Appraisal of investment projects in Agribank: Current situation and Recommendation

Overview on appraisal of investment projects in credit activity of commercialbanks: definitions, concepts, significance, and important roles of appraisal ofinvestment projects in credit

1 Rationale

Operation of the Commercial Bank of Vietnam in recent years, including two mainworks, they are: currency trading and lending activities In which, lending activitiestend to shift the proportion of credit from monoculture to diversified products andservices During the transition period on goals, the revenue from lending accounted

a large proportion of total revenue in the bank Therefore, if the banks desire to runsustainable development and assert their competitiveness, it is necessary for thebank to do well in credit activities

However, credit activities bear such a lot of risks due to uncertainties, marketfluctuations, information asymmetry, competition and exchange rate risk that needbetter solutions to detect those risks One of these measures is to improve thequality of the evaluation of investment project In other words, the banks have toconduct project evaluation in a comprehensive, carefully and cautious mannerbefore going on the investment Because of the fact that the evaluation has helpedthe bank avoid the risk and ensured that the investment will track the safety, createthe potential for the economy on an upward In addition, the project appraisal alsocontributes to curb some of inefficient businesses, losses or possible bankruptcy.Nevertheless, in Agribank, not only does the investment project appraisal lack theprofessionalism but it also does not work effectively In fact, investment projectappraisal has not yet complied with the provisions of the bank for all the projects.Furthermore, evaluation work has not been focused and concern properly; thisprocess has not been conducted regularly and continuously throughout the life ofthe investment project As a consequence, the bank still can not recover some oftheir capital caused by poor evaluation works Currently, not only is Agribankstriving to complete the assessment work of investment project but it’s also makinginvestment project appraisal become a banking service for fees Recognizing theimportant of the problem on improving the effectiveness of the appraisal in

Agribank, I would choose the thesis: “Appraisal of investment projects in Agribank: Current situation and Recommendation”

2 Research objectives

The thesis will analyze and explain about the theories and practices of investmentprojects appraisal in credit activities at commercial banks

3 Research questions

The thesis research aims at thoroughly answering questions:

 What are procedures and contents of an investment project appraisal?

 Factors influence investment project appraisal?

 How have investment project appraisals been implemented in Agribank?

 What are the problems in investment project appraisals in Agribank?

 What recommendations can be raised to enhance the quality of investmentproject appraisals in Agribank?

4 Research methodology

Secondary data for analysis was acquired mostly through the Internet, with commonsources including Argribank website, Vneconomy website, etc The data was alsocollected from reports and papers compiled by Appraisal Department at Argribank.After that, an analysis of the bank’s data on operational activities, especiallyinvestment project appraisal, in some recent years was conducted The research alsohas a reference on previous research on investment project appraisal in commercialbank

Primary data for the research is acquired by a combination of various sources:

 Observing officers in the daily working performance at AppraisalDepartment;

 Interviewing 10 officers in Credit Department and two officers inBoard of Management with five research questions above to getadditional information on the procedures and methodology applied

in investment appraisal procedure

5 Research scope

Research objects: Thesis research focus on process, significance objectives of

appraisal of investment projects in Agribank

Research scope: All data presented in thesis research is extracted from Agribank inrecent years (2000-2011)

6 Research structure

Thesis research comprises of three main parts:

Chapter 1: Overview on appraisal of investment projects at commercial banks.

Overview on appraisal of investment projects in credit activity of commercialbanks: definitions, concepts, significance, and important roles of appraisal ofinvestment projects in credit activity of commercial banks

Chapter 2: Current situation of appraisal of investment projects in Agribank

Introduction about Agribank; current situation of appraisal of investment projects inAgribank; Then, evaluating the success and drawbacks of the presented currentsituation

Chapter 3: Recommendations to enhance the quality of appraisal of investment projects in Agribank

Recommendations to enhance the quality of financial appraisal of investmentprojects in Agribank in particular and in the commercial banks of Vietnam ingeneral

Chapter 1: Overview on Appraisal of Investment Project

in Commercial Bank 1.1 Credit activities of commercial banks

1.1.1 Commercial banks

A commercial bank is a type of financial institution and intermediary It is a bankthat provides transactional, saving, money market accounts and that accepts timesdeposits.

The functions of commercial banks are divided into two categories: Primaryfunctions and secondary functions including agency functions

 Issuing letters of credit, traveller’s cheques, circular notes etc

 Undertaking safe custody of valuables, important documents, andsecurities by providing safe deposit vaults or lockers;

 Providing customers with facilities of foreign exchange

 Transferring money from one place to another; and from one branch

to another branch of the bank

 Standing guarantee on behalf of its customers, for making paymentsfor purchase of goods, machinery, vehicles etc

 Collecting and supplying business information;

1.1.2 Credit activities of commercial banks

“Credit” is derived from the Latin “Credo” – meaning as the trust or credibility.

