theoretical background on lending activities to smes at commercial bank

With the efforts of all officialsand employees of branches, lending activities to SMEs of MB Tay Ha Noi in therecent years has achieved a number of accomplishments reflected in the follo

First of all, I am heartily thankful to my supervisor, Prof Dr Pham QuangTrung who guide and support me from the initial to the final of the thesis

This thesis would not have been possible without helping of my colleagues

in MB and other banks Therefore, I would like to thank my colleagues who areopen –mind in sharing experiences and points of view

In doing this thesis, it is an honor for me to receive many feedbacks fromMilitary Bank customers about the subject I would like to show my gratitude

to representatives of Military Bank’s SMEs customers who support bring memany ideas

Lastly, I offer my regards and blessings to all of those who supported me inany respect during the completion of the project

Nguyen Khac Kien

TABLE OF CONTENT

ABBREVIATITION Bil/Mil Billion/Million

CAD Credit Appraisal Department

CSD Credit Supporting Derpartment

CRD Customer Relationship Department

CRO Customer Relationship Officer

CSO Credit Supporting Officer

GDP Gross Domestic Product

IFC International Finane company

JSCBs Joint stock commercial Bank

MB Military Bank

OECD Organization for Economic Co-operation and Development

RM Relationship Manager

SMEs Small and Medium –sized Enterprises

SOCBs State owned commercial Bank

SWOT Strength – Weakness – Opportunity – Threats

LIST OF TABLE

LIST OF FIGURES

EXECUTIVE SUMMARY

MB Tay Ha Noi branch is one of the youngest branches of MB, wasupgraded by transforming Ha Tay office transition In comparison with otherbranches, locating in urban area, Tay Ha Noi branch has many weaknesses MBTHN has continuously developed not only in term of profit and economicperformance, but also in term of quality for credit product and other services related

to customer

Lending activities to SMEs play a crucial role for Commercial Bank So

that, many commercial Banks tend to target its customer toward this segmentation.

Military Bank Tay Ha Noi branch is not in the trend With the efforts of all officialsand employees of branches, lending activities to SMEs of MB Tay Ha Noi in therecent years has achieved a number of accomplishments reflected in the following

aspects: (i) MB Tay Hanoi has grown fast and strongly in the scale of lending to

SMEs, (ii) Credit Procedure of MB has a lot of improvements to shorten theapproval time of loan for customers to meet the capital needs of the business, (iii)

MB package provides credit and interest rate policies of free competition for SMEs.However, SME lending activities of MB THN branch still include some difficulties

In line with title of this research, the author has analysed current situation ofSMEs lending at Tay Ha Noi branch to find out its achievements and shortcomings.From the difficulties and shortcomings the author shall identify the solutions toenhancing lending to SMEs at MB Tay Ha Noi

In research process, the author has collected both primary data as well assecondary data In order to find solution for the problem, this research used somemethods to analyse including: Microsoft Excel software, using table, figure

After doing research lending activities to SMEs, the author has pointed outsome main findings about lending activities to SMEs in general and lendingactivities to SMEs at MB Tay Ha Noi in particular The author has showncomponents of lending activities Those are: lending objective, lending conditionsand lending procedure to obtain a loan The thesis has mentioned factors that impact

on lending activities as well: External factor such as: impacts of monetary toolssuch as capital re-issuance, compulsory reserve ratio, open market operation, creditinterest, etc; factors from SMES, economics environment, In addition, thesis hasshown internal factors, such as: lending policy of commercial bank, Capital scale ofbank, diversity of banking product,…

From the above background on lending activities to SMEs, the write hasanalyzed current situation of MB Tay Ha Noi and has point out some difficulties

and shortcoming of lending to SMEs at Tay Ha Noi branch as: (i) lack of standardprocess of selling, (ii) Lack of customer oriented business practices, (iii) BanksStaff, (iv) Credit procedure of MB, (v) high bad debt ratio.

After that, the author has suggested some solutions and recommendation toenhancing lending SMEs as: (i) MB Tay Ha Noi should orientate targetedcustomers concretely, (ii) MB should issue a standard selling process as well as asale kit pack for enterprises customers relationship staffs, (iii) Regulation on goldenselling hours for customer relation staffs , (iv) Improving the credit procedure forSMEs, (v) Improving services providing process, (vi) Manage customers afterlending

For SMEs, they should improve their bankable capacity by upgrading theirinfrastructure and paying more attention to employees in term of knowledge,professional and computer Skills In addition, SMEs should participate inprofessional Associations to be updated information about market and industries.SMEs should invest accountancy system software and hire qualified accountant tocomplete financial statement better Besides, SMEs should be more active to access

to the banks by contacting RM frequently and enthusiastic to participatingworkshops or clients meeting arranged by the banks as they can get helpfulinformation for financing sources

CHAPTER 1

INTRODUCTION

1 Rationale

Small and medium sized Enterprises (SMEs) play a important role in the

Vietnamese economy According to the recent statistics, SME represent

approximately 97% of total of Vietnamese enterprises SMEs not only contribute toeconomic growth but also create millions of jobs per year for the Vietnameselabours, to eliminate the poverty, strengthen social security Annually, SMEcontribute to Government budget above 40% of GDP Nevertheless, thedevelopment of the private sector in general and of SMEs in particular is still farfrom its potential SMEs could not develop as expected because of a range wide ofinternal and external factors .

