A commercial bank is a form of credit institution entitled to carry out all banking activities and other related activities” Banking activities are those of monetary business and banking services with regular operations as accepting deposits, and using them to provide credit and payment services

Thus, as financial intermediaries, monetary trading enterprises and financial service providers, the concept of commercial banks can be constructed from many different aspects Along with the development of the banking system all over the world, laws and regulations of each country could expand or restrict the activities of commercial banks in a certain number of areas

- Mobilized capital is the main capital of commercial banks Mobilized capital is actually the cash asset of depositors that commercial banks are allowed to manage and utilize in a certain period, but they need to return immediately and fully according to customer’s demand However, this source of capital usually has the following features: unstable capital source and accounted for the largest proportion

of the capital This capital is used to provide credit or create reserve funds

- Borrowed capital plays an integral part in the total capital of commercial banks, which is usually domestic borrowed capital, including capital borrowing from the State Bank and capital borrowing from other commercial banks through interbank market

- Trust capital is the capital received from financial institutions, the State budget to support for socioeconomic development projects or ecological environment remediation programs This fund is used only for specified objectives

• Financial leasing

This is the medium and long-term credit type As one of the most popular financing tools in the modern business world, financial leasing service uses finance leases to leverage assets

• Bank guarantee

By using this kind of credits, customer will be guaranteed by a commercial bank to be able to get loans at other banks or continue the signed economic contract

- Investment

This is the second important investment activity of commercial banks since it brings about a considerable income Commonly, commercial banks will use their capital and other stable capital sources to invest in the forms of buying shares, stocks of other companies or purchasing government bonds, local administration bonds, or corporate bonds All these investment activities are aimed at getting profits and diversifying risks

2.1.2.3 Intermediary Operations:

Apart from fund mobilization and utilization function, commercial banks also provide customers with intermediary services, including collecting cheques, drafts, bills of exchange and dividends of the shares for their customers; preserving valuable assets,

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important documents of customers; making payment for their clients and at times accept the bills of exchange of their customers for which payment is made at the fixed time; purchasing and selling foreign currency, gold, silver and jewels; arranging to send money from one place to another for the convenience of their customers; being a financial consultancy

2.1.3 Classification of Bank Credit

- Unsecured loans are considered to grant for customer with high reputable, or having regular transactions and good credit relationship with the bank, or loans under government directives

2.1.3.3 Based on lending types

- Discount: commercial banks will advance an amount of money that is equivalent to the value of commercial paper and undue collateral securities after discounting the expected income that banks will get by becoming the owner of these papers

- Loan: commercial banks will lend money to customers on condition that they will have to pay back with interest in a specific time

- Guarantee: commercial banks commit to meet all financial obligations of customers

in case they are not able to comply with their commitments with other partners

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- Financial leasing: commercial banks pay money to buy assets for their customers to lease and they have to follow some specific requirements about renting and asset resolution after the contract is over

2.1.3.4 Based on risk assessment

According to Decision No 493/2005/QD-NHNN dated April 22, 2005 issuing the Regulations on Classification of Debts and Loans Provisioning in Banking Operation

of Credit Institutions, bank loans are classified into five categories, which is primarily based on the period that payments of principal and interest are overdue:

Category 1 (pass): debts that are not due and the borrower is able to pay the principal and interest of debts in full and in a timely manner

Category 2 (special-mention): debts that are overdue less than 90 days and rescheduled debts that are not due

Category 3 (sub-standard): debts that are overdue from 90 to 180 days and rescheduled debts that are overdue less than 90 days

Category 4 (doubtful): debts that are overdue from 181 to 360 days and rescheduled debts that are overdue from 90 to 180 days

Category 5 (loss): debts that are overdue more than 360 days, rescheduled debts that are overdue more than 180 days and debts that are subject to rescheduling arrangements as directed by the Government