Nature of credit is an asset transaction between a borrower and a lender on the basis

of repayment of both principal and interest

For a commercial bank, credit is a basic function and a core activity of anycommercial bank Bank credit is defined as “a form of credit reflects an asset (cash

or goods) transaction between the lender, that is a bank or a credit institution, andthe borrower, that is individuals, enterprises, business owners, in which the lendertransfer the asset to the borrower, so that the borrower can use it in a pre-identifiedtime period under the agreement Once the maturity dues, the borrower holds theresponsibility to unconditionally repay the entire principal and interest to thelender”

Importantly, credit activities take a crucial role in creating revenue for the bank.Besides the attractive profits, the credit medium - long term is also very goodweapon damage competition between the banks together With this product, thebank will serve better for business owners and attract more customers to thebank In determining the expansion for medium - long term, the Bank does not justlook at the immediate benefits but also expected in the longer term benefits, such ascredit expansion medium - long term loans to promote short term

However, credit activities of commercial banks seem to have so much problems anddangers that was represented by the relatively high volume of bad loans One of themost common reasons lead to bad loans is that the banks do not have sufficientinformation from its customers or the information asymmetry To put it simply, due

to the insufficient filtering mechanism is not sufficient, the bank lend the customerswho were able to cover up their acts and information in the loan transaction toperform the highly risky project In other words, information asymmetry occurs inthe performance of the contract between the bank and credit customers in which oneparty (customers) that has more information can have harmful acts to the one (bank)with less information This is the problem of asymmetric information in theeconomic activities The two most common behavior caused by asymmetric

information were the adverse selection and moral hazard Adverse selection is theact occurred before the signing of the contracts with on party who has moreinformation (customer loans) can cause damage to the less information one (bank).Moral hazard has similar effect to the adverse selection but occurring after signing

of the contract

In the lending activities, banks have always been the parties who have lessinformation about the project, the use of the loan; therefore, in order to ensuresafety in their operations, the credit institutions must have to handle asymmetricinformation They must have measures to limit adverse selection and moral hazard

to lend the right people, right objects and to closely monitor customers in ensuringthe recovery of both principal and interest on credits granted

One of the popular measures of the banks to limit information asymmetries is “FiveC’s”, which are the basic components of any credit analysis The 5 ‘C’s aredescribed here to give an insight into each component and into the sources ofinformation that the banks use for evaluate them

Character: is the sense of responsibility to repay the loan by the borrower Since

there are no accurate quantitative methods to assess credibility, the bank will decidesubjectively whether the customers can afford to pay this loan or not The bank willcheck the previous debts, review the credit report, and education level andexperience of customers’ business Other issues related to individual qualificationsand experience of employees will also be considered

Capacity: The possibility of having cash to pay loans or not Since this is the

primary source to pay the loans, banks want to know exactly what the paymentplans are in the future Bank will review the business cash flow, time of payment,and the successfulness of ability to pay the loans

Capital: is the personal money invested in the company and this target shows how

much the customers will lose when the projects failure Banks want customersmortgage their property and be responsible for financial risk when ask for the bank

loans Bank will consider the debt figures to find out the total debt to totalinvestment ratios.

Collateral: the guaranteed by a third party is another form customers can guarantee

to the bank If the money of borrowers is not enough for the debt, the bank is stillguaranteed by estimated sources of payment If the borrowers fail to repay, the bankwill recover and disposal machinery, buildings, receivable account andinventories Loan contract must carefully determine what items are consideredcollateral Business owners may be asked additional collateral of personal property(such as bonds, stocks) along with the assets of the company to borrow somecapital In some cases, banks may require the third guarantor signed the guarantee

to ensure the payment if the borrowers (guaranteed) can not be paid

Conditions: relating to economic circumstances of each locality and each country.

The banks will consider this component of borrowers by answering the followingquestions What are the influences of revenues of the projects on the entireeconomy? If the economy deteriorated, whether have the company's revenuesdecreased or not (e.g like a chain grocery store)? The projects that have revenue ofstability or affected little by the economy will normally be in favorer from banks.Beside, investment project appraisal is also an effective tool to prevent creditactivities from risk

1.2 Appraisal of investment project

1.2.1 Investment project

According to modern economists, "Investment project is a set of specializingactivities with an aim to create a new reality based on given resources "

In Vietnam, the concept of investment is presented in the regulation of investmentmanagement: "Investment project is a set of proposals related to the contribution ofcapital in order to create capital, to expand or renovate materials to achieve a certaingrowth in quantity or to maintain, to improve and to upgrade the quality of products

or services within a certain time period”

 In term of the form:

Investment project is a documentation file presenting planned activities andexpenditure in a detailed and systematic basis in order to accomplish set objectivesand expected results in the future

 In term of the content:

Investment project is a collection of co-related and linked activities whose the aim

is to achieve the goals set forth through the given resources including capital,production capacity, technology, labor