Because of its potential developing of SMEs, more and more Vietnamesecommercial banking focus on much this market segment And not to be in the trend,Military Bank also spends its resource to supply banking services to SMEs

However, many SMEs are now still reluctant to access to MB’s loan due tomany reasons for not only from the SMEs but also from the bank Whereas, in linewith harsh competitive environment is increasing in the banking market, pressures

on boosting outstanding loan, guarantee, and other banking services from HeadOffice to the branch is very high So that enhancing lending to SMEs is the mostimportant target for MB Tay Ha Noi branch Working as manager of transaction

office at Military Bank Tay Ha Noi branch I choose the topic: “Enhancing lending

to SMEs in Military Bank – Tay Ha Noi Branch” with the hope that this research

can be helpful to my branch in its business

The rationale of this paper is to review the achievements of MB Tay Ha Noifor the past 4 years as well as investigate and analyse shortcomings, limitation andobstacles that lending activities to SMEs in Tay Ha Noi branch is facing with thenpropose the solutions to improve SMEs lending capacity for MB’s staffs, toenhance lending activity to SMEs

2 Research Objectives

In line with title of this research, the report will aim at finding the solutions andmeasurement to address the difficulties and constrains that SMEs have been facingwith to get a loan from Military Bank in general and MB Tay Ha Noi branch in

particular In order to get these final objectives, the writer will do the research with

3 sub-objectives as listed as below:

- To clarify component of lending activities to SMEs at commercial bank.

- To analyse current situation of lending activities to SMEs at MB Tay Ha Noi branch to find out its achievements and shortcoming

- To propose solutions and recommendation to enhance the lending activities in MB

Tay Ha Noi branch

3 Research question

In order to meet the above research objectives, this research find answer forthe following questions:

-What is component of lending activities to SMEs?

-How is current situation of lending activities to SMEs at MB Tay Ha Noi branch -How to improve lending activities to SMEs at MB Tay Ha Noi Branch?

Figure 1.1: Research Process

4.2Data collection

Data used in the thesis is primary and secondary:

- Secondary data within the scope of this research will be collected fromdifferent resources, such as: website, annual report, books and other researchesabout Military Bank, supplying banking services to SMEs The secondary datawill collected from 2010 - 2012

- The primary data will be collected in 2013 in-depth interview to gatheropinion of managers, directors, relationship officers, Credit appraisal, andenterprises about banking services to SMEs Of which, the number ofinterviewees are allocated as the table as bellows:

Characteristics of Small

and Medium Size

Enterprises

Collecting primary data

about lending activities to

SME at MB Tay Ha Noi

by in – depth interview

and Survey

Current situation oflending activities to SMEs

at MB Tay Ha Noi

Solutions andrecommendations to improvelending activities to SMEs at

MB Tay Ha Noi

Collecting secondary data

about lending activities to

SMEs at MB Tay Ha Noi

from website, annual

reports, books and other

researches about MB,

lending activities

5 Research scope

Research object: The research focuses on lending activities to SMEs at

Military joint stock commercial Bank

Location: Military joint stock commercial bank – Tay Ha Noi branch The

report analyzes and gives recommendation mainly in the lending to SMEs ad

solution in aspect of the particular Branch (MB Tay Ha Noi) Therefore, the

research only mentions issues of operational level

Time: Secondary data will be collected from in the last three year (period

2010-2012) Primary data will be gathered in 2013

Research structure: The thesis will be structured as following chapters:

CHAPTER 2 THEORETICAL BACKGROUND ON LENDING ACTIVITIES TO

SMEs AT COMMERCIAL BANK 2.1 Commercial Bank and Small and Medium - Sized Enterprises

2.1.1 Nature of Small and Medium - Sized Enterprises

2.1.1.1 Difinition of SMEs

The term “small and medium sized enterprises” is one that has no universallyaccepted definition within the financial sector Most organisations base on the datathey have and their financial interest, therefore using annual turnover and financialexposure Other definitions use size, value and complex of business or group

The European Union defines SMEs by various measures including assets,turnover and number of employee, although this latter dimension is onlyoccasionally used to segment business portfolio in European banks The mostcommon definition used by European banks is based on annual turnover Typically,businesses with an annual turnover under €3 million are managed together andclassified as small This is broadly consistent with Basel II Capital adequacy accordthat allow commercial exposures under €1 million to be defined as others retaillending

A clear definition as to what constitutes a SME is likely to vary from one creditprovider to another The following definition is provided as an example:

• Business with Turnover of < €50 million (part of EU definition)

• Businesses with Annual Turnover of < £2m and borrowing of <£1m (Bank of operational definition)

• Businesses whose total lending facilities are between AUD $250,000 and AU D$500,000 (sourced from eserve Bank of Australia Bulletin and experience

of customised score card development in Australia)

• Businesses with < 500 staff (US government definition)

It is worth noting that the majority of SMEs in most countries fall in to the microsegment typically with Turnover < €2m and less than 10 employees

The only similarity of SME’s definition is to define a type of enterprise on givencriteria of operation scope and forms of ownership Defining a SME in the world isbased on the two popular criteria: the quantitative and qualitative one These criteriaare very important and regularly used to defines types of enterprises by countriesand organisation However, these criteria are differently applied each country andorganisation