Debts in category 3, category 4, and category 5 are considered as bad debts

2.2 Overview of medium and long-term credit of commercial banks

2.2.1 Definition of medium and long-term credit

According to Lê Văn Tề (2009), based on the term to maturity of the loans, there are three types of credits: short-term credit, medium-term credit, and long-term credit While short-term credit is less than 1 year and used to add to the contemporary shortage of current capital of enterprises, medium and long-term credit can be understood as the kind of credit, which is extended for more than one year Therefore, medium and long-term credit may be considered as term loans In the book “Term Lending to Business” (1942:2) written by Neil H Jacoby and Raymond J Saulnier,

“term loans” is defined as follows:

2.2.2 Features of medium and long-term credit

2.2.2.1 High risk

What makes medium and long-term credit different from short-term credit is long maturity Short-term credits are able to meet the short-term liquidity requirements; thus, it can ensure the overall liquidity of commercial banks In contrast, medium and long-term credit is usually used for expanding production, constructing infrastructures, improving technological equipment or production line These projects are often considered to have low profitability in short term, so their durations have to be long The longer the loan is, the higher the risk is In addition, the loan will only be returned when investors get profit

2.2.2.2 High interest rate

This feature is literally the result of the above feature Investors who borrow a medium

or long-term loan which is riskier than the short -term will definitely have to pay at a higher interest rate in order to cover the risk that may happen to commercial banks

2.2.3 Purposes of medium and long-term credit

While the purposes of short-term credit are only to afford living cost, pay salary, meet manufacturing cost such as the purchase of raw materials, medium and long-term’s aims are to scale up production, build infrastructure, etc Because of using medium long-term with different purposes, these loans need long time to generate profits

2.2.4 Role of medium and long-term credit

2.2.4.1 To the enterprises

In the market economy with fierce competition among enterprises, it is necessary for enterprises to continuously enhance products and service quality This also means that only when companies invest in buying modern equipment as well as expanding product line will they win in this competition and dominate the domestic market Hence, investing in development and production plays an integral in every firm development To the state-owned companies, beside scarce budget resources, they

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have to actively look for medium and long-term capital resource to meet the economy’s demand; whilst, to private enterprises, their initial equity mainly comes from external sources of fund

From the listed purposes of medium and long-term credit, it can be seen that effects of medium and long-term credit on production and business operations of enterprises are absolutely undeniable Fixed assets established from long-term loan will upgrade and modernize facilities and therefore, boost the productivities of the enterprise

2.2.4.2 To the banking operation

“Medium and long-term credit is both an attractive source of profits and an effectively

competitive tool among banks”

( Giáo trình “Ngân Hàng Thương Mại” – PGS.TS Phan Thị Thu Hà) Medium and long-term credit brings a great amount of profits and enhances bank’s competitiveness in commercial banking system Consequently, it can be supported that enhancing the number and the quality of medium and long-term credit is considered as

a strategic action for all banks’ development

When banks sign contracts with their customers for lending the amount of medium and long-term loans, that banks would like to build up relationships and keep in touch with their customers for a long time in future and draw customers’ attention toward their services Actually, when banks get on well with their customers, they certainly earn customers’ trust and then easily persuade them to use the banks’ other services

2.2.4.3 To the economy

In economies, a demand for the medium and long-term credit is regularly required for the reason that all enterprises always nurture the hope of developing and broadening production’s scale, advancing technology and information science… Especially, with respect to Vietnam’s economy, there is now an urgent need for basic construction Because of businessmen’s limited capital as well as their hesitating investment psychology, the source of capital directly invested in enterprises mainly originates from banks’ support (Tín dụng ngân hàng, 2009, Lê Văn Tề)

For a long-time research, Shin-ichi Fukuda also summarizes the role of medium and long-term credit to the economy in the “Working paper No 77 (2001)” as below:

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From the macroeconomic viewpoint, the allocation of medium and long-term funds is warranted, if the allocated medium and long-term funds had great external effects in increasing capital stock and production The ratio of medium and long-term loans has positive effects on investment in the economy that has a potential liquidity risk in the financial market When there is a possibility of a liquidity shortage, the firm’s investment decision tends to be conservative Thus, to the extent that the medium and long-term debt makes the liquidity shortage less likely outcome, medium and long-term loans can have a positive impact on investment

Moreover, effective medium and long-term credit may make a positive influence on all fields including economics, politics and society as well as all people in society When the process of production develops at a higher speed, there are a lot of changes such as

a considerable increase in enterprise’ capital, social welfare insurance, a noticeable reduction in the unemployment rate, and the great improvement in living condition of people from all walks of life Actually, this kind of credit makes contributions to restructuring the investment capital, streamlining the economy and then keeping the society in order and safe

2.3 Medium and long-term credit quality

2.3.1 Criteria in measuring medium and long-term credit quality

Medium and long-term credit quality is evaluated based on two criteria: qualitative and quantitative

2.3.1.1 Qualitative criteria

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To classify based on qualitative criteria, loan officers commonly based on the “5C’s of credit” or “5C’s of banking” as a reference when considering a request for a loan Namely, these are Capacity, Collateral, Capital, Character and Conditions

Character

When loan officers evaluate character, they look at stability (for example: how long the customer has lived at his current address, how long he has been in his current job, and whether he has a good record of paying bills on time and in full) In term of loan used for business, credit staff may consider customer’s experience and track record in his business and industry to evaluate how trustworthy he is to repay the loan

Capacity

Capacity refers to considering other debts and expenses when determining customer’s ability to repay the loan Creditors usually evaluate the debt-to-income ratio The lower the ratio, the more confident creditors will be in customer’s capacity to repay the money he borrows

Capital

Capital refers to borrower’s net worth — the value of his assets minus his liabilities Collateral

5 C's

Character

Capacity

Capital Collateral

Conditions

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Collateral refers to any asset of a borrower (for example, a home) that creditor has a right to take ownership of and use to pay the debt in case the borrower is unable to make the loan payments as agreed

❖ Income from credit activities

In fact, it can be affirmed that the credit quality will not be high if banks do not get any profit from their credit activities, which is an important condition for banks’ survival and development

Income from credit activities =Profit from credit activtiesTotal income

 Income from medium and long-term credit activities:

Profit from medium and long − term activitiesTotal income from medium and long − term credit activities

Indeed, this indicator can show more clearly the significance of medium and long-term credit toward all bank activities By building up the above equation, Peter S Rose draws a conclusion that profit only comes from credit activities while total income is calculated by all incomes from all bank activities (Peter S Rose, 2004) Furthermore, improving the credit quality becomes a meaningful action only when it helps to enhance banks’ profitability…

❖ Capital turnover

This criterion is often used to evaluate the ability to manage the credit capital and the credit quality with respect to satisfying customers’ need

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Credit cycle = Loan revenue

Outstanding loan average

 Medium and long-term credit cycle :

Medium and long−term loan revenue

Medium and long−term outstanding loan average

The above ratio reflects the ability to expand medium and long-term lending activities

The credit cycle ratio is usually lower than 1 due to the long term of loan; therefore,

the figure for outstanding loan will be higher than that of loan revenue in the same

year The closer the ratio is to 1, the better quality the lending and debt collection

activtities the bank has

❖ Overdue debt ratio

Mr Rose (2004) supposes that the overdue debts will occur when the term for

repaying debts and interests terminates but the borrower cannot repay debts and

interests on time Overdue debt is a situation that not all banks expect For that reason,

banks always make every effort to minimize overdue rate as low as possible Overdue

outstanding loan

Total outstanding loans

Generally, the amount of overdue debt is shown as overdue debt ratio:

Overdue debt ratio = Overdue outstanding loan

Total oustanding loans

 Medium and long-term overdue debt ratio :