So, investment project must set out how given inputs are effectively utilized inorder to gain expected outputs in accordance with specific objectives Inputs arelabor, materials, land and capital Output is product or service made How giveninputs are utilized refers to the use of technological solutions, governance andmanagement in any enterprise

1.2.2 Characteristic of investment project

To clarify the concept of investment project, the following will analysis the typicalcharacteristics of investment project:

The objectives and targets of projects are clear: Each project represents a task or a

group of tasks that need to be done with a defined set of outcomes which satisfy acertain demand The project is also such a complex system that it should beguaranteed about the basic objectives of time, cost and completeness with highquality

The project has its own cycle of development and limited survival time: That is, like

the living entity, the project has gone through various stages: formation,development and ending

Uncertainty and risk: Most projects require a great number of funds, materials and

labors in a certain period of time On the other hand, the time of investment andoperation should extend, so the investments in projects often have high level of risk

Investment project decisions are often and primarily financial decisions:

Capital is understood as lucrative resources, so the investment decision is oftenviewed in terms of financial (profitability, cost, ability to recover capital ornot ) In fact, the investment decisions are considering under the limitations of thestate budget, local, and individual Many projects are feasible in other aspects such

as economic or society but not feasible in finance, so they can not be done inpractice

The above characteristics are not only setting the contents for the analysis andevaluation of projects but also finding out the methods of measurement andevaluation to make efficient investment decisions

1.2.3 Investment project appraisal

As presented, an investment project proposal after completing will be passed to anew stage To properly assess the rationale, effectiveness and feasibility of theproject and to confidently come to an investment decision, there must be anappraisal process which is independently and separately from drafting process Thisprocess is known as investment project appraisal

Investment project appraisal is defined as “a process that an authority organization(State or Private) will verify and review an investment project in an objective,scientific and comprehensive basis in all aspects of legislation and basic contentsthat can affect the performance, the feasibility and the reality of the project, in order

to make an investment decision or to grant the investment license…”

1.2.4 Contents of investment project appraisal

The content of investment project appraisal includes the evaluation of all theaspects: market, technical, financial, organizational and operational andenvironmental aspects

1.2.4.1 Evaluating the market aspects

The market is a very important stage to decide the success or failure of a project, sothe evaluation of the market is one of the content that is indispensable whenassessing the feasibility of investment projects Depending on the amount and theaccuracy of the information collected, evaluation officers assess the marketaspects of products on the following aspects:

 Analysis the market demand of the project products in the present and future

To determine the level of consumption in a given period (year / quarter) using thefollowing formula:

Total = total + GDP + total - tota l - total

inventory imports exports inventory

in the beginning in the last period

Analysis the product supply situation in the present and future

Sources of domestic supply:

• How many facilities are already producing products of the project?And how much is the capacity and actual output of each?

• The ability to expand production of existing facilities and otherfacilities may have in the future

• Plants are being and will be invested

• The project to produce the same products / substitutes are being andwill be deployed

Imported Sources: Estimated annual imports (based on average growth per year)

1.2.4.2 Evaluation on the technical aspects

The contents of the technical evaluation include:

Description of the products that the project will produce: Characteristics of the

products, byproducts and wastes; the quality standards to be achieved; the forms ofpackaging, the utility and usage of the product We need to use a lot of methods andmeans to check product quality, the requirements on product quality to achieve theexpected quality

Determination of the capacity of the project:

• Determining normal capacity of the project to meet the needs of the marketthat the project is expected to dominate

• Determination of the maximum nominal capacity of the project: the number

of products produced per unit of time to meet the demand of the market thatthe project will take over, just to make up losses losses during production,storage, shipping and handling

• Determination of the actual capacity of the project feasibility and expectedproduction levels over the years, technical level of machinery, capable ofproviding raw materials, production costs and cost of capital

Evaluation on the technologies and production methods: selection of technologies

and production methods is the most appropriate type for the project products toproduce, in accordance with the conditions of the machinery, equipment to beprocured, with the possibility of financial and other relevant factors such as skills,management skills

Definition of the input of raw materials: Raw materials input include all the main,

auxiliary materials and packaging materials This is an important technical aspect ofthe project

Consideration of the condition of infrastructure: demand for energy, water,

transport, communications Those issues must be considered because it affects thecost of investment and production costs

Consideration of the siting of the project: Aspects of the geographical and natural

conditions, economic, social, technical related to the operation and effectiveness

of the project

Evaluating the technical construction of the project: Find solutions to technical

building requirements and ensure future production, just shorten the constructiontime, quickly putting the project to use, ensuring the construction costs must bebased on requirements of the machinery, equipment, production lines,infrastructure, operating organization, the demand for reserves of raw materials andproducts, the employee will use

Evaluation on the progress of construction projects: The scheduling of the project

to ensure the project went into operation in time intended

Evaluation on the waste disposal problem of environmental pollution: Identify the

waste may cause pollution of the project Selection methods and means of wastedisposal based on the specific conditions of environmental protection laws at thelocal, location and scale of project activities, waste, costs for waste disposal