 Definition in Viet Nam

The Decree 90/2001/ND-CP issued on 23rd November 2001 regarded a

small and medium sized enterprise as the one whose equity capital is no more thanVND 10 billion or is using no more 300 permanent workers According to thisDecree, the SMEs include: Enterprises registered and operated under the Law onEnterprises in 1999, Enterprises registered and operated under the Law on State-owned Enterprises registered by the Law on Cooperative in 1996

The Decree 56/2009/ND-CP issued on 30 th June 2009 stipulates that Small

and medium businesses that have business registration in accordance with law,

is divided into three levels: micro, small and medium scale total capital (total capitalequivalent to total assets is determined in the balance sheet of enterprises) ornumber of employees per year (total funding is the priority criteria), as follows:

Size Areas Supper Small

Enterprise

Small Enterprise Medium Enterprise

2.1.1.2 Characteristics of SMEs

• SMEs has developed very quickly and contributed a considerable portion to

the Vietnamese economy in recent years

• SME join in many industries and exist under all types of economic components: They do their business not only in commerce and services sectors,

but also in industry, construction and agriculture, forest, aquiculture, etc SMEsare found in form of many type of economic component, such as: privateenterprises, Joint stock company, Limited companies, etc…

• Small of capital but fast speed of cash flow: Limited scale of capital in SMEs

is the result of some reasons including their inability to increase capital throughbonds and some perplexing difficulties in dealing with bank loan Hence, SMEsmust fasten the speed of cash flow to use capital effectively

• SMEs have simple structures and systems Those simple centralized systems

facilitate flexibility and shorter reaction times They are the basis for SMEs’capability to adapt quickly to changes in their environment Nevertheless, thesesystems are often based on the owner’s personal experience and less onobjective reasons Thus they often stay unchanged, though circumstances wouldrequire other structures and systems The whole strategic direction is oftenutterly dependent from one individual or a small group of individuals over along period of time

• Competitive ability of SMEs is not really perfect: The capital of SMEs is

rather medium; they have fewer opportunities to upgrade and renovatetechnology for higher quality of products and services They also face with thelimitation of market information, ineffective marketing that lead to manydifficulties in the market penetration and distribution

• SMEs are capabilities management and staff qualification: SMEs are the

new type of economic component; therefore their level of managers andqualification of staffs are not high In term of administration, many topadministrators of SMEs were not educated in business and administration; theywork mostly by their experiences

• Lastly, SMEs sometimes are very much focused on the person of the owner.

The businesses’ success and market position depend on the vision and theentrepreneurial talent of these leaders A well managed small or medium sizedbusiness may be able to overcome size-specific problems of resources byexecuting and intelligent outsourcing strategy, by focusing on few corecompetencies and by developing a motivating corporate culture

2.1.1.3 Development of SMEs

(i) Number of SMEs

According to the General Statistics Office, most of active enterprises have smalland medium size In term of labor scale, among 248,842 active enterprises as

of January 1, 2010, there are 162,785 micro enterprises, 74,658 smallenterprises, 5,010 medium enterprises and 6,389 active enterprises The totalnumber of micro, small and medium enterprises accounted for 97.43% During

2000 – 2009, micro enterprise sector achieved the highest average growth rate of24.7% per annum in term of number, while the average growth rate of small,medium and large enterprises are 20.41%, 11.79% and 7.28%,respectively

(ii) Contribution of SMEs to Vietnamese Economy

According to the statistic over 40% of GDP is produced by SMEs Further, SMEsare the engine of growth in Vietnam just as small business plays the same role indeveloped markets like the U.S In Vietnam, SMEs in Vietnam; on average, haveseen their profits grow approximately 20 percent each year for the immediate past

Figure 2.1: Private Sector Contribution to Vietnam's GDP

in comparison with Public Sector and FDI

(Source: Business-in-asia.com)

Particular, from 2007 to 2009, SME sector made a significantcontribution in taxes and other payables to the State Budget In 2007, taxes andother payables to the State Budget of SME amounted to VND 58.403 billion Thisnumber was sharply increased to VND 90,507.8 billion in 2008 and VND 111,181.4billion in 2009 The proportion of total taxes and other payables to the State Budget

of the SME business sector gradually increased from 26.57% in 2007 to 27% in

2008 and 30.9% in 2009 Growth rate of taxes and other payables to the StateBudget of SME increased by 54.97% in 2008/2007 and 22.84% in 2009/2008,higher than that of the whole business sector (52.51% in 2008/2007 and 7.41% in2009/2008)

2.1.2 Major activities of commercial Bank

2.1.2.1 Definition of Commercial Bank

The term ‘Bank’ is defined in different ways by different economists A fewdefinitions should be mentioned such as below:

According to Walter Leaf “A bank is a person or corporation which holds byitself out to receive from the public, deposits payable on demand by cheque.”Horace White has defined a bank, “as a manufacture of credit and a machine forfacilitating exchange.”

According to Prof Kinley, “A bank is an establishment which makes toindividuals such advances of money as may be required and safely made, and towhich individuals entrust money when not required by them for use

The Banking Companies Act of India defines Bank as “A Bank is a financialinstitution which accepts money from the public for the purpose of lending orinvestment repayable on demand or otherwise withdraw able by cheques, drafts ororder or otherwise.”