Medium and long−term overdue outstanding loan

Total overdue outstanding loan

In the above equation, the overdue debt is a rest of loans, which have not been repaid

to the banks; total outstanding loans are the amount of money, which the bank pumps

into the economy for a period of time (Peter S Rose, 2004)

The overdue debt ratio illustrates the current status of overdue debt in the bank This

ratio is inversely proportional to the credit quality of the bank, which means that the

higher the overdue debt ratio is, the lower the credit quality and the higher the risk the

bank has Hence, banks always try to keep this ratio as low as possible However, in

fact, this goal is quite hard to reach so they tend to accept a certain percentage of

overdue debt within safe limitation According to some experts, bank should at least

keep the overdue debt ratio lower than 3%, and the ideal figure should be under 1%

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2.3.2 Factors affecting medium and long-term credit quality

Chart 2.1 Factors affecting medium and long-term credit quality

2.3.2.1 Objective factors

❖ Economic environment

Every commercial bank is governed by economic cycle In the booming economy, enterprises are doing a roaring trade, accompanied with the demand of expanding their production As a result, demand for medium and long-term increases, and credit activities of commercial banks also develop In contrast, during the economic downturn, demand for bank credit decline as production and business activities have stagnated due to the difficulty in selling products Thus, the ability to attract capital of the economy also decrease At that time, a large amount of money will be abandoned Mobilized capital is not used effectively, which leads to the decreasing of credit quality

❖ Legal environment

At present, the fact that the system of legal documents has not been synchronized had led to several difficulties for commercial banks in singing and implementing credit contracts The banking law is not fully developed, which affected the management of credit quality of commercial banks

Medium and long-term credit quality

Objective factors

Economic

environment

Legal environment

Subjective factors

Banks

Credit appraisal

Quality of human resources

Credit policy

Equipment serving for credit activities

Customers

Customer’s capacity

Customer’s reputation

Customers’

asset ownership

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Changes in policies, especially the economic structure, import-export policies, also have large effects on repayment capacity of firms The reasons behind bad debts or overdue debts are mainly because the enterprises are not able to sell their products or

do not have alternative business plan

The State management over enterprises is not really effective The government still allows many firms to run business with many functions and responsibilities that exceed their ability, which leads to losses and credit quality decline

There are many factors that can form part of an appraisal These include: financial (this is the most commonly assessed factor), legal (the value of an investment may be

in it enabling an organization to meet current or future legislation), environmental (the impact of the work on the environment is an increasingly important factor when considering an investment), social (for charitable organizations, return on investment could be measured in terms of quality of life), operational (benefits may be expressed

in terms of increased customer satisfaction, higher staff morale or competitive advantage), risk (all organizations are subject to business and operational risk, an investment decision may be justified because it reduces risk)

- Quality of human resources

The quality of human resource and personnel management have effects on all aspects

of banks, of course, including lending activities It is clear that the role of credit officers depends on the scale and personnel management of banks In small commercial banks, credit staff can work as private lenders, debt collectors, marketers, loan checkers, etc In context of increasingly developing economy, a credit officer has

to deal with lots of work relating many fields as well as many kinds of customers, so

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the quality of lending activities directly relies on the quality of recruitment and skill training, education and morality training and organizational structure arrangement It can be said that credit staff is the decisive factor in the success of the credit activity Interest rates of medium and long-term credit

❖ Customers

- Customer’s capacity

Banks’ income is partly earned from a part of enterprises’ profit in form of income for loan As a result, production effectiveness of customers plays a key role in deciding the medium and long-term credit quality

Because of customers’ great importance in managing loans, banks need evaluate the capacity of customers exactly before signing lending contracts The first thing is capacity for markets which is shown by goods’ quality, price and life cycle and enterprises’ status in markets When getting a good knowledge of customers’ capacity for markets, banks can simply evaluate these goods’ advantages and disadvantages in markets and then decide their lending activities toward enterprises Next is capacity for finance that represents the level of finance autonomy It means that an enterprise with

a good finance capacity can easily earn banks’ trust in ensuring the quality of lending activities, which motivates banks to continue signing medium and long-term credit