1.2.4.3 Evaluating the financial aspects

This part is mandatory and evaluation officers must conducted carefully for anyinvestment project before granting credit Contents of the financialevaluation include:

Appraisal of total investment capital

Total investment of the project includes fixed capital and initial working capital forproduction (the production cycle for the first business) In this evaluation, staffshould consider whether the total investment capital was calculated rational or notand whether it included all the necessary items such as inflation, exchange ratechange…

Funding sources and capital structure

For each source of capital, we should evaluate the following aspects:

• The legal basis and factual basis to ensure the authenticity of funding

• The progress of each capital to ensure that projects are implemented and putinto operation as planned

Evaluation of revenues, expenses, costs and expected profit

Based on recalculating of input costs, estimation of consumption rates and saleprice, appraisal staff should make the estimates of revenue, cost of the project in theform:

6 Income afer tax

To assess the feasibility of a financial investment, banks often use some of thefollowing criteria:

• Target value of lifetime net income of the project (NPV)

NPV is the difference between all the project's net cash flow in future be converted into the present and the present value of initial investment

n Bi - Ci

NPV = ∑ - PV

i = 0 ( 1 + r ) n

Where: NPV is net present value of the project life

Bi is the income in ith year

Ci is the cost in the ith year

r is the discount rate selected

n is the length of time

PV is the present value of project investment

The project would be acceptable if NPV> = 0

• Target internal rate of return IRR

IRR is the rate that if we use it to convert the project revenues and expenditures intopresent value of project, the revenues = expenditures or in other words, the project'snet income is zero IRR is a basic indicator of financial analysis; it reflects theinterest rate that the project can achieve

igh are used often as the interest rate on bank loans

• Target capital recovery time T

As the time needed for project operations, the full collection of initial capitalspent That is the time needed to repay the initial investment by the net profit andannual depreciation recovery

Total investment

T =

Profit + Depreciation

annually to pay the annual debt

The project would be accepted only if the payoff of the project <= The number ofyears of operation of the project

• Determine the break-even point

Break-even point is the point at which revenue is enough to offset the costs of the project, in other words, the project does not have both interest and loss Break-even point can be expressed by volume break-even point or revenue breakeven

Break-even point in production (X)

lifetime project, the project will lose and vice versa Therefore, this criterion is as small as possible, the higher the safety of the project the shorter the payback

• Determine the break-even capacity (NI)

NI =

Break- even sales -Total revenue for life projectIndicator NI greater than or equal to 30% for a project to be selected

• Target profit rate of investment (ROI)

This is an indicator evaluated the profitability of an investment contract, thisindicator is also called the rate of return on investment

Profit after tax -Total investment

This indicator is as high as possible because it reflects a dollar invested in theproject will produce how much after- tax profit

In fact, staff draws up a spreadsheet calculating the financial performance targets ofthe project in the following sample:

7 Income after tax

8 Annual cash flow (CFi)

In this evaluation, staff should evaluate the following contents:

• Assessment of experience, organization and management level of theinvestors, evaluate the knowledge, access to new technologies and operatingthe project

• Assess the legal, reputation, financial capacity, technical competence ofcontractors and consultants, construction and installation works

• Assess availability of human resources for the project, the plan ofarrangement, layout work, qualifications, technical qualifications of theworkforce, training plans of the enterprise

1.2.4.5 Evaluating the environmental aspects

Staff appraisal should have to check the current legal document to see whether theproject must establish environmental impact assessment or not During the survey,staff appraisal should consider the level of environmental pollution projects,solutions and business facilities applied in handling the waste, the conformity ofthese solutions with the regulations of environmental protection laws and the cost ofthe solutions

1.2.5 Methodologies

Investment projects will be properly and accurately appraised when appraisingauthority organization can combine scientific methods with practical managementexperience and reliable information sources The investment project appraisal can

be conducted in different methods, depending on the content and requirements forthe project Here are some highly advisable methods:

 Indicator comparative method

An advantage of this method is simply and easy in use Economic and technicalindicators of investment project will be compared with other investment projectsthat are already completed or still on operation Indicator comparative method isconducted based on following indicators:

• Designing and construction standards declared in State regulations

• Technology and equipment standards in relation to national andinternational technology investment strategy

• Standards for the project’s products the market is demanding

• General indicators, such as investment capital structure, investmentrate…

• Benchmark indicators of production, energy consumption, materials,labor, wages, and management costs… classified in particularindustries compared with actual economic and technical indicators ofinvestment project; or compare between projected and actualindicators

• Indicators of investment efficiency

• Benchmark financial indicators of corporate finance in line withguidance and direction of the State and industry for the enterprises inthe same type

• The newly-arising indicators:

• Usage of indicator comparative method should be flexibly andreasonably applied to specific conditions and characteristics of eachinvestment project and enterprise Rigid and conservative comparisonshould entirely be avoided

Appraisal in overall: It is an overview of the basic contents representing the

legality, correspondence and reasonableness of the investment project Appraisal inoverall allows appraising authority organizations to envision the investmentproject’s generalization, to understand the scale and significance of investmentproject in the national socio-economic development strategy, to identify the legalbasis of the project and to ensure the investment project management board iscapable to control the project

Appraisal in detail: It is a review in an objective, scientific and detailed basis each

specific content that directly affects the feasibility, effectiveness, and reality of theinvestment project in all aspects: legal aspect, market aspect, technological aspect,environmental aspect and economic aspect … in accordance with the objectives ofperiodically national socio-economic development

In the detailed appraisal stage, evaluators have to give clear opinions: “agree” or

“can be amended or supplemented” or “cannot accept” When conducting theappraisal in detail, defectiveness and flaws will be identified, and conclusionsdrawn from former content may reject the whole investment project and evaluators

no longer need to continue with the remaining of the investment project

 Sensitiveness analysis method

This method is usually used to test the sensitiveness of financial performance of theinvestment project The basis of this method is: forecast the probability ofunanticipated events that might happen to the investment project in the future andanalyze the impact of those uncertainties to investment efficiency and breakevencapacity of the project

 Risk elimination method

The project is a set of elements that are estimated in the future During theinvestment process cycle, there appears a wide range of potential risks that mayarise Therefore, to ensure the steadiness of the project, some possible risks arepredicted and appropriate economic and administrative procedures are established

to limit the impact of potential risk to a minimum or to diversify the risks to relatedparties

Several risk elimination methods can be mentioned as: bidding, constructioninsurance and guarantee contracts In fact, typical risk diversification methods are:bank guarantees, the guarantee of reputable enterprises with strong financialpotential and collateral Moreover, to avoid the fact that an asset used as collateral

in many credit institutions at the same time, the official establishment of nationalregister in collateral transaction is essentially needed

1.2.6 Factors affecting the quality evaluation of investment project appraisal

in commercial banks

Factors affecting the quality of evaluation can be divided into two categories: subjective factors and objective factors

 Subjective factors

Human factors: These factors are considered to be the most basic and important.

In the evaluation of investment project at commercial banks, bank staffs are directlyassessed Quality of the assessment is achieved or not is depended very much on thelevel of staff In another words, it is depended on the level of understanding of theprocess, contents and technical consideration of the investment project appraisal.Besides, appraisal staff must have extensive knowledge of politicaleconomy, law In addition to qualifications and experience, professional ethics

is also a matter of concern

Information: investment project evaluation was conducted based on information

gathered from multiple sources So the information is important factor for the

success of evaluation Collecting the right information will ensure the accuracy ofthe project evaluation and the safety of funding operation in the bank.

Method of assessment: The information collected by each project is unique to a

certain evaluation that staff should select; then the appraisal officers will make theauthentication method and the appropriate to ensure that banks lend effectivelyand successfully

The operating organization: Evaluation of investment project is a set of activities

closely related to each other The evaluation includes three phases: Before, duringand after the loan was conducted The division of responsibilities into thereasonable and scientific steps is essential On the other hand, reasonable operatingmode of leadership is the basis of developing the capacity of the staff appraisal Thedelimitation of powers and responsibilities for each division will make the appraisalbecome more accurate, objective and easier

Application of science and technology: Presently, in the bank, activities from

storing to processing information are mostly done on computers At the same time,the network will also help banks facilitating the exploitation of collectedinformation Thus, the evaluation work carried out more easily, reducing the risk oferrors in calculations, saving time in creating effective evaluation

 Objective factors:

Policies, development plans of the State: The investment projects of development

are often used resources of the country and to achieve the objectives that areidentified by investors as well as society State is always expressed its interest tothis area because it affects the development of social economy It also expresses thehuge concern of the State to the investment project For instant, one investmentproject, especially, large-scale projects will require the approval of the competentState So, project appraisal of the bank can not go against the general nationalstrategy

The authenticity of the information business itself: Although the qualifications of

a good evaluation of where it is difficult to go deeper and understand the internalsituation of the enterprise Thus the quality of the evaluation of customers islimited Therefore, the information true, accurate enough, the enterprise will createconditions for staff appraisal accurately evaluates the business We can say,cooperation and capacity of the business really is a good guarantee for bankappraisal of investment project

The fluctuations of the environment, the market: Investment projects usually

have relatively long-lived; therefore, they may be biased by environmental factors.Especially with projects in foreign currency loans, the appraisal is affected byfactors of international nature, particularly changes in politics and finance

Chapter 2:

Current situation of appraisal of investment project

in Argribank

2.1 Introduction about Agribank

2.1.1 Establishment and development of Agribank

Agribank - the leading commercial bank in Viet Nam Founded on 26 March, 1988

and operating under Law on Credit Institutions, to date, Vietnam Bank forAgriculture and Rural Development (Agribank) is the leading commercial bank

in Vietnam, holding the dominant role in the economic development of Vietnam,particularly in the investment for agriculture, farmers, and rural areas

Agribank is the biggest bank in Vietnam in terms of assets, number of staff, branchnetwork, and customer base As of December 2010, Agribank’s leading position hasbeen confirmed in many aspects:

- Total capital resources: VND 434,331 billion

- Equity: VND 22,176 billion

- Total assets: VND 470,000 billion

- Total outstanding loans: VND 354,112 billion

- Branch network: 2,300 branches and transaction officesnationwide

- Employees: 35,135

Agribank has always put a strong focus on investments for and application ofbanking technology to support its business administration and advanced networkdevelopment Agribank was the first bank to complete the Project on modernizingthe Intra-bank Payment and Customer Accounting System (IPCAS) sponsored y theWorld Bank With the modern IPCAS in place, Agribank is fully capable ofproviding modern banking products and services to different types customers athome and abroad At present, Agribank has a customer base of over 10 millionhouseholds and 30,000 enterprises

Agribank is one of the Vietnamese banks with strong correspondent banking

relationship, being a correspondent bank of 1,034 foreign banks in 95 countries andterritories (as of December 2010).

Agribank is the current President of the Asia-Pacific Rural and Agricultural CreditAssociation (APRACA) and also is a member of International Confederation ofAgricultural Credit (CICA), Asian Banker Association (ABA); Agribank has hostedmany international conferences, including the FAO Conference in 1991, APRACAConference in 1996 and 2004, the Conference of Agricultural Credit in 2001,APRACA International Conference on Fishery in 2002

In the context of complex economic circumstances, Agribank is still trusted byinternational organizations such as the World Bank (WB), the Asian DevelopmentBank (ADB), the French Development Agency (AFD), the European InvestmentBank (EIB), and others.These organizations selected Agribank to implement 136projects with total capital funding of more than USD 4.2 billion, of which thedisbursed amount was of over USD 2.3 billion Agribank constantly approachedand attracted new projects: the second phase of a co-finance contract with theEuropean Investment Bank (EIB); the third phase of Rural Finance Project funded

by the World Bank; Biogas project funded by the ADB; a JIBIC project with Japan;and project for small rubber holdings development funded by the AFD

Besides mandates in business, Agribank also displays its social responsibility as amajor enterprise to the cause of Social Security of the country In 2009, Agribankcontributed to the building of dozens of schools, hundreds of houses of gratitudeand healing and donated tens of thousands of gifts to the poor and the people whowere affected by natural disasters with an amount up to hundreds of billions ofVietnamese Dong In implementation of the Government’s Resolution No.30a/2008/NQ-CP to provide assistance programs for faster and sustainable povertyreduction for 61 poor districts in 20 provinces, Agribank supplied VND 160 billion

in support for the two districts of Muong Ang and Tua Chua of Dien Bien province

In 2009, Agribank was honored to receive General Secretary of the Communist

Party of Vietnam Nong Duc Manh to visit on the occasion of the celebration of itsfounding and 21 years (26/03/1988 – 26/03/2009).

Agribank is determined to maintain and confirm its leading and dominant positions

to provide loans for the cause of industrialization and modernization of agricultureand rural development, economic development in conformity with the policies andobjectives set by the Party and the State

2.1.2 Development and growth

Agribank remains sustainable development and growth Agribank has confirmed theposition of the biggest commercial bank and the dominant role in the nationaleconomic development especially to agriculture, farmers and rural areas Agribankhas played the role of the market leader, comply and enforce the policies of theParty, the State and the instruction from the Government and the State Bank ofVietnam on monetary and capital investment policy

In the context of a profound and comprehensive integration, more severecompetition and challenges after Viet Nam entry into the World Trade Organisation(WTO) on 7 November 2006 following which Viet Nam has to fully open thebanking and financial market in 2011, Agribank insists on the target towards astrong and modern banking and financial group with reputation in local market aswell as international market

For the coming years, Agribank is to promote the role of the leading bank in thenational economic development and the dominant role in agricultural and ruralfinancial market, serving agriculture, farmers and rural areas Agribank will makegreat efforts in fund mobilisation from both local and foreign sources, maintain thecredit growth at a reasonable level Agribank will give priority in investment inagriculture, farmers and rural areas especially to farm households with agricultural,forestry, fishery, and salt production and to SMEs which has met the demand fortransition to agricultural and rural production As a result 70% of the totaloutstanding loans will be in agriculture and rural areas For maintaining the leading

bank providing the modern and high quality products and services, meeting thedemand of customers and increasing the noncredit income, Agribank is focusing onrenovate and develop banking technology in a modernisation manner Agribankexpects to reach the goals for 2011 as follows: the fund resource increases by 22%-25% compared with 2010; the rate of loans to agricultural and rural areas is 70%,NPLs below 5%, noncredit income increases by 20%, profit increases by 10%,CAR complies with international standard.