Thus, we can say that a bank is a financial institution which deals in debtsand credits It accepts deposits, lends money and also creates money It bridges thegap between the savers and borrowers Banks are not merely traders in money butalso an important sense manufacturer of money

A commercial bank is a type of financial institution and intermediary It is abank that provides transactional, savings, and money market accounts and thataccepts time deposits

In Vietnam, the Law on Credit Institution dated 16th June 2010 has definedcommercial bank as a type of bank which may conduct all banking operations andother business activities under this Law for profit (in which, banking operations

means the trading in and regular provision of one or some of: (i) Deposit taking; (ii) Credit extension, (iii) Via-account payment

2.1.2.2 Major activities of commercial banks

According to the Law on Credit Institution dated 16 th June 2010,

Vietnamese commercial banks can be formed under many types, including:Domestic commercial banks, State commercial banks, Joint-venture wholly foreign-owned banks However, in any kinds of establishment types, Commercial bank shall

conduct the following traditional activities: capital mobilization, credit services,payment and treasury, etc…

 Capital mobilization is one of the most important activities of commercial

banks They can mobilize capital from various sources: (i) accept deposit fromorganization, individuals, and other credit institution in the form of demand, term orother of deposit, (iii) issuance of valuable paper such as: certificates of deposit, bondsand other valuable papers, (iii) borrowing from state bank,…

 Credit extension means an agreement allowing an organization or

individual to use a sum of money or a commitment allowing the use of a sum ofmoney on the repayment principle by such professional operations as lending,discount, financial leasing, factoring, bank guarantee and other credit extensionoperations as permitted by State Bank

 Provision of services of via-account payment means the provision of

payment instruments; provision of services of payment by check, paymentorder, payment authorization, collection, collection authorization, bank card,letter of credit and other payment services for clients via their accounts

2.1.3 Role of lending activities to SME for Commercial Bank

2.1.3.1 Lending definition

Lending can be understood simply is that bank supply a certain amount ofmoney to business using in a certain duration with the commitment of repayingprincipal and interest on time 1

Lending is an activity of high ratio in credit activities of banks There aremany criteria for categorizing lending activities:

In terms of time, lending is divided into:

+ Short-term loan : From 12 months under for financing current assets

+ Medium-term loan: From 1 year to 5 years (it is up to 7 years in comebanks) for sponsoring fixed assets such as vehicles, some types of plants and

1 Phan Thi Thu Ha, 2007,Commercial Bank, NEU publisher.

animals, wearing equipment, building new projects of small and medium scales forterm production and short time of return

+ Long-term loan: Over 5 years ( or over 7 years) for sponsoringconstruction works such as houses, airports, bridges, roads, machines andequipment of high value and long life

In terms of lending method

+ Installment loan: This method is applied to clients with demand of loan

per installment At each installment, client and lending bank make borrowingprocedures as regulated and sign in credit contract

Banks will collect principal and interest due to term in the contract Duringclient’s use of loans, banks will monitor use purpose and effectiveness In case ofcontract violation, banks will collect prior to term or change loans into overdueloans

+ Lending by credit line: The lending commercial banks will specify creditline after receiving full documents from clients For clients of general productionand business, production and business plans of clients are plans of each subject.Accordingly, lending banks will determine credit line for general production andbusiness plans

Within credit line and validity of credit line, at each time of withdrawal,clients write loan receipt enclosed with documents suitable with use purpose withincredit line After lending, banks must monitor credit line strictly, ensuring no excess

of signed credit line During the process of borrowing and paying loans, if clients’production and business change, leading to demand of line, clients must submitrequest of re-determination of credit line Banks will consider and agree to modifycredit line and supplement in credit contract if banks see that it is reasonable

+ Project loans: Banks lend clients for carrying out projects of business andservice development and projects for life Banks and clients sign in credit contractsand agree investment capital during the life of project, determining terms ofpayment Banks will disburse in accordance with schedule of projects At each time

of withdrawal, clients write receipt of loan within agreed investment capital,enclosed with borrowing documents suitable with use purpose of loans in creditcontract

+ Overdraft lending: This type allows borrowers to over spend their depositbalance to a certain limit in a certain period of time Such limit is called overdraftline

+ Circulation loan: This technique is based on circulation of goods.Enterprises may not have sufficient capital for purchasing goods Banks can lendenterprises to purchase goods and collect loans after goods are sold

In terms of mortgage

+ Lending with collateral : This type of lending is based on assured assets

such as mortgage and pledge of assets or with guarantee of the third party Assuredloans are usually applied to clients with low credit line or high value loans to ensuresafety for banks

+ Lending without collateral: This type of lending is carried out based onprestige, applied with goods clients that are truthful in business, with strongfinancial capacity Banks can lend based on clients’ prestige without any assuredassets

In terms of loan use purpose

+ Loan for production

+ Loan for business and service

In terms of currency

+ Loan in domestic currency

+ Loan in foreign currency

2.1.3.2 The importance of SMEs lending to Commercial Banks

Lending activities are those with many potential risks But they are mainactivities of lending banks Apart from potential risks, lending banks get interestssuitable with loans Such interests are main incomes of banks

In market economy, lending is the basic economic function of banks Foralmost banks, credit debts counts more than 50% total current assets and incomefrom lending activities counts from 50% to 60% total income of banks On the otherhands, risks in lending activities mainly concentrate in lending items When a bankfalls into seriously difficult financial situation, reasons often comes from its lendingactivities The bank may fail to collect capital, or loose management, issue unclearcredit, apply poorly appropriate credit policies or it can be the unpredictedeconomic downturn or other reason from clients.