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contracts with enterprises Finally, that is customers’ capacity for management Management level, in general, often makes great contributions to the success of an enterprise; thus, enterprises with good organizational structures can certainly get more profits than ones with disordered structures It proves that the higher the level of management is, the more easily enterprises can fulfill loans for banks

- Customer’s reputation

Banks’ staff can identify customers’ reliability by investigating business relationships between customers and economic institutions Indeed, reputation has much effect on banks’ interaction with customers, which is an important basis for banks to consider signing contracts with individuals or enterprises Moreover, it can affect banks’ gaining benefits and collecting debts if banks and customers are connected by lending credit contracts Nguyễn Minh Kiều (2007) indicates a lot of criteria to classify credit, including customers’ reputation In term of customers’ reputation, credit is divided into two groups: lending with collateral and lending without collateral Actually, it can

be said that whether banks credit quality is safe or not is dependent on evaluating

characteristics of customers through their reputation in the past

- Customers’ asset ownership

The role of customers’ asset ownership is also as important for banks as customers’ reputation Like the reputation, the asset ownership is a tool that can partly measures the safety of lending activities As usual, to get the amount of loans from banks, customers must have the collateral to affirm that they have enough ability to cover debts or if there is any risks, the collateral can be a substitute for fulfill bank loans

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CHAPTER 3: CURRENT STATUS OF MEDIUM AND LONG-TERM CREDIT QUALITY AT VIETCOMBANK

3.1 Overview of Joint Stock Commercial Bank for Foreign Trade of Vietnam

3.1.1 Brief history of establishment and development

3.1.1.1 Establishment and development history

JSC Bank for Foreign Trade of Vietnam, formerly known as Bank for Foreign trade of Vietnam, was established on 01/04/1963 from the Foreign Exchange Bureau (of the State Bank of Vietnam) Being the first state commercial bank chosen for pilot privatization by the Government, Joint Stock Commercial Bank for Foreign Trade of Vietnam officially came in to operation on 02/06/2008, after successfully implementing the equitization plan through IPO Vietcombank (stock code: VCB) officially listed on the Ho Chi Minh Stock Exchange (HOSE) on 30/06/2009

During more than 50 years of growth and development, Vietcombank has contributed significantly to the stability and growth of national economy, upholding the role of a major foreign trade bank in facilitating efficient domestic economic growth as well as influencing considerably on regional and global financial community

After more than a half-century operating in the market, Vietcombank, one of the biggest commercial banks in Vietnam, currently has more than 14,000 employees, more than 460 branches/ transaction offices/ representative office/ affiliates both in Vietnam and abroad, including Head Office in Hanoi, 96 branches, over 368 transaction offices all over the country, 2 subsidiaries in Vietnam, 1 representative office and 2 subsidiaries in other countries, 5 joint ventures In addition, Vietcombank has also developed an Autobank system with over 2.300 ATMs and more than 69.000 Points of Sale nationwide Bank’s operations are supported by a network of more than 1,856 correspondent banks in 176 countries and territories around the world

Vietcombank’s team of professional employees with excellent ability in banking and finance have a good sense for modern and integrated business environment…Thanks

to their contribution, Vietcombank remains the primary choice for large corporations, domestic and foreign enterprises as well as millions individual customers With great wisdom and high dedication, Vietcombank staff has been making efforts striving for a more and more sustainable Vietcombank Vietcombank’s goal is to become Number 1 bank in Vietnam in 2020 and among 300 largest banking financial groups managed by best international practices

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3.1.1.2 Development in 2015-2016