To reach those ends, Agribank will put forth a number of solutions which arefollowing the policy of the Government and the State Bank of Viet Nam onmonetary policy, speeding up the fund mobilisation from different sources,enhancing the cooperation and connection with big organisations and enterprises,enhancing the fund mobilisation in urban areas and cities to supplement capital torural area and ensure capital for agriculture, farmers, and rural areas; carrying outinvestment selectively and with priority, focusing on due debts and NPLs collection

in order to revolve capital for agriculture, farmers and rural areas as well as keyprograms of the Government, ensuring the credit growth as instructed by the StateBank of Viet Nam Agribank plans to carry out a 10 year strategy review (2001-2010), develop business strategy for 2011-2015 towards 2020; develop thepromotion strategy for Agribank trade mark The banking technology will bemodernised based on IPCAS II which is used to develop the new products andservices with high quality to better serve the customers, enhance competitiveadvantage The products like cross border payment, remittance, FX dealing, andvaluable papers will be paid much attention to All procedures will be reviewed andamended as needed according to the new management model and internationalstandards Human resource development and training will play an important role indeveloping Agribank trade mark and culture and prestige in local and foreignmarket Agribank philosophy is always for the prosperity and sustainabledevelopment of customers, partners, of the whole community and the bank itself

2.1.3 Organization chart of Agribank

Organizational chart of Argibank

2.1.4 Functions of Departments at Agribank

2.1.4.1 Boards of Managers (BOM)

BOM of Agribank comprises: branch Manager and branch Vice Managers, who areresponsible in front of Board of Directors, General Director of Agribank andauthority agencies on assigned tasks and branch’s business operation

Within the rights and responsibilities of branch Manager, branch Vice managers canact on proxy of branch Manager to perform assigned tasks

2.1.4.2 Customer Department

Board of Managers

Department

Administration Department

Accounting -Treasury Department

Credit Management Department

Asset Valuation Accounting - IT

Teller

Treasury

Planning - Administration

Human Resource

Internal Control

Customer

Department

Branch Customer Department is the business operation department in branch whose functions are:

 Marketing banking products and services of Agribank

 Business developing in respective market in which the branch locates anddeveloping corporate, individuals and business entity customers

 Performing credit activity and other banking functions according to bothAgribank and legal regulations

 Taking care of customer base in branch and other assigned strategicallycustomers

 Performing other functions assigned by branch Board of Managers

Branch Customer Department includes: Business Development, Corporate

Customers, Individuals Customers and Commercial Sponsorship

Human resource structure: Head of department, vice head of Department, Head of

each professional unit and staff

Relationships with branch BOM and Head Office BOM: is directly under the

control and management of Head Office Customer Department and branch BOM

2.1.4.3 Credit Management Department

Branch Credit Management Department performs following functions:

 Organizing, managing and performing credit management activity,appraising and managing collateral, credit supporting

 Counseling branch Manager and Head Office related ProfessionalDepartments in building credit management policies, collateral appraisaland management, credit support

 Planning monthly/quarterly/annual business plans, keeping track onimplementation activity and proposing recommendations to branch BOM

to tackle difficulties in business operation

 Performing other functions assigned by branch BOM

Branch Credit Management Department includes: Credit management and Asset

Valuation

Human resource structure: Head of department, Vice head of Department, Head of

each professional unit and staff

Relationships with branch BOM and Head Office BOM: is directly under the control

and management of Head Office Professional Departments and branch BOM

2.1.4.4 Accounting and Treasury Department

Branch Accounting and Treasury Department functionalizes:

 Performing financial management and accounting activity in branch

 Nurturing information technology training for branch

 Performing direct transactions with customers in: settlement, cashmobilization and cash transaction, treasury management…according

to current regulation of Agribank and SBV

 Marketing and collecting comments and feedbacks from customers,proposing recommendations to branch BOM in order to enhance thecompetitive advantages and develop market share

 Counseling branch BOM in policies and strategies related toaccounting and treasury activity, as well as customer transactions…

 Planning monthly/quarterly/annual business plans, keeping track onimplementation activity and proposing recommendations to branchBOM to tackle difficulties in business operation

 Performing other functions assigned by branch BOM

Branch Accounting and Treasury Department includes: Accounting – IT, Teller and

Treasury

Human resource structure: Head of department, Vice head of Department, Head of

each professional unit and staff

Relationships with branch BOM and Head Office BOM: is directly under the

control and management of Head Office related Professional Departments andbranch BOM

2.1.4.5 Administration Department

Branch Administration Department functionalizes:

 Performing administrative and general coordinative activities and humanresource management in branch according to current Agribank’sregulations

 Counseling branch BOM on policies and strategies related to functionsand responsibilities of various departments