Lending in general and lending to SMEs activities in particular play a crucialrole for Vietnam Commercial Bank Currently, lending activity accounted for 80-90% of the Bank's profitability

In terms of benefit, SME banking service has Return on total assets (ROA)which is higher than the average of other services In addition, according to thesurvey, "The method of SME banking services in OECD and emerging markets" ofIFC in 2007, the profitability of SME services is higher than the average level of allbank activities

Moreover, lending to SME is the foundation to develop other non-creditservices According to IFC, more than 60% of SME revenue in the leading bankscomes from non-credit services such as internet banking, paying to suppliers,remunerating employees

2.2 Components of lending activities to SMEs at commercial bank

2.2.1 Lending objectives

SMEs have various demands of loans They are different in business lines, type ofownership as well as scale Credit risks to such subjects are different Therefore,commercial banks choose different clients based on business strategies and theirtaste of risks

Normally, clients are chosen due to such criteria as business line, revenue scale, total asset scale, or lending on assured assets Such criteria are found in credit

policies of Banks As specified by laws, some clients are in prohibition andlimitation of loan In turn, commercial banks also define clients and business linesprohibition and limitation of loan to limit credit risks

Moreover, clients are categorized into Traditional clients and important clients,others Traditional clients and important clients usually enjoy preferential policiesfrom commercial banks (including policies in interest rate, fee, assured assets andtime and formalities in gaining loans)

In terms of sponsored subjects in credit issuance, normally commercial bankssponsor for the three main objectives as the following:

- Short-term loan up to 12 months to compensate deficiency in flow capital ofenterprises and other short-term demands of enterprises for expenditure

- Medium-term loan from 12 months to 5 years is used to purchase fixed assets,improve equipment, technology, expand production and business, build newprojects of small scale and short-term return

- Long-term loan over 5 years is provided to meet long-term demands of enterprisessuch as building houses, equipment and vehicles of large scale, building newfactories

2.2.2 Lending conditions

Like other lending activities, loans to SMEs of commercial banks are based onsome most general principles in order to ensure safety and profitability Underregulations of the State Bank of Vietnam, enterprises have to satisfy the followingconditions in order to get loans from Banks According to Decision 1627/2001/QD-NHNN dated 31 December 2001 of the State Bank on issuing regulations on lending

by credit institutions to clients stipulate conditions for borrowers, as following:

- The client has civil legal capacity and capacity for civil acts and bears civil responsibility as stipulated by law, in particular:

- In the case of a borrower being a Vietnamese legal entity or individual:

o A legal entity must have civil legal capacity;

o An individual or an owner of a private enterprise must have civil legalcapacity and capacity for civil acts;

o A representative of a household must have civil legal capacity andcapacity for civil acts;

o A representative of a co-operative must have civil legal capacity andcapacity for civil acts;

o A partner of a partnership must have civil legal capacity and capacityfor civil acts;

- In the case of a borrower being a foreign legal entity or individual, it musthave civil legal capacity and capacity for civil acts under the laws of thecountry of which the legal entity holds nationality or of which the individual

is a citizen, if the foreign law is required to be applied by the Civil Code ofthe Socialist Republic of Vietnam or is referred to in an international treaty

to which the Socialist Republic of Vietnam is a signatory or participant;

- It must have a lawful purpose for utilizing the loan capital;

- The client must have the financial capacity to ensure repayment of the loan within the time-limit undertaken;

- It must have an investment project or plan for production, business and services which is feasible and effective, or it must have an investment project or a feasible plan to service living conditions which complies with the law;

- It must comply with the regulations of the Government and the guidelines of the State Bank of Vietnam on security for loans

From general regulations of the State Bank of Vietnam and of the Government,Commercial Banks will have their own specific regulations on lending conditionsbased on taste of risk and business strategies Conditions also include: legal

capacity, financial situation of clients, feasibility and effects of borrowing plans,security.

Apart from prerequisite conditions to get credit, banks also have different policies

on fees and interest rate depending on loan term, currency and type of clients Fortraditional clients who use many products and services of Banks, or clients indevelopment priority of banks, loan interest rate is usually lower than that of newclients

In terms of collateral policy: Banks often requires borrowers to have assured

assets as mortgage for the loans For traditional clients with prestige, Banks canlend without requirement of assured assets (unsecured lending) or apply flexiblepolicies in assured assets such as accepting machines, equipment, receivables orgoods as mortgages

Normally, policies on assured assets includes regulations on assured assets for eachform of credit, Percentage of lending amount to value of assured assets, valuationand management of security assets Commercial banks also present lists of assuredassets accepted by Banks as well as loans with compulsory assured assets

2.2.3 Lending Process

Normally, in study of lending activities to SMEs, we just consider lendingProcedure of commercial Banks That is to consider from clients’ submission ofborrowing documents Within scope of this thesis, the author would like to mention

a further definition namely lending process Lending process can be divided into 2phases including Sales and lending Procedure

2.2.3.1 Steps of Sale process

Step 1: Prospecting

This is the first step in selling process The process of looking for and checkingleads is called prospecting or determining which potential customer could becomecustomers

Step 2: Pre- approach

This stage involves the collecting of as much relevant information as possible prior

to the sales presentation The pre-approach investigation is carried out on newcustomers but also on regular customers

Step 3: The Approach

The salesperson (RM) should always focus on the benefits for the customer This isdone by using the product's features and advantages

Step 4: Sales presentation

After the prospects interest has been grasped, the sales presentation is delivered.This involves a "persuasive vocal and visual explanation of a business proposition"

It should be done in a relaxed atmosphere to encourage the prospect to shareinformation in order to establish requirements Some small talk may be necessary

to reduce tension but the purpose always remains business

Step 5: The trial close

The trial close is a part of the presentation and is an important step in the sellingprocess Known as a temperature question - technique to establish the attitude ofthe prospect towards the presentation and the product

Step 6: Handling Objections

Objections are often indications of interest by the prospect and should not beviewed with misgiving by salespeople The prospect is in fact requesting additionalinformation to help him to justify a decision to buy The prospect may not be fully

convinced and the issues raised are thus very important It also assists thesalesperson to establish exactly what is on the prospect's mind.

Step 7: Closing the sale

This is the last part of the presentation Many salespeople fear the closing of a sale.Closing a sale is only the confirmation of an understanding Fear will disappear ifthe salesperson truly believes that the prospect will enjoy benefits after the purchase

of the product

2.2.3.2 Lending Procedure

Upon clients’ agreement of borrowing, lending process shifts to a new phase that iscarried out in accordance with a certain procedure from clients’ preparation ofborrowing documents at banks to the end of credit relations – referred to as lending

Procedure Lending Procedure is a process of continuous phases in a certain order

with close correlations Principally, lending Procedures of banks are similar incontents However, they are different in details The building of a suitable lendingProcedure will improve effectiveness of management in order to reduce risks andraise profits In terms of managerial aspect, the building of a suitable lendingProcedure will have the following advantages:

Lending Procedure acts as a base for building a suitable organization model atBanks In which tasks of departments, sectors and functional units are clearlydefined with activities relating to lending activities, helping the assignment of tasks

to each position

Based on lending Procedure, banks will set up administrative formalitiesappropriate with regulations of laws and ensure safety in business Design oflending formalities must be suitable with each group of clients, type of loans inorder to get full necessary information but avoid annoyance to clients as well assave time of two sides

Additionally, lending Procedure helps bankers to get to know their responsibilities,relations with other colleagues or understand more clearly their roles in the entireprocess, then perform good attitude at work.

Lending Procedure is also the base for monitoring the progress of issuing creditsand adjusting credit policies to suit reality Through monitoring lending Procedure,Bank managers quickly determine phases, tasks in need of adjustment as well astraining orientation and future assignments in order to control risks at creditissuance Moreover, with control of implementation progress, banks will quicklydetect inappropriate regulations in policies as well as in the procedure itself Thenmanagers will apply changes to enhance the control of credit use process of clients

as well as credit activities in general

Table 2.1: General credit procedure Phases of

procedure

Source and origin

of information

Tasks of Banks in each step

Output after each Step

Approaching,spreading and guiding

to make documents forclients

Completingborrowingdocuments andsubmit to analysisdivision

Credit

analysis

Documentsrequesting creditissuance submittedfrom phase 1

Additionalinformation fromfield trips,interviews withclients or from

Appraising financialand non-financialissues done byindividuals or appraisaldivision

Reportingappraisal resultsand sending tocompetent

division to decidethe loans

decision

Documents andinformation fromphase 2 andreporting appraisalresults

Additionalinformation

Lending or rejectingdecisions ofindividuals/divisionassigned to decide

Lending orrejecting

decisionsImplementinglegal proceduressuch as signingcredit contracts,mortgage

contractsDisbursement Lending decision

and relevantcontracts

Documents and

disbursement: VATinvoices, Economiccontracts,

Comparison ofdebts

Appraising documentsand bills in accordancewith approvedconditions of Lendingdecision

Transferring todeposit accounts

of clients ortransferring toclients’ suppliers

Periodical financialreports

Other information

Analyzing financialactivities, financialreports, periodicallyinspecting productionand business facilities

of clientsCollecting debtsReviewing and rankingLiquidating credit

Reportingmonitoringresults andrecommendingsolutionsPreparingformalities forcontract

liquidation

Step 1: Preparation of documents requesting credit issuance

In this phase, all documents are completed, proving real demands in credit of clients

as well as proving legality and civil status of clients and the volunteering inrequesting credit of clients Number of documents in this phase depends on:Clients: New or old clients, normally new clients have to submit a considerablenumber of documents; Trust and rating of clients to Banks; Credit demand scale ofclients: when loan scale is high, more documents will be required

Step 2: Credit Analyses

It analyzes current capacity and potentials of clients in loan use as well as returningcapacity to Banks Main targets of credit analysis is to seek possible situations ofrisks to Banks and estimate controlling ability of Banks to risks as well as planmeasures for preventing and limiting possible damage On the other hands, creditanalysis also helps banks check the accuracy of information provided by clients inorder to have right valuation of clients’ attitudes

Financial analysis is divided into 2 fields: financial analyses and non-financialanalyses Financial analysis is to analyze factors that have little or no relation tofinancial situations of clients in a direct way It is to inspect and analyze legality ofclients, purposes of loans, analyze prestige of clients, management capacity of theManagement Board, Executive Board

Financial analysis is to analyze current situation and predictions of financialsituations of clients in future in order to seek and estimate the worst situations thatreduce payment ability of clients Financial analysis includes general valuation ofcapital management and business activities, analysis of financial factors, analysis ofmonetary circulation, etc

Step 3: Credit authorities

The assignment of people to made credit decisions depends on policies andmanagement methods of each bank The right of deciding can be concentrated onone person or a group of persons

This phase ends with documents of credit decisions In case of agreement, banksand clients will sign in relevant formalities such as credit contracts, receipt of loans,mortgage contracts and other documents

Step 4: Disbursement

It is the operation of providing money to clients on the basis of credit line signed incontracts Disbursement must ensure the following principle: disbursement requirescorresponding goods, suitable with borrowing purposes as specified in creditcontracts

Step 5: Monitoring, debts collection and credit liquidation

The phase of controlling credit is continued for the purpose of monitoring, valuatingthe compliance level to credit contracts of clients and timely proposing suitablesolutions

Credit control is usually carried out in the following measures:

+ Controlling account activities of clients at banks

+ Periodically analyzing financial reports

+ Visiting and inspecting business locations of clients

+ Checking assured assets

+ Controlling clients’ activities through relations with other clients

+ Controlling through other information such as mass media, taxation agencies,courts

To term of payment banks will collect principal and interest Banks will review andrate credit in certain periods If clients fail to pay, banks will implement measures tosettle problematic debts

2.3 The factors that effect on lending activities to SMEs

There are many factors that affect lending decisions yo SMEs of commercialbanks Such factors can be categorized into two groups:

2.3.1 External factors

 Policy of State Bank of Vietnam

Operations of commercial banks are under strict control of the State Bankand of the Government In which lending activities of banks are under directimpacts of monetary tools such as capital re-issuance, compulsory reserve ratio,open market operation, credit interest, etc

+ Capital re-issuance: This is the form of credit issuance of the State Bank

to commercial banks Then the amount of issued capital increases, promotinglending capacity of commercial banks

+ Compulsory reserve ratio: it is the ratio between the numbers of payment

means in need of deactivation per total mobilized deposit Accordingly, the StateBank causes effects to price and credit amount, affecting lending capacity ofcommercial banks

+ Open market operation: It is the activity of purchasing and selling

valuable documents such as Government bonds, Treasury bills, etc in monetarymarket, balancing the supply and demand of valuable documents, affecting reserves

of commercial banks and lending capacity of commercial banks

+ Credit interest: The increase or decrease of interest rate can affect supply

and demand of loans, influencing lending capacity of commercial banks Ifmobilization interest rate is high, more clients will deposits at banks and banks will

be active with the capital for extending loans

 Factors from SMEs

They are the most significant factors that affect lending activities ofcommercial banks Therefore, they directly influence lending decisions ofcommercial banks to clients Enterprises always want to have capitals and seekways to get loans from banks Banks decide to lend after analyzing all relevantfactors of enterprises such as civil legal status, legal use purpose of loans, sufficient

financial capacity for paying loans, feasible investment projects and production andbusiness plans, compliance with regulations on loans as specified by theGovernment and guidance of the State Bank of Vietnam However, the truth offinancial information and paying capacity of enterprises changes after lending.Some enterprises apply negative methods, distorting financial reports; fail toprovide full faithful and necessary information to banks Many enterprises use theloans not on purposes and defraud banks after getting loans This situation not onlyaffects loan quality but also relive trust from banks Consequently, banks have toapply more methods for security, which limit access to loans of good enterprises.

Moreover, prestige of enterprise has influences on borrowing capacity ofenterprises Enterprises with high prestige in market can enjoy many referentialpolicies from banks in terms of loan scale, loan term, interest rate, reducingborrowing expenses of enterprises

 Factors of economic environment

The economic development causes direct influences on credit activities andcredit demands in the economy A stable economy, a growing economy, a favorablebusiness environment, growing consumption demand will create conditions forenterprises in their business to gain high profit, extending production leading toincrease of credit demand At the same time the economy will develop more,income and savings are improved, capital source for market also increases They aretwo favorable conditions for extending lending activities of commercial banks Onthe contrary, downturn economy, high inflation, ineffective investments, narrowproduction activities, low investment demands, low capital for investments will givebanks no chances to extend their lending activities

At present, when Vietnam is an official member of WTO, the integration intointernational and regional economies will provide more goods opportunities tobanks Banks can extend their lending activities in home currency and foreigncurrency to both domestic and foreign companies

 Factors of legal environment

Legal environment in business is the combination of all legal factors thataffect business activities, including: Legal system, enforcement methods of business

participants in market A stable and strict legal environment will facilitateproduction and business activities of enterprises, creating more favorable conditionsfor enterprises to get loans from banks On the contrary, an uncompleted,inconsistent legal environment with continuous changes in signed commercialdecrees, decisions, and agreements will have influences on lending decision ofcommercial banks to SMEs.

 Factors of political, security and social environment

They are crucial factors that are always attached to the economic stability anddevelopment Any countries that want to have a developed economy must be stable

in security, politics and society It can be said that Vietnam is a country of stablepolitics, strong defense in the world It is valuated as a country of high safety that isthe basic conditions for national economic growth

2.3.2 Internal factors.

 Lending policies of bank: This is the general guidance to credit staff

of banks, contributing to improve specialization and consistence in lendingactivities of banks in order to limit risks and promote profitability Including:

+ Client policy: Borrowing clients of banks are various from enterprises, public

agencies, individuals, consumers, etc Banks will categorize traditional clients andsignificant clients and others If an enterprise is in group of traditional andsignificant clients, it will enjoy preferential policies in lending of banks

+ Policy on lending scale and limit

+ Interest policy: Banks have different interest rates depending on term, type ofcurrency, type of clients Flexible interest rate policy will allow credit staff to makechanges in certain limits or allow clients to choose the level of interest rate Thisincreases access of SMEs to loans

+ Policy on loan term and loan period: If loan term and loan period areappropriate with production and business cycles, term of return of investmentprojects, paying capacity of enterprises, it will enhance lending effectiveness to bothbanks and enterprises, extending the loans to enterprises in general and SMEs inparticular

 Capital scale of bank

Capital scale of banks, particularly scale of owner’s equity, is an importantfactor affecting lending decisions of banks According to Clause 1, Article 18 of theLending regulations of credit organizations to clients issued in accordance with theDecision No 1627/2001/QĐ-NHNN dated 31/12/2001 of the Governor of the StateBank of Vietnam: the maximum loan outstanding balance of one client shall notexceed 15% own capital of credit organizations, excepting for loans from trustees ofthe Government, organizations, individuals or clients are other credit organizations

 Quality and diversity of lending forms

This factor directly affects lending activities of banks A bank with simplelending products and low quality will have less potential to grow, to extend loans

As borrowers will reach banks with high quality services to get loans In such fiercecompetition, banks must continuously improve their product quality and diversifyproducts in order to extend market share, increase lending capacity, which play animportant role in products and services of banks

 Qualification of bankers

Human factor plays a significant role in products and services of a bank, inwhich qualification of bankers is the most important factor Credit staff have directinfluence on lending activities They are in touch with clients and form the image ofbanks in clients’ mind

 Information technology

Information technology has brought considerable benefits to many fields inproduction, material and mental life The application of modern informationtechnology in all phases of business activities helps banks update, collect, processand analyze information quickly, simplifying working procedures, reducing costand improving product quality

CHAPTER 3 CURRENT SITUATATION OF LENDING ACTIVITIES TO

SMEs AT MILITARY BANK – TAY HA NOI BRANCH 3.1 Overview of Military Bank and Tay Ha Noi Branch

3.1.1 Military bank overview

Military bank was established on the 4th of November 199 under the name ofMilitary Commercial joint-stock bank under License No.0054/NH-GP dated on 14September 1994 issued by the State bank of Vietnam with a 50 years

Military Bank has its head office at 21 Cat Linh Street, Hanoi For 18 year,

MB has been one of leading commercial joint-stock banks in Vietnam MB hasachieved and maintained the on-going trust from Customers, Partners and Investorswith its sustainable development and high growth rate

Military Bank has been providing main banking services to corporatecustomers, individual customers and financial institution In addition, MB hasoffered their customers a numbers of additional services such as internet banking(eMB), mobile banking, home banking, contact centre, bank plus,….At the end of

2011, MB has a network of 246 ATM and 1.325 POS…………

For many years, MB has been annually ranked at A level – the highest level

by the SBV MB has become one of the 3 leading commercial joint stock banks inaspects of fund utilization and fund mobilization capability

Over 18 years of construction and development, Military Bank hasdeveloped with the model of universal bank with its network in 56 provinces andcities across the country, including 01 Head office, 01 Transaction Centre; 1

representative branch in Laos, 1reprensentativ branch in Cambodia; 115 branchesand transaction offices, 315 ATMs, 2 cooperative companies; 05 subsidiariesincluding Thang Long Securities JSC, MB management investment; MB debtmanagement and asset exploitation Ltd Co.,, MB Housing joint stock company;Vietnam REMAX Company; 03 business units including a card centre, aninformation technology centre, and a human resource development centre.

3.1.2 Overview of MB Tay Ha Noi branch

Tay Ha Noi branch is one of the youngest branches of MB, was upgraded bytransforming Ha Tay office transaction The Head Office is located on 1st floor NamCuing Building, Duong Noi urban area, Ha Dong, Ha Noi Starting with thepreliminary employees of 14 in 1998, after nearly 5 year, MB THN now has 80staffs and the number of loan approximately 1050 billion VND, 1.200 billion VNDfund mobilized Now, the branch has 3 transaction offices

In comparison with other branches, locating in urban area, Tay Ha Noibranch has many weaknesses However the development of branch is really proud

MB Tay Ha Noi consider as a highest growth rate of MB system in term of Scale ofTotal Asset and Outstanding, profit after tax as well

HA ĐONG

OFFICE

customer service Dept

VAN PHU OFFICE TRANSACTION

XUAN MAI OFFICE TRANSACTION