Along with the sustainable growth and astounding business results achieved, Vietcombank has implemented many projects to improve working capital, standardize the internal governance procedure to strengthen competitive capacity, and create a solid foundation for the application of best international corporate governance practices With a focus on staff training and capacity enhancement, Vietcombank always has high- quality human resources, meeting the requirement of business operations Besides, as the principal state owned banks and the leader of the banking sector, Vietcombank has contributed significantly to the restructuring scheme of credit institutions and the overall success of the banking sector in general Vietcombank also actively joins the community to share the social responsibilities to eliminate hunger and reduce poverty through many charity programs and ensure social security countrywide; through which the corporate reputation is highly recognized nationwide

Moving forward in 2016, the economy has seen positive signs of promising results while many challenges and difficulties remain ahead This context requires Vietcombank to continue in its efforts, with the highest sense of responsibilities to strive for the planned objectives, to continue its breakthrough and to make new accomplishments These objectives create a solid foundation to bring Vietcombank firmly on the path of becoming the Number 1 Bank in Vietnam as well as cementing our reputation in the region, governed by the best standards and continuing to earn the trust of the authorities as well as fulfilling the beliefs and expectations of the investors and millions of customers

3.1.2 Operation fields

Vietcombank provides customers with a wide range of leading financial services in international trade; traditional services such as capital trading, capital mobilization, credit, project financing…etc., and modern banking segment such as forex trading and derivatives, card services, e-banking and so on Vietcombank has many advantages of applying advanced technology into the automatic banking system, products development, e-banking services, based on its high technology foundation Products such as Digital Lab, Internet Banking, VCB Money, SMS Banking, Phone Banking have always attracted a great deal of customers by its convenience, promptness, safety, efficiency, creating the habit of non-cash payments amongst the mass

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3.1.3 Mission and vision

Vietcombank’s vision is: “Becoming a dynamic financial holding company, ranking among the 300 leading financial group of the world by 2020, with its operations in

both domestic and international financial market”

Vietcombank has announced its 2017 motto, which is “Speed – Efficiency – Sustainability” and the corporate governance motto which is “Innovative – Disciplined – Responsible” The major objective is to pursue the strategy for the period 2011 –

2020 with the aim of developing the scale and depth of Vietcombank’s operations, embracing the quality and efficiency as the core values and continuing the implementation of international management standards

To carry on the tradition of more than 50 years, the core values and the position which Vietcombank has successfully built up; together with the trust and support of our loyal customers, partners and shareholders; the creativity, bonding and responsibility of nearly 15,000 employees across the system, Vietcombank is determined to overcome all the difficulties and challenges, seizes the opportunities to continue developing at a rapid and sustainable pace

3.1.4 Organizational structure

Chart 3.1 Organizational structure of Vietcombank

(Source: Vietcombank annual report 2015)

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3.2 Business performance of Vietcombank between 2014 and 2016

3.2.1 Business results of Vietcombank during period between 2014 and 2016

Table 3.1 Business volume of Vietcombank between 2014 and 2016

Compare 2016/2014

Value Rate

Rate (%)

before tax 5,844 6,827 8,523 983 16.82% 2,679 45.84% Profit after

tax 4,586 5,332 6,851 746 16.26% 2,265 49.38% Charter

capital 26,650 26,650 35,978 0 0 9,328 35% CAR 13.13% 11.61% 11.04% -1.52% -13.09% -2.09% -18.93% NIM 2,35% 2,58% 2,63% 0.23% 9.78% 0.28% 11.91%

(Source: Vietcombank Financial statements 2014-2016)

Overall, Vietcombank did pose a higher performance for 2016 According to the financial statements of Vietcombank from 2014 to 2016, it can be seen that total assets

or total capital of Vietcombank increased annually To be more specific, there was a dramatic increase in the amount of total assets from just 576,996 billion VND to 787.907 billion VND between 2014 and 2016, a rise of over 200,000 billion VND in 2 years The figures have indicated that the business volume of Vietcombank is quite stable and definitely on the rise