 Performing other functions assigned by branch BOM

Branch Administrative Department includes: Planning – Administration; Human

resource

Human resource structure: Head of department, Vice head of Department, Head of

each professional unit and staff

Relationships with branch BOM and Head Office BOM: is directly under the

control and management of Head Office related Professional Departments andbranch BOM

2.1.5 Business result of Agribank in recent years.

According to Consolidated Income Statement of Agribank, accumulated profit as at31/12/2010 was VND 542 billion, increases 17% as compared to planned profitwhich was VND 465 billion for the whole year 2010 Total assets were VND17,823 billion Such impressive profit was a crucial foundation for Agribank toinitiate the Group mechanism in the near future Currently, Agribank is focusing on

launching two projects: social insurance payment agent and tax collection agent InNovember 2009, Agribank officially completed increasing chartered capital fromVND 3,300 billion to VND 3,650 billion.

In recent years, Agribank has achieved optimistic business results Agribank likeother commercial banks, multi-functionally operates in various areas nationwide.Currently, Agribank has involved in almost all financial and monetary services such

as deposit mobilization, settlement, bank guarantee, foreign exchange trading,international settlement, insurance, securities, consulting, businesses supporting;and other services (ATM, credit cards, Home – Banking,…)

Table 2.1: Income statement of Agribank

Loan to other credit institutions 0 0 0

III Income Statement

Foreign exchange transaction

income

Investment securities income 0 0 0

Net profit before tax 35,040 31,312 31,724

As of 31 December 2010, outstanding loans to the economy reached VND 354,112billion, an increase of VND 69,495 billion (24.4%) compared with the beginning ofthe year Outstanding loans in convertible foreign currencies reached VND 27,739billion, an increase of VND 5,638 billion (25.5%) compared with the beginning ofthe year, equivalent to 7.8% of total outstanding loans In 2009, Agribankcompleted the scheme “Vietnam Bank for Agriculture and Rural Development –expansion and improvement of efficiency of capital investment for agriculture,farmers and rural areas in 2010 and orientation toward 2020”, with the aim ofmaintaining the proportion of loan portfolio in the sector at 70% of total outstandingloans in 2020, of which outstanding loans to households and individuals account forabout 55% of total outstanding loans, raising the ratio of outstanding loans per

household to VND 20-25 million in 2010 and VND 50 million in 2020 Inimplementation of the Decisions by the Prime Minister on interest rate subsidy, tohelp prevent the economic decline, maintaining growth, ensuring social security, as

of 31 December 2010, Agribank had provided loans under interest rate subsidyprogram to a total of 1,337,651 customers with an outstanding loans of VND194,293 billion, accounting for nearly 30% of total loan portfolio under interest ratesubsidy program of the whole Vietnamese banking system Particularly, outstandingloans to agriculture and rural areas alone accounted for 56.8% of the totaloutstanding loans, and 95% of customers under this program

2.2 Investment project appraisal in Agribank

2.2.1 Current situation of investment project appraisal at Agribank

Since the establishment, the bank has continuously maintained and improved itsposition in the financial market nationwide Together with the rapid development ofcredit activities, the bank’s investment project lending has been also growing interms of both quality and quantity aspects, confirmed the superiority of the branch

in this sector

2.2.2 Process of investment project appraisal at Agribank

Concrete steps of the process of evaluating a project are:

Step 1: Contact with customers, documented loan guidelines

Bank's staff make contact with businesses that wish to borrow for businessexpansion or implementation of a project Employees guide customers to make loanapplication and complete necessary documents related

Step 2: Receive the loan documents, check the completeness and validity of

documents

Credit officers receive records directly from customer, assess records according tothe request of circular 06/1999/TT- BKH- ĐT on 24/11/1999 the guidance on thecontent, the size of investment, dossiers of investment project evaluation,

Step 3: Evaluation of the project (this step will be specify in the following part)

Step 4: The decision of the competent person:

Credit Committee or the Assembly of credit (depending on the project) will reviewthe records and opinions of staff appraisal which determines whether or not theproject loan If agreed to provide credits for the project and will be disbursed underthe agreement of two parties

For small projects, borrowing from 2 billion or less and have collateral, guarantees,just up the credit committee, this committee will be responsible for the appraisaland lending decisions

For large complex projects, over 2 billion loan it needs to set up the appraisalcouncil for consideration and evaluation of projects

2.2.3 Content of investment project appraisal in Agribank

When an investment project proposal was applied to Agribank, appraisal officers will conduct the following steps to evaluate this investment project:

2.2.3.1 Evaluation of loan document:

Loan application ensuring completeness and validity according to the bank’sregulation need to include:

• Documents evidencing the legal status of the borrower

The decision to set up or permit the establishment

Certificate of business registration (in the valid period)

• Records of the use of loan:

Evaluation of

loan document

Evaluation of lending customers

Evaluation of investment project

Evaluation on loan